Swedish Housing Bubble Pops As Stockholm Apartment Prices Crash Most Since June 2009

Even though Sweden’s property bubble is not the longest running (that accolade goes to Australia at 55 years), it is probably the world’s biggest with prices up roughly 6-fold since starting its meteoric rise in 1995.

Of course, as we noted last month when the SEB"s housing price indicator, which measures the difference between those who believe prices will rise and those who expect them to drop, took its first substantial tumble, the era of the steadily inflating housing bubble in Stockholm may finally have come to an end.

Now, it seems that the "hard data" is aligning with the "soft data" as Swedish home prices across the Nordic country posted their first decline since the spring of 2012, down 0.2% year-over-year and 2.9% sequentially.  Per Bloomberg:

The property market in the largest Nordic economy is rapidly cooling after years of price increases that were driven largely by housing shortages and ultra-low interest rates. Supply is now outstripping demand and stricter mortgage rules, as well as growing apprehension among households, are driving prices lower. The drop is being led by high-end apartments in Stockholm.

 

According to Maklarstatistik’s number, nationwide apartment prices fell a monthly 3 percent in November, adding to October’s 1 percent drop. House prices fell 1 percent in the month, after being unchanged in October. Apartment prices in greater Stockholm fell 3 percent in the month and were down 4 percent from a year earlier, the first such decline in almost six years.

Worse yet, the slump in Stockholm specifically is even more dramatic with apartment prices down 4.2% sequentially, the steepest since October 2008, and 6.0% year-over-year, the biggest June 2009.

Not surprisingly, the sudden pricing collapse has sparked a bit of a panic supply boost as sellers attempt to beat the bursting of the bubble.  Of course, we"re sure this strategy will work out perfectly, as it always does, because nothing helps correct an over-supplied market like a massive flood of even more supply. 

Greater supply “has resulted in buyers having more to choose from and taking longer before buying,” Hans Flink, head of sales and business development at Maklarstatistik, said in a statement. “The sellers are therefore starting to adjust their prices to the tougher competition, which is pushing prices down somewhat.”

Luckily, Bloomberg was able to find at least one economist who dug up some "rather encouraging" signs amongst the wreckage...

But there may be glimmers of hope. Andreas Wallstrom, an economist at Nordea Bank AB in Stockholm, said data for the last few weeks from property-listings website Booli “are rather encouraging,” as they indicate that prices have leveled out since mid-November and up until the first week of December. Average prices per square meter have even increased somewhat in both Stockholm and in the country as a whole in that period, he said.

 

“Our tentative call for December is that home prices will stay unchanged compared to November,” Wallstrom said. “In all, we forecast relatively stable home prices from here. To see a sustained downturn in prices, it will likely require a change in households’ housing costs. As long as mortgage rates remain low, which we expect, it is difficult to see a marked decline.”

Of course, we remember some Bear Stearns analysts who saw similarly "rather encouraging" signs in the U.S. housing market back in 2008...

David Stockman Exposes "The Illusion Of Growth"

Authored by David Stockman via The Daily Reckoning,

The Wall Street Journal published a superb example of hopium recently in a sunny-side-up story entitled “U. S. Manufacturing Rides Rising Tide, Buoyed by Global Growth, Optimism.”

Indeed, this lazy cheerleading excuse for journalism captured the sum and substance of why the punters keep buying the dips despite troubles gathering all around.

That is, as the tax bill falters, the crusade to remove the Donald from office gathers strength, the Fed moves into balance sheet normalization and instability breaks out all over the world from the Persian Gulf to the Korean peninsula.

You would think the title says it all, but the WSJ was not nearly done. It cited a 156,000 pick-up in manufacturing employment since last November, rising energy and commodity prices as evidence of a booming global economy and double digit growth in business investment earlier this year, among other things.

American manufacturing has picked up pace over the last 12 months thanks to steady global economic growth, a rise in energy and other commodity prices, and increased business confidence.

 

Although progress isn’t being felt by all industries, makers of items ranging from bulldozers to semiconductors to food products are on the upswing as various measures of spending, sentiment and employment have climbed, while stock markets have hit record highs.

Yet every one of the trends cited in the WSJ article are less than a year-old. They coincide with the Great Coronation Boom in the Red Ponzi ( the run-up to Xi Jinping’s ascension to total power at the 19th Party Congress); represent only a minor up-tick from the 2014-2015 global deflation; and in the context of the current feeble recovery from the 2008 crisis represent nothing at all to write home about.

Indeed, I am confident that as the Red Ponzi goes into a stabilization and credit containment mode, as is already evident from the October economic data (fudged as it is), that the slight lift to global activity engendered by the latest China credit impulse will quickly fade. And with it the entire trading meme reflected in that WSJ puff piece.

But short of that yet to unfold but predictable global mini-cycle, the actual data on U.S. manufacturing output trends through September reveal nothing to smile about.

In fact, overall U.S. manufacturing production is still down 4.3% from its pre-crisis high back in December 2007, and was no higher last month than it was three years ago in November 2014.

Of course, global commodity prices did perk up during the last 18 months. Not only did they rebound off the bottom in normal cyclical fashion, but the hands of China’s central bank were more than a little evident.

When they unleashed the latest credit tsunami in early 2016, the hordes of Chinese speculators dutifully bought up all the iron ore, copper, steel, diesel fuel etc that was to be had and which could be readily financed in cash and futures markets alike.

Presently, they will be selling, too, as the post-coronation signals coming out of Beijing become unmistakably clear.

Nor is the above even the half of it. If you look at output of U.S. consumer goods, which is much less attached to the global commodity/industrial cycle, the rising tide of manufacturing output is nowhere to be seen.

In fact, consumer goods production has flat-lined for the last two years, and is still below where it was at the pre-crisis peak.

The same is true of manufacturing employment. There is no “rising tide.” Thus, between October 2007 and the April 2010 bottom, the U.S. lost 2.3 million manufacturing jobs — representing a loss of 76,000 high paying jobs per month.

By contrast, during the three years since October 2014, the U.S. has recovered about one-tenth of that loss — with manufacturing jobs expanding at a rate of  just 6,000 per month. That is to say, the WSJ was essentially trumpeting statistical noise.

We are now 120 months from the pre-crisis peak in November 2007. Yet the compound annual growth rate of manufacturing is just 0.08%. Which is to say, nothing.

By contrast, every prior peak-to-peak recovery pales that tiny beep of white noise into insignificance. Thus, between July 1981 and the July 1990 peaks, industrial production expanded at 2.18% a year during the so-called Reagan boom.

Likewise, during the Greenspan tech boom of the 1990s, the compound annual growth rate (CAGR) for industrial production was 4.02%. Even during the highly artificial and unsustainable Greenspan housing boom between December 2000 and November 2007, the index rose at a rate of 1.31% per year.

So Thursday’s industrial production number for October actually signaled that the U.S. industrial economy remains dead in the water. It is floundering in a manner that is off the historical charts — and not in a good way.

But stocks keep marching higher.

In short, financial information has been totally corrupted by the distortions of monetary central planning. Accordingly, when the third and greatest financial bubble of the 21st century collapses — and it is coming soon — it will also arrive as a great surprise.

As I keep insisting, monetary central planning systematically falsifies asset prices and corrupts the flow of financial information.

That’s why bubbles seemingly inflate endlessly and massively, and also why financial crashes and economic corrections appear to come out of the blue without warning.

