Cape Fear? S&P Peak PEG ratio At All-time High, Shiller CAPE Ratio At Second All-time High As Dow Pierces 26K Mark

Yes, the stock market is on a roll with the Dow recently piercing the 26,000 mark. And the S&P500 index has pierced the 2,800 mark. Of course, the massive Federal Reserve intervention (along with other global central banks) has certainly thrown gas on the fire.

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Looking at price levels alone is not meaningful. So, let’s look at two stock market adjusted indices.

First, there is the S&P Peak PEG ratio.  It is a price to peak-earnings multiple, adjusted for long-run trend growth. It is at the all-time high.

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Second, we have Bob Shiller’s CAPE (Cyclically Adjusted Price-Earnings) ratio that is now at the second highest peak (after the Dot,com bubble) and above the notorious Black Tuesday of 1929.

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But it is not just the stock market that may be overheated. How about home prices … again?

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And if we adjust home price growth by hourly earnings by the majority of the population, we see that home prices YoY are growing 3 times faster than hourly earnings YoY.

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This might help explain why The Fed is so timid about unwinding its balance sheet.

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Did someone mention fear?

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Hysterianomics! Focusing on M2 Money Growth Is Misguided (Deficits and Debt Are What Is Scary)

I attended an investors presentation last week. Having given presentations to investors in the past, I thought I knew what to expect. I was dead wrong. The presentation was one chart, M2 Money Stock, and why the US economy is doomed because of rampant inflation. The sales pitch was to buy gold and other precious metals because the world is ending!! I just rolled my eyes.

Here is the chart (not their chart, but the same one from the Federal Reserve of St Louis).

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M2 is a measure of the money supply that includes all elements of M1 as well as “near money.” M1 includes cash and checking deposits, while near money refers to savings deposits, money market securities, mutual funds and other time deposits.

To be sure, The Federal Reserve has ramped-up M2 Money Stock, particularly starting with the Clinton Administration and Alan Greenspan’s Fed. I suggested plotting M2 Money growth and population growth on the same chart.

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But if we look at the same chart in Year-over-year (YoY) terms, you will see that US population growth has declined from 1992 to today. Yet starting in 1995, M2 Money Stock growth soared (although it has been declining over the past year).

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But what about M2 Money VELOCITY (M2 Money/GDP)? M2 Money VELOCITY peaked shortly after Greenspan’s Fed started to rapidly expand M2 Money Stock. But M2 Money Velocity has kind of died (lowest in recorded history).

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What about the “runaway inflation”? He made it sound like The Weimar Republic is coming next! I requested that he plot M2 Money growth YoY on the same chart as Core PCE Prices YoY (core inflation). M2 is growing at 4.7% while Core PCE Prices are growing at … 1.5%.

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Besides, if one is worried about inflation, you can purchase Treasury Inflation Protected Securities (or TIPS).

And The Dow just broke 26,000 for the first time!

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The real problem is the growing Federal Budget deficits.

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With exploding healthcare costs (as in Medicare), spending is rapidly diverging from tax revenue.

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And with over $20 trillion in public debt, the US is facing hard decisions on spending and taxation.

M2 Money growth is NOT causing Weimar or Venezuela like inflation. But Gold is still a good alternative to Fiat currency.

Children playing with stacks of hyperinflated currency during the Weimar Republic, 1922

Fed Paid $29.3 Billion To Banks NOT To Lend In 2017 (Excess Reserves), Fed Earned $80.2 Billion For Treasury

Yesterday, The New York Federal Reserve announced that it actually increased their $4.2 trillion balance sheet by $1 million rather than shrinking it.

This comes on the heels of The Federal Reserve announcing that it provided $80.2 billion in payments to the US Treasury in 2017. This is the lowest remittance to Treasury since 2015, but still positive.

The Fed’s $4.45-trillion of assets – including $2.45 trillion of US Treasury securities and $1.76 trillion of mortgage-backed securities that it acquired during years of QE – produce a boatload of interest income. How much interest income? $113.6 billion.

Which brings us to excess reserves. Excess reserves—cash funds held by banks over and above the Federal Reserve’s requirements—have grown dramatically since the financial crisis. Holding excess reserves is now much more attractive to banks because the cost of doing so is lower now that the Federal Reserve pays interest on those reserves.  Excess reserves as of the end of 2017 are around $2 trillion and the interest rate paid on excess reserves is now 1.50%.

In 2017, the interest that the Fed paid the US banks and foreign banks doing business in the US jumped by $13.8 billion to $25.9 billion. The Fed also paid banks $3.4 billion in interest on securities sold under agreement to repurchase. That brings the amount that the Fed paid to banks of $29.3 billion.

The Fed will likely raise rates further this year, perhaps 4 times.

This would push the rate on excess reserves to 2.5% by the end of the year. Excess reserves will likely shrink as QE is being unwound, but I am doubtful. And the amount that the Fed pays the banks this year might surge to $40 billion or more (slow shrinking and rising interest paid on Excess Reserves).

So, Treasury is receiving a windfall every year from The Fed courtesy of QE. And Treasury receives another windfall from the notorious 2012 profit sweep from Fannie Mae and Freddie Mac. (Can you spot Treasury’s changing of the Fannie/Freddie bailout terms??)

