Locked and Not Loaded


John Wayne had a way with words.

His delivery and performance as Marine Sargent John Stryker in the Sands of Iwo Jima were so convincing as to garner him an Academy Award nomination for Best Actor in a Leading Role. Though the marines Sargent Stryker led into battle might have begrudged his demanding training standards, the reality of life and death depicted on the battlefield quickly quashed resentment and replaced it with respect. It’s fitting that one of Hollywood’s toughest guys was the first in recorded history to command his onscreen troops into battle with the rally cry, “Lock and Load!”

It seems conceivable that Richard Fisher might have just seen Wayne’s World War II classic the night before his January 5th CNBC interview. Like Wayne, the former Dallas Federal Reserve President who went by the simpler term “boss” to yours truly for the better part of the last decade also happens to have a way with words. To wit is the following witticism: “The Federal Reserve is a giant weapon that has no ammunition left.”

Talk about fighting words.

If only policymakers understood that their collective mouthpiece was a weapon in and of itself. But they cannot seem to contain their commentary to the detriment of their ostensible lofty goal of stabilizing the financial system.

Take the other Fischer, as in Stanley Fischer, the Godfather of central banking. Was it not borderline reckless to insist that the Fed would hike interest rates four times this year in the face of market turmoil that made last August look like a walk in the park? It’s not so much that stock and bond market gyrations should be the driving force behind monetary policymaking. But prudence ought to at least dictate that public remarks not exacerbate the panic inciting investment behavior.

Going back to Richard Fisher for a moment, he rightly pointed out the direct source of market instability when he said, “We (the Fed) front-loaded an enormous rally to generate a wealth effect.”

Few former central bankers today have the gall to aver that the wealth effect performed as their models suggested they would. Turning the discussion into something political is a red herring; set that aside. Instead focus on research published by the International Monetary Fund (IMF) last summer. The conclusion of a study of 150 countries: the wealth effect is not only dead, unbalanced rewards of riches to the top earners actually slows aggregate economic growth.

Not that such math is infallible, but the IMF researchers determined that when the wealthiest 20 percent enjoy a one percent boost to their income, the annual growth rate of their respective country’s economy contracts by 0.1 percent within five years. The flipside: when the lowest 20 percent of earners see their incomes grow by that same one percent, economic growth rises by 0.4 percent over the same period.

Of course, lifting all boats requires true grit (if Mr. Wayne’s other boots fit…). In the case of the United States, it would require Congress first reform and then invest wisely in the nation’s education system so as to effect a lifelong wealth effect that benefits the economy in the long run.

But then, such actions require that adult comportment exist in DC to begin with. It has proven appreciably easier for politicians to lean on the Fed to keep interest rates at artificially low levels, which inevitably produces the illusion of wealth to low income earners via credit. No other sin of central banking has exacted such long-lasting damage on its country’s citizens (think subprime this or that).

As for what’s to come in the nearer term, veteran contrarians would suggest that a rally in the markets is building. Whether it’s investor sentiment surveys or Citigroup’s Panic/Euphoria gauge, which is deep in panic territory, history suggests that the rally stocks attempted earlier this week reflected what bulls were hoping was a deeply deeply oversold  market.

That said, these metrics say nothing about true valuations, which remain undetermined given the boost to the ‘E’ in the price/earnings (P/E) ratio care of the lowest debt-service costs in the history of mankind and share buybacks. These feel-good earnings boosters will prove as ephemeral to the stock market as they have every other time monetary policy has encouraged executive trickery.

If Fisher is right about the Fed’s lack of ammunition, further accommodation won’t be capable of riding to the rescue. Not that other policymakers are ceding even a hint at such a possibility.

Take the San Francisco Fed’s John Williams, who the Wall Street Journal recently ranked fifth in terms of influential Fed speakers (after Janet Yellen, Stanley Fischer, Bill Dudley and Jeffrey Lacker). The Journal attributed William’s former role as Yellen’s research director when she ran the SF Fed to his perceived role as one who “tends to signal the shifting consensus.” In other words, his comments are the next best thing to hearing it straight from Yellen’s mouth.

In a speech he gave the first week of January, he redefined understatement, conceding that the Fed had underestimated the negative economic ramifications of the decline in oil prices: “The world had changed; the U.S. has a lot of jobs connected to the oil industry.”

Not to worry, he continued, now that consumers finally trust that oil prices could remain low for a prolonged period of time, they will finally open their wallets and spend that windfall they’ve stingily been hoarding, which has in turn held back economic growth. His bottom line is that the Fed will hold to its plans to continue raising interest rates given that, “the U.S. economy still has a good head of steam.”

Isn’t it sublime when truth trumps fiction? Let’s hope William’s comments were:

A) not translated to other languages thus preventing the insulting of those devastated by the 250,000 and counting energy layoffs worldwide (to say nothing of metals and mining workers), and

B) for added good measure, not widely disseminated in Texas newspapers where 60,000 and counting high-paying energy jobs have been lost.

Perhaps Fedspeak, which purportedly has been raised to a Zen-like state in the era of unprecedented transparency, should follow Fed statements’ lead. Deutsche Bank’s Torsten Slok has been tracking the number of words in Fed statements for years. After peaking at 895 words in September, 2014, the number mercifully dwindled down to 556 as of December’s historic statement release.

Maybe even an election year moratorium on Fedspeak would do for now given how challenging it is to keep pace with all of the Candidate-speak clogging the airwaves. The investment community could put a motion to vote: replace confusing, contradictory and controversial Fedspeak with a press conference after every Federal Open Market Committee (FOMC) meeting.

Yellen pulling out the miracle of a unanimous vote at December’s meeting leaves little doubt the fair chair has gained control of her unruly underlings. That being the case, let her present a unified front in explaining the Committee’s decision-making methodology and determinations at the close of every FOMC meeting. If nothing else, the financial markets would be freed from what’s become a fresh source of violent volatility.

After all, it was Stanley Fischer himself who recently said of the Fed’s desire to normalize interest rates: “We want to get there and get there without creating big messes in the markets.”

If that’s truly the case, given the destructive toll inflicted by Fedspeak in recent years, less would indeed be more. It’s one thing to be locked and loaded. Try naming any war in history that’s been won firing off ineffectual blanks.


Grandma Got Run Over by a Rate Hike

Grandma got Run Over by a Rate Hike

Some songs don’t merit remakes.

And yet, a little over seven years ago, a variation on a southern Christmas ditty sprang onto the scene. The original remake, in the event you didn’t catch it on your radio, involved changing “Reindeer” to “Rate Cut.” Some seven years and over half a trillion in foregone savings later, most would agree that seniors were flattened in the era of zero interest rates.

Early last year, the insurer Swiss Re released findings of a study which found that in the five years through 2013, U.S. savers had lost some $470 billion in what they would otherwise have earned in interest income had rates not been held at artificially low levels.