Back in the winter of 1999-2000, for example, we were allegedly in the midst of a “new age economy.” The revolution in technology then underway, it was claimed, meant all historic valuation benchmarks — like P/E multiples, cash flow and book values — were irrelevant to stock prices.

Likewise, in the fall of 2007 there was nary a cloud in the economic skies. That’s because the Great Moderation led by the geniuses at the Fed had purportedly engendered a “goldilocks” economy destined to expand indefinitely.

Within months of the dotcom epiphanies, however, the highflying NASDAQ 100 crashed — eventually hitting bottom 83% below its new age heights. And 15 months after the S&P 500 reached its goldilocks peak of 1570 in October 2007 it staggered around in smoldering ruins at 670 — down 57% from its housing bubble high.

Today, the so-called stock market now consists entirely of what amounts to day traders and HST (high speed trading) machines. There is no “price discovery” in the classic sense of divining the true economic and political fundamentals. The casino has become entirely a ward of the central banks.

Needless to say, we are again on the precipice of a crash and correction that no one sees coming, but this one has an added twist.

Namely, three strikes and you are out!

What I mean, of course, is that the Fed and other central banks are out of dry powder. They are now stranded near the zero bound with bloated balance sheets that have actually reached hideous girth relative to current GDP and all historical experience — meaning they will have almost no capacity to reflate the next busted bubble, as they quickly did in 2001 and 2009.

Do yourself a favor and get out of the casino now.

Greece Plans 30 Billion Euro Debt Swap As It Prepares For The End Of Bailouts

Greece is planning a 30 billion euros debt swap which will convert 20 existing bonds into 5 (or less) new issues in the next few weeks (although the exact timing remains uncertain). The bonds are expected to have similar maturities to the existing notes from 2023-2042.

According to Bloomberg, the Greek government is planning an unprecedented debt swap worth 29.7 billion euros ($34.5 billion) aimed at boosting the liquidity of its paper and easing the sale of new bonds in the future. Under a project that could be launched in mid-November, the government plans to swap 20 bonds issued after a restructuring of Greek debt held by private investors in 2012 with as many as five new fixed-coupon bonds, according to two senior bankers with knowledge of the swap plan. The bank officials requested anonymity as the plan has yet to be made public.

Markets have responded well to the news as Bloomberg reported.

• Greek 10-Year Yield Drops to Lowest Since July on Debt-Swap Plan

• Greek 5-yr bond yield drops by 10bps to 4.345%, its lowest level since the nation issued the new note in July.


• Demand spurred by optimism that the third bailout review will be completed in time; news that government is planning a debt-swap plan is also boosting sentiment

While we struggle to believe that the Greek debt crisis is anywhere near close to being solved, at least the country seems to have been touched by Europe’s recovery.

Furthermore, the European Council announced on 25 September 2017 that Greece’s finances have stabilised and it was closing the excessive debt procedure. It sounded good anyway...

"After many years of severe difficulties, Greece"s finances are in much better shape. Today"s decision is therefore welcome", said Toomas Tõniste, minister for finance of Estonia, which currently holds the Council presidency.

 

"We are now in the last year of the financial support programme, and progress is being made to enable Greece to again raise money on the financial markets at sustainable rates." 

 

From a deficit of 15.1% of GDP reached in 2009, Greece"s fiscal balance has steadily improved, turning into a 0.7% of GDP surplus in 2016. Although a small deficit is projected for 2017, the fiscal outlook is expected to improve again thereafter…In the light of this, the Council found that Greece fulfils the conditions for closing the excessive deficit procedure. Greece will now be subject to the preventive arm of the EU"s fiscal rulebook, the Stability and Growth Pact. Monitoring will continue until August 2018 under its macroeconomic adjustment programme.

Meanwhile, the planned debt swap is a step in the Greek government’s preparations for August 2018 when, excuse our cynicism, Greece will essentially look to borrow more money to buffer its debt mountain. Bloomberg comments. 

“The move aims to address the current illiquidity of the Greek bond market,” according to analysts at Pantelakis Securities SA in Athens.

 

It will also “establish a decent yield curve, thus facilitating the country’s return to public debt markets.”

 

The move comes as Greece prepares for life after the end of its current bailout program in August 2018. The debt swap is a step toward the country’s full return to markets required to avoid a new bailout program. The government plans to tap the bond market in 2018 to raise at least 6 billion euros to create an adequate buffer to honor debt obligations, according to a government official…

 

Finance Minister Euclid Tsakalotos said in October that tapping markets soon wouldn’t be aimed at getting fresh money so much as to better manage the country’s debt and make its bonds more attractive. The new bonds, following the swap, are expected to have the same value as the old ones and will have a fixed coupon, one of the people with knowledge of the matter said.

Talking of cynicism, Goldman Sachs role in this transaction remains uncertain.

The challenge for Greece is to be in a sufficiently strong financial position to refinance more than 17 billion euros of debt in 2019 as Bloomberg explains, Greece returned to markets in July for the first time since 2014, raising 3 billion euros through new 5-year bonds. Now, with the swap plan, the government wants to ensure it can tap the market for enough funds to refinance its debt obligations in 2019, which originally amounted to 19 billion euros. The government managed to reduce this number by 1.6 billion euros with the July bond issuance.

While the timing of the debt swap transaction is uncertain, the government is aiming to complete it in time for the return of representatives of the country’s creditors in the last week of this month. No doubt they will be overjoyed by what they find.

There"s just one thing...

I Know What the Economy Did Last Summer Part 2: The Real Estate Rollover

In fact, I knew what the economy did last summer before summer even began. Since the beginning of the year, I have been writing that it appeared housing was reaching a new bubblicious peak and that the real estate market was getting ready to roll over. Just before the start of the summer, I confirmed that prediction by saying that it looked like that process had begun. I anticipate it will be a slow turnover at first, just as it was in 2007, which did not reach free fall until late in 2008. Likewise, I anticipate the present decline will not reach free fall until 2018.

While housing played out about as I expected this summer (see below), the more obvious collapse right now is developing in metropolitan commercial real estate, particularly in retail space due to the retail apocalypse. Even longtime commercial real-estate mogul Sam Zell warned last week that he would not consider investing any capital in retail real estate. In Zell’s words, the real estate landscape looks “like a falling knife.”

“An area that’s in this much disarray, with so many weak players, is not an area where I would want to deploy capital at this time. And I’m generally a contrarian, and I generally rub my hands together at the opportunity for serious dislodgment, but I think what we’re dealing with here is very significant… It’s going to be very hard to take that shopping center land and redevelop it with all of these competing people having rights.” (Newsmax)

Zell sees retail’s mortal throes as a violent struggle that is going to take a few years to play out.

A second problem the commercial real estate bubble faces (and Zell describes it as a bubble in that there is way too much space dedicated to retail in the US compared to other nations), is that Chinese investors are being forced to exit, and they have been a major support to that space. In Manhattan, for example, Chinese investors have made half of all commercial real estate purchases. The Chinese government decided this summer to squeeze that dry in order to stop the flow of yuan out of the country. In London and Australia, Chinese buyers accounted for about a quarter of commercial real-estate purchases. The Chinese government is pressuring Chinese banks to stay away from these deals.

Morgan Stanley estimates that China overseas direct property investment could plunge by 84% in 2017 and another 15% in 2018. (Business Insider)

After a seven-year boom, commercial real estate prices peaked this year with July showing the first year-over-year decline. Transactional volume also declined 8% in the first half of 2017 with the second quarter turning out to be the third consecutive quarter to see year-on-year declines. Without the Chinese bellows pumping a lot of oxygen into the fire, it looks like the flame is going out.