Yes, Treasury makes good money from The Federal Reserve and having seized the profits from Fannie Mae and Freddie Mac. Will they relinquesh control?

Fed INCREASES $4.2 Trillion Balance Sheet By (Drumroll) … $1 Million

The Federal Reserve is shrinking their prodigious balance sheet by baby steps.  Like Steve Martin doing Michael Jackson’s Billie Jean.

According to the NY Fed, their securites holdings INCREASED by $1 million from th previous week rather than shrinking it. Not decreased, mind you,  but INCREASED.

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T-note and T-bond holding remained the same while Agency MBS holdings rose by $1 million.

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Way to unwind, Fed!

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A Huge Player (Kingpin) in VIX Options Just Changed Its Buying Behavior (Elephant Trades)

Kingpin? Like the movie with Woody Harrelson and Randy Quaid about bowling?

(Bloomberg) — Trading patterns associated with the new kingpin in volatility options resurfaced on Wednesday, hours before concerns about trade protectionism roiled markets.

The so-called “VIX Elephant” — the moniker bestowed upon the options giant by Macro Risk Advisors head of derivatives strategy Pravit Chintawongvanich — traded more than 2 million contracts, closing out positions in January VIX options and rolling the trade over to same-strike options that mature the following month.

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This entailed buying back 262,500 January VIX puts with a strike price of 12, selling 262,500 15 calls, and buying back 525,000 25 calls in order to close out the existing position. Then, the new position was established by selling 262,500 12 February puts, buying 262,500 15 calls, and selling 525,000 25 calls.

This particular trade, which stands to gain should implied equity volatility rise moderately, confirms a definitive shift in the Elephant’s buying and selling patterns.

“While the ‘Elephant’ originally traded three-month options, rolling after two months, they appear to have switched to a one-month cycle,” the strategist writes.

Daily volume in options tied to the Cboe Volatility Index hit their second-highest level on record Wednesday, exceeded only by the last time the Elephant — joined by another mystery volatility buyer known as “50 Cent” — went on the stampede at the start of December.

The 1 year holding period return (HRP) for the VIX is -13.85%.

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The timing of that roll proved fortuitous: a spike in implied volatility allowed the Elephant’s previous positions to be closed at a loss of $2 million rather than $20 to $30 million.

However, Chintawongvanich estimates that this trader is down roughly $35 million since then as market calm prevailed.

“More generally, the ‘Elephant’ trades reflect a trend towards low premium outlay hedges with minimal convexity,” the strategist concludes. “Clients we talk to have been more interested in VIX call flies or S&P put flies that carry well and have a fairly low initial cost, but may not mark up as much as an outright option in a risk-off scenario.”

In other words, this Elephant might soon be seeing a new animal on safari: copycats.

The Fed has just begun raising rates (only back to October 2008 levels) and barely unwinding their balance sheet. Apparently, there is considerable concern over an unraveling on the stock market with further rate increases/unwinding.

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True,  the trade picture is murky as is The Fed’s will to further raise rates and unwind its balance sheet.

10-year Treasury note volality remains extremely low with all the Central Bank microaggression.

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Did someone mention Kingpin?

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Venezuela’s 2Y Sovereign Yield Almost Hits 200% As Annual Inflation Rate Hits 3733% (Maduro Wants Oil-backed Cryptocurrency, El Petro)

I wonder if Venezuelan President Nicolas Maduro sits in his mansion singing “Don’t Cry For Me, Venezuela.” Perhaps Gordon Lightfoot’s “The Wreck of The Edmund Fitzgerald”  is more appropriate given Maduro’s assinine management of the Venezuelan economy.

As Professor Steven Hanke of Johns Hopkins University has found, annual inflation in the once-thriving economy has reached 3,733%. The good news? At his last reading, it is down from 4,651%!

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While Venezuelan inflation is “dropping,” their 2-year Sovereign yield has almost hit 200%!

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The Venezuelan sovereign yield curve is inverted (or downward sloping) in the extreme.

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Maduro just ignores Venezuela’s Parliament as he will likely do with his latest idea:  issue an oil-backed cryptocurrency—the Petro.

Apparently, Maduro isn’t watching crypto-currency Ripple! Or has been watching and doesn’t care (which is likely the case).

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Here is Maduro singing “The Wreck of The Venezuelan Economy.”

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CMBS Alert: Sears to Close 103 Stores—14 Locations in CMBS, Six With Elevated Risk (Retail Inferno Continues!)

The retail inferno continues, this time with retail giant Sears announcing the closure of 103 stores with 14 locations in CMBS deals. CMBS Alert – Sears to Close 103 Stores – 14 Locations in CMBS, Six With Elevated Risk

The 14 locations in CMBS deals are mostly in small markets like Rapid City, South Dakota and Taft, California.

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The Rapid City closure is hardly a surprise. It was in the BACM 2006-3 deal that has sustained millions of dollars of losses.

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Not only is the Sears property in Rapid City to be closed, Sears is late on the loan. And the Fifth Third Center in Columbus, Ohio is in foreclosure.

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This just goes to show you that it is more than a retail inferno. Even office buildings are seeing foreclosures as well.

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