Forget the shoulda, coulda, woulda nature of the matter – as if overwhelmed by a group epiphany, most economists now miraculously agree that the Federal Reserve was much too late in removing the punch bowl. The question for the here and now is what’s Grandma to do in the aftermath of the initiation of the long-feared tightening campaign?

As an aside, it’s beyond grating to hear every pundit on the financial news circuit brag about how they were all on board with the Fed hiking back in 2013. The term “taper tantrum” couldn’t have earned its name without most of Wall Street whining at the prospect of a mere reduction in the Fed’s quantitative easing campaign back in the summer of 2013.

Pardon the digression. Back to Grandma. What’s she to do when the recession does arrive? Take the best case scenario, that we’re talking 18 months from now and the re-writing of history books on lengthy economic expansions. Then what does she do?

By then, Baby Boomers will be endeavoring to retire en masse: according to a recent survey, two-thirds of boomers plan to retire by the time they turn 70. As it so happens, this year, the firstborn class of 1946 turns 70, meaning we are just at the outset of the trend.

Before continuing, the flipside of the above statistic is worth noting. If two-thirds of Boomers plan to retire by the age of 70, a solid one-third (think 25 million folks here) do not plan to leave the workforce. This goes a long way to explaining the relative strength of this cohort’s lofty labor force participation rate to say nothing of their propensity to be upsizing their homes.

According to a November Fannie Mae report, in 2013, the per capita rate of single-family home occupancy was unchanged with that of 2012 and in fact above 2006 levels. Far be it from downsizing, the average number of rooms per home increased from 2011 to 2013, the latest year for which data are available.

One interim observation:  While the explosion in apartment occupancy has been no mirage, it is entirely attributable to the Millennial generation. From 2011 to 2013, the number of Boomer apartment dwellers remained static while the number of Millennials living in apartments grew by a half million a year.

(Trivia – 2015 marked the year both generations numbered 75 million. From here on out, Millennials will increasingly outnumber Boomers, who’ve reigned supreme as the largest generation this country has known for what feels like a millennia.)

As for the Boomers who do want to retire, what exactly is it they’re willing to part with? For most, the answer is absolutely nothing. They want to keep their (large) home, their two cars and the lifestyle to which they’ve become accustomed. If only their desires matched up with their prospects. A survey released last spring by the Insured Retirement Institute found that Boomers’ “economic satisfaction” dropped to 48 percent last year from 65 percent in 2014 and 76 percent in 2011.

Delineating between retirees and those still working reveals a yawning gap: Retirees’ satisfaction caved to 45 percent from 72 percent in 2014 compared to 53 percent of working Boomers feeling satisfied vs. 60 percent the prior year.

In all, only six in 10 reported having saved adequately for retirement. This squares with a separate study that found those aged 55-64 had an average combined 401k and IRA balance of $111,000 in 2013.

So what’s a would-be retiree to do? Saving $10,000 a month to play catch-up would be a good start. That’s a steep order considering the median annual income in this country is somewhere in the neighborhood of $55,000.

Which brings us back to Grandma and that rate hike, which is sure to be blamed for the recession but in truth will be coincidental in nature. Whether she likes it or not, if that cruise she’s been planning is going to remain in her grand retirement plans, she might just have to sell off her beloved home sweet home.

According to 2013 Census data, the 32 million single-family abodes Boomers call home account for over one-quarter of the nation’s housing stock. This cache of cottages has an estimated market value of $8 trillion which equates to 42 percent of the value of all owner-occupied homes out there (they don’t call them McMansions for nothing).

Aside from the observation that we’re talking about a whole heck of a lot of house, who exactly is going to buy them? Would you answer, “Why, the Millennials naturally”?

I’m personally going with AMC Lending’s Logan Mohtshami’s take on this one. He forecasts that demand for single-family homes won’t improve meaningfully until 2020 or so. “Until then, expect a slow and steady rise for (housing) starts and permits.” That, by the way, is just what we’ve had in recent years – slow and steady, as in new single-family home construction is a fraction of what is should be given population growth.

As for all that touted Millennial pent-up demand, even last year, the ranks of 25-34 year olds bunking up with mom and dad rose in number. The generation is effectively going in reverse vis-à-vis what the broad housing market needs, which is for this generation to fly the coop once and for all.

“We need the young to rent, hook up, date, find a steady relationship, pop the question, and have kids before we have any major boom in single family home sales,” Mohtshami wisely observes.

Of course, some of these choices are cultural as we’ve all learned. Why not live in your parent’s basement and drive a nicer set of wheels than you could otherwise? But surely that thinking is not representative of every member of this whole 75-million strong army?

On a more fundamental level, broad-based, higher paying job growth is what’s needed to solve this entrenched issue. That’s difficult to foresee given shrinking corporate profits and contracting manufacturing activity to say nothing of mounting evidence of a slowdown in the labor market, the most lagging of all indicators.

What transpires between now and 2020 is what really matters for the economy, and by extension for housing, which has yet to fully recover from the great housing crisis. Some 15 percent of U.S. homeowners still owe more on their home than it is worth. Many who borrowed against their home equity during the housing boom are just now having to start making good on that promise.

That said, mortgage applications have picked up over the past year and anecdotal evidence suggests more first time homebuyers are entering the market, albeit at inflated prices. But first timers are not what Boomers need. McMansions are sold to the generation that moves out of their first home, known as move-up buyers.

Will Grandma and her friends and neighbors with roofs over their heads be the only damage exacted by the coming recession, whenever that inevitably descends on the economy? We can only hope.

The starting point for the Baby Boomer generation is nothing to laugh about. The United States ranks 29th among 33 developed countries for seniors living in poverty – 21.5 percent of Americans ages 65 and older live in poverty vs. 12.6 percent for all developed countries.

It is hard to say when, and even if, monetary and fiscal policymakers will ever own up to the part they’ve played in encouraging debt in lieu of prudence. We can only hope they rue the day such darkly humorous lyrics sprang to mind (substitute “Hike” for 2015 version).

Grandma Got Run Over by a Rate Cut
Walking Home from D.C. Christmas Eve
You Can Say There’s No Such Thing as Free Lunch
But as for me and Grandpa, We Believed


Bottoms-Down Forecasting

Griswold, Bottoms-down forecasting

What do bad wiring, methane and non-chloric, silicon-based lubricant have in common?

Presumably a classic Christmas movie would not first come to mind. It’s a Wonderful Life and Miracle on 34th Street, those are true classic masterpieces. In more recent movie history, A Christmas Story and Home Alone have captured the rowdier spirit of the season.

That leaves National Lampoon’s Christmas Vacation a close fifth for some as a must watch, at least among the non-animated classics. Favorite scenes compete for top spot in this less-than-high-brow comedic tale; two of these star animals. In the first, a cat chewing Christmas tree light wires ends fatally for the feline. This side-splitting scene was almost cut by the PC police, which just goes to show you. In the second scene, an indoor squirrel chase also delights; the culmination of a hilarious series of events that features methane gas and Cousin Eddie, perhaps the best redneck character to ever grace, if such terms as redneck and grace can reside together, the big screen.