The second US housing bubble in a decade started showing several signs of topping this summer

Exactly as predicted on this blog…

U.S. homebuilding unexpectedly fell in July amid broad declines in single- and multi-family home construction, suggesting the housing market was struggling to rebound after slumping in the second quarter. Housing starts declined 4.8 percent. (Newsmax)

While it was “unexpected” to economists, who couldn’t even see the Great Recession coming, it certainly wasn’t unexpected here. I pointed out during the second quarter that the slump back then looked like the beginning of a rollover in housing that would become more evident in the summer. July added momentum to spring’s decline; at which point, June also also got revised downward. The concurrent decline in building permits indicated the deteriorating condition of the housing market would persist.

Housing is now falling at its steepest pace since 2010. New-home sales fell even harder in July than new-home construction, crashing a whopping 9.4% month on month. That amounted to an 8.9% plunge year on year and established a seven-month low. (Economists had actually expected a 0.3% gain! I can only wonder how they came by their lame prediction.)

Then homebuilding fell again in August when a rebound in single-family home construction was more than offset by persistent weakness in multi-family home construction and when the number of permits issued for new single-family homes took yet another drop, while the permits for multi-family homes went up. In all, a mixed month.

Likewise, pending sales dropped in August, backtracking 2.6% (YoY) to their lowest since January of last year to which the chief economist of the National Association of Realtors said the housing market has been drained of all of its past year’s momentum. He attributed this in large part to home prices having risen far above incomes.

The continual decline in sales (number of houses sold) means that housing prices have to start falling again, which so far they have resisted, in order for homes to start to become affordable under rising interest rates. Affordability based on the slight rise in income over the huge rise in prices since the Great Recession is at the lowest it has been since 2008, so buyer pessimism about ever being able to afford a house is rising quickly.

With another bump in interest from the Federal Reserve anticipated by nearly everyone in December, a price decline is now inevitable as there are very few potential buyers left at current prices. Each hike reduces the number of qualified potential buyers unless prices drop or wages rise. Of course, falling prices will also mean homes start to go underwater on their mortgages. Then defaults will start to rise as a result because adjustable rates will go up some, and people who bought to flip will be underwater; everyone will be less able to refinance. The math is the same as in 2007.

The summer plunge, therefore, shouldn’t have surprised any economist, given that rising interest rates are certain to force people out of the market when wages are not rising and prices have risen a lot in many regions. Immigration is also tightening, thereby reducing the number of first-time buyers. One has to wonder how economists missed all of this. How are house-warming parties not going to come to an end when the cheap booze is taken away? Apparently economists learned nothing from the situation that created the Great Recession. Nor did politicians, for we are right back where we were in the fall of 2007.

In fact …

U.S. consumers slowed their borrowing in August to an annual pace of 4.2 percent — a pullback from a pace of nearly 7 percent over the past three years.(Newsmax)

Of course they did. How could they not? While those figures do not include mortgages, the same forces are at work in both credit markets.

Moreover …

Economists and financial markets monitor the consumer borrowing report for insights about consumer spending, a category that represents about 70 percent of U.S. economic activity.

So, how could a 40% slowdown in the annual expansion of consumer borrowing (compared to the previous three years) not be indicative of an economy that is showing some major cracks, as I had said we’d see emerge this summer?

The hurricanes’ helping hand for housing construction strikes a blow to banks and insurance

As noted in other articles, the recent hurricanes are bound to help the housing construction market, as a massive number of new homes will have to be rebuilt and old homes will have to be repaired; but economically, that doesn’t really help the economy overall (as also noted earlier). As with auto sales, the hurricanes shift the hurt from one part of the economy to another as insurance companies, banks, and the national debt all take major hits. (Banks were not fully covered by insurance on these mortgages because not all homes were in areas that required flood insurance to get a loan.)

According to Black Knight Financial Services, of the 1 million or so mortgaged homeowners in the [Hurricane Harvey] disaster area, more than 75,000 will become delinquent within two months, and 45,000 are at risk of becoming seriously delinquent or even face foreclosure inside a four-month period. (Newsmax)

[As assessments of damage continued, Black Knight updated its figures to 300,000borrowers in the vicinity of Houston (and adding Florida) could become delinquent on their loans and 160,000 could become seriously delinquent, or more than 90 days past due. And the count for Irma is still unfolding.]

If the latest figures prove out, it will amount to, at least, a 25% increase in nationwide foreclosures just from Hurricane Harvey! $700 billion in mortgage balances are at some level of increased risk in those two hurricane areas. That means the reconstruction after Hurricanes Harvey, Irma and Maria (and now unfolding … Nate) will be happening at a time when banks will be less able to make loans or, at least, lest likely, as they are entering a period of intensified strains.

I would also expect some lag between the loss of housing construction that was already underway before Harvey and the pickup in housing that will come in its aftermath. That’s because debris has to be cleared out of the way, infrastructure repaired, materials brought in, permits issued, plans made, qualified labor hired, etc.

All of this is likely to make prices rise even higher because of labor shortages and material shortages. Labor shortages, however, may mean a lot of reconstruction has to wait for a long time. (All good news if you’re a carpenter, plumber, electrician, etc.; but not if you’re not.) The downward effects of the hurricanes are likely to be far greater in the near term than any lift from reconstruction:

“With the pace of housing starts in July and August retreating, and a likely depressed September, we now anticipate that housing starts will fail to expand much, if at all, in the third quarter,” said Kristin Reynolds, a U.S. economist at IHS Markit in Lexington, Massachusetts. (Reuters)

Overall, growth in construction in the US dropped this summer to its lowest level since 2011, matching the growth level it held just before the financial crisis in the fall of 2007 — a common theme in Summer’s data.

And this last week brought another piece of data in common with that theme of reverting back to the mean of Great Recession statistics:

Wall Street was completely clueless ahead of today’s payroll, with most expecting a small positive print but two brave forecasters went so far as to predict that the recent hurricanes would result in a negative print, and sure enough, moments ago the BLS reported that in September, the US economy lost 33,000 hurricane distorted jobs, the first payrolls decline since September 2010. (Zero Hedge)

The hurricanes forced the first decline in jobs since the tail end of the Great Recession. While that’s an anomaly, it’s an anomaly that is starting to sound like a new statistical trend toward reversion.

As anticipated, none of this stopped the Federal Reserve from commencing with its great QE unwind this month.

So, three major cracks that I have been predicting all showed up this year on schedule:

1. A significant decline in auto sales and prices and accompanying rise in auto loan defaults.


2. A major decline in retail sales, resulting in rising defaults and mall and store closures.


3. The start of a rollover in real estate.

(See “I Know What the Economy Did Last Summer Part 1 : Carmageddon and the Retail Apocalypse.”)

I’ll close with a summary of the summer from Jeffrey Snider that isn’t very summery:

We can’t pretend as if the economy was cooking before Mother Nature interfered. It wasn’t. If one thing has become absolutely clear about the economy in 2017, it is that it has fallen off dramatically when compared to the last half of 2016. This is the opposite of what was supposed to happen, what most people and all Economistswere expecting. The rebound off the early 2016 trough was only the first part of bigger things, or so it may have seemed. For reasons beyond the mainstream grasp, however, the farther into 2017 we go the farther away that dream seems to get.(TalkMarkets)

In my next article, I’ll review the stock market where I said I anticipate a crash sometime between the start of summer and January of 2018. While a stock-market crash has not yet begun, I allotted myself a broader window for that one, noting that central banks could easily hold the market up well beyond the start of summer now that stocks are entirely rigged by central banks … even to the point of CB’s directly purchasing certain companies that are most notably driving the market up.

