THE WOLF STREET REPORT

Peak “Everything Bubble?” The data is piling up.

For nine years, US stocks, foreign stocks, government bonds, corporate investment-grade bonds, junk bonds, leveraged loans, emerging market bonds, art, classic cars, residential real estate, commercial real estate, startup valuations…. they all surged. Then came 2018. Which changed everything. (15 minutes)

The price of rising interest rates. Read…  US Banks Disclose Biggest Unrealized Losses on Security Investments since Q1 2009: FDIC

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  64 comments for “THE WOLF STREET REPORT

  1. michael
    Dec 17, 2018 at 12:11 am

    Wolf,

    Glad to hear your voice has recovered. I have been reading that the primary banks are loaning money to the non-bank entities. If the narrative is that the banks are lending more prudently does that not represent an ill omen?

    • Dec 17, 2018 at 1:45 am

      The thing is by lending to shadow banks, big banks have an entity between them and the borrower that takes the first loss. And the bank gets the collateral. So first the shadow banks has to collapse, with equity holders and unsecured creditors eating the first loss, and then the collateral has to be worth a lot less than loan value before the bank takes a hit. Bank loans are usually very senior. This dilutes the damage for the banks.

      • Rob
        Dec 17, 2018 at 6:01 am

        What shadow banks? Are you talking about CLOs? The market size is tiny, $600bn o/s, underlying loans >$150m, $50m EDITDA, 5.5x EBITDA. 40%+ LBO equity below needs to be wiped out first plus any high yield.

        What gets killed by rising rates? Leverage and duration. Operating leverage is a form of leverage, so companies reliant on low wages.

        • Dec 17, 2018 at 10:17 am

          Rob,

          By “shadow banks” I mean “non-bank” lenders.

          The largest mortgage lender in the US is now Quicken Loans. The company is not a deposit-taking bank. So it’s a “non-bank” lender, or a “shadow bank.” As commercial banks (deposit-taking banks) have become more prudent in mortgage lending, shadow banks such as Quicken Loans have jumped in.

          These non-banks or “shadow banks” are not regulated by the Fed, the FDIC, and the OCC, which are the three banking regulators. Since they don’t take deposits, and depositor money is not at risk, they will likely not get bailed out when they topple. During the Financial Crisis, non-bank mortgage lenders were the first to collapse, and they were allowed to collapse.

        • Iamafan
          Dec 17, 2018 at 10:34 am

          I believe a previous wolf article mentioned that Wells was exposed by about 60B and three other banks were exposed by about 30B each.

          I wonder how much is Charles Schwab is exposed to and whether their customers really know it’s possible repercussions. Same for Fidelity.

        • Broker Dan
          Dec 17, 2018 at 12:25 pm

          Wolf,

          But these non-bank lenders don’t hold these loans, they originate and sell on the secondary market.

          The only way the loan comes back on them is via buyback. Buybacks are typically pushed onto the originating lender if there is a defect in underwriting, compliance or fraud.

          So these loans are ultimately held by Fannie n Fred as well as larger Banks.

        • Dec 17, 2018 at 12:37 pm

          Broker Dan,

          Yes, see my reply to Ambrose Bierce (below), last paragraph. Most of the funding from Quicken Loans mortgages comes from securitization (including MBS guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae) and from bond issuance. A collapse of Quicken Loans would spread most of the losses to investors and mortgage guarantors, not the banks.

        • alex in san jose AKA digital Detroit
          Dec 17, 2018 at 7:52 pm

          Wonderful explanation of “shadow banks”, Wolf.

      • Dec 17, 2018 at 11:21 am

        Insert Quicken for Countrywide and you have 2008 redux? When you say collateral you mean they hold the title on the property in a market more like quicksand? There is no collateral anywhere, unless home buyers recently started making down payments in gold.

        • Dec 17, 2018 at 12:31 pm

          Ambrose Bierce,

          Let’s put some numbers to it.

          The bank that lends to Quicken Loans gets collateral in form of the underlying mortgages. These mortgages are secured themselves by collateral (the house or condo). If Quicken Loans defaults on the bank loan, the bank gets the mortgages that back the bank loan. If an underlying mortgage defaults, the bank can foreclose on the house, which means the bank gets the house and sells it at auction and gets the cash from the sale.

          Even if the house price plunges 50%, it means the bank gets 50% of the loan value, and books a loss for the other 50%.

