Digital Gold? Bitcoin Rebounds From Correction While US Dollar Weakens

Yes, the US Dollar is FIAT currency (not backed by a precious commodity like gold, silver or even iron pyrite).

Bitcoin, the largest crypto-currency, has more than recoverd from the “correction” last week. It has resumed its all-time high price This is happening as the US Dollar weakens.

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Here is Bitcoin relative to Gold. Check out their relative performance since September.

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Is it digital gold? Well, Bitcoin is an alternative to FIAT currency like the US greenback, the Euro and the Yen. The massive expansion of Central Bank balance sheets has certainly concerned investors.

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An example of an 1899 $5 silver certificate.

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Multifamily Starts Rise 37.4% In October, Largest Increase In 2017 (West Declines 3.70% As Lonzo Ball Forgets How To Shoot)

Housing starts rose 13.7% MoM in October to 1,290K units SAAR (or 1.29 million). However, the largest share of housing starts were in the 5+ unit (multifamily) category. Multifamily units grew at a rate of 37.4% MoM.

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October was the highest growth in 5+ unit starts in 2017.

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1-unit (detached) housing starts grew at 5.28% MoM, also the best month in 2017. You can clearly see the housing construction bubble that peaked in early 2006.

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The biggest gainer? The Northeast US at 42.16% MoM. The South grew at only 17.17% while the West actually declined at -3.70%.

This is the Lonzo Ball Effect. This is where your starting point guard goes 1 for 9 from the floor, 0 for 6 from the 3-point line for a dismal 2 points and the opponent doesn’t even bother the foul him.  A clear sign of stagnation in the West.

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Perhaps Lonzo Ball should consider changing the name of his basketball shoe company name from Big Baller to Small Baller.

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Bond Traders Should Prepare for Yield Curve to Zero Out in 2018 (Really?)

(Bloomberg) — Just how much further can the relentless flattening of the U.S. yield curve go? All the way to zero, according to T. Rowe Price Group.

The asset manager, which oversees about $948 billion, is the latest to weigh in on the trend that’s pushed Treasury curves to the flattest levels in a decade. The Federal Reserve has raised interest rates twice this year and is set for a third hike in December, leaving two-year notes at the highest yields since 2008. Meanwhile, demand from overseas investors, insurers and pension funds has kept 10-year yields near their 2017 average.

“The peak yield on the 10-year Treasury should roughly approximate where the final level of fed funds settles out, so that to us implies a flat yield curve if we assume the Fed will do two or three hikes in 2018,” Mark Vaselkiv, chief investment officer of fixed income at T. Rowe Price, said at a press briefing. In his eyes, the Fed will likely stay the course, and the difference between short- and long-term debt could reach zero as soon as the second half of next year. 

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Expectations are beginning to build for the Fed to step up its pace of rate hikes as inflation shows signs of stabilizing and with the lowest unemployment rate since 2000. Economists at Goldman Sachs Group Inc. and JPMorgan Chase & Co.are among those forecasting that the Federal Open Market Committee next year will likely tighten four times, rather than the three implied in policy makers’ projections.

If the committee does what Goldman and JPMorgan project, on top of a December move, the midpoint of the fed funds target rate would be 2.375 percent. That’s higher than the current 10-year Treasury yield of 2.35 percent. In other words, if the Fed can’t move the long end, officials will bring about a zeroing out of the yield curve.

“Once you get fed funds above 2 percent, you’re starting to get closer to the zone where you can talk about a flat yield curve,” said Steve Bartolini, a fixed-income portfolio manager at T. Rowe.

Fed’s Resolve

Some bank strategists aren’t so sure the Fed would willingly allow that to happen. Bank of America Corp. strategists say the flattening trend will prevent the Fed from raising rates as fast as officials may want. 

The central bank wouldn’t risk “consciously putting short-term rates above five-year term rates,” Bank of America strategists led by Shyam Rajan said this week in a note. They’ve never allowed that to happen aside from a brief period in its previous tightening cycle, they wrote.