And then there’s the infamous downhill sled scene. In endeavoring to achieve a “new amateur, recreational, saucer-sled land-speed record,” Clark Griswold, played perfectly by Chevy Chase, waxes a steel sled with a kitchen lubricant. The fiery end in a Wal-Mart parking lot is truly one for the ages. With Christmas being over, it seems a shame to store these moments with everything else that comes out for the Holidays and won’t be seen for another long year.

But look ahead to the New Year we must. Wall Street has been doing just that for the better part of the last month. Barron’s recently characterized the Street’s 2016 outlook as, “Cautious, but Optimistic.” The group’s mean forecast places the benchmark Standard & Poor’s 500 stock index at 2220 by the end of next year, roughly six percent above current levels.

Of course, the optimistic predictions are on par with those being espoused at this time last year that have not panned out as prognosticated. But the optimism is to be expected. With rare exceptions, strategists are a sanguine lot, as they should be. After all, they’re tasked with keeping their firms’ clients’ money fully invested (and therefore fully fee-generating).

Given his constructive posture, Goldman Sachs’ David Kostin is this year’s standout among Barron’s ten cited strategists. His 2,100 yearend S&P 500 target is the lowest of the bunch. His outlook is weighed down by the view that the Fed will hike rates four times in 2016. This will in turn drag down what will otherwise be decent earnings against the backdrop of yet another year of tepid economic growth.

Citigroup’s Tobias Levkovich, a friend and investing legend in his own right, is characteristically optimistic. His Barron’s forecast lines right up with the consensus: The S&P will end next year at 2200. That upbeat take makes his downside risks all the more intriguing as they tap the contrarian in him. Tellingly, they begin with upside risk to the employment and wage picture which triggers a “chase towards higher bond yields.” This chase would catalyze what policymakers fear more than wage inflation; that is wide scale bond fund withdrawals which exacerbate illiquidity and trigger further financial market tightening.

Policymakers have good reason to be concerned: U.S. credit mutual funds have doubled since 2010 and now own a fifth of the market; retail investors have poured over $1.2 trillion into credit mutual and exchange-traded funds since then. The last thing portfolio managers need at this juncture is greater constriction on their ability to trade their holdings.

The real question is whether the long-anticipated rise in wage inflation is really around the corner. That would be a good problem to have for many Americans. While jobless claims would have many believing the arrival of higher paychecks is imminent, layoff announcements are poised to end the year up by nearly a third over 2014. In other words, the lowest commodity prices in 16 years will continue to exact a macroeconomic toll; the damage is unfolding with a lag as many companies (and countries) have banked on a rebound in energy prices.

The conventional wisdom heading into 2016 is that the economy is finally poised to reap the benefits of lower gasoline prices; oil prices have fallen so far they no longer have the ability to do incremental harm. Fresh data on home sales in energy dependent states, though, defies this conclusion as the fallout appears to be intensifying. Punctuating the latest stats on housing, the outlook in the just-released Dallas Fed manufacturing survey tumbled to its bleakest levels of the past year, matching lows last seen in 2009.

Meanwhile in the Midwest, the prognosis for the Chicago region refuses to break into positive territory. This can’t be comforting given the auto sector’s outsized positive influence on the current recovery. The dour outlook does, however, help explain the fact that the number of cars sitting in inventory vis-à-vis sales levels is at the highest since 2009.

The credit markets, for their part, are shooting first and presumably taking questions at a later date. What’s spooked them? In bond land, investors rely on the distress ratio to guide them, that is the number of high yield bonds trading at yields 10 percentage points or more above comparable-maturity Treasury bonds. As of November, one-in-five companies were in this leaky boat, the highest showing since 2009.

The distress ratio is seen as a precursor to the more definitive default rate, when companies actually renege on their interest payments. For now, the rate is just north of three percent, not high enough to set off any alarms. But forecasts are calling for it to push five percent next year fueled by energy company defaults, which are expected to spike to 11 percent.

A bit of context: Though the rate itself will remain historically low, the dollar amount of failing debt is expected to rise to $66 billion, close to 2001’s $78 billion but still a fraction of 2009’s record $119 billion. If only the credit markets existed in a vacuum. Roll the rest of the world’s debt markets into the equation and defaults have indeed risen to the highest level since 2009.

In the event the repeated mention of 2009 has given you a case of the jitters, fear not. At least that’s what New Albion Partner’s Brian Reynolds advises. Reynolds, who tracks public pensions’ penchant for risk taking, provides assurances to the leery in the form of a running tally of pension allocations to credit funds.

Reynolds’ figures grace these pages with frequency for good reason, namely that pensions have a lot more cash to throw around than most – as in $18 trillion. With the latest month’s count in hand, it’s official — pension allocations to credit funds hit monthly records in August, September, October, November and now December. In all, some $175 billion earmarked to fund current and future retirees’ income has flooded credit funds since August 2012. With the trend continuing apace, demand for all manner of credit promises to continue burying supply, propping up a market that should be toppling over.

As simple as the argument is, Reynolds could be on to something. If he’s right, recession may not greet the next president proving the cheery prognosticators at the Congressional Budget Office right. At the start of this year, the CBO predicted that the current recovery would last, at a minimum, through the end of 2017. Maybe the CBO has also been following pension behavior and knows that financial engineering in the New Year will remain alive and well.

If only this could end as well as a feel-good Christmas movie. For now, policymakers are looking the other way. What say could they possibly have in the matter, even if they did acknowledge that pensions are using neither a bottoms-up or top-down methodology to test the appropriateness of their portfolio allocations? Besides, party poopers have no place as New Year revelers gear up for one last hurrah.

But what if 2015 really is akin to 1998, and not 1999, for investors? What if this rally has legs and can keep recession at bay? Well then, we position our collective portfolios to profit at the expense of irresponsible pensions employing a bottoms-down approach, Griswold-style. The fact that they’re placing pensioners’ promised paychecks at grave risk of spontaneous ignition can be relegated to denial-ville as so many seemingly intractable issues are today.


A Texan in King Arthur’s Court


Diamonds are said to be a girl’s best friend, but for all their beauty, they can’t impart wisdom? This season as my gift to you, I would like to share the true wisdom of a gift I received years ago, one whose value cannot be measured in carats and nestled in robin’s egg blue. The gift is a story that can be taken as a parable, featuring that iconic little box and a legendary banker. You will soon agree that it is a priceless gift that truly keeps on giving.

It will come as no surprise to any who have met him that the giver of the gift was Arthur Cashin, one of the greatest storytellers of all time. Over the past decade, I’ve had the honor to call him friend. His infinite wisdom and consummate knowledge of the history of the financial markets were hugely helpful in fulfilling my role as advisor to Richard Fisher. Bringing those two gentlemen together several months before Fisher retired was bar none the highlight of my career at the Federal Reserve.

