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.
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.
Housing is one of the recipients of The Fed’s quantitative distortion (QD).
One indicator? Home prices are still growing almost twice as fast as average hourly earnings.
These are no “Tiny Bubbles”.
But YUGE bubbles. Hence, American households are living on a prayer that the massive bubbles don’t burst.
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).
Financial markets are experiencing “The Crazy World of Libor, Swaps and Treasury Yield Curves.”
In other words, all three curves have a downward sloping section, all at different times, but all short-term (less than 6 year maturities).
What uncertainties are in financial markets and the unlying economies, you may ask? How about trade (e.g., US and China trade flows), Brexit, China’s recession, Japan’s ongoing stagnation (despite negative interest rates), Italy and Germany’s slipping into darkness, not to mention uncerainty about The Fed’s path for balance sheet unwind.
The Fed’s balance sheet is a particular concern since the 10-year Treasury Note yield began to rise when the unwind began, but rates have gone DOWN when the unwind got serious in 2018. Or is Fed Chair Jerome Powell really “The Iceman”?”
Here is a photo of Fed Chair Jerome Powell weiliding his “ice axe.”
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.
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).
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.
The stock market is pleading for SLOWDOWN in monetary normalization.
Yes, it is possible that Libor is signalling that The Fed will try to give more oxygen to financial markets.
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.
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.
But in terms of central bank balance sheets, only the US is shrinking their balance sheet.
There are currently around $9 trillion of bonds trading at negative interest rates.
As we stand today, the US Treasury yield curve is downward sloping at tenors 1-3 years.
The current implied policy curve for The Fed is declining (meaning Fed Fund rate cuts are implied in 1-3 years.
So, former Fed Chair Janet Yellen thinks rates could go up or down.
Back in 2010, bank analyst Chris Whalen wrote this piece for Zero Hedge entitled “The Sanders Polynomial or Why “Esto se va a poner de la chingada””.
Yes, things got ugly for the residential mortgage market following the mortgage purchase application bubble that peaked around 2005. If you fit a non-linear curve to MBA Mortgage Purchase Applications, you can see a polynomial peaking in 2005.
Here is the updated chart. Mortgage purchase applications have started to rise again since 2010, but at a much slower pace. And there is no polynomial since 2010, just a nice linear increase.
But the mortgage market has fundamentally changed since 2005-7. First, the volume of adjustable rate mortgages (blue line) has declined to under 10% of all mortgage applications. Second, the number of mortgage originations under 620 (also known as “subprime” is far below the levels seen in 2003-2007. Also, the number of non-vanilla ARMs (like pay-option and Limited Documentation ARMs) have reduced greatly.
So when the narrator at the end of the movie “The Big Short” said that nothing has changed, that was fundamentally incorrect. As you can see, ARMs and subprime have essentially vanished. Here is a chart of The Big Short period (in red) and notice that mortgage lending truly did change.
Also, a non-banker lender, Quicken Loans, is the second lending originator after Wells Fargo. My how times have changed.
But are lender credit standards too high? Or are lenders and investors low riding credit?
How about a spoonful of extra credit box expansion?
But let’s not turn back the credit clock too far!!