Lacy Hunt, chief economist at Hoisington Investment Management, said last month he sees the yield curve inverting by the end of next year as long as the Fed keeps shrinking its balance sheet. John Herrmann at MUFG Securities Americas wrote in a note this week that he’s targeting 2020 for the spread to hit zero.

The timing matters because an inverted yield curve has proven a reliable indicator of an impending recession. When the spread between short- and long-term debt shrinks, it tends to hurt bank earnings and the real economy.

The yield curve from two- to 10-year Treasuries is about 64 basis points, near the flattest since November 2007. The last time the spread was at that level and still getting narrower was April 2005, about two-and-a-half years before the recession began. It remained close to zero for about 18 months.

‘‘Within a 12-month horizon, it makes total sense that the curve typically flattens when the Fed hikes,’’ said Alan Levenson, T. Rowe’s chief U.S. economist.

Let’s see how many rate hikes there will be. According to WIRP, the only above 50% implied probability in the 1.5-1.75% range is for the March and May FOMC meetings of 2018.

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Unless the 10 year Treasury yield falls by 80 basis points as the short-term rates rise, the yield curve will not likely invert.

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Unless, of course, we rapidly approach a recession.

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US Industrial Production Rises To 2.88% YoY, Capacity Utilization Rises To 77% (M2 Velocity Still Dead)

Call it rebound from the horrible hurricanes in Texas, Florida and even Georgia. The October Industrial Production numbers are out and IP YoY climbed to 2.88%.

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Capacity utilization rose to 77%, although it is still below the Fed target (not spoken of recently) of 80%. The last time was 80% Capacity Utilization was during the housing bubble.

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The problem is that M2 Money Velocity (GDP/Money Stock) remains at an all-time low.  Although we are seeing a stabilization in labor force participation.

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The US Federal Reserve is printing currency (M2) at a rate almost twice as fast as Industrial Production growth.

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Here is a photo of a young Janet Yellen contemplating print more and more money.`

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The Yellenburg Omen! Are Fed Rate Hikes Nailing The Stock Market?

Recently, the Hindenburg Omen has been flashing red, signifying a coming stock market correction. But the Omen has flashed several times since 2008 and nothing has happened.

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A closer look at the McClellan Oscillator.

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The VIX stock market volatility index is on the rise.

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But will another rate hike in December by Yellen and crew cause further declines in the stock market? It lends itself to a new term: Oryellian.

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Trapped! Dodd-Frank And The Demise Of Bank Real Estate Lending

Nothing has been the same since the financial crisis and the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into federal law by President Barack Obama on July 21, 2010. Dodd-Frank created the Consumer Financial Protection Bureau (CFPB).

Whether you like more regulation or not, Dodd-Frank and the CFPB have had a chilling effect on the mortgage market. Note that before The Great Recession, real estate loan growth at commercial banks YoY regularly exceeded M2 Money Stock growth YoY. Not so starting in late 2008. With the exception of a brief respite in 2016, M2 Money Stock growth YoY has exceeded Real Estate Loan growth YoY.

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An alternative explanation of the slowdown in Real Estate Lending YoY since 2008 is the growth of excess reserves of depository institutions.

To deal with the 2008 financial crisis, the Federal Reserve pumped large amounts of reserves into the banking system and introduced new programs that altered the terms of the trade-off banks make when deciding their level of excess reserves. In short, the marginal benefit of holding additional reserves has increased, whereas the marginal cost has decreased. As a result of these new Federal Reserve policies, holding reserves is now much more attractive to banks. It is more attractive because the cost of holding excess reserves—in the form of forgone interest—is significantly lower than it was before the crisis.

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So, the US still has excess reserves trapped in the Federal Reserve system. Between excess regulatory burden (Dodd-Frank, CFPB) and slow wage growth, we have a problem with the banking industry. It is not generating sufficient lending growth to stimulate the economy.