House Price Bubbles 2.0 In Pictures

By Mark Hanson Of M Hanson Advisers

Bottom Line: House prices and end-user, shelter-buyer fundamentals have never been further apart in key, economically significant cities.

The two charts presented in this note highlight just how diverged house prices have become from end-user, shelter-buyer, employment and income fundamentals in the most populated, economically significant US cities.

I maintain that House prices are always drawn to the purchasing power — or, economic strength — of the end-user, shelter-buyer cohort, as the dominant, permanent demand driver.

But, sometimes House prices, like other asset prices, go through periods of separation from end-user, shelter-buyer cohort fundamentals.  And based on the most recent data of incomes, mortgage rates, and House prices in key cities around the nation, house prices and end-user fundamentals have never been further apart.  Even in Bubble 1.0, the divergence wasn’t this bad because exotic loans, which were the incremental driver of House prices, made for legitimately low monthly payments.

Some positive or negative divergences can be solved through lots of time, as the economy shrinks or grows.  But, over the past several years, as the economy barely grew each year, house prices soared at a pace that exceeded Bubble 1.0 in most regions.

As such, it’s reasonable to assume that the massive divergence in most key metros has been driven largely from the three things that just so happen to be present in all bubbles throughout history; SPECULATION, LEVERAGE, AND EASING CREDIT STANDARDS, regardless if on an individual, corporate, financial market, or Gov’t level.

* * *

THINK ABOUT IT THIS WAY…

If everybody had to buy a house the exact same way — say, with a 30-year fixed, fully-documented mortgage and 20% down — HOUSE PRICES could never detach from the end-user, shelter-buyer employment and income fundamentals for a particular region. In other words, HOUSE PRICES would be attached to and track these fundamentals, perfectly.

But, in times, of increased speculation, leverage, and declining credit standards, the end-user, shelter-buyer employment and income fundamentals get drowned-out and asset prices attach to the incremental spec and high-leverage drivers.  How long and far asset prices are driven by the incremental, spec and leverage drivers determines the scope of the divergence and ultimately the possible downside risk in an asset class.

For housing, in particular, using these data, I can easily calculate the potential HOUSE PRICE downside in each area.

Bottom line:  This massive HOUSE PRICE/fundamentals divergence will close at some point, either from surging wages, plunging credit standards or rates (make monthly payments less), falling HOUSE PRICES, or a combo of all three. 

* * *

Onto the data.

A big problem with house prices experiencing even a “moderate” correction of 10% to 20% — already underway in many of the most over-priced regions — is with between 40% and 50% of all house purchases for years being of the “less than 10% down” variety — and because it takes 8% to 10% equity to sell plus the 3% to 10% down payment on the new house — it doesn’t take much downside to swamp the nation in “NEGATIVE EQUITY” once again. And we know for certain that many homeowners rather pay their credit cards and car payments before their mortgage when they are underwater.

* * *

ITEM 1)  Household income INCREASE needed to Buy the Median Priced House in Key Cities.

Bottom Line:  On a “national” basis the divergence isn’t too bad…6%.  But, in the key cities that drive the US economy, Bubble 2.0 has blown large.  This represents significant downside, especially in the sand states, just like in Bubble 1.0.

ITEM 2)  DIVERGENCE between Actual Household Income & Income Needed to Buy the Median Priced House.

Bottom Line:  Here too, on a “national” basis the divergence isn’t too bad…-6%.  But, in the key cities that drive the US economy, Bubble 2.0 has blown large.

Mark Hanson Reveals "The Next Housing Bubble"

The striking Case-Shiller regional charts shown below, courtesy of MHanson.com, make Mark Hanson angry: "so, 2006/2007 was the largest house price bubble ever, but there is nothing to see here in 2017?" and sarcastically points out that "if this isn"t a house price bubble, I would hate to see one."

His bottom line:

If 2006/07 was the peak of the largest housing bubble in history with affordability never better vis a’ vis exotic loans; easy availability of credit; unemployment in the 4%’s; the total workforce at record highs; and growing wages, then what do you call “now” with house prices at or above 2006 levels; worse affordability; tighter credit; higher unemployment; a weakening total workforce; and shrinking wages? Whatever you call it, it’s a greater thing than the Bubble 1.0 peak.

And visually:

Below are some further observations and "red-flags" from Hanson on Peak Housing, after the latest new home sales data:

• Sharp downward sales revisions for past 3-months.


• Huge downward price revisions for past 3-months, lower by 10%, 5% and 3%, respectively, exactly as I predicted on last month"s release.


• Builders maxed out on pricing power; Med & avg prices flat for 2-years.


• The all-important Southern Region was flat YY; the South makes up over half of all sales in the nation, and drives builder demand and profits.


• 100% of the June YY sales gain came from the Western Region, which doesn"t jibe with the weak price performance and will likely be revised lower next month.


• Income required to buy the avg priced builder house is at historical highs and has completely diverged from the multi-decade trend line.


• Historically low growth & rebound relative to resales suggest "lack of supply" meme in the Existing Sales market is over-stated.

As he says, "Peak builder is here."

Finally some other quantitative and qualitative observations from the housing guru:

1) New Home Sales "up to" 1995 levels after $15 TRILLION in debt and Fed liquidity aimed largely at the sector.

2) Builder pricing power largely flat for 2-years.

3) Income required to buy the average priced builder house has completely diverged from the multi-decade trend line. This obviously explains why sales are only at 600k SAAR now vs 1.2 million in Bubble 1.0. Reversion to this mean will occur...either thru a sharp rise in income; new exotic loan programs, which make payment less; or house prices dropping.

4) Last time builders were this euphoric was the peak of the biggest credit bubble in history.

5) It"s too bad the public isn"t as euphoric about buying as the builders think they are.

Carmageddon Crashes into “the Recovery” Right on Schedule — EXACTLY as Predicted Here

Carmageddon, as Wolf Richter has called it, is hitting the US economy exactly as I said a year and a half ago would start to happen at the very end of 2016 or the start of 2017. Measured year-on-year, auto sales have declined every month of 2017, and are now starting to cause the financial wreckage that I said we would experience in what will become a demolition derby for US auto manufacturers.

“A stretched auto consumer, falling used [vehicle] prices, and technological obsolescence of current cars are ingredients for an unprecedented buyer’s strike,” wrote Morgan Stanley’s auto analyst Adam Jonas in a note to clients. (Wolf Street)

Stanley now foresees a “multiyear cyclical decline,” along with a declining “willingness of financial institutions to lend as aggressively as in the past.”

After an eight-year boom, the industry appears “to be hitting a point of diminishing returns where the tactics required to attract the incremental consumer may be putting even more pressure on the second-hand market, leading to adverse conditions for selling new vehicles….” not even record incentives, reaching $14,000 for some truck models, have much impact. Those are the “diminishing returns” – when you throw gobs of money at a problem and it doesn’t have much impact. Lenders, particularly the captives, stepped forward, making loans with very long terms, low and often subsidized interest rates (“0% financing”), sky-high loan-to-value ratios, and leases that gambled on very high residual values that have now gone up in smoke as used vehicle prices are heading south.

