Wyld Stallyns: Fed GROWS Balance Sheet (SOMA Rises $1.72 BILLION In One Week)

The Federal Reserve was supposed to start unwinding their balance sheet in October. It is now mid-November and the Fed Balance Sheet is growing rather than unwinding.

The System Open Market Account (SOMA) Holdings as of November 15, 2017 showed that their balance sheet actually grew by $1.72 BILLION.

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So, The Fed has not started unwinding their balance sheet.

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Yes, Stanley S. Fischer, Esq. and Jan ‘Janet’ Yellen are … WYLD STALLYNS!!!!!!

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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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ECB’s Loose Monetary Policy Has Created Asset Bubbles, But Little Inflation (Hasn’t Helped Deutsche Bank Much Either)

(Bloomberg) — The European Central Bank’s unprecedented monetary stimulus has done little so far for inflation. For asset prices, it’s a different story. A gauge measuring weighted price developments of property and financial assets of German households rose 8.7 percent in the third quarter compared to the previous year, the most since at least 2005.

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For a closer look at German existing home prices and the DAX (German Stock Market) compared to ECB stimulus, look no further. Yes, both German home prices and the DAX have skyrocketed with the ECB’s massive monetary stimulus.

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Deutsche Bank’s stock price has declined from over 90 Euros per share in May 2007 to 16 Euros today (after Cerberus (aka, “The Hound of Hades”) was revealed as DB’s top shareholder). All that monetary stimulus and DB is still under 20 Euros???

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And then there is the EU’s paltry core inflation rate at 1.1% YoY after all that monetary stimulus.

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Queue up Don Ho and his hit song “Tiny Bubbles.” 

Cheers!

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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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