          But wait… Not ALL Mortgages default. Even during the big-bad Financial Crisis, only about 10% of the mortgages defaulted (which was HUGE).

          So if Quicken Loans defaults on the $3 billion bank loan from Bank A that it used to fund 10,000 mortgages, Bank A gets the 10,000 underlying mortgages with a loan value of $3 billion. Using the worst-case figures from the Financial Crisis, about 1,000 mortgages (10%) will default. In other words, $300 million in mortgages will default. Bank A forecloses on these mortgages and sells the homes at a 50% loss — a loss of $150 million.

          So Bank A’s total loss on its $3 billion loan to Quicken Loans is $150 million if 10% of the mortgages default, and if home prices plunge 50%. That loss is about one year of interest that the bank earned on this loan before.

          Remember that most of the funding for Quicken Loans’ mortgages doesn’t come from bank loans but from securitization (including MBS guaranteed by the GSEs) and bond issuance. A collapse of Quicken Loans spreads most of the losses to investors and mortgage guarantors, not the banks.

  2. Rowen
    Dec 17, 2018 at 12:46 am

    Why do asset prices go up? More buyers than sellers at every price point.

    This is has been a generational asset bubble riding on top of a generational demographic bubble. Once the demographics have turned, no amount of money printing (short of an actual revaluation) can bring back peak prices.

    • Rowen
      Dec 17, 2018 at 12:50 am

      Also, which are the only assets have intrinsic value independent of the number of buyers/sellers?

      Cash and guaranteed-debt securities held to maturity.

    • Dec 17, 2018 at 11:13 am

      you need to read Bob Prechter on this

    • EcuadorExpat
      Dec 19, 2018 at 12:10 am

      Its a dollar bubble plain and simple, not an asset bubble, which is merely a symptom. There are two kinds of bubbles, a price bubble, and a supply bubble. The USA dollar is experiencing both.

      You will never see this dollar bubble in the media, because even the most common man understands bubbles, and how they eventually end. Thus we have situations like this that seem impossibly complicated, but it sure gives the talking heads and the writers fodder, while keeping the common man in the dark believing that somehow this will come out OK, when it is simply awesome corruption every where one takes a real look.

      If you just detach yourself from all this, quit trying to make a buck by intelligently moving your assets, and just think this situation through, you know exactly how this is going to end up. Your belief that somehow you are superior enough in studying the situation so that you will know when to get out is simply arrogance. You would never risk your life in a situation where there was a 5% chance of survival, yet you blithely risk your assets with your beliefs. The only thing that will wake all these asset movers up is when they make a trade and nobody will take the other side of that trade.

      An incredibly perceptive question was asked, “if you are making money in the markets, who is losing that money?” Nobody answers that question. If you do not understand where your trading profits came from over the last 10 years, there is pretty much zero hope that you will be able to keep them when they return from whence they came. And they will return.

  3. Ronnie
    Dec 17, 2018 at 1:19 am

    Scary.

  4. OutLookingIn
    Dec 17, 2018 at 1:58 am

    As debt becomes ever more unmanageable, it begins to collapse. As debts collapse so will assets, because debts are the other side of assets with resultant asset values collapsing. What we are currently witness to, is the beginning of a downward reset of financial asset prices, compliments of a yield shock. Asset prices are no longer driven by the economy, but drive the economy.

    The US sovereign bonds (aka) Treasuries trade based on inflation expectations. When inflation is higher, so are Treasury bond yields.
    An historic milestone was achieved on Friday December 14 2018, as the US one year Treasuries were market priced as riskier than similar Chinese sovereign debt. America now pays more to borrow money than China does.

    Massive leverage is the root cause which drove up asset prices. The difference between the net worth and GDP trend lines, suggests that asset prices are over-valued by more than 40%. Asset markets will eventually regress to their long term mean valuation, often over-shooting to a lower level before finding the mean. Its not a question of “if” but of “when”. And I think “when” has arrived.

    • Spooked
      Dec 17, 2018 at 1:38 pm

      Yep. Debt will do us in. All this was predicted by Nicole Foss of The Automatic Earth a decade(?) or so ago. Her archived stuff is still worth a read – she long ago fled the scene to remote NZ, as I recall.

      Just about time for a Victory Garden.

      PS you gold bugs better be thinking long term

      • Rowen
        Dec 17, 2018 at 5:17 pm

        Correct.

