Iron Man? Avocado, Iron Ore And Gold Prices Surge With Global Tariffs And Uncertainties (Crazy Train! Wage Growth Now Exceeds Home Price Growth!)

I was torn between Iron Man and Crazy Train, but finally decided on Iron Man to represent recent price surges in iron ore, gold and … avocados.

Or maybe Crazy Train is more appropriate since US core inflation numbers are signaling low inflation. But since I love avocados and guacamole, rising Haas avocado prices are a burden.


Both the Case-Shiller 20 metro home price index and hourly wage growth are higher than core inflation (PCE price growth). The good news is that wage growth now exceeds home price growth nationally.


Also note that wage growth YoY is over twice that of core inflation.

All abroad The Fed crazy train!



Regulatory Arbitrage Alert! US Regulators Ease Bank Capital Rules

The song “Ease on down the road” comes to mind. 

Bank regulators ease capital rules.

The three main federal bank regulatory agencies have issued new simplified regulatory capital rules, finalizing a plan first proposed in 2017. The changes jointly announced by the   on July 9 apply only to banks that do not use the “advanced approaches” framework for calculating their capital requirements, generally those with less than $250 billion in total consolidated assets and less than $10 billion in total foreign exposure. Under the final rule, those banking organizations will be subject to simpler regulatory capital requirements for mortgage servicing assets, certain deferred tax assets arising from temporary differences, and investments in the capital of unconsolidated financial institutions than those currently applied. Non-advanced approaches banks would also have a simplified calculation for the amount of capital issued by a consolidated subsidiary and held by third parties (i.e., minority interest) that can be included in regulatory capital. The agencies said that revisions to the definition of high-volatility commercial real estate exposure in the capital rule will be addressed in a separate rulemaking. The final rule was issued as part of a March 2017 report to Congress pursuant to the Economic Growth and Regulatory Paperwork Reduction Act of 1996 in which the three agencies committed to meaningfully reduce regulatory burden, especially on community banking organizations.

Community banks exempted from Volcker Rule. Five federal financial regulators have adopted a final rule to exclude community banks from the Volcker Rule, consistent with the banking deregulation law enacted last year. The final rule, announced on July 9, exempts community banks with up to $10 billion in total consolidated assets, and trading assets and liabilities of five percent or less of total assets, from having to comply with Volcker, which generally prohibits banks from conducting certain investment activities with their own accounts and limits their dealings with hedge funds and private equity funds or covered funds. Named for the former Fed chairman who had championed the measure, the original Volcker Rule is spelled out in section 619 of Dodd-Frank. But under Section 203 of the Economic Growth, Regulatory Relief, and Consumer Protection Act – the Dodd-Frank partial rollback that became law in May 2018 – smaller banks were exempted. Consistent with Section 204 of the Dodd-Frank rewrite, the final rule also permits a hedge fund or private equity fund, under certain circumstances, to share the same name or a variation thereof with an investment adviser as long as the adviser is not an insured depository institution, a company that controls an insured depository institution, or a bank holding company. The final rule was issued jointly by the Fed, FDIC, OCC, CFTC and SEC.

Fed’s Quarles: revised stress capital buffer proposal to be ready in the ‘near future.’ In what could amount to one of the most major revisions to the post-crisis stress testing program, Randal Quarles, Federal Reserve vice chair for supervision, announced that the Fed will finalize a revised stress capital buffer (SCB) “in the near future.” In a July 9 speech at a conference sponsored by the Federal Reserve Bank of Boston, Quarles said the simplified new metrics for assessing a bank’s capital adequacy could be in place in time for next year’s stress tests. Following an overview of how the stress test regime has evolved over the past decade, Quarles laid out recent and proposed changes to the Comprehensive Capital Analysis and Review (CCAR) intended to make the process “more transparent and simple and to feature less unnecessary volatility.” He pushed back against criticism that the Fed’s “proposed changes to stress testing amounts to providing banks with the answers to the tests,” arguing that, “Like a teacher, we don’t want banks to fail, we want them to learn.” The SCB would replace the current methodology requiring banks to achieve minimum targets measuring capital strength with what Quarles described as a simpler and more tailored, though still stringent, framework where banks would “be held to a single, integrated capital regime” and that regulators could average the test results from previous years. “By my math, the number of different capital requirements applicable to large banks would fall from 18 to eight and the number of different total loss absorbing capacity requirements for large banks would fall from 24 to 14,” Quarles said.

