Livin’ On A Prayer: Average US Household Net Worth Is A Staggering $692,100 As Of 2016! (Median Only $97,300)

As 1980’s big-hair, New Jersey band Bon Jovi sang, US households are “Living on a Prayer.” Or The Federal Reserve-created massive asset bubble.

As of 2016, the mean net worth of US households was a whopping $692,000! And the median is $97,300.

Quite a disparity.

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Of course, The Federal Reserves zero-interest rate policy (ZIRP) and quantitative easing (QE) helped created massive asset bubbles that have helped households to historic high net worths.

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Housing is one of the recipients of The Fed’s quantitative distortion (QD).

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One indicator? Home prices are still growing almost twice as fast as average hourly earnings.

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These are no “Tiny Bubbles”.

Gold anyone?

But YUGE bubbles. Hence, American households are living on a prayer that the massive bubbles don’t burst.

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On a side note, I used to live in Rumson NJ and Jon Bon Jovi used to run by my house on the weekends (sans the big hair).

 

Divergence! Hong Kong’s HIBOR/LIBOR Spread Largest Since Financial Crisis While PBOC’s Balance Sheet Diverges From US Fed’s (China Default Crisis?)

There is considerable divergence between China and the US in terms of financial condition. The trade disagreement between China and the US comes to mind.

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First, there is considerable divergence between Hong Kong’s 1-month interbank lending rate, HIBOR, and the US 1-month interbank lending rate LIBOR. In fact, the divergence is the greatest since the financiak crisis. For the moment, the US Fed is engaged in quantitative tightening (QT) while China is frantically going the opposite direction.

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Second, Central bank balance-sheet divergence is reducing the impact of China’s government-induced liquidity injections, contributing to an increase in corporate defaults. Since Fed run-off began in October 2017, the impact of People’s Bank of China (PBOC) balance-sheet expansion has diminished considerably, as the FX-adjusted effect of last year’s 1 trillion yuan in central bank stimulus resulted in a $160 billion contraction when converted into U.S. dollars. Total assets at China’s central bank rose 2.6% to a record 37.2 trillion yuan in 2018. Yet, when expressed in dollars, the PBoC’s balance sheet fell by 2.9% to $5.4 trillion.

Chinese onshore defaults rose to a record $16.5 billion in 2018, and are up $1.4 billion year-to-date. China offshore defaults rose to $3.3 billion in 2018, and are up another $275 million in 2019.

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The Dow is up over 200 points on a deal preventing a US government shutdown. Democrats agreed to build a wall between the US and Mexico … 55 miles of the 2,000 mile US-Mexico border. As if drug traffickers (and cartels), human traffickers and gangs like MS-13  can’t figure out how to bypass the 55 miles of additional walls. 

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Deutsche Bank’s 6.25% Perpetual CoCo Bond Is Going CoCo Loco!

A friend of mine testified in the US House of Representatives that CoCo (Contingent Convertible) bonds are the savior of the banking industry. Apparently he didn’t know about Deutsche Bank’s precarious position!

Additional Tier 1 contingent convertible bonds, CoCos, are among the riskiest debt because they can be wiped out to create capital for a bank in a financial crisis. While they are sold as perpetual bonds, they are typically callable after five years. Secondary market pricing of the debt is based on the expectation they will be redeemed at the first call date.

One CoCo bond stands out in the CoCo Loco-sphere: Duetsche Bank’s 6.25% bond. Which is signalling a potential wipe out.

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This is not surprising given Deutsche’s performance since the global financial crisis when it peaked at $125 per share in May 2017 and is now trading at an abyssmal $8.31 per share.

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Deutsche Bank’s 6.25% CoCo bond is going loco!

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Storm Ahead? Baltic Dry (Shipping) Index Founders In Rough Trade Sea

The Baltic Dry Index seems to be signalling declining shipping costs … or foundering trade between the US and China.

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The Baltic Dry Index is a composite of the Capesize, Panamax and Supramax Timecharter Averages. It is reported around the world as a proxy for dry bulk shipping stocks as well as a general shipping market bellwether.

Yes, the BDI is measuring some distress for China Imports YoY in USD.

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No, that isn’t the SS Minnow foundering.

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(Un)Willing! Bank Willingness To Lend To Consumers Drops To Zero (Recession Alert!)

It seem s that banks willingness to lend to consumers hass fallen. Perhaps it should be an index of “Willing.”

Bank willingness to lend to consumers, a prime driver of Federal Reserve monetary policy, typically slumps to zero before a recession.

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Yes, as The Fed continues to unwind its balance sheet, bank willingness to lend to consumers is melting.

The Federal Reserve Open Market Committee (FOMC) looks at the bank willingness to lend numbers.

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Goin’ Down! Fed Continues Balance Sheet Shrinking Of $14.2 Billion (Unwind Reaches $434 Billion, Remains on “Autopilot”)

As Bruce Springsteen famously mumbled, The Fed’s Balance Sheet is “Goin’ Down.”

As of Feburary 6, 2016, The Federal Reserve of New York further shrank The Fed’s Balance Sheet by $14.2 billion.

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This week it was $11.665 billion of US Treasury Notes and Bonds and $2,525 billion of US Floating Rate Notes. For a grand total of $14.2 billion reduction in liquidity.

Now The Fed has unwound $434 billion of its prodigious balance sheet.

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While other central banks filling their punch bowls ever further.

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So, The Fed is continuing its draining of the monetary punch bowl on autopilot.

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Three-Month Libor Fixing Falls by the Most Since May 2009 (Signal That The Fed Might CUT Their Target Rate?)

One of the world’s most important borrowing benchmarks staged its biggest one-day decline in a decade on Thursday.