How many times have readers here heard me stress the economic Law of Diminishing Returns that economists and banksters and CEOs are almost universally ignoring. This exact scenario, you may recall, is what I said would happen this year, only I said it in January, 2016, year before it began:

Auto-traders are auto-traitors

I’m speaking here of the financiers and the manufacturers, not the buyers. Auto sales are at a record high (up 15% in 2015), and some look to that as evidence that the US economy is strong. I would say, instead, it is the exception that proves the rule. It is one more part of the problem because that accounting is all baloney, and baloney is why most of the world’s economic experts don’t see any of this coming. They believe their own baloney.

You have to consider what factors have taken auto sales to these supposedly soaring heights. In part, it’s consumer confidence, which is a positive tail wind for the economy; but terms of credit on automobiles have been extended out to all-time extremes, too, of seven years on a highly depreciable asset. Down payments have, as they were just before the Great Recession, been minimized, as has interest. Most of all, most of these sales are not sales at all. The industry now leases far more cars than it sells.

You have to wonder why so many economists are blind to how significant all of that is and to what it means. So blind, in fact, that they point to auto sales as an indicator of a strong economy when it is the same mess we saw in the Great Recession. Apparently economists are incapable of learning anything.So, the biggest scare here is how blind it proves the experts are who guide the economy.

Has anyone forgotten what supported auto sales in the year before the Great Recession? Zero interest, zero down, and zero payments for a year. At the time, I was asking, “What’s their end game? Where do they go from here now that they’ve spent the year giving away one-year leases because people can return all these cars at no loss?

What we see now is that the automotive industry has doubled down on desperation by adding to that original mess longer-term loans and particularly by moving toward leases and calling them the new auto sales. As recently as 2010 fewer than one in ten auto loans exceeded a six-year term. Now, that is the average loan length.

It’s dumbfounding to me that people are stupid enough to site auto sales as evidence of a healthy economy when they are built on such precarious terms and are mostly not even true sales. Just as in housing, we have switched from being a nation of auto owners to auto renters. As with housing, I expect a collapse of auto sales because it is built on a rickety foundation, but it will be a trailing trend because it depends on a weakening of the consumer base as the economy slides back into recession. However, it will increase the speed and depth of the economic collapse as it joins the forces of the fall.

Auto sales may not join the parade of panic until late in the year or 2017; but expect automakers within a year of so to end up right back where they were during the worst of the Great Recession … with less hope of a bailout. Oh, my goodness, the sheer stupidity!

…Does anyone remember 2008 when automakers went bankrupt-or-bailout? They’re betraying the bailouts we gave them by setting up disaster all over again.

…Total car debt in the US right now is 30% higher than it was at its last peak right before … 2008! It has risen from about 600 billion dollars in outstanding debt to over a trillion dollars. Does that really leave any headroom for market expansion? Are you seeing a pattern here?

It’s the same thing, but an order of magnitude greater, and anyone who is not steeped in economic denial could have and should have seen this coming. I knew it was coming and how long it would take because it is the same pattern I saw leading into the Great Recession. (I choose to learn patterns from history, but our leaders, including CEOs, do not.) As I’ve said before, we (as a nation) have learned NOTHING.

The Great “Recovery” is all about repeating the mistakes that created the Great Recession in order to recover the glory bubble days; only we are repeating those mistakes at a vastly higher magnitude because the Law of Diminishing Returns has reached the hockey-stick side of the curve. That is as true for the housing market and all of the Federal Reserve’s plans as it is for the auto industry and the consumer banks that operate in that industry.

The fallout from Carmageddon on banks and investors as well as automakers

Derivatives (remember those dangerously cloaked things?) made up of auto loans made to people with good credit have already reached their highest default rate since 2008 when automakers wound up having to be bailed out or barely escaped that kind of perverse salvation plan. JPMorgan Chase & Co. is now tightening up on any more auto loans.

And then there are the subprime junkers:

Institutional investors that manage other people’s money grabbed subprime auto-loan backed securities because of their slightly higher yields. These bonds are backed by subprime auto loans that have been sliced and diced and repackaged and stamped with high credit ratings. But those issued in 2015 may end up the worst performing ever in the history of auto-loan securitizations, Fitch warned.

 

And then there are those issued in 2016. They haven’t had time to curdle.

 

The 2015 vintage that Fitch rates is now experiencing cumulative net losses projected to reach 15%, exceeding the peak loss rates during the Financial Crisis. (Wolf Street)

According to Bloomberg,

Subprime auto bonds issued in 2015 are by one key measure on track to become the worst performing in the history of car-loan securitization … , which is higher even than for bonds in … 2007….  The 2015 vintage has been prone to high loss severity from a weaker wholesale market and little-to-no equity in loan contracts at default due to extended-term lending.

Gee, who could have seen that coming? Oh, yeah, me … clear back in 2015:

Auto loans and student loans are a leaning tower of debt. Auto sales have peaked only as a result of a huge extension of looser, loser credit where loan terms are now up to seven years long, and interest is low or non-existent as are down payments. The last time we saw such desperate financing measures in the auto industry was just before the Great Recession, and we all know what happened to the auto industry then. We also know what happened to the housing industry when it peaked because of this kind of looser credit. We’ve learned nothing and have repeated the problem … on steroids. So, another crash is coming. (“Epocalypse Soon“)

And even earlier than that when I wrote …

Another support given was that “sales of autos are still rising.” Wow! Only because of SEVEN-YEAR auto loans, zero-interest loans, and the fact that auto dealers are now counting leases as sales!

 

That’s the same easy-credit bubble that was created in housing! How can people not see that it is exactly the same thing — only in cars?

…Moreover, how can people not see that this was the same nonsense that got automobile manufacturers in trouble during the last economic crash? It’s why they went down at the same time housing went down. (“Sometimes When I Read Economists My Brain Hurts“)

Because of these extended terms on a rapidly depreciating asset, as I warned way back when the practice began, negative equity now averages a little higher than $5,000, which is the worst ever, and which means banks effectively have no collateral.

As Wolf points out, that negative equity now gets rolled over into a new car loan when the old vehicle is traded in, making the new loans worse than ever. So, the cause of bad debt spreads like cancer. (We see it happening, but we still allow it because we’re dumb like that. At least, those who are bankers and regulators are because they learned nothing.) Vehicle trade-in values have reached their lowest levels since 2010. That kind of date should mean something by association.

Speaking of the Great Recession, do you remember how some housing lenders made the subprime mess as bad as it was by not checking on the credit data of those they were making loans to? Those loans got batched into the derivatives that went bad. Well, the nation’s largest sub-prime auto lender, Santander Consumer USA, has only been verifying 8% of its loans! (Again, we learned nothing!)

In other collateral damage this week, General Motors announced an extended closure of two of its car manufacturing plants. This is partly due to drivers switching to SUVs, but the increase in SUV sales is less than the decline in car sales. Multi-industry factory output across the US is down for the second time in three months, and that number, too, is driven largely by the crash in auto production.

Carmageddon has been building insidiously each month since the start of the year, but the impact of decline is now waking up banks, manufacturers and investors to the significance of this event, which I said back in January of 2016 would be just one part of a massive and slowly unfolding “Epocalypse.”

As the impact is summarized on Wolf Street (linked to above),

Over the longer term, Jonas gets outright bearish – and with good reason. He expects a slump that will last years. For 2018, he cut his previous estimate of 18.9 million down to 16.4 million, which may still be high. And for 2019 and 2020, he slashed his estimate to 15 million sales.

And how bearish for auto sales is this?

But he notes that to maintain sales even at that low level, the government would have to step in and subsidize in some way new car purchases.

There we are! We are right back to government bailouts of the auto industry in one form or another, even to maintain declining sales.

