Death Star? Fed Seems Resigned to Bubble Risk in Effort to Extend Expansion (Declining R-Star)

Asset bubbles abound thanks to Central Bank low rate policies. And these aren’t tiny bubbles, but gargantuan asset bubbles.

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(Bloomberg) — Some Federal Reserve policy makers seem resigned to running a heightened risk of asset bubbles and other financial excesses as they seek to keep the economic expansion going.

That’s one of the messages tucked inside the minutes of the Federal Open Market Committee’s March 19-20 policy making meeting.

“A few participants observed that the appropriate path for policy, insofar as it implied lower interest rates for longer periods of time, could lead to greater financial stability risks,’’ according to the minutes, published April 10.

Chairman Jerome Powell could be one of those officials. He’s publicly pointed out that the last two expansions ended not in a burst of inflation, but in financial froth, first a dot-com stock market boom, then a housing bubble.

A willingness by the Fed to court such perils by holding rates down should be good for the economy for a while. After all, the aim of such a policy would be to sustain growth at a healthy enough clip to meet the Fed’s twin goals of maximum employment and 2 percent inflation.

But that monetary stance could store up trouble down the road should the financial threats materialize.

“Easy financial conditions today are good news for downside risks in the short-term but they’re bad news in the medium term,” senior International Monetary Fund official Tobias Adriantold a Boston Fed conference last year.

In economists’ parlance, here’s the Fed’s dilemma: R-star — the neutral interest rate that stabilizes the economy when it’s meeting the Fed’s goals — may be so low that it also prompts super-risky behavior by investors.

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Behind the fall in R-star: an aging population and slower productivity growth that has boosted savings and depressed investment.

Catch a falling star? Or is it a Death Star?

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Bring Out Your Fed! Existing Home Sales Fall -5.44% YoY In March (EHS Inventory Lowest Since 1999)

Bring out your Fed!

According to the National Association of Realtors (NAR), existing home sales tanked -5.44% YoY in March.

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At the same time, the INVENTORY of existing home sales rose in March, but still remains near its lowest level since 1999.

Existing home sales Median Price YoY has slowed to 3.8% with The Fed’s quantitative tightening (QT). As opposed to 13.4% YoY during The Fed’s QE3.

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Time to bring out your Fed!

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CRE Bubble? Commercial Real Estate Prices Since The Financial Crisis (Apartments Have Largest Run-up, Retail Has Poorest)

Given the advent of on-line shopping, commercial real estate prices are not quite back to where they were at the height of the asset bubble prior to the financial crisis of 2008-2009. Suburban office space is barely above the pre-crisis peak.

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On the other hand, apartment prices are substantially above where they were in 2008-2009, as are CBD (Central Business District) offices.

All with the help of The Federal Reserve’s low interest rate policies. But notice that the growth rate of CRE has slowed (except for apartments).

The good news for CRE investors? The Fed isn’t likely to keep raising their target rate or continue to shrink their balance sheet.

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US Housing Starts Fell In March, Slowest Pace Since May 2017 Despite Interest Rate Declines (5+ Unit Starts Decline 3.44%, 1 Unit Starts Decline 0.38%)

The hopium about interest rate declines didn’t pay off in March. Housing starts fell despite declining interest rates.

(Bloomberg) —  U.S. new-home construction unexpectedly fell in March, decelerating to the slowest pace since May 2017 and suggesting builders remain wary even as lower mortgage rates and steady wage gains offer support to consumers.

Residential starts fell 0.3 percent to a 1.139 million annualized rate after a downwardly revised 1.142 million pace in the prior month, according to government figures released Friday. Permits, a proxy for future construction, slumped 1.7 percent to a 1.27 million rate. Both figures missed estimates.

1-unit starts fell -0.38% in March while 5+ unit (apartment) starts fell -3.44%. The Midwest was the biggest loser at -17.61%. The biggest winner was … the West at 31.40%.

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The decline in 10 year Treasury rates (yellow line) provided a nice pop in 1-unit start in January, but nada in February and Match (white line). Apartment starts (blue line) have slowed.

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So pushing interest rates down has not paid off as hoped.

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Fire! Templeton Deepens Short Duration Bet To -2.21 in $34 Billion Bond Fund

Negative duration bets? Financial markets are coming undone.

(Bloomberg) — Average duration in Templeton Global Bond Fund shortened to -2.21 years by end of first quarter, from – 1.6 years at end of 2018, according to latest filing.

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Builds up Mexico position to 13% from 12.6% at end of 2018, making the country the biggest portfolio holding

Brazil and U.S. remain in top three country holdings with at least 11%

Other top 10 exposures include India, Indonesia, South Korea, Argentina, Ghana
Retains short position on euro, yen, Australian dollar

Increases cash to 32.2% from 24.9% at end of 2018

Total net assets increase to $33.8b from $33.5b

NOTE: fund, run by Michael Hasenstab and Calvin Ho, has returned 3.5% in past year, outperforming 58% of peers, according to data compiled by Bloomberg.

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Templeton’s negative duration bet comes as The Federal Reserve announced that they may need to buy more government bonds than it did before the 2008 financial crisis and conduct other money-market operations to implement its current approach to managing U.S. interest rates.

