Be Careful Comparing The Dot.com Bubble With Today (Hint: Fed Went From Soulful To Shattering With Collapsing Money Velocity)

It is problematic comparing stock market ratios of today …

to the infamous dot.com bubble of 1995 to 2004.

Why? The Federal Reserve wasn’t pumping trillions into the market.

Look at the red line (Fed Funds Target Rate from 6.5% in 2000 to 0.25% today and the orange line (the massive growth of The Federal Reserve Balance Sheet).

The Fed isn’t trying just a little, but tried so hard. M2 Money Velocity was over 2.0 but is now almost 1.0 with M2 Money growing at 24.1%.

Can The Fed endlessly print money without consequence? Of course not. We are ka-screwed.

Is Fed Chair Jerome Powell really Vanilla Ice?

Dow Mini Up 800 Points, Gold And Bitcoin Up Too

Everything is coming up roses as the US economy continues to expand. The Dow Mini is up around 800 points prior to opening. Gold and Bitcoin are also up.

The US Dollar tanked before stock market opening.

US Pending Home Sales Decline -2.2% MoM In September, But Rise +21.9% YoY (Still Limited Inventory)

The classic “Good news, Bad news” story. US Pending Home Sales are UP 21.9% YoY … but down -2.2% MoM.

Pending home sales display the classic v-shaped recovery despite mortgage credit availability tanking.

Low inventory of homes for sale continues to plague housing markets, contributing to soaring median home prices.

Terminal (Money) Velocity? The Missing Existing Home Sales Inventory And Collapsing Money Velocity

Have you ever wondered why the inventory of existing home sales have crashed since the housing bubble of the early/mid 2000s?

If I overlay the median price of existing home sales with low inventory and low money velocity, we get surging prices.

Poor Kristy Swanson.

Venezuelan Annual Inflation Rate Is A Pulverizing 2,025% As Oil Prices AND Production Collapse

In August 2018, Venezuela re-denominated the bolivar, lopping five zeros off it. Today’s price of 25.00 new bolivars is equal to 2,500,000 old bolivars. Converted into dollars, that comes to less than $0.50.

Bloomberg’s Cafe con Leche indicates that a cup of coffee (with milk) in Caracas Venezuela costs 430,000 Bolivars. This is happening as Venezuela’s crude oil basket crashed to 13.74.

This is happening as Venezuela oil production is crashing.

According to Steve Hanke at Johns Hopkins, the Venezuelan annual inflation rate is at 2,025%, over 4X Zimbabwe’s annual inflation rate.

V-Shaped Recovery In Housing Starts/Permits To Build (1-unit Starts Up 8.52% In September)

The housing starts numbers for September were released this morning and point to a V-shaped recovery for housing markets. 1 unit starts were up 8.52% and permits to build were up 7.8%.

This is a V-shaped recovery for single family housing.

Unfortunately, there is no V-shaped recovery in 5+ unit multifamily housing.

But the overall economy is showing a distinct v-shaped recovery, according to The Atlanta Fed GDPNow forecast model.

Lenders Tighten Standards On Credit Cards To Beyond Financial Crisis Peaks

To quote Dean Martin, “Ain’t That A Kick In The Head.” Let ’em have it!

Net % of Domestic Respondents Tightening Standards on Consumer Credit Card Loans just rose to a level higher than that of the financial crisis.

Odd since US home prices are rising through the stratosphere and mortgage rates are at an all-time low. Essentially, homeowners will equity in their homes may have to turn to cash-out refis in lieu of using credit cards.

Yes, cash-out refis (white line) have grown as consumer credit tightens (yellow line).

Like the sailor said, quote, ain’t that a hole in the boat?

All Quiet On The Wall Street Front? US Bond Volatility Jumps, Stock Volatility Calm, Gold Vol Calm, US Dollar Swap Forward Rate Calm

With about two weeks to go until the U.S. election, volatility gauges for stocks and bonds are on different paths. The Cboe Volatility Index — known as the equity market’s “fear gauge” — has been relatively subdued this month in contrast to the ICE BofA MOVE Index, the Treasury market’s equivalent measure.