        The issue is how much austerity the savers will extract from the debtors before they realize that the savings was merely a mirage of the debt.

    • EcuadorExpat
      Dec 19, 2018 at 12:16 am

      Massive leverage only occurs in a corrupt system. When institutions collect fees and them move the liability on to others, this is not banking or brokering, it is simple fraud made legal by allowing the inmates to design the laws. Somebody in this situation is lying, it is the no clothes call nobody will make because they don’t want to lose the chance of getting more.

      Housing bubbles occur because of fraudulent assessments, and financial bubbles occur because of fraudulent rating firms.

  5. Willy2
    Dec 17, 2018 at 2:43 am

    – My personal bet is that the FED won’t touch rates at all. But I have been wrong before.

  6. raxadian
    Dec 17, 2018 at 5:03 am

    The everything bubble was a “credit is cheap bubble” that lasted way more that it should have. Is no surprise the start of the end of this bubble coincides with the FED raising rates.

    The faith people had on “But the stocks can only keep going up” is something one would think of the naive people who were not prepared for the Wall Street Crash of 1929, not people who not only suffered the Financial crisis of 2007–2008 but also had to remember the Dot Com Crash that occurred not ten years before and the Tequila crisis before that.

    And let’s not even start on Bitcoin…

    Of course hindsight is 2020 and maybe is the fact I live in a country that gets a cold every time the world economy sneezes is what has mentally prepared me to the fact you can’t even go ten years without some economical crisis…

  7. MC01
    Dec 17, 2018 at 5:20 am

    There has been three trends you highlighted very well in your report.

    First, it seems like the Bank of Japan (BOJ) has shifted somewhat from a strategy completely built around ferociously chocking government bond yields to much increased support for the Nikkei 225. The latter seems to be some sort of safety net: create ripples or perhaps even peaks that can be sold to bail traders out. What the BOJ plans to do with all their assets that aren’t securities (those can be just held to maturity and either allowed to roll off or replaced) remains an interesting question.
    Second, Chinese real estate… The chief problem is they are literally running out of buyers: home ownership rate is at 90% of households (as usual caution is to be exercised around official Chinese statistics) and over 18% of residential real estate purchases this year are “third or more” homes. Many of these people owning two or more homes expect to shift them at a large profit short term (under five years) and on top of this construction of new units doesn’t seem to be slowing down if iron ore imports (needed for rebar and other structural elements) are anything to go by. For me this is the most important thing going on economically worldwide at the moment because it needs to be defused but the Chinese government appears to be as confused as it’s on trade matters.
    Third, thanks a lot for talking about the insane bubbles we’ve had here in Europe and the desperate and criminal (I don’t use this word lightly) attempts to reinflate them. I’ve recently read a very apt metaphor: 2008 was like landing in hospital due to some eating disorder and what has been going on since 2011 is like trying to cure said disorder by eating a whole chocolate cake every day and calling it a diet.

    • Judy Lawson
      Dec 17, 2018 at 8:24 am

      That metaphor is great! Thanks for the good words.

    • OutLookingIn
      Dec 17, 2018 at 10:44 am

      A small grammar correction, if you please:

      What you have is not a pure metaphor.
      By the use of “like” or “as” it is a simile.
      What you do have however, is a mixed metaphor.

      Not nit-picking, just pointing out common English usage mistakes.

      p.s. If English is not your native tongue, then this may be over-looked.

      • Dec 17, 2018 at 11:42 am

        It could also be metonymy, the language is based on metaphor. Not that non-english speaking people don’t understand metaphor they just approach it differently.

  8. Escher
    Dec 17, 2018 at 6:33 am

    If the unwinding of this “everything bubble” continues, won’t the Fed reverse its QT and interest rate hike policies? After all, it seems to take its cues from Wall Street.

    • Tinky
      Dec 17, 2018 at 8:03 am

      No doubt, BUT that will be the equivalent of a surrender, or the curtain being pulled back, Wizard of Oz style. And so markets will not merrily pick up where they left off, and soar blissfully as long as the spigot remains open.

      I’ll let more sophisticated observers parse it out more finely, but suffice to say that neither further suppression of interest rates (after the 10 years and counting “emergency”), nor yet another round of QE, will save the patient. Which is why it is often suggested that the Fed is “trapped”.