You see, the warnings given during the Great Recession were completely sure: if you bail the failures out once, you create “moral hazard,” which causes the greedy to double down on their stupid risks. They learned nothing. Forget the idea that CEOs are smart … unless by “smart” you mean smart at con games. If you cannot learn from an event as obvious and global as the Great Recession, you cannot learn from anything … not even to save your soul from its own corruption.

Why is it important that I point out that I predicted these things?

Because if someone can show these events are predictable — in how they will fall, how hard they will fall and even WHEN they will fall, then it becomes inexcusable that we went down this path all over again! The idiots who cause the problem can no longer say, “Well, we cannot be expected to have seen something like this coming.” Yes, they can be and should be expected to have seen it coming. It is inexcusable that they did not! So, let’s cut off that path of escape from responsibility for the wreckage that is coming due to their uninhibited greed and foolhardy risk taking.

It is also important because it is about destroying the economic denial that is rampant throughout this nation and that will destroy the nation entirely if it continues.

Finally, it is important because you might just stop to think that, if someone predicted the catastrophe that is unfolding right now a year before the first actual signs of failure began, then you might want to pay attention to rest of what he was predicting. And I beat that drum again and again because so few people are listening, and it is far past time that they did. It is time for this nation to wake up to its own economic stupidity.

Carmageddon was a completely foreseeable and, so, completely avoidable pile-up!

U.S. Weeks Away From A Recession According To Latest Loan Data

While many "conventional" indicators of US economic vibrancy and strength have lost their informational and predictive value over the past decade (GDP fluctuates erratically especially in Q1, employment is the lowest this century yet real wage growth is non-existent, inflation remains under the Fed"s target despite its $4.5 trillion balance sheet and so on), one indicator has remained a stubbornly fail-safe marker of economic contraction: since the 1960, every time Commercial & Industrial loan balances have declined (or simply stopped growing), whether due to tighter loan supply or declining demand, a recession was already either in progress or would start soon.

This can be seen on both the linked chart, and the one zoomed in below, which shows the uncanny correlation between loan growth and economic recession.

And while we have repeatedly documented the sharp decline in US Commercial and Industrial loan growth over the past few months (most recently in "We Now Know "Who Hit The Brakes" As Loan Creation Crashes To Six Year Low") as US loans have failed to post any material increase in over 30 consecutive weeks, suddenly the US finds itself on the verge of an ominous inflection point.

After growing at a 7% Y/Y pace at the start of the year, which declined to 3% at the end of March and 2.6% at the end of April, the latest bank loan update from the Fed showed that the annual rate of increase in C&A loans is now down to just 1.6%, - the lowest since 2011 - after slowing to 2.3% and 1.8% in the previous two weeks.

Should the current rate of loan growth deceleration persist - and there is nothing to suggest otherwise - the US will post its first negative loan growth, or rather loan contraction since the financial crisis, in roughly 4 to 6 weeks.

An interesting point on loan dynamics here from Wolf Richter, who recently wrote that a while after the 1990/1991 recession was over, the NBER determined that the recession began in July 1990, eight month after C&I loans began to stall. "As such, the current seven-month stall is a big red flag. These stalling C&I loans don’t fit at all into the rosy credit scenario. Something is seriously wrong."

However, it wasn"t until loan growth actually contracted, that the 1990 recession was validated.  Well, the US economy is almost there again. And this time it"s not just C&I loan growth, or lack thereof, there is troubling.

As the chart below shows, after peaking in late 2016, real-estate loan growth has also decelerated by nearly half, to 4.6%.

More troubling still, after flatlining at nearly double digit growth for much of 2016, starting last September there has been a sharp slowdown in commercial auto loans, whose growth is now down to just a third, or 3%, of what it was a year ago.

While it remains to be seen if C&I loans have preserved their uncanny "recession predictiveness" for yet another turn of the business cycle, the charts above confirm that the US economy is rapidly slowing, and validating the poor Q1 GDP print. Furthermore, one thing is clear: absent a substantial rebound in loan growth, whether for commercial, residential or auto loans, there is no reason to expect an imminent uptick in the US economy. We only note this, because next week the Fed plans to hike rates again. If it does so just as US loan growth contracts, it may be doing so smack in the middle of a recession.

The Biggest Real Estate Bubble Of All Time Just Did The Impossible

One month ago, we said that "the Vancouver housing bubble Is back, and it"s (almost) bigger than ever."

Fast forward to today, when we can scrap the almost part: according to the latest data from the Real Estate Board of Greater Vancouver, nearly a year after British Columbia implemented a 15% property tax targeting foreign buyers, in May the biggest real estate bubble of all time did the impossible and in a testament to the persistence of Chinese oligarchs, criminals, money launderers and pretty much anyone who is desperate to park their cash as far away as possible, after a modest drop following last summer"s tax the Vancouver housing bubble has bounced right back to new all time highs, as prices of detached, attached houses and apartment all surged to new record highs.

According to the Real Estate Board, rhe breakdown in prices by category was as follows:

• For condominiums, the benchmark price was C$571,300 last month, a 17.8% jump over the past 12 months and 3.1% more than April 2017.


• The benchmark price of an attached unit was C$715,400, 13.1% more than a year ago, and a 1.9% increase compared to April 2017.


• The benchmark price for detached properties was $1,561,000, an 3.1% increase over the last 12 months and a 2.9% increase compared to April 2017.

The only thing that did fall in May was the number of actual transactions, as residential property sales in the region totaled 4,364 in May 2017, a decrease of 8.5% from the 4,769 sales in May 2016, an all-time record.

In other words, all that the 15% surtax achieved was to drastically slowdown the rate of transactions (or perhaps home flipping). Meanwhile, as sellers held out to find more aggressive buyers, they were in luck as the new wave of buyers has emerged, and undeterred by the 15% premium, they have been slowly but surely lifting all available offers.

While there is little we can add to this month"s update that we didn"t already say a month ago, below we again put Canada"s housing market, and bubble, in perspective with some of our favorite charts, first showing total Canadian household debt compared to the US. Most of this is in the form of mortgages.

Next, despite Canada"s low rates, the debt service ratio of an average Canadian household is nearly 40% higher than when compared to the US.

And finally, the punchline: indexed home prices in Canada compared to the US. This needs to commentary.

In retrospect, perhaps Canada was lucky that the attempt to deflate the Vancouver housing bubble failed, had it succeeded and spread across the nation leading to a historic crash and collapse in collateral values and widespread defaults, the "mean-reversion" outcome would have been devastating for the Canadian banking sector. Which of course, is not to say that Canada"s problem has been fixed, but at least for the time being, the can has been kicked once again, courtesy of Chinese buyers who would rather park their cash in Canada than at home.

Housing Recovery? US Mortgage Applications Tumble Most Since 2016

After dismal housing starts and permits data yesterday, the "housing recovery" narrative took another knock this morning as mortgage applications tumbled 4.1% last week - the biggest drop since December 2016.

While mortgage rates were unchanged, both purchases and refis fell notably...

• Purchases down 2.7% after rising 1.7% in prior week


• Refis fell 5.7% after rising 3.3% in prior week

Perhaps additionally of note the government"s programs saw a dramatic drop off in the last week...

The Vancouver Housing Bubble Is Back, And It's (Almost) Bigger Than Ever

For a while it seemed that the Vancouver housing bubble, the direct result of a relentless tidal wave of Chinese "hot money", had burst after last August the British Columbia province implemented a 15% property tax to stem the inflow of offshore funds. And indeed, in the immediate months that followed, Vancouver"s housing priced tumbled from record highs.