Or as Arthur Brown sang, “We are the Gods of hellfire,  and we bring you … FIRE!”

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Financialization And New York City Rents (Rent Bubble????)

Financialization refers to the increase in size and importance of a country’s financial sector relative to its overall economy.  And the center of US financialization is … New York City with its investment banks like Goldman Sachs.

While west coast housing prices are cooling (but still uber-expensive on the coast). NYC rents are still hot.

Rents climbed to a first-quarter record in Manhattan, and to all-time highs in Brooklyn and Queens, data from StreetEasy show. At the same time, purchases declined and almost a fifth of home-sellers in the three boroughs were forced to cut their prices.

Many New Yorkers, weary of bargaining with owners whose list prices are still out of touch with a slowing market, are choosing to remain renters until they find the perfect deal. That’s given landlords power to raise rates and offer fewer lease sweeteners, said Grant Long, senior economist at StreetEasy.

Central Park South was Manhattan’s costliest neighborhood in the first quarter, with a median asking rent of $7,200. Landlords sought $3,785 in Greenwich Village, $3,995 in Chelsea and $2,900 on the Upper East Side. Borough-wide, rents rose 2.6 percent from a year earlier, the biggest annual increase since 2016, according to a StreetEasy index.

Owners listed apartments for a median of $3,035 in the Long Island City neighborhood of Queens, and $2,995 in Brooklyn’s Williamsburg.

The Flatiron district is no slouch at $4,615 median rent. This trendy area has numerous millionaires and billionaires (as Bernie Sanders loves to say).

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But since the advent of financialization in the 1980s, the wealth distribution in the US has become the most skewed since the 1930s.

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And much of the skew is about the consolidation of financial power in New York City (and regulation of the 0.1% resides in Washington DC.

Yes, The Federal Reserve, the hell hound for Wall Street, has helped inflate asset bubbles and keep them frothy, benefitting the 0.1%.

At the national level, home price growth YoY, while slowing, still exceeds average hourly earnings for the majority of US workers as well as core inflation.

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So, are we in a housing bubble? Previously, “economists” have said that a housing bubble is when home price growth exceeds wage growth. But when I speak to the Five Star Government forum on housing on Tuesday, I will be the only one that says the word “bubble.”

Mentioning a bubble in the 5 Star gathering is like including Carolina Reaper 2,200,000 SHU peppers in the spice mix.

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Raw Oyster Stew! BoJ’s Kuroda Says That There Is Room For Interest Rate Reduction (The Swiss Miss?)

Much like the Three Stooges bit “Raw Oyster Stew”,  using Central Banks to stimulate a structurally flawed economy is like Curly trying to eat the raw oyster.

(Reuters) – Bank of Japan Governor Haruhiko Kuroda told CNBC that there is room for reducing long-term and short-term interest rates.

“I think there (is) still some room for further monetary easing if needed,” he said, adding that it isn’t necessary at this stage.

Kuroda also said that the Japanese economy has “slightly slowed down”, partly because Japan’s exports to China have become “somewhat” weak.

Yes, Kuroda can try to push Japanese sovereign rates lower. The benchmark for low interest rates is … Switzerland. (Aka, The Swiss Miss!)

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Swaps? Yen versus Franc swap rates:

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So, Kuroda is suggesting a Swiss put on rates. Or a Swiss Miss!

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My Kuroda!!  

Bubble Monster! Central Bank Continued Surrender Leading To Declining VIX, Reduced VIX Positions And Rising SMART Money Flow Index

As I wrote at the beginning of The Fed’s quantitative easing (QE)  ventures back in 2008, The Fed will never be able to “normalize” monetary policy. As we have seen, The Fed has all but quit rate hikes and has annoucned end an to QT (quanitative tightening) in the Fall.

In celebration of the eternal Central Bank monetary stimulus, S&P500 volality (VIX) is collapsing … again as VIX Futures open interest is shrinking. Accordingly, the SMART Money Flow Index is rallying as investors see Central Bank surrender.

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The global Central Bank asset purchase bonanza!!

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Coupled with low rates.

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The Fed and other Central Banks are contuning to run their bubble machines!

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Here is a video of The Federal Reserve.

Global Supply Of Negative Yield Bonds Hits $10 TRILLION (Europe’s Sweet 16 Of Negative Yielding Sovereign Debt)

To listen to some talking heads, everything is beautiful.

But according to the bond market, everything is not beautiful. In fact, there is concern about global economic growth and financial fragility.

There is now $10 trillion in negative yielding bonds in the global economy.

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And in Europe, there are 16 nations with negatiive 2-year sovereign yields, including Germany and France.

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Notice that the short-end of the yield curves in Europe and Japan are negative.

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People get ready for negative Central Bank rates in the USA!

Rollercoaster! Global Economic Growth (G10, US, Emerging) Sliding Down Together

The global economy is in a rollercoaster pattern.

And unfortunately the G10, US and Emerging nations are on the downward side.

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This might explain Larry Kudlow’s call for a 50 bps drop in the Fed Funds Target Rate. At least Trump’s nominee for The Fed’s Board of Governors was previously the President of the Kansas City Federal Reserve. And CEO of Godfathers Pizza! Conditional on the US Senate approving his appointment, “Welcome to the party, pal!”