    • MC01
      Dec 17, 2018 at 9:12 am

      I’ve been reading a whole lot of stuff, ranging from simple comments to opinion pieces on why and how “2019 will be the year of QE/stimulus/whatever you want to call it”.

      Most people I’ve talked to said China will start another massive round of stimulus around the Chinese New Year 2019 (February 5) and that the rest of the world will have no other choice than follow. I respectfully disagree.
      China may as well flood her own economy with liquidity once again, but how effective will that be remains to be seen: the European Central Bank (ECB) has added €2.6 trillion in liquidity to the European Monetary Union (EMU) through asset purchases alone and drove interest rates well below the ground. This has been going on day in day out since 2015 and accelerated sharply in 2017: assets held by the ECB are now an astonishing 41% of the EMU GDP. According to ruling wisdom this should have been the final panacea, yet QE is coming to an end amid rapidly deteriorating economic fundamentals and riots in the streets. Literally.

      The burst of activity generated by that ridiculous liquidity injection had the effect of not just creating more asset bubbles which are now hissing air (see Euro stock markets) but of adding more distortions on top of the distortions which were waiting to be liquidated since 2009: see the Housing Bubble 1.2 in countries like Italy, Portugal and Spain, where high real estate prices have become completely detached from available stocks and wages. And let’s leave increased government spending alone for now.

      The ECB will keep on dousing markets with liquidity for now, and may even come to the rescue of the bumbling amateurs running Italy further into the ground right now, but the party is over and the tattoo is being beaten. Better make that glass of beer last as long as possible and prepare for one massive hangover.

    • Dec 17, 2018 at 10:28 am

      Escher,

      That’s what Wall Street hype organs want you to think.

      But the Fed is specifically targeting high asset prices because they’re a risk to “financial stability” because banks use them as collateral for their loans, and when a bank lends on inflated collateral values and the loan goes bad and the collateral has to be sold, but only fetches a fraction of the loan value, the bank gets hit.

      Last time this happened, it caused the Financial Crisis, and the Fed desperately wants to avoid another financial crisis. It said so specifically in its “Financial Stability Report,” which I reported on:

      https://wolfstreet.com/2018/12/02/the-fed-explains-why-its-raising-rates-to-prevent-financial-crisis-2/

      • Escher
        Dec 17, 2018 at 7:31 pm

        Thanks Wolf. Guess this means the Fed is looking to slowly deflate this asset bubble so as to not create a panic. Question is whether Powell can resist the pressure from administration and his buddies at Goldman/JP Morgan et al if markets continue to head downwards.

  9. Dec 17, 2018 at 6:59 am

    Wolf:

    Great walk through our nine-year Frankenstein Finance past and what is in store.

    Do wonder, however, especially given what sounds to my bilingual ears as (your) German extraction, that you seemingly fail to grasp the true significance and capital gains potential of mispriced gold and silver, the only forms of money that stood the test of time over thousands of years, from Persia to Rome to a 1964 silver-backed US dollar certificate.

    Actually, it’s amazing that although you connect all the other asset bubble dots correctly back to nearly a decade of financial repression, you simultaneously fail to grasp that popping same bubbles will ultimately NOT have people run back into the very fiat currencies in which they are priced. Reason: virtually all fiat currencies of any importance are utterly bankrupt, debt-based units affiliated with our global debt edifice of $250trn, which is over 3x global GDP.

    Trust, as history shows, can only be regained when massively abused money (decoupled from the discipline) is again anchored in the only real money, gold and silver.

    The implications of this for PM prices couldn’t be more bullish, given a) the massive monetary bases and the debt saturation they are part and parcel of, and b) the fact that less than 1% of the global portfolio value of bonds and stocks (south of $300trn) is invested in PM, most of that of course paper PM, which exceed physical availability by well over 100:1. Translation: only a tiny shift in global portfolio allocations will result in a hugely higher PM equilibrium price given less than $150bn in mined PM a year and above ground stocks of “only” about $8trn, most of that held in firm hands or much of it hard/expensive to recover (junkyards filled with tiny slivers of silvers scattered all about).

    Finally, we won’t have to wait for a return to sound currencies (PM-backed; historically about 40% has done the trick, which would currently suggest a gold price in excess of $10K per Troy ounce) for PM to rocket ten-fold higher. That will happen as people realize that government bonds are junk bonds as well. This, as your audio describes, and given the insolvency of virtually all bigger governments, shouldn’t take too long to be visible even to the totally ignorant.