However, it was not meant to be, and less than a year later, the Vancouver housing bubble is back, and it"s (almost) bigger than ever.

Over the past few months, with many suspecting - as we did - that the housing market in Vancouver had finally normalized, attention shifted to what emerged as the next hotbed of rampant housing speculation in Canada, Toronto, where last month average selling prices surged by 33%.

As it now turns out, ignoring Vancouver, and underestimating the persistence of aggressive Chinese buyers turned out to be a mistake, because earlier today the Real Estate Board of Greater Vancouver announced in its latest monthly report that while home sales in the Vancouver housing market had predictably slowed down in April compared with a year ago, prices - which had dipped slightly in recent months- once again surged.

First the (somewhat) good news: the overall turnover in the Vancouver resi market slowed down appreciably, with property sales in the region totaling 3,553 in April 2017, a 25.7% decline compared to April 2016 when 4,781 homes sold and a 0.7% decrease from the 3,579 sales recorded in March 2017. Sales of single-family homes in April 2017 were hit the hardest, reaching 1,211, a decrease of 38.8% from the 1,979 detached sales recorded in April 2016. Meanwhile, sales of apartment, or condominium, properties reached 1,722 in April 2017, a decrease of 18.3 per cent compared to the 2,107 sales in April 2016.

Yet while sellers and buyers were less likely to agree on a closing price than just a few months ago, that does not mean that sellers were more aggressive, or that prices had declined at all. In fact quite the opposite: the benchmark price for all types of residential properties in Metro Vancouver, Canada"s most expensive real estate market, was C$941,100 ($686,583.50) in April. That was up 5 percent over the past three months and 11.4 percent higher compared with a year ago.

The breakdown was even more stark by category:

• For condominiums, the benchmark price was C$554,100 last month, a 16.6% jump over the past 12 months and 3.1% more than March.


• The benchmark price of an attached unit was $701,800, 15.3% more than a year ago, and a 2.4% increase compared to March 2017.


• The benchmark price for detached properties is $1,516,500, an 8.1% increase over the last 12 months and a 1.8 per cent increase compared to March 2017.

And the visual testament to just how strongly the Vancouver housing bubble has returned, and as of April has almost surpassed last year"s all time highs:

In other words, all that the 15% surtax achieved was to drastically slowdown the rate of transactions (or perhaps home flipping). Meanwhile, as sellers held out to find more aggressive buyers, they were in luck as the new wave of buyers has emerged, and undeterred by the 15% premium, they have been slowly but surely lifting all available offers.

"In the condominium and townhome markets, demand has been increasing for months and supply is not keeping pace, said the board"s president, Jill Oudil. "This dynamic is causing prices to increase and making multiple-offer scenarios the norm," she said in a statement.

She added that “Home buyers are looking to get into the market and they’re facing fierce competition”, and it mostly comes out of China. Or perhaps it is simply other Canadians armed with cheap money loans, rushing to fill the void, because as the following charts show, whether it is due to Chinese buyers or not, China has a very big housing problem on its hands, and explains why the recent collapse of alt-mortgage lender Home Capital Group, which accounts for just 1% of all loans in the market, has escalated all the way to the finance minister. The reason is simple: one the first domino falls, nobody knows just how far the resultant avalanche will go.

To put Canada"s housing market, and bubble, in perspective, first here is a chart of total Canadian household debt. Most of this is in the form of mortgages.

Next, despite Canada"s low rates, the debt service ratio of an average Canadian household is nearly 40% higher than when compared to the US.

And finally, the punchline: indexed home prices in Canada compared to the US.

In retrospect, perhaps Canada was lucky that the attempt to deflate the Vancouver housing bubble failed, had it succeeded and spread across the nation, leading to a collapse in collateral values and widespread defaults, the "mean-reversion" outcome may have been far more devastating. Which of course, is not to say that Canada"s problem has been fixed, but at least for the time being, the can has been kicked once again.

Deutsche Bank: "It Was Good While It Lasted"

It all started in February, when we first reported that something unexpected had happened: for reasons that were at the time unknown, the global credit impulse had unexpectedly tumbled, turning negative, a move which we predicted would result in a steep slide in the "soft" economic data, end the "reflation" optimism and unleash a wave of dovishness from the Fed.

Then, two months later when the reflation trade was officially over, in early April the culprit for this sudden collapse in global growth momentum was identified: China, which together with the price of oil, had been the only catalyst for the global reflation trade since the "Shanghai Accord" in February 2016, and had seen its credit impulse crash at the fastest pace since the financial crisis, dropping to a level not seen since 2010. 

Fast forward to this weekend, when in his latest fixed income weekly report, Deutsche Bank"s Dominic Konstam - who two weeks ago flipped back from being passionately bearish on rates and TSYs, and a supporter of the reflation trade, to anticipating much lower yields and a slowdown in the economy - writes that "It was good while it lasted."

What he is referring to is both the so-called "bear market" in bonds as well as global growth momentum, and in taking a page from the second derivative playbook we have focused on over the past two months, he expects it to decline sharply now that US excess liquidity has reached a downward inflection point, and as a result for the foreseeable future monetary policy will be a headwind: "historically, the peak in G3 yields has coincided with peaks in output momentum. It would not be unreasonable to expect at least a 50 bps decline from peak to trough in G3 yields following a peak in yield momentum."

Below, he explains why his latest advice to rates traders is to "Sit back, relax, the bear market in bonds may be over."

G3 yield momentum has swung from a monthly trough of -2 percent in early 2015 to the recent peak of almost +60 bps in March, 2017 using 5y5y government bond yields for France, US and Japan (equal weights France, US and 15 percent for Japan). Momentum is the change in the year versus the previous year. At current levels momentum is still strong at +38 bps. But if yields stay where they are momentum will rise to new peaks of +82 bps in June. Yet according to global output momentum (change in year over year output growth), yield momentum itself should be going in the opposite direction. Even if momentum was to fall to zero, a “neutral” zone for 5y5y global yields would need to be 70 bps lower by June versus current levels; if the market was more patient, 50 bps lower by October, which was before the accelerated sell off around the US election. Flat momentum wouldn’t be reached until December, 2017.

The concern for excessively bearish yield momentum reflects the fact that when output momentum peaks or troughs, there is a strong correlation with troughs or peaks in yield momentum with varying degrees of subsequent adjustment depending on the nature of the shift in output. The correlation isn’t always contemporaneous but it is always within a few months either side. One can’t help but think that if output momentum is rolling over, then we have already seen a clear signal of the rollover in yield momentum and if that is the case the recent (local) bear market is over and the only question is the extent to which it can unwind.

Ironically the bear market, since it was never that strong, failed to break the long run decline in global yields. If the bear market in bonds is dead, the bull market may never have noticed.

For those who wish to recreate their own excess liquidity tracker at home, which together with Chinese credit impulse are arguably the two most important leading indicators in a time when credit creation is the only thing that matters, here are some further details.

Our starting point for the shift in output momentum is the excess liquidity model. It is very clear that there is pending a decent loss of momentum predicted by the rollover of excess liquidity. This would also serve to reconcile the hard and soft data debate.