It’s impossible to describe Cashin’s breadth of knowledge of the most historic moments in modern day stock market history. It’s an understatement to say that he has earned his stripes. One year ago, King Arthur, as Fisher and I are apt to call him, celebrated his 50-year anniversary as a member of the New York Stock Exchange. The NYSE commemorated the occasion by having Cashin ring the opening bell; the moment befitted the occasion perfectly.

Readers of Cashin’s Comments, a daily missive that delights his followers the world round, would agree that it’s hard to pin down the very best story he has told over the years.

Cashin’s recollection of the day that followed the 1987 crash is among my favorites. Though the Dow initially opened up 200 points, trading quickly turned negative. Adding fuel to the panic, were banks in the process of cutting off lines of credit to the specialists on the floor. What would have followed, if this had proceeded, could have been catastrophic.

Few recall that Alan Greenspan was on an airplane headed back to Washington DC at the time. The freshly appointed Federal Reserve chairman had landed in Dallas on Black Monday just in time to learn that the Dow had fallen by 22 percent while he had been in flight. This shocking news prompted Greenspan’s cancelling his Dallas engagement and heading back to DC. Unfortunately, for the markets, he was once again in the air as yet another historic sell off ensued.

As Cashin wrote on the 25th anniversary of the crash, news that Greenspan couldn’t be reached was of little comfort to NYSE Chairman John Phelan: Desperate, Phelan called the President of the New York Fed, Gerry Corrigan. He sensed the danger immediately and began calling the banks to reopen the credit lines. They were reluctant but Corrigan ultimately cajoled them. The credit lines were reopened and the halted stocks were reopened. Best of all, the market started to rally and closed higher on the day.”

The story of the day the NYSE didn’t crash harder is a classic. But it doesn’t resonate as much as it once did. Since 1987, the stock market has operated in an increasingly contained vacuum thanks in large part to overly-easy monetary policy. That makes the following story, generously gifted to me in its entirety by King Arthur, the most relevant of the day. The two main characters of this timeless tale are Charles Lewis Tiffany and John Pierpont Morgan.

Being the astute jeweler that he was, Mr. Tiffany knew that Mr. Morgan had an acute affinity for diamond stickpins. One day, Tiffany came across a particularly unusual and extraordinarily beautiful pin. As was the custom of the day, he sent a man around to Morgan’s office with the stickpin elegantly wrapped in a robin’s egg blue gift box with the following note:

“My dear Mr. Morgan. Knowing your exceptional taste in stickpins, I have sent this rare and exquisite piece for your consideration. Due to its rarity, it is priced at $5,000. If you choose to accept it, please send a man to my offices tomorrow with your check for $5,000. If you choose not to accept, you may send your man back with the pin.”

The next day, the Morgan man arrived at Tiffany’s with the same box in new wrapping and a different envelope. In that envelope was a note which read:

“Dear Mr. Tiffany. The pin is truly magnificent. The price of $5,000 may be a bit rich. I have enclosed a check for $4,000. If you choose to accept, send my man back with the box. If not, send back the check and he will leave the box with you.” 

Tiffany stared at the check for several minutes. It was indeed a great deal of money. Yet he was sure the pin was worth $5,000. Finally, he said to the man: “You may return the check to Mr. Morgan. My price was firm.”

And so, the man took the check and placed the gift-wrapped box on Tiffany’s desk. Tiffany sat for a minute thinking of the check he had returned. Then he unwrapped the box to remove the stickpin.

When he opened the box he found – not the stickpin – but rather a check from Morgan for $5,000 and a note with a single sentence – “JUST CHECKING THE PRICE.”

Ah, but for the days of old, for bygone times when markets operated as price discovery mechanisms.

Howard Silverblatt, the man behind the Standard & Poor’s 500 index, has not been on Wall Street for quite as long as Cashin. Still, as he nears the 40-year mark at S&P, he too has earned the distinction of a true markets veteran.

Silverblatt’s recent work on share buybacks has cast a harsh light on one of the unfortunate outgrowths of accommodative Fed policy. This year’s third quarter marked the seventh consecutive three-month period in which over 20 percent of the S&P 500 constituents “bought their earnings per share (EPS) via buybacks,” in Silverblatt’s words.

Drilling down leads to the discovery that one-in-five companies have juiced their EPS by a minimum of four percent over the prior year via buybacks. How does this work? The act of reducing share count by at least four percent by definition boosts earnings PER share by the same amount. Looking ahead using companies’ more recent activity as a gauge, this year’s last three-month period will mark an eighth consecutive quarter of similar share count reduction.

At $559 billion over the past 12 months, buybacks are up 1.6 percent over 2014. Still, barring an extraordinary fourth quarter, 2015 will not be one for the record books. For now, the 2007 record of $589 billion looks to stand.

Of course, there is hope for short-sighted investors, if hope is what you’d call it. As Silverblatt quips, “The combination of low interest rates, even as Yellen & Co increases rates, and high cash levels continues to give companies the ability to set record shareholder returns.”

Or, as Cashin has said of this corporate conduct, “Companies have raised financial engineering to a Botox state.” It won’t surprise you that I couldn’t agree more.

Perhaps we should all make a wish that the gift of price discovery is under the tree this year, symbolically wrapped in that beautiful robin’s egg blue. How lovely it would be to resurrect those wondrous words uttered so long ago by J.P. Morgan: “Just checking the price.”

Fittingly it happened that, Silverblatt and Wall Street’s most ardent and succinct Fed policy critic, Peter Boockvar, rounded out a merry New York gathering where Fisher and Cashin shared their stories whilst marinating an ice cube or two. This holiday season, I will count among my many blessings the friendship of such wise men, especially that of Wall Street’s very own King among Men.


Mind the Cap

Mind the CapSomething is rotten in the state of U.S. monetary policy. This Wednesday will likely mark the beginning of the first rate-hiking cycle since the last one began nearly 12 ago. The “yield curve” depicts the yield of each bond from the shortest to the longest maturities. In robust economic times, the curve is upward sloping reflecting investors’ expectations of higher income in exchange for taking on the added risk of holding bonds for longer periods of time.

Back in June 2004, the difference between the ten-year and two-year Treasury notes was 190 basis points (bps), or one-hundredths of a percentage point. Today, that spread is 123 bps.

Starting points also must be taken into consideration. The fed funds rate at the point of the last lift-off was 1.0 percent compared to today’s zero. During the last tightening campaign, the Fed had to raise rates by a quarter of a percentage point four times to arrive at today’s spread. The current differential suggests that tightening in other forms has already begun.

The Lindsey Group’s Peter Boockvar recently documented the other prominent differences between then and now. In the four quarters through 2004’s second quarter, gross domestic product growth averaged 4.25 percent vs. 2.2-percent now. The unemployment rate was 5.6 percent vs 5 percent today and the factory sector was still squarely in expansion mode compared to today’s slump to contraction territory. Meanwhile, housing starts are running at about half their mid-2004 pace. And the consumer is a shadow of its former self: at 2.9-percent, today’s year-over-year rate of retail sales growth, netting out autos, gasoline and building materials, is half of what it was back then.