    In short, this time around, we have a government bond crisis heaped upon all kinds of other non-performing debt/bonds in the private sector starting to manifest themselves.

    So what’s the only true save haven in town? Assets that have value on to themselves and are indestructible, divisible, fungible, worn as jewelry-based net worth in many EM, and have a myriad of uses in industry and medicine.

    As amazed and dazzled as I am about your unbelievable and lightning fast capacity to aggregate, distill, and disseminate well enormous amounts of valuable financial and economic data (my hat’s off to you — wow!), I’m equally amazed at your capacity to miss the forest for all the trees here (also case, in my view, as concerns your/your site’s somewhat sophomoric green energy misconceptions, but I digress).

    “Es wird schon schief gehen!”

    Greetings,
    Dan

    • Dec 17, 2018 at 10:45 am

      Dan Kurz,

      Indeed, you’re totally correct: as you said, I “fail to grasp the true significance and capital gains potential of mispriced gold and silver, the only forms of money that stood the test of time over thousands of years, from Persia to Rome to a 1964 silver-backed US dollar certificate.”

      As most WOLF STREET readers probably know, I’m not a gold bug, and this site doesn’t promote gold, and I don’t think gold is the solution to our problems today. Nor will the “gold standard,” or any version of it, ever be used again — it’s just not practical in a modern economy. People who hope for it and are waiting for it have been and will be permanently disappointed. Permanent disappointment is not a good place to be :-]

      Nor do I look at everything through gold-colored glasses. I’m a realist. Whether I like it or not, “money” is what a society decides it is. Always has been, always will be. I try to stay away from wishful thinking.

      But I do think gold serves a purpose for investors under certain conditions as long as they don’t expect it to skyrocket over the next few years. Since late 2011, gold has been one of the few assets that didn’t rise in lockstep with the Everything Bubble. I have said this before: this makes a reasonable but not exciting case for diversification.

      • Lisa Murphy
        Dec 17, 2018 at 2:44 pm

        “I’m not a gold bug, and this site doesn’t promote gold, and I don’t think gold is the solution to our problems today.”

        That’s why I signed up for your blog. So many people on the internet pushing the ‘hyperinflation is coming’ goldbug scam. They’ll say: The Fed is going to suddenly get concerned for the welfare of the masses and do helicopter money drops to save those poor dear people that they love so much. What?? So I keep asking, why would the Fed want to hyperinflate the dollar? Their existence (and the existence of those Nice people they serve) depends on a viable dollar. And furthermore, when have they brought on hyperinflation it in the past?

        Yes diversification! I own 5s 10s, 20s and 100 dollar bills – very diversified.

        • SocalJim
          Dec 17, 2018 at 4:26 pm

          Right you are about the gold. Most often, investments in gold do not work for many reasons.

      • Dec 17, 2018 at 8:04 pm

        Nothing could be more practical or have more integrity and stability than a PM-based monetary system. Look back in history to see when wealth of nations trajectories were at their most robust, and you will invariably find sound money and unfettered price discovery as two hallmarks.

        In terms of execution practicality, you re-issue PM-backed notes with independently verified PM stocks. Those notes can be paper or electronic (including debit cards). Today’s technology makes it even simpler and more doable. The desirability speaks for itself. And there is plenty of PM to do this with; it would simply have to be reflected in totally out-sized fiat currency and debt creation (way in excess of underlying real GDP growth)

        Plus, PM extraction happens to occur at roughly the rate of GDP growth, which is comprised, over time, by population growth and productivity growth.

        This too makes it much closer to perfect money than anything else out there ever invented.

        Society, over time, has always gone back to PM-backed money. You may want to re-read your second to last paragraph response to my comments.

        I’m not a gold bug, but a value bug. Most of my 35-year career in the investment business, most of it as a CFA, was spent in the bottom up world of valuing individual securities, mainly stocks and, to a lesser degree, distressed corporates. And, for most of those same 35 years, I held stocks, nearly exclusively, in fact. A pronounced shift to PM has only occurred within the last four years.

        Your stance (“I try to stay away from wishful thinking”) and, frankly, your global ignorance here — shared widely in the investment community, BTW — makes me even more bullish about the coming PM overshoot expressed in fiat currency terms.

        In my book, that’s kind of exciting. Perhaps enough to make a wolf howl at night when it happens.