The three-month London interbank offered rate for dollars sank 4.063 basis points to 2.697 percent, the largest one-day slide since May 2009. The move may reflect a benchmark that’s making up ground following a repricing of short-end Treasuries and associated instruments in the wake of the Federal Reserve’s dovish pivot in recent weeks.

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The 3-month LOIS spread (3-month Libor – Overnight Indexed Swap rate) has been receding … again as of Feb 5th (Libor rates on Bloomberg as not updating on Feb 7).

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Typically, Libor rates rise ahead of Fed rate hikes. While the “catching up” explanation is likely, it is also possible that Libor is signalling a cut in the Fed Funds rate coming up.

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The stock market is pleading for SLOWDOWN in monetary normalization.

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Yes, it is possible that Libor is signalling that The Fed will try to give more oxygen to financial markets.

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Former Fed Chief Yellen Says Rates Could Next Move Up or Down (Implied Rate Forecast Is Down, US Treasury Curve Downward Sloping From 1-3 Years)

My favorite Bloomberg headline of all time is: “Former Fed Chief Yellen Says Rates Could Next Move Up or Down.” Wow, how insightful. But of course, she was refering to The Fed Funds Target rate which she kept at 25 basis points seemingly forever. However, current Fed Chair Jerome Powell could either raise, lower of keep rates constant, depending on the state of economy.

But then again, both the ECB and Bank of Japan are currently at zero (ECB) and below zero (BOJ). The US Fed is headed in a direction that differs from other central banks.

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While Powell has been increasing The Fed Funds Target rate AND shrinking The Fed’s balance sheet, Europe is drowning in negative target rates (Eurozone, Switzerland, Sweden, Denmark) as is Japan.

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But in terms of central bank balance sheets, only the US is shrinking their balance sheet.

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There are currently around $9 trillion of bonds trading at negative interest rates.

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As we stand today, the US Treasury yield curve is downward sloping at tenors 1-3 years.

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The current implied policy curve for The Fed is declining (meaning Fed Fund rate cuts are implied in 1-3 years.

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So, former Fed Chair Janet Yellen thinks rates could go up or down.

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The Average Adjustable-rate Mortgage Is Nearly $700,000! (Misleading Because Mortgage Refis Are Essentially Dead)

MarketWatch has the tantalizing headline of “The Average Adjustable-rate Mortgage Is Nearly $700,000.”

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True, the average loan size for ARMs (adjustable-rate mortgages) is substantially higher than for FRMs (fixed-rate mortgages).

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But here is a catch. Mortgage refinancing applications are virutally dead.

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Mortgage purchase applications are relatively sedate but rising following the financial crisis with new rules governing bank lending such as QM (Qualified Mortgage) and other Consumer Financial Protection Bureau (CFPB) rules.

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A more relevant chart that the one posted by MarketWatch is a comparison of average loan size by purchase applications and refi applications. Note that following the financial crisis, average loan size for purchases is higher than for refi applications.

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For the week ending 02/01/19, mortgage purchase applications SA declined 4.58% while mortgage refis were up 2.6% from the preceding week.

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The bottom line is that the MarketWatch piece, while tantalizing, is fundamentally misleading. Mortgage refi applications are nearly dead and mortgage purchase applications are rising again, but are no where near the 2000-2007 levels.

So, who killed mortgage refinancing applications?

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These guys! (Paul Volker can be excluded from the blame list).

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“Bond King” Gross Retires, Dudley “Amazed and Baffled” About Fed’s Balance Sheet Unwind And World’s Largest Pension Fund Suffers Catastrophic Quarter (Boogie In The Dark?)

I feel like investors are doing the “Boogie In The Dark” when it comes to understanding this broken market.

What’s going on?

First, bond king Bill Gross (formerly of PIMCO then Janus-Henderson) has thrown in the towel after 50 years.  His success at PIMCO was in the greatest bond bull run in modern history. But his Janus fund started near the peak of The Fed’s QE3 balance sheet expansion. Then his fund underperformed when The Fed started unwinding their balance sheet (and raising their target rate). Translation: The Fed got bond king Gross dizzy … and he retired.

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And that brings me to the former New York Fed President William Dudley.

(Bloomberg) — Former Federal Reserve Bank of New York President William Dudley said he’s “amazed and baffled” at the attention the wind-down of the U.S. central bank’s balance sheet has been receiving from investors, pointing to other culprits as the likely cause of recent volatility in financial markets.

Amazed and baffled? Just ask Bill Gross about the importance of Fed’s wind-down.

Then we have the world’s largest pension fund, Japan’s Government Pension Investment Fund that lost 9.1 percent, or 14.8 trillion yen ($136 billion), in the three months ended Dec. 31. The decline in value and the rate of loss were the steepest based on comparable data back to April 2008. Domestic stocks were the fund’s worst performing investment, followed by foreign equities. Assets fell to 150.7 trillion yen at the end of December from a record 165.6 trillion yen in September.

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But who helped break the market by distorting asset prices and returns? The Federal Reserve and other global central banks.

With so many uncertainties in global market (Brexit, trade wars, Venezuela’s meltdown, The Fed’s uncertain policy path, Italian debt crisis. etc., …

(Bloomberg) — Italy is preparing to sell as much as 1.8 billion euros ($2.1 billion) of state-owned real estate as it seeks to rein in soaring debt, people with knowledge of the plan said.

investors should hedge their risk exposure across markets … or move to cash or short-term Treasuries. In other words, take out some insurance.

Lastly, down in Virginia, we are suffering through yet another embarrassing governor (Northam) after McAuliffe and his electric call debacle.

Bye, bye Bill Gross. I can’t stand to see you go.

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