The powerhouse of the U.S. economy was then and remains consumption. The anemic level of retail sales would thus be confusing given the price of gasoline being below $2 a gallon for most Americans were it not for the one critical factor. According to a new Harvard study, a record number of renters are spending more than 30 percent of their incomes to lease the roof over their head; that amounts to nearly half of all renters. Meanwhile, the percentage of home sales that go to first-time buyers remains depressed at 31 percent, far from a normal market’s 40-percent level.

Housing is more burdensome than it has ever been for middle-income Americans. It’s no wonder they have less residual to spend on life’s little non-necessities. Inflation, it must be noted, is also running below the level Fed officials have traditionally deemed appropriate. And commodity prices’ continued declines have decimated millions of workers’ incomes and exacted tremendous damage on exporting nations’ economies. Finally, the strong dollar acts as a further depressant on U.S. exporters and emerging markets.

The last several months have also witnessed not only an acute rise in financial market volatility but a meltdown in the riskier corners of the credit markets. Couple this with the traditional evaporation of liquidity as yearend approaches and logic demands to know why policymakers would dare risk raising interest rates.

And yet, the financial markets have nearly fully priced in a rate hike today. Any lingering doubts were extinguished in the wake of Chair Yellen’s stating she stands ready to withstand a double dissent from two of the governors on the Federal Open Market Committee. Fed District president dissents have become common in their prevalence in recent years. But there have only been four governor dissents since 1995.

A double dissent would be remarkable, historically speaking, revealing a deep level of discord among Committee members. So why chance it?

Perhaps it’s the complete unknown that’s driving the insistence of lift-off. The mechanics of raising rates is complex against a backdrop of an atrophied fed funds rate market. Enter the repurchase, or repo market, the overnight market in which banks and other financial institutions pledge securities collateral in exchange for cash. Today’s repo rate has effectively replaced yesteryear’s fed funds rate.

Ensuring the smooth functioning of the repo market is thus critical to the successful implementation of a rate hike. The sheer size of the Fed’s balance sheet given its $3.4 trillion in purchases of Treasurys and other securities presents a convenient solution to the potential for an insufficient supply of collateral.

The expansion of its ‘reverse repo facility,’ which absorbs liquidity via money markets funds, would accomplish the task of ensuring market functionality. So too, though, would the sale of Treasurys off the Fed’s balance sheet; this maneuver would also soak up cash while simultaneously supplying collateral to a market starved for it.

The crucial difference is at the core of why the Fed is acting against every grain of its traditional modus operandi. Raising the cap of the reverse repo facility does not release collateral from the Fed’s balance sheet. The immense size is thus preserved.

The program is currently capped at $300 billion per day. This figure is a pittance of the potential demand from the $2-trillion plus in yield-starved institutional reserves sitting on bank balance sheets. Policymakers have gone to great lengths to ensure that a raised cap could be subsequently lowered. All things considered, it would be quite the feat to force that big of a genie back into its bottle, ensuring the balance sheet would not shrink.

By June 2006, which marked the close of the last tightening cycle, the fed funds rate had risen to 5.25 percent. Today’s markets are barely pricing in two more quarter-percent hikes in the New Year. Unless the economy is poised to become the longest in postwar history, chances are what little tightening can be accomplished will be quickly reversed as recession descends.

As for the Fed’s balance sheet, what if the maintenance of its current size becomes critical to the smooth functioning of overnight rate markets? Looking back in years to come, some may conclude that the Fed never intended to initiate a cycle per se but rather to make a calculated move to effect long term monetary policy by proxy.


The Fed Awakens

Fed hike

What if Mario Draghi really did whip out a bazooka?

On December 3rd, the stock market pitched a fit reacting to what it perceived to be insufficient stimulus on the part of the European Central Bank (ECB). The market had wanted “Super Mario,” as investors have lovingly nick-named the ECB president, to take two measures.

The first would have expanded the quantitative easing (QE) program, increasing the amount of securities the ECB is committed to purchase. The second would have cut already negative deposit rates by -0.15%; Draghi only delivered -0.1% (negative rates penalize banks for holding excess cash at the EBC when they could lend it out to spur economic growth.)

Borrowing a page out of New York Federal Reserve President Bill Dudley’s battle plan, Draghi did manage to push through a much more forward-looking program – reinvestment of any proceeds that result from securities maturing on its balance sheet. Bratty fast-money, instant gratification investors dismissed the move.

Draghi, though, never looked more the cat that ate the canary than he did the next day in New York. He vociferously reiterated his commitment to do whatever it takes to get inflation to the ECB target, as long as that might take. If QE wars need be fought long into the future, reinvestment will strategically position Draghi on the central banking battlefield.

Back at home, many market watchers are scratching their heads as to why the Fed would be raising rates at this juncture. Financial conditions have tightened, not eased, since the Fed pushed the hold button at its September meeting. And yet, the markets and economist community remain unanimous that the Fed will pull the trigger.

What if it really is all about reinvestment and not one teensy quarter-point rate hike? Over the next three years, some $1.1 trillion in Treasurys could roll off the Fed’s balance sheet if reinvestments were to cease. Tack on the potential for mortgage backed securities (MBS) to prepay and/or mature and you’re contemplating a figure that approaches $2 trillion.

Make no mistake, shrinkage of the Fed’s balance sheet to half its current size is much more feared by market participants than a slight tick-up in interest rates. Taking the step to not reinvest would increase the supply of Treasurys and MBS available to investors and reduce the Fed’s support of the economy. The higher the supply on the market, the lower the price and hence, higher the yield, which moves opposite price.

“It seems to me you’d like to have a little room before you start ending the reinvestment… (which) is a tightening of monetary policy.” So said Dudley on June 5th to a group of reporters. He went on to define how big the ‘room’ needs to be a “reasonable level.”

“By how far that is – you know, if it’s 1 percent or 1.5 percent – I haven’t reached any definitive conclusion.”

At the risk of allowing the appearance of decision-making to occur in unilateral fashion on Liberty Street, Fed Chair Janet Yellen made clear to reporters that the entire Federal Open Market Committee (FOMC) was tasked with determining the future size of the balance sheet.

In a June 17 Q&A session that followed the FOMC meeting, Yellen assured the public that, “President Dudley was expressing his own personal point of view, but this is a matter that the committee has not yet decided and I cannot provide any further detail.”

But what if there’s more than one way to skin the reinvestment cat?

The interest rate markets that determine the cost at which banks lend to one another is notoriously illiquid at the end of calendar quarters and years. The Fed knows this. That makes the insistence on raising interest rates this month all the more intriguing given the pressures emanating from the corporate bond market.

As watching-paint-dry boring as the mechanics surrounding the actual rate hike are, a rudimentary understanding is crucial to grasping the tumultuous nature of the deliberations among FOMC voting members. (That was a preamble to implore the reading of the next few paragraphs.)