        Let’s stay tuned.

        Plus, speaking about when it happens, how about putting a little of your money where your mouth is, Wolf: how about a 7 Troy ounce silver bet (about $102 currently with a silver price of $14.66 per Troy ounce).

        Specifically, that within two years, or by 12/17/2020, the price of silver in dollar terms is five-fold or more higher than today, or at least $73 per Troy ounce?

        If I win the bet, you send me 7 silver Buffalo rounds. If you win, I send you 7 silver Buffalo rounds. Deal? Hope so. It would be fun. Today’s date: 12/17/2018.

        Greetings,
        Dan

        • Dec 17, 2018 at 9:40 pm

          You gold bugs are so full of self-contradictions it’s laugh-out-loud hilarious. You want a gold standard to guarantee a stable currency, AND at the same time, you want/predict that your “money” (gold and/or silver) will skyrocket five-fold or whatever in two years. Money that skyrockets five-fold in two years against local goods (as you’re betting) is NOT a stable currency. Even a surge of “only” 50% (instead of five-fold) by this “money” against local goods over two years would be the worst imaginable “deflation” that would strangle the economy.

          You have to choose what you want: Either a stable “money” or something that you want to skyrocket in two years because you own a bunch of it. You can’t have it both ways.

    • Escierto
      Dec 17, 2018 at 1:15 pm

      You, along with all the other gold bugs, have been saying the same thing for years. Precious metals and mining stocks have been in the toilet for years and will probably stay there for another decade at least.

      • Spooked
        Dec 18, 2018 at 3:51 am

        “Precious metals and mining stocks have been in the toilet for years and will probably stay there for another decade at least.”

        OTOH, one wonders why the Chinese, Indians, Russians & others have been buying gold hand over fist?
        Long term (decade +) perspective, maybe?

        • James
          Dec 18, 2018 at 1:49 pm

          China and Russia are largely buying gold for strategic paramilitary purposes.

          China is offering payments in part Yuan/part gold for oil, natural gas, and some strategic rare earth metals. This is to help erode the US (petro) Dollar’s strength as a reserve currency. Russia has this goal as well.

          Gold is also useful as payment to avoid US sanctions on countries (i.e. Iran and North Korea). Gold has long been used in the covert intelligence communities for large scale operations as well.

          Thirdly, Gold is an insurance policy for the corrupt ruling elite/dictators of these countries. Gold keeps their wealth and power protected from cyber attacks on the national economy/currency that would result from our new Cold War heating up (say, US and China fighting over the South China Sea. Or NATO and Russia in the Baltic States). Economic cyber attacks are THE big vulnerability; indeed, many strategists see cyberwar as the opening volley of any future conflict, before the militaries even start shooting.

    • Spooked
      Dec 17, 2018 at 1:53 pm

      In the scramble to raise cash to pay off debt, gold will sell off like almost everything else and Pretchers’ $300 (?) may be close.

      So if you’re a (youngish) person and can wait it out, gold will shine, one day.

      Alternatively, your kids/grand-kids will build a Shrine to your memory. There’s always a positive.

  10. Xypher2000
    Dec 17, 2018 at 8:13 am

    If it happens like 2008, home prices will drop again and be affordable. Been waiting for this to happen for 2 years. First house I bought on short sale just outside of phoenix in 2009 was almost 1/3 of the price it was originally purchased brand new in 2003. Bought at 5.2% and then a couple years later, refinanced at 3.25%. Our situation changed and we moved back to Iowa, now i’m looking forward to a similar deal here, though prices won’t drop nearly as drastic, but if they drop 25% that makes a 200k house more affordable at 150K.

    • James Levy
      Dec 17, 2018 at 10:28 am

      Your continuity bias is, I think, misplaced. These crises are getting worse, and it is unclear to me that there is any way for Central Banks to both reflate the economy again and retain any value in our various currencies. I liken this to metallurgy–you can only heat and bend a metal so many times before it loses its elasticity and becomes hopelessly brittle. Next time, the economy may break and reset at a much lower level of both activity and technology. Your assumption that you will just be able to swoop in and buy what you want, and that the rest of the economy will simply remain as-is, may proved illusory.

      • TrojanMan
        Dec 17, 2018 at 12:13 pm

        There is $250 trillion of dollar denominated global debt. Liquidity is not the same as equity and those debt obligations are not going to simply disappear.