For those investors less familiar with the excess liquidity model, it is simply the difference in the first derivative from a Fisher equation, MV=PT where V is considered constant. The only adjustment we have made historically to V is during financial crisis when it was marked lower by 20 percent. M is very broadly defined to include MZM and all credit outstanding adjusted for central bank and bank holdings of debt to avoid double counting. PT represents nominal output and for monthly data we use finished goods producer prices, excluding oil to reflate industrial output. Excess liquidity itself is highly correlated with output momentum, regardless of whether it is reflated with a one year lead. This isn’t necessarily surprising since it implies that today’s output growth is a function of last year’s credit growth and a lagged dependent variable, the latter normally ensures a decent forecasting capability reflecting the strength of the cycle. Intuitively the model works well as credit expansion is required to sustain faster growth (it “accommodates” economic growth). This may occur endogenously (as Keynes argued, real growth solicits stronger credit) but not necessarily – sometimes if credit is constrained any acceleration in real growth or pricing may simply cannibalize itself. In the latest downturn in excess liquidity the run up in producer prices has not been accommodated by faster credit expansion – credit has actually slowed slightly and hence there is deficient excess liquidity to sustain output momentum.

Finally, based on both empirical data and concurrent indicators, the correlation between turning points in output momentum and yields is well established. The charts below show various metrics for G3 yields, US yields and 5y5y yields versus both nominal and real output momentum.

There are about 15 episodes going back to 1992 which are all coincident with the shift in direction of yield momentum. For G3 yields, there are 59 months where yields are at least one standard deviation higher than a year ago and 39 months when yields are at least 2 standard deviation higher than a year ago. In the former case the subsequent move in yields averages -56 basis points and in the latter case, -61 basis points. The last major shift in momentum was 2014 after taper tantrum. In the latest episode there has been a 1 sd increase in yield momentum for March-April, 2017. It would not therefore be unreasonable to expect at least a 50 bps decline from peak to trough in G3 yields – if Japan doesn’t move, then depending on the move in European yields, this would be disproportionately larger for the US.

In short: the gamble launched with the Shanghai Accord in February 2016 which prevented a global bear market, namely the global reflation experiment is once again dead - thank China and central bankers who had hoped to hand over monetary policy to Trump"s failed fiscal policy. The market just doesn"t know it quite yet. 

Deutsche Bank: "It Was Good While It Lasted"

It all started in February, when we first reported that something unexpected had happened: for reasons that were at the time unknown, the global credit impulse had unexpectedly tumbled, turning negative, a move which we predicted would result in a steep slide in the "soft" economic data, end the "reflation" optimism and unleash a wave of dovishness from the Fed.

Then, two months later when the reflation trade was officially over, in early April the culprit for this sudden collapse in global growth momentum was identified: China, which together with the price of oil, had been the only catalyst for the global reflation trade since the "Shanghai Accord" in February 2016, and had seen its credit impulse crash at the fastest pace since the financial crisis, dropping to a level not seen since 2010. 

Fast forward to this weekend, when in his latest fixed income weekly report, Deutsche Bank"s Dominic Konstam - who two weeks ago flipped back from being passionately bearish on rates and TSYs, and a supporter of the reflation trade, to anticipating much lower yields and a slowdown in the economy - writes that "It was good while it lasted."

What he is referring to is both the so-called "bear market" in bonds as well as global growth momentum, and in taking a page from the second derivative playbook we have focused on over the past two months, he expects it to decline sharply now that US excess liquidity has reached a downward inflection point, and as a result for the foreseeable future monetary policy will be a headwind: "historically, the peak in G3 yields has coincided with peaks in output momentum. It would not be unreasonable to expect at least a 50 bps decline from peak to trough in G3 yields following a peak in yield momentum."

Below, he explains why his latest advice to rates traders is to "Sit back, relax, the bear market in bonds may be over."

G3 yield momentum has swung from a monthly trough of -2 percent in early 2015 to the recent peak of almost +60 bps in March, 2017 using 5y5y government bond yields for France, US and Japan (equal weights France, US and 15 percent for Japan). Momentum is the change in the year versus the previous year. At current levels momentum is still strong at +38 bps. But if yields stay where they are momentum will rise to new peaks of +82 bps in June. Yet according to global output momentum (change in year over year output growth), yield momentum itself should be going in the opposite direction. Even if momentum was to fall to zero, a “neutral” zone for 5y5y global yields would need to be 70 bps lower by June versus current levels; if the market was more patient, 50 bps lower by October, which was before the accelerated sell off around the US election. Flat momentum wouldn’t be reached until December, 2017.

The concern for excessively bearish yield momentum reflects the fact that when output momentum peaks or troughs, there is a strong correlation with troughs or peaks in yield momentum with varying degrees of subsequent adjustment depending on the nature of the shift in output. The correlation isn’t always contemporaneous but it is always within a few months either side. One can’t help but think that if output momentum is rolling over, then we have already seen a clear signal of the rollover in yield momentum and if that is the case the recent (local) bear market is over and the only question is the extent to which it can unwind.

Ironically the bear market, since it was never that strong, failed to break the long run decline in global yields. If the bear market in bonds is dead, the bull market may never have noticed.

For those who wish to recreate their own excess liquidity tracker at home, which together with Chinese credit impulse are arguably the two most important leading indicators in a time when credit creation is the only thing that matters, here are some further details.

Our starting point for the shift in output momentum is the excess liquidity model. It is very clear that there is pending a decent loss of momentum predicted by the rollover of excess liquidity. This would also serve to reconcile the hard and soft data debate.

For those investors less familiar with the excess liquidity model, it is simply the difference in the first derivative from a Fisher equation, MV=PT where V is considered constant. The only adjustment we have made historically to V is during financial crisis when it was marked lower by 20 percent. M is very broadly defined to include MZM and all credit outstanding adjusted for central bank and bank holdings of debt to avoid double counting. PT represents nominal output and for monthly data we use finished goods producer prices, excluding oil to reflate industrial output. Excess liquidity itself is highly correlated with output momentum, regardless of whether it is reflated with a one year lead. This isn’t necessarily surprising since it implies that today’s output growth is a function of last year’s credit growth and a lagged dependent variable, the latter normally ensures a decent forecasting capability reflecting the strength of the cycle. Intuitively the model works well as credit expansion is required to sustain faster growth (it “accommodates” economic growth). This may occur endogenously (as Keynes argued, real growth solicits stronger credit) but not necessarily – sometimes if credit is constrained any acceleration in real growth or pricing may simply cannibalize itself. In the latest downturn in excess liquidity the run up in producer prices has not been accommodated by faster credit expansion – credit has actually slowed slightly and hence there is deficient excess liquidity to sustain output momentum.

Finally, based on both empirical data and concurrent indicators, the correlation between turning points in output momentum and yields is well established. The charts below show various metrics for G3 yields, US yields and 5y5y yields versus both nominal and real output momentum.

There are about 15 episodes going back to 1992 which are all coincident with the shift in direction of yield momentum. For G3 yields, there are 59 months where yields are at least one standard deviation higher than a year ago and 39 months when yields are at least 2 standard deviation higher than a year ago. In the former case the subsequent move in yields averages -56 basis points and in the latter case, -61 basis points. The last major shift in momentum was 2014 after taper tantrum. In the latest episode there has been a 1 sd increase in yield momentum for March-April, 2017. It would not therefore be unreasonable to expect at least a 50 bps decline from peak to trough in G3 yields – if Japan doesn’t move, then depending on the move in European yields, this would be disproportionately larger for the US.

In short: the gamble launched with the Shanghai Accord in February 2016 which prevented a global bear market, namely the global reflation experiment is once again dead - thank China and central bankers who had hoped to hand over monetary policy to Trump"s failed fiscal policy. The market just doesn"t know it quite yet.