Of course, non-bank lenders like Quicken Loans and REITs are not regulated by The Fed, FDIC and OCC.  Is this a reaction to regulatory arbitrage?

Or did the regulators just drop a bomb on the economy?



US House Price Growth Signals “Bubble” As Recession Probability Rises (On The Road Again?)

I remember when a Chief Economist at a large Washington DC area housing finance entity said that the definition of a house price bubble is when house price growth exceeds household income growth.  Sounds reasonable. But what that means is that most of the USA is mired in ANOTHER house price bubble.

According to research from Clever.  national house price growth is exceeding median household income growth. But a substantial margin.


Of course, the San Francisco area is an extreme example of a house price bubble.


The Los Angeles area is no bubble-slouch.


In contrast, midwestern cities of St Louis and Cincinnati have slight house price bubbles.


Let’s see how house prices stand up to a recession when it occurs.


So it looks like the US is on the road again to housing crisis.

Retail Inferno! 12,000 US Stores Are Forecast To Close In 2019

The retail inferno is escalating in 2019.

According to Coresight Research,  in the US, year-to-date announced closures have already exceeded the total we recorded for the full year 2018. Coresight Research estimates announced US store closures could reach 12,000 by the end of 2019.

So far this year, US retailers have announced 7,062 store closures and 3,017 store openings. This compares to 5,864 closures and 3,258 openings for the full year 2018.

Here is Coresight’s complete list of store closures so far for this year:

Payless ShoeSource: 2,589 (includes 248 Canada locations and 114 smaller-format stores in Shopko Hometown locations).

Gymboree/Crazy 8: 749

Dressbarn: 649. Here are the locations that closed in June and closing in July.

Charlotte Russe: 494; but the company’s new owner is opening new stores.

Shopko: 371

Charming Charlie: 261

LifeWay Christian Resources: 170

Topshop: All 11 U.S. stores

Henri Bendel: 23

E.L.F. Beauty: 22

Here are more announced closures that could roll into 2020:

Family Dollar: As many as 390 stores

Fred’s: 442; the company said it would close another 129 stores with going-out-of-business sales beginning Friday.

Chico’s: 74, but 250 over the next three years.

GNC: 233

Gap: Roughly 230 in next two years

Walgreens: 195

Foot Locker: 165, total includes closings outside of the U.S.

Signet Jewelers: The parent company of Kay, Zales and Jared said it would close another 150 stores.

Pier 1 Imports: 57, but up to 145 could close.

Ascena Retail: 120

Destination Maternity: 117

Sears: 72

Victoria’s Secret: 53

Vera Bradley: 50

Office Depot: 50

Kmart: 48

CVS: 46

Party City: 45

Sears Hometown and Outlet Stores: 45

The Children’s Place: Up to 45

Z Gallerie: 44

DKNY: 41

Stage Stores: 40 to 60

Bed Bath & Beyond: 40

Abercrombie & Fitch: 40

Francesca’s: At least 30 stores

Build-A-Bear: Up to 30 over two years

Williams-Sonoma: 30

J.C. Penney: 27

Bath & Body Works: 24

Southeastern Grocers: 22

Saks Off 5th: 20

Lowe’s: 20

J. Crew: 20

Macy’s: 8

Nordstrom: 7

Target: 6

J.Crew: 5

Kohl’s: 4

Whole Foods: 1

Calvin Klein: 1

Pottery Barn: 1

Now, that is a lot of retail store closings! Hopefully, The Fed doesn’t adopt the practice of buying failing retail stores to prop-up REITs and CMBS.

At least Charming Charlie wasn’t named Charming Jeffrey (Epstein)!




Pelosi’s Famous Chili? US 30-year T-bond Auction Nets Only 50% Bidder Participation (FAIL!)

Foreign investors are seemingly NOT seeking safety with the 30-year US Treasury bond if the auction today is any indication.

The 30-year Treasury auction saw a decline in bidder participation, largely due to the absence of foreign interest.


The 30-year Treasury price declined and the yield jumped.


Could this be a sign of foreign investors finally sick of US uncontrolled spending and deficits? Since the US House of Representatives holds the purse strings of the Federal government, is this Speaker Pelosi’s famous chili?