      • DF
        Dec 17, 2018 at 12:43 pm

        There’s no way to “anneal” the economy?

  11. Tony bolongy
    Dec 17, 2018 at 8:32 am

    Good day everyone and happy holidays to everyone

    I’m not sure if Jerome Powell takes his cue from wall street like someone posted earlier Jerome Powell was a former partner of the Carlyle Group .He gave up his hi paying job there to become fed chairman for much lower pay does this mean anything I don’t know but I betcha any money he makes more the 19 bucks an hour at the fed no?

    • Dave
      Dec 17, 2018 at 5:39 pm

      Fed Chair makes $100/hour, plus a government dental plan.

  12. Iamafan
    Dec 17, 2018 at 12:47 pm

    Wolf,

    How much and what tranche do this originators keep?
    I read they only keep like 5%. Don’t know what tranche.
    Can Fannie & Freddie require them to take back some losses if their mortgages blow up?

    Thanks in advance.

    • Petunia
      Dec 17, 2018 at 1:54 pm

      The banks do have to take back the bad agency loans. The riskier loans tend to have insurance so the banks get their money, unless the insurer goes bust(think AIG).

      In the old days the banks kept the tranches they couldn’t sell, usually the longest end. Now they probably chop up the front end 5% and keep that so they can get their money out first.

      • Iamafan
        Dec 17, 2018 at 4:31 pm

        Thank you.

    • Dec 17, 2018 at 6:34 pm

      Since the rule changes following the financial crisis (Dodd Frank), originators are required to retain 5% of the credit risks of the underlying mortgages (“skin in the game” to reduce “moral hazard”), but this may not be a “tranche” of the MBS since a MBS may pool mortgages from different originators.

      yes, the GSEs can require originators to buy back mortgages (and this has happened quite a bit after the financial crisis). But there has to be a reason, such as falsification of some data in the application. This can lead to drawn-out negotiations and even lawsuits.

  13. jon
    Dec 17, 2018 at 1:31 pm

    Housing seems to have peaked. West Coast prices slowly sinking, NYC the same.

    Great site for up to the minute housing sale info is housingbubble.blog, which recently published some info on Las Vegas:

    “for the month of November. 10,000 single family homes were on the market and by the end of the month, 7,000 homes had zero offers on the table.”
    “a Las Vegas realtor, said price cuts of up to tens of thousands of dollars are now common. ‘Any property that we’re pulling up right now, it’s reduction, reduction, reduction,’ she said.”

    I am a senior who downsized and moved from Pahrump, NV to Yuma, AZ. The (bloated) profit from my sale of my manufactured home in March 2018 allowed me to purchase in cash a park-model home on land I own. Small, around 400 sq ft, but perfect for my retirement, with no mortgage.

    Good time to sell if circumstances allow.

  14. Memento mori
    Dec 17, 2018 at 4:09 pm

    With the market down today, look how the crying babies will be out in force now asking for more free money.
    Pay attention how media will demonize Powell and announce apocalypse now if fed keeps raising rates. Let’s see what Powell is made of, will he be a Volker or another Wall Street servant. My money is on the latter.

    • IdahoPotato
      Dec 17, 2018 at 5:00 pm

      When the bond crybabies join the stock crybabies, you know it’s serious.

      https://www.bloomberg.com/news/articles/2018-12-17/doubleline-s-gundlach-says-fed-shouldn-t-raise-rates-this-week.

    • MC01
      Dec 18, 2018 at 1:27 am

      In the meantime, the much awaited “stimulus” speech by President Xi of China turned out to be filled with generic political topics instead of the trillions of renmimbi in liquidity and fiscal incentives everybody was seemingly expecting.
      Intriguingly enough it was structured in such a way it could not be “interpreted” as dovish, like Wall Street and her sibling around the world like to do these days: it was basically all standard (and safe) Maoist rhetorics. Good luck using that to prop up stock markets.

      Next up, the Wall Street hype machine threatens to hold its collective breath until it turns blue if no more stimulus is forthcoming.

  15. SocalJim
    Dec 17, 2018 at 4:19 pm

    Soon, the central banks will learn that they must supply easy money policies with inflation. That is their only option. Get ready for slower growth with inflation. This is very different than 2008.