The overnight fed funds rate market, which the Fed employed to embark on its last rate-hiking cycle, is a shadow of its former self in terms of trading volumes. We’re talking about $50 billion a day compared to today’s theoretical $2 trillion in institutional cash dehydrating on bank balance sheets parched for safe positive yields.

It’s a complete unknown what portion of this $2 trillion would rush off bank balance sheets into money market funds. That said, it’s a slam-dunk assumption that the demand for higher yields is ubiquitous among those making south of nothing on their cash.

Planning for a complete unknown dictates that the Fed be flexible in trying to minimize overnight rate market upheaval. Funny thing – policymakers have a tool that can maximize a smooth transition called the reverse repurchase ‘repo’ (RRP) facility.

In the post-zero interest rate world, which celebrates its seven-year anniversary the day the Fed is expected to raise rates, repo markets determine overnight rates. Banks and other financial institutions swap collateral in the form of U.S. Treasurys, MBS and corporate debt to other investors for cash. In that these are overnight trades to facilitate the shortest-term funding needs, the bank buys back the securities the next day.

A bank in the above example that’s selling securities overnight, with the understanding they’ll buy them back the next day, is entering into the repurchase agreement. The party on the other side of the transaction, which buys the securities overnight agreeing to sell it back the next day, has entered into a reverse repurchase agreement.

Mitigating any disruptions in this market is key to a successful initial rise in interest rates. That’s saying something when the size of the collateral market has already shrunk from $10 trillion in 2007 to $6 trillion today. A rate hike, in its simplest form, involves reducing the liquidity in the system from this $6 trillion starting point. It follows that the Fed can use its RRP to absorb liquidity using money market funds as the conduit.

The problem is the RRP is currently capped at $300 billion per day, a fraction of the potential demand for the discernible yield money market funds will presumably be able to offer in a positive rate environment.

Of course, the Fed could satisfy the need to provide the market with collateral by selling Treasurys, but again this shrinks the balance sheet.

What of the elegant solution cleverly proposed by Dudley, you ask? The answer: Temporarily lift the cap off the RRP to act in the markets’ best interest. In the blink of an eye, the money market fund industry will be completely dependent upon the RRP as a one-stop shop for overnight collateral. In a world bereft of collateral sourcing to begin with, how could such a dependency imply anything “temporary”?

The short answer is it won’t. The long-term devilishly detailed answer: Yes, the Fed uncapping the RRP would succeed in tightening financial conditions by absorbing monies from the money market funds that will be flooded with deposits. But this maneuver will not release the collateral from the Fed’s balance sheet. The size of the mammoth balance sheet would thus be largely held intact.

Perhaps this is why we’ve been hearing dissentious grumblings from unusual suspects such as Fed Board governors Lael Brainard and Daniel Tarullo. Monetary policy is effectively being determined mechanistically at an illiquid time of the year notorious for mechanical dysfunction. Policymaking by proxy has to bristle even the loyalist of consensus builders.

Recall that there have been only four dissents on the part of Fed governors over the past 20 years (Federal Reserve district president dissents are relatively-speaking a common occurrence). If dissent weren’t a clear and present danger, why would Yellen warn Congress she’s prepared to push forward with a rate hike in spite of potential dissents? The chair could easily have been referring to mutinous governors.

Since the creation of the RRP, policymakers have gone to great pains to reassure the public they have the political will to shrink the facility when the time comes. That would be quite the acrobatic act if the money market fund industry becomes reliant on the RRP for daily functionality.

Conveniently, with markets pricing in all of two additional rate hikes in 2016, we’ll never get to Dudley’s 1 to 1.5-percent overnight rate that justifies shrinking the balance sheet.

Will policymakers have the luxury of time to raise interest rates enough to combat the next recession? Looking 12 months out, it’s much more likely that the business cycle will have turned. As the Wall Street Journal has pointed out, at 78 months, the current expansion is longer than 29 of the 33 dating back to 1854.

There’s no doubt the Fed’s first rate hike in nearly a decade is an awakening. The open-ended question is the true motivating factor. Perhaps investors should cue off Draghi’s recent success in securing ECB balance sheet reinvestment and connect the dots from there.


Desperately Seeking Equities in Dallas

Chevelle“When the words ‘big block’ and ‘Chevelle’ meet, a good time is pretty much guaranteed. When you throw in a complete off-body restoration, you end up with a tire-melting conversation starter that everyone stops to look at.” Some 47 years on, people are still stopping to stare at the 1968 Chevelle Super Sport V8. Indeed, one such specimen, in Tuxedo Black was on full display in University Park, Texas this past weekend.

Chevrolet’s classic muscle car landed in its new home via an enclosed car transporter with a posh travel mate that lends new meaning to modern day muscle car — the 2015 Rolls Royce Phantom Coupé. In a nod to tradition, this particular four-wheeled gem was two-toned, as in midnight blue on the bottom and pearly ivory on top. The company boasts that the car “longs to be driven” and personifies “the pinnacle of contemporary sporting style and glamour.”

One thing is for sure. Both cars capture the gilded era in which we’re all living. Nestled inside Dallas, University Park, affectionately known as UP to its residents, is home to the third-highest concentration of financial markets professionals in the country after New York City and Greenwich, Connecticut. A drive through the picturesque, tree-lined streets of UP and its sister, Highland Park, supplies visual validation to the dry statistic.

That same drive through the Park Cities reveals the pinnacle of a different craze, that of spec building on a grand scale. It’s all but impossible to drive a square block without seeing a massive home going up in the name of 2 and 20. In the event you’re not an active investor in a private equity or hedge fund, the numbers refer to how funds keep their lights on. They collect two percent of assets under management every year from you, the lucky investor, who passes ‘Go.” Then they keep 20 percent of any profits earned. Sweet gig if you can get it.

Kudos to enterprising homebuilders and vendors of luxury automobiles for being keen to the potential profits awaiting at the intersection of “How to earn vast wealth and How to flaunt it.”

In the event the fabulously wealthy need extra inspiration during this festive time of the year, there’s always the Financial Times’ (FT) must-read magazine How to Spend It. There’s even a FT website dedicated to “worldly pleasures.”

For those inclined to large-scale luxuries, the British newspaper also offers its loyal readers a real estate section in its weekend edition. On any given Saturday morning, House & Home might feature Scottish castles and Riviera villas that can be had for a song. It was thus telling that the November 21st H&H featured a lovely graphic of a cowboy galloping across a range trying to lasso a floating home filled with dollar signs. The title: Dallas v Houston.

At the risk of eliciting shock, Dallas won the war hands down thanks in large part to its more diverse economy that’s better shielded from the energy price rout. There’s no doubt, with mega-firms such as Toyota and State Farm relocating their corporate headquarters to North Texas, that the demand for housing will be largely insulated from the decline in oil prices.