Will The Federal Reserve raise the interest rate on excess deposits that will encourage commercial banks to jump back into the residential mortgage market? Currently, a number of non-bank lenders are leading the mortgage market, such as Quicken Loans and PennyMac.

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An alternative to the traditional depository institution lending model is represented by Quicken Loans. These loans are NOT kept on Quicken’s balance sheet, but sold to other market plays and can be securitized.

So, we continue to have a mortgage lending hangover thanks to the excesses of the subprime and ALT-A markets of the last decade. It resulted in the predictable regulatory overreach which has discouraged traditional banks from making residential mortgage loans (except Wells Fargo, of course).

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Here is CFPB Director Richard Cordray!

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The U.S. Yield Curve Is Flattening and Here’s Why It Matters (Will The Fed Cause Yield Curve Inversion?)

Bloomberg has an interesting article this morning of the US Treasury yield curve.

(Bloomberg) — If you haven’t been paying attention to the persistent flattening of the U.S. yield curve, you’re way behind it.

 Peter Cecchini, chief market strategist at Cantor Fitzgerald, calls it “the most important thing to have a clear idea about now.” Billionaire fund manager Bill Gross says we’re rapidly approaching a point at which the trend will induce an economic slowdown. Others claim it’s only natural, with the Federal Reserve raising short-term interest rates in the face of stubbornly low inflation. 
To put it simply, the Treasury yield curve measures the spread between short- and long-term debt issued by the U.S. government. It’s the extra compensation that investors demand to lock away their money for an extended period.
 
No matter which theory of flattening you subscribe to, the world’s biggest bond market is sending a signal that traders can’t ignore. The longer the trend continues, the more likely its effects could spread to bank earnings and the real economy, while at the same time it would limit the Fed’s ability to respond when these risks emerge.
To get a sense of just how dramatic this trend has been, here’s a look at a handful of curve measures now versus the start of 2017. In trading Monday, they were all close to the flattest levels in a decade.
  • From two years to 10 years: 72 basis points, down from 125
  • From two years to 30 years: 119 basis points, down from 187
  • From five years to 10 years: 33 basis points, down from 52
  • From five years to 30 years: 80 basis points, down from 114

Everyone has their favorite theory for why this is happening and what it means for the economy and the markets, and all of them likely play a part so here’s a breakdown of each one:

It’s the Fed’s Fault

The simplest reason for the flattening comes from looking separately at what’s going on with short rates, the most sensitive to Fed policy expectations, and longer-term yields, which take their cues from the outlook for inflation and economic growth.

After years of balking at tightening monetary policy for fear of disrupting markets, Fed officials finally stuck to their plan in 2017, earning bond traders’ trust in the process. The two-year Treasury yield is at the highest level since 2008 as investors prepare for a rate hike in December, and begin to build up expectations for further increases next year.

With short-end yields climbing, the curve historically tends to flatten as longer-term rates rise more slowly. But since the start of 2017, 10-year and 30-year yields have actually declined. And the culprit behind that appears to be stubbornly muted inflation.

Even with U.S. jobs growth humming along and unemployment at the lowest level since 2000, the Fed’s preferred gauge of price growth was running at just 1.6 percent in September. It fleetingly rose above the central bank’s 2 percent target at the start of the year, but has since struggled.

This all raises the specter of what some call a potential “policy mistake” from the Fed.

That narrative “has ruffled a few feathers,” BMO Capital Markets strategists Ian Lyngen and Aaron Kohli wrote in a note last week. “Growth is moving at a solid clip and the labor market is ostensibly at full employment — so why aren’t we in an environment with a steeper curve and higher yields?”

Their conclusion is the Fed has built up a reputation as an inflation fighter. That means going forward, traders should expect a lower yield range for 10- and 30-year Treasuries than they might have otherwise.