The Greenspan Retreat! US Core Inflation Checks In At 2.1% YoY, Rent Inflation At 3.4% YoY, Home Price Growth At 5.2% YoY

Today, the US inflation numbers were released and CNBC proclaimed “US core inflation posts biggest gain in nearly 1 1/2 years!” Yes, core inflation (CPI less food and energy) rose 2.1% YoY, hardly distinguishable from other readings since 2000.  But what is noticeable is the “Greenspan Retreat,” the last time core inflation exceeded 5%.


Of course, housing rents and prices are growing at over twice that of core inflation. The FHFA purchase only index YoY is growing at 5.2% and owner’s equivalent rent is growing at 3.4%.


Things have never been the same since Fed Chair Alan Greenspan’s tenure. It is off to the races for assets since Greenspan and his merry men.


 Alan Greenspan cheering 5% core inflation in 1990.



Surprise! Powell Cites Trade Risks As Reason For Fed Rate Cuts Despite Solid US Economy (Macro Risk Index Lower Than Average)

Federal Reserve Chair Jerome Powell gave his reasoning upcoming rate cuts despite a solid US economy. The trade war with China.

To be sure, the Citi Economic Surprise Index – Global has been in negative territory since the beginning of 2018, the longest stretch of negative readings since 2014. But there were negative patches prior to 2017 before the twin bursts of positive readings.


On the other hand, the Citi Macro Risk Index is actually declining.


And the VIX, TYVIX and MOVE indices are tame.


I could see Powell pushing for rate cuts if the Macro Risk index was at 2015 levels, but lower than average macro risk?

The Powell Scowl.



Jaws! All Quiet On The Debt Front Prior To FOMC Meeting (Vol Cube Showing Stress At Both Ends Of The Curve)

Yes, and the woman going for a night swim in the film “Jaws” felt perfectly safe too. Until the music started.

SIFMA has an excellent chart documenting the explosion of debt issuance since 1998 that   amped-up with The Fed’s intervention in 2008.


Despite the massive growth of long-term debt (with correspond high duration risk), the interest rate volatility cube is showing calm seas … except at the short-end of matures .. and now the long-end is starting to show more volatility.


Is it my imagination, or do those volatility spikes look like shark fins??

The Fed Funds Futures market is showing 1-2 Fed Funds rate cuts for the next two meetings.


And the expected future outcomes are pointing in the downward direction.


Even Austria is showing a steep decline in their 100-year bond yields.


While it is seemingly all quiet on the bonds front, volatility is emerging at both ends of the maturity curve. HEDGE!!!!


Despite “Strong” US Jobs Report, Fed Rate Cut Still Likely (Interest Rate Volatility Cube Still Spiked At Short End)

Despite Friday’s “strong” job report of 224,000 jobs added to the US economy and speculation that The Federal Reserve may actually NOT cuts rates at the next FOMC meeting, The Fed Funds futures market is still signaling an upcoming rate cut.


And the expected path of Fed rate cuts (orange dashed line) is still downward sloping,


The US dollar swaps curve, the OIS curve and the swaps SPREAD curve are all sagging at the short-end.


The interest rate volatility cube is still spiked at the short end (according to swaptions).


Let’s see if things change by Monday afternoon (my class meets at 4:30 PM EST).

Fed Chair Powell may have more free time to socialize if Trump has his way!!



Bizarro Invasion! Denmark And German Sovereign Yields Negative (And 10Y German Yields BELOW The ECB Main Refinancing And Deposit Rate!)

The European Central Bank’s President, Mario Draghi, 8-year term is up in October … and  Christine Lagarde of the International Monetary Fund has been chosen to replace him. Will Lagarde continue Draghi’s policies (yes) or change course (no)?

But Europe has been invaded by the bizarro legion.

Case in point. Both Germany and Denmark have negative sovereign yields out to 20 years. Germany, which has issued longer maturity sovereign debt, has slightly positive yields beyond 20 years.


And the German 10-year Bund yield is now below the ECB Main Refinancing Rate, ECB Deposit rate and the European Financial Stability Facility (EFSF) rate. How bizarre is that?


Yes, the monetary Bizarro legion has invaded earth (or at least Japan and Europe).  And the US monetary policy has been bizarro since Alan Greenspan.