Inventories in both cities remain on the lean side. That said, building supplies in Houston do raise a red flag. In a sign of how quickly markets can turn, realtors reported 26 percent more homes on the market in October than the same month in 2014. And sales fell 10 percent over September and are now down by one percent over last year.

Houston’s latest existing home sales report punctuated a separate statistic that found new home sales had nosedived 27 percent in September over 2014. Builders were presumably not able to pull back quickly enough given the rapidity with which energy prices collapsed. In a sign of what’s to come, builders reported a cancellation rate of 26 percent; the norm is well below 20 percent. That’s what happens every time oil prices fall below $55 a barrel, especially if they stay there as is the case today.

The FT article cleverly compares Houston’s reliance on oil to that of the City of London’s dependence on the fund management industry. Which so happens to bring us back to the subject of Dallas.

Dallas is creating 100,000 new jobs a year. But the influx of new workers who’ve been regaled with tales of sprawling suburban bliss is being greeted with something of a rude awakening. Yes, there really is no state income tax. ‘Tis true, it can be 72 degrees and sunny in December (as in this week). And it is the case that you can buy more home for your hard-earned buck than in many coastal cities.

The problem is the cost savings have been whittled down. Overall sales in the DFW metro area are up 17 percent over last year. Prices meanwhile have surged by 8.7 percent, second only to Denver.

In a nod to the local frenzy, newspaper reporters stake out new subdivisions like they would have college unrest on campuses in the late 1960s. They’re writing stories on would-be buyers queuing overnight to get first dibs on lots that fit their budgets.

Such anecdotes certainly don’t suggest land as far as the eye can see and an abundance of supply. In fact, there’s a dearth of affordable properties attributable to more than a wet spring building season and the in-migration of new companies. In recent years, deep-pocketed private equity investors have targeted Texas cities as ripe for the picking.

The combination of agnostic price-point buyers and tight supply has been toxic for lower income workers. Median existing home prices in Dallas are $220,000 lining up with the national average. That places Dallas on par with Philadelphia and Chicago for two points of reference. New homes, meanwhile, are commanding nearly $300,000.

Of course, there’s always the rental market. Unless there isn’t. Axiometrics, a consultancy that tracks apartment rents, reported that Dallas rents rose by 6.8 percent over 2014 in the year through October. That easily outpaces the national average of 4.9 percent.

Last week, the Texas A&M Real Estate Center’s former chief economist sounded a warning about housing affordability:

“People aren’t coming to Texas to pay a premium for housing; they come for the economy. When we keep our rents low, businesses thrive and the economy goes up. When homes get too expensive, no one wants to come here or employers have to pay more, and then Texas no longer has the competitive edge.”

Some data backing the signs that the times are a changin’: In 2004, the percentage of Dallas homes sold that were between $120,000 – $139,999 was 12.4 percent; that dropped to 7.5 percent in 2014. The flipside is that homes priced over $500,000 used to only comprise 4.0 percent of sales; that share has since doubled.

Can the Dallas housing market’s evolution be sustained? The answer is highly dependent on the future trajectory of the financial markets. Standard & Poor’s Howard Silverblatt points out that the S&P 500 is up a barely discernible 0.23 percent this year. Ex-energy, however, the most closely followed stock index in the world is up 2.4 percent.

Contrast that with the index’s return going back to June, 2014, when oil was $105 a barrel. Since then, the S&P 500 has gained 5.27 percent with energy off a staggering 38.2 percent. Net out energy and the S&P 500 is up 10.6 percent.

Clearly the broader market has lost momentum. And that’s not just because of the carnage in the oil patch, though that one factor has been a huge drag. That’s where things get tricky for Dallas in particular. Not only is Dallas beholden to the financial services industry to crowd its elite enclaves with the best wheels money can buy. It’s also bound to the energy sector, albeit in less direct fashion vis-à-vis Houston.

Being familiar with the business of pulling black gold out of the ground, many Dallas private equity firms saw fit to lead the charge into the financing of the shale revolution. The damage will thus not be readily apparent until a good number of companies in the space run out of breathing room. One-in-five U.S. oil producers are hedged between $80 and $85 a barrel. The New Year will bring a crude reality to these companies whose lenders have been so badly burned they’re disinclined to extend a lifeline.

Marry the double reliance on energy and the financial markets and it makes perfect sense that Park Cities home sales fell by 20.6 percent in October over last year. Still, prices are up 5.6 percent year-over-year exemplifying the classic lagging relationship between sales and prices. As for the nation as a whole, Redfin real estate recently reported that prices for luxury homes had fallen by 2.2 percent in the third quarter marking the first drop since 2012.

For now, a $7.5 million, 13.5-thousand square foot Tuscan-style farmhouse remains on the Dallas market. And luxury cars continue to fly off dealer lots. The latest manufacturer to crown Dallas its number one market is none other than McLaren. These things do tend to bubble up when only the best will do.

The FT article ended with this cheeky warning: “The good news is that anyone who wants to live in Texas could be in for a treat post-bust.” For spec builders and the money backing them, such a scenario would be anything but ‘good news.’


Nerf Wars

Nerf N StrikeWe consume, therefore we are??

That was certainly the case this last long weekend as a determined mom cast about all over cyberspace in search of not one, not two, but three Nerf N-Strike Elite Tactical Vests. It’s so rare that anything not involving a screen captivates the littles. Hence the glee at seeing three young boys and half the neighborhood engaging in nonstop Nerf Wars at all hours of the day and night. Outdoors. The wars have escalated such that the soldiers must now be outfitted with gear to pack extra ammunition. The fruitless search for said vests, however, proved the backyard warring trend was anything but contained to a tiny hamlet in the middle of Dallas.

The quest began in benign fashion. Easy, breezy, Walmart.com appeared to have them for $29.99 apiece. Not so fast. The gigantic retailer’s out-of-stock advisory led to ToysRUs.com where quantities were limited to five units at $32.99 a pop though they were in stock…until they weren’t at checkout. The next search finally produced dividends at EntertainmentEarth.com (who knew?)…that is, until after entire checkout process was complete and fine print popped up that they were backordered indefinitely, for $35.99 each. Desperate, eBay was summoned but all 19 that had been available at $49.99 were sold out.

Pride and wits have prevented a final stop at Amazon.com where the starting price for the 12 remaining in the country starts at $74.50 and ends at $132.47. Each. Those who are willing to pay the ransom at the last bastion of supply and demand, a.k.a. Amazon Marketplace, validate the instant gratification economy the U.S. has become.

Tuesday’s news that the measly manufacturing sector had slid into contraction in November was largely shrugged off given 85 percent of the economy is services. That’s fair enough, though foolhardy as the factory sector tends to lead economic developments. Still, it’s the consumption portion of the GDP equation that most rankles. Recall that two-thirds of the biggest economy in the world consists of what we collectively buy.

An innocent enough headline highlighted how far households have journeyed to arrive at their current consuming state. A recent Wall Street Journal story, “Americans Opt to Save, Not Spend,” told a cautionary tale. U.S. consumers “socked away” so much of their income in October that the personal saving rate rose to a three-year high of 5.6 percent.