  16. SocalJim
    Dec 17, 2018 at 4:24 pm

    Investors that think this is a 2008 replay are making a mistake. 2008 was a deflationary slowdown. This time we will see an inflationary slowdown and the rules will be very different. Investors using a 2008 playbook will be very disappointed.

    • Shawn
      Dec 17, 2018 at 5:49 pm

      First of all, great report, Wolf. Though I hate NPRs Marketplace program, they did say that the latest inflation numbers were 2.2%, “within FED guidelines”. Their words. If this is an Inflationary slowdown, why the disconnect with what the mainstream media is feeding us? BTW. I got flamed twice this week on various blogs talking about the ‘Everything Bubble’.

  17. David Horowitz
    Dec 17, 2018 at 5:05 pm

    Check out John Hussman’s latest market comment: https://www.hussmanfunds.com/comment/mc181128/

    By paying interest on excess reserves, the economy is already behaving as if the Fed has cut its balance sheet to $2T.

  18. Lion
    Dec 17, 2018 at 5:30 pm

    Reading through the comments, I think of the children’s story about the Ant and the Grasshopper. Will say I’m more the Ant. I don’t begrudge the Grasshoppers for having fun, but I do see winter coming and it’s late to prepare for the coming storms. I think I have our family positioned to weather the storm. I wouldn’t want to be at the mercy of the government for survival.

  19. sierra7
    Dec 17, 2018 at 6:59 pm

    Again, thank you Mr. Richter for a great presentation. Lots of good comments too. I think Mr. Powell will become “Mr. Volcker” contrary to many others’ thoughts. It has to come. Also agree that gold is an “anachronism” as far as becoming the future “money”. Maybe in a most destructive global atmosphere but not as a modern monetary representative; too restrictive in supply. But, what do I know!! Have a good Holiday!

  20. Kyle Myers
    Dec 18, 2018 at 9:21 pm

    Great recap. You’re right, housing is local, but many times the money used to buy the housing comes from national or international sources. When these international sources (i.e. China) begin to slow down, they will need to liquidate their U.S. Holdings. Then, that local housing, has now become internationally influenced.

  21. EcuadorExpat
    Dec 19, 2018 at 12:18 am

    Civilization ends when bad things do not happen to bad people.

  22. Dave
    Dec 19, 2018 at 8:15 am

    Wolf-
    I’m a small business owner (contractor) and done well through all economic cycles. Wondering with this bubble again happening, would we have been better off with no govt intervention during the last bubble, albeit a few years of misery, in order for prices -affordability for average people etc. to come back down to normal levels?

    • Dec 19, 2018 at 10:16 am

      Dave,

      I agree with your sentiments and your experiences.

      The government needs to provide the classic safety net that it is set up to provide, such as unemployment insurance. The government also need to make sure that infrastructure of all kinds and public services don’t collapse, such as electricity, water, communications, etc.

      The Fed needs to make sure that the financial infrastructure holds up and that people can get their paychecks, which means that when credit freezes up, it needs to step in as lender of last resort and keep the financial pipelines open. The Fed did this with numerous programs (TALF, etc., not QE).

      Other than that, the government and the Fed need to let the markets work things out. Maybe the government should increase staffing at bankruptcy courts to more efficiently deal with the cleanup. And it should hire more prosecutors and see to it that those who violated the laws are actually taken to task over it. But it’s the market’s job to sort out valuations of assets.

      However, the Fed’s zero-interest-rate policy and QE were designed to transfer wealth from savers to banks, and to enrich asset holders (Buffett with his financial and insurance empire was the biggest single beneficiary of QE and ZIRP). QE and years of ZIRP caused all kinds of problems and were terrible policies for labor and young people.

      For business owners, as you have experienced: When credit doesn’t freeze up (though it may get more expensive), and everything else (power, water, communications, etc.) functions, a good business that is well-run and is not overleveraged will do just fine. Revenues might decline some, and profits might sag, but a business can manage that. There might be some adjustments and changes the business has to make, but that’s what good management is all about.

      Also, tough times will shake out weak competitors that might have been undercutting prices, etc., and that’s good for the well-run survivors. And in bad times, there are many opportunities that don’t exist in good time. Just make sure you don’t have too much debt.

      As a business owner, I’m not worried about the next recession. I’ve managed businesses through recessions (including the terrible local depression in Tulsa during the oil bust of the 1980s from which the city never really recovered). It can be a challenge, but that’s what running a business is all about.

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