Supply and Demand

Another factor pinning down longer-term yields: forced buyers, both in the U.S. and elsewhere.

Asset-liability managers like insurance companies and pension funds are always seeking duration, and 30-year Treasuries are among the best ways to get it. Combine that appetite with increased demand from passive mutual fund giants like Vanguard and BlackRock, and you’ve got a recipe for a sustained bid on the long end of the Treasury curve.

If that wasn’t enough, Treasury recently announced that it wants to focus increased issuance in bills and shorter-dated coupon maturities, like two- and five-year notes. That creates relative scarcity at the long end of the curve and a premium at the short end to absorb the extra supply.

Some see it as no coincidence that on the day of the Treasury’s refunding announcement, the yield curve from five to 30 years flattened by the most in two weeks.

“For all the discussions about the yield curve these days, one factor that is really driving positioning in the Treasury market is the expectation of future Treasury issuance,” Ben Emons, head of credit portfolio management at Intellectus Partners, wrote in a note.

Draghi’s Driving

To Cantor Fitzgerald’s Cecchini, those looking only within the U.S. to understand the yield curve are missing the bigger picture.

The global bond market is still awash in central bank purchases, he said, most notably from the Bank of Japan and the European Central Bank. And over the course of the past few years, the yield spread between 10-year Treasuries and German bunds has grown wider, creating an opportunity for overseas investors to add U.S. debt.

The ECB, led by Mario Draghi, announced last month that it plans to keep buying bonds through September 2018, albeit at half the current pace from January. It’ll also continue to reinvest proceeds from maturing debt for an extended period. The bank’s main refinancing rate has been pinned at zero since early 2016, sending yields negative on trillions of dollars of debt from Germany to Italy and the Netherlands.

“As long as the ECB continues to buy the long end of the curve, they’re in control of developed market long-ends, including Treasuries,” Cecchini said in a telephone interview. “It’s very hard to draw from history in this environment. The lessons from history only make sense if facts and circumstances are close to what they were.”

History’s Guide

If one does take history at face value though, the $14.3 trillion Treasuries market is sending a warning about the economic outlook. Yield curves are the flattest in a decade, and it’s no coincidence that about 10 years ago marked the start of an 18-month recession. The yield curve has proven a reliable indicator of impending economic slumps when it inverts, and short rates exceed longer-term yields.

Lacy Hunt, chief economist at Hoisington Investment Management, sees a good chance of an inverted curve as soon as a year from now if the Fed continues to shrink its balance sheet. He says the tightening policy will likely choke off credit growth and curb excess reserves, slowing the economy and suppressing inflation.

Banks typically prefer a steeper yield curve because they generate income from the spread between long-dated loans and deposits that are priced on shorter-term rates. Without the gap, their performance suffers.

It’s already starting to show this year: U.S. financial stocks have trailed the S&P 500 as the yield curve has flattened. While banks’ lending margins have increased slightly from their 2015 lows, they remain below the average of the past 30 years, according to the Fed.

A potential increase in the cost of credit is at the heart of what worries Janus Henderson Group’s Gross.

“In a highly levered economy with a lot of debt, and that typifies the U.S., we don’t have to go flat, perhaps another 20 to 30 basis points of tightening would be enough in order to induce certainly a slowdown in the economy,” he said on Nov. 3.

The flattening trend may be a warning sign, or — to borrow one of the phrases Gross helped to popularize — it might just be “the new normal.” Either way, it’s a trend that’s poised to dominate bond traders’ decisions in the months to come.

I agree with Lacy Underall Hunt. Further rate increases and a Fed balance sheet unwind could lead to an inversion of the US Treasury yield curve. Inversion is when the 10 year T-note yield is below the 2 year T-Note yield. Inverted Treasury curves occur several months before entering into a recession.

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Here is the US Treasury Actives curve today compared with December 1, 2006 when the yield curve was last inverted, mostly in the short-end of the curve.

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