First things first. The Bureau of Economic Analysis (BEA) deducts payroll and income taxes from personal income to get disposable personal income, our take home pay. The BEA then nets out what we spend – everything from what we buy to the mortgage payment – to get an estimate of the saving rate. The final step involves dividing personal income by personal saving.

If you think the calculation skews the data to those who make lots of money, you’re right. The latest figures show that nearly half of U.S. workers don’t save one thin dime, mainly because they can’t and also make ends meet. Squaring the circle is the fact that the top 10 percent of earners save 10 percent or more while the top one percent save closer to 40 percent of their earnings.

The real question is how on earth the consumption-hooked economy has managed to grow at all in recent years, all things considered. Some historic perspective is needed about now.

To place October’s ‘alarming’ 5.6-percent figure into context, the rate averaged 9.8 percent from 1950-2000. Drilling down, today’s level is in line with the 5.5-percent average of the 1990s, but down markedly from the 1980s 8.6-percent and the 1970s 9.6-percent rates. By the same token, it’s well above 2006’s negative one percent rate, meaning people literally spent more than they earned and had to burn through savings or borrow to accomplish that task.

There are three other historic precedents of negative annual saving rates – 2005 and 1933 & 1932. The motivating factors behind the rare numbers, however, speak to how very much the country’s culture has changed. During the Great Depression, when one-in-four workers were unemployed, households had no choice but to break into their piggy banks to cover the cost of necessities.

In 2005 and 2006, the negative rate was driven by the easiest credit standards in recorded U.S. history. Millions of homeowners cashed equity out of their homes; the annualized withdrawal figure peaked at $700 billion in 2005. The amount of pseudo-wealth this generated amounted to between six and eight percent of disposable income during the housing boom heyday. Suffice it to say, this provided a huge boost to consumption and, most importantly, felt great.

What’s most unbelievable is that people managed to spend so much. Of course, that was then. Home equity withdrawal is a pittance of its former self and over 10 million homes have been lost to foreclosure. Ancient logic dictates that scarred Americans would have shunned debt in the aftermath of such financial carnage for many years.

Why then did consumer credit rise by an unprecedented $29 billion in September, the most since record keeping began in 1941? Why should we expect to see an equally robust figure when the October report is released on December 7th?

The media tells us that debt reflects confidence in the economy. But what if we’ve all been duped? What if we consume just because we can, just because the money is there for the taking?

The latest figures on household debt put total balances at $12.07 trillion. That’s still shy of the $12.68 trillion record hit in the third quarter of 2008. But the pace of credit growth — $355 billion per quarter – suggests the figure will be eclipsed early next year.

It can’t hurt that mortgage lending has finally picked up. But the real action has been outside the mortgage arena. Consumer credit outstanding is at a record $3.5 trillion and counting. Auto balances in the third quarter alone grew at a 12-percent rate and now eclipse $1 trillion. Sadly, a good number of these loans are going to households who can hardly shoulder the payments. Sound familiar?

Seabreeze Partners’ Doug Kass spent a full day last weekend cruising auto lots. His observation is telling:

“This experience put the extraordinarily liberal financing plans that are available into fresh focus. In fact, I’m being kind as some offers are flat out irresponsible.”

Meanwhile, student loans continue to gallop ahead and sit at $1.2 trillion in outstanding balances (not to worry, new policies and fresh efforts promise to excuse billions of dollars of federal student debt in the years to come). Credit cards remain the laggard class at $714 billion but growth in this category too has been stellar of late.

Economists shush-shush these outstanding figures reminding the masses that the cost to service household debt is hovering near all-time lows. Please. This argument lends new meaning to disingenuous. How is it possible that the cost to service debt be anywhere but rock bottom levels seven years into a zero-interest rate policy?

News that mortgage lending standards are loosening should be welcome. But home prices have been rising for 44 straight months. It would almost be a blessing in disguise if new entrants to the housing market continued to be denied access to mortgages if it meant preventing them from buying at what appears to be a top in the making.

Perhaps what’s missing is a strong enough voice urging Americans to show more restraint than we have in generations. Maybe a double-digit saving rate wouldn’t be such a bad thing after all. Granted, it wouldn’t be pleasant in the beginning. Sacrifice never is.

But the fact is, far too few Americans have saved enough for retirement. The Center for Retirement Research found that in 2013, the average retirement assets of those aged 50-59 were just $110,000. With the stock market up, that figure has no doubt improved since then, but two glaring details require consideration.

First, a typical retiree needs at least $250,000 saved to generate $10,000 a year in income. The hope is this is sufficient to augment what little they can expect from Social Security. More to the point, nearly every investment inside these retirement accounts is at risk of suffering major losses given asset class valuations.

A recent Fidelity Investments study found that 11 percent of 401(k) account holders aged 50-54 had all of their assets in the stock market. Other disturbing statistics followed indicating many will be forced to work well past retirement age out of necessity.

At the risk of piling onto a busy holiday season agenda, maybe we should all plan to shop a little less and put in some quality reading time. Not sure which title to choose? Try former Bank of England’s Lord Adair Turner’s new book, Between Debt and the Devil. The basic premise of the book is that most credit is not needed for economic growth, that it in fact drives malinvestment and foments boom and bust cycles.

It certainly feels like that’s the roller coaster ride the U.S. economy has been on since household debt took off for the races in the 1980s. Does anyone recall the young, upwardly mobile professionals who first embraced debt en masse, who flaunted their gold cards and BMWs they could ill afford? Is it any coincidence that this same Baby Boomer generation is so ill-prepared for retirement?

Name a yardstick, any yardstick – margin debt, mergers & acquisitions, high end home sales, fine art auctions, household net worth, and of course, hard-to-procure Nerf N-Strike Elite Tactical Vests. It’s plain as day we’re in a huge boom right now. What’s the hardest part about not falling victim to the bust cycle that inevitably follows? The answer to that is easy. Pigs get fat. Hogs get slaughtered.


A Contrarian Gives Thanks

Oct. 7, 2015: Families for Excellent Schools rally for equality

Italians can be quirkily superstitious souls. When written in Roman numerals, XVII, a.k.a. 17, can be re-arranged to spell VIXI, as in Latin for, “My life is over.” Funny thing, it’s not Friday the 13th that spooks those of Roman heritage as much as Friday the 17th. In fact, 13 is still considered to be a lucky number in many Italian quarters, especially in places like Monaco and Macau.

This week’s very American tradition has been given short shrift by the decorators at large who appear to have misplaced Thanksgiving on their calendars. How else could millions of Christmas trees magically appeared the minute the last Trick or Treat was posited on the West Coast?

To punctuate my dismay at the rush to the holiday races, I thought this week would be a good time to pause and give thanks for the many things for which we have to be grateful. For those of you who’ve wondered if I’ve ever seen a glass that’