JP Morgan’s Global Credit Volatility premium index has soared since June while gold’s 3m implied volatility is calm.

The Quadratic Interest Rate Volatility and Inflation Hedge ETF has leveled-out after rising from the Covid outbreak.

The US Dollar Swap forward rate has crashed with Covid and has laid flat ever since.

(A vanilla interest rate swap is an agreement between two counterparties to exchange cashflows (fixed vs floating) in the same currency. This agreement is often used by counterparties to change their fixed cashflows to floating or vice versa. The payments are made during the life of the swap in the frequency that is pre-established by the counterparties.)

US Public Debt Now Exceeds Economic Output, US Budget Gap Triples to Record $3.1 Trillion on Virus Relief (M2 Velocity Crashes To All-time Low)

This is a nightmare. A nightmare on Constitution Avenue.

(Bloomberg) — The U.S. budget deficit more than tripled to a record $3.1 trillion in the latest fiscal year on the government’s massive spending aimed at softening the blow from the coronavirus pandemic.

The increase brought the deficit as a share of gross domestic product to 16% in the year ending in September, the largest since 1945, a Treasury Department report showed Friday. At the end of the financial crisis in 2009, the ratio was close to 10% before slowly narrowing through 2015.

Investors have handed the government ultra-low borrowing costs to finance the spending, resulting in a 9% drop in federal interest payments during the year. But the national debt is now bigger than the size of the economy, and it could be almost double GDP by 2050 as an aging population places more demands on Social Security and Medicare, according to the Congressional Budget Office.

The risk is that in the long term, rising debt could end up sparking inflation and repelling investors if the market becomes too saturated. Federal Reserve Chair Jerome Powell and other officials say eventually the debt trajectory will need to be addressed, but now isn’t the time to worry because unemployment remains high and the pandemic has crushed many businesses, warranting further support for the economy.

While the central bank cut the benchmark interest rate to near zero in March and expects to keep borrowing costs very low likely for years to come, lawmakers remain deadlocked over additional fiscal aid ahead of the Nov. 3 election.

The report showed federal spending jumped 47.3% to $6.55 trillion in fiscal 2020, driven by increased outlays for unemployment compensation and small businesses that were approved by President Donald Trump and Congress. Government revenue declined 1.2% as receipts from individual and corporate income taxes fell.


Underscoring the massive fiscal relief efforts this year, the Treasury’s report showed $275 billion in outlays for federal additional unemployment compensation that included the now-expired $600 supplemental weekly jobless payments. Spending for state unemployment benefits totaled nearly $196 billion in the fiscal year.

Spending on national defense went from the second-largest outlay in fiscal 2019 to fifth in 2020 as pandemic-induced spending resulted in larger spending for income security, health and Medicare.

As Congress and the Administration continue the spending splurge, what are the odds that spending (and borrowing) will decline after Covid recedes? Especially with declining money velocity and exploding public debt.

A Farewell To ARMs: The Adjustable-Rate Mortgage Share Dwindles To 2% In Latest Mortgage Bankers Association Report)

Back in 2011, former HUD and Freddie Mac Chief Economist Michael Lea wrote an article entitled “Do We Need the 30-Year Fixed-Rate Mortgage?” We argued that plain vanilla ARMs (without teaser rates and other tricked-up products during the housing bubble) offered consumers advantages over fixed-rate mortgages (FRMs).

The answer to that question has just been answered: adjustable rate mortgages as a percentage of all mortgages has fallen to its lowest level since financial crisis and The Great Recession.

The reason? First, consumers flock towards FRMs when mortgage rates decline. In part, thanks to The Federal Reserve’s interest rate policies (as shown below).

Lea and I argued that there are certain advantages to ARMs for consumers (see paper at link), such as a lower mortgage rate on average.

Also, empirically mortgage rates on average fall negating the “fear factor” of mortgage rates rising on an ARM reset.

The latest mortgage applications volumes from the Mortgage Bankers Association shows that the ARM% has dwindled to 2%.

5/1 ARM rates (purple) are currently higher than fixed mortgages rates. The 15-year mortgage rate is the lowest.

Yes, it is A Farewell To ARMs, but not as Ernest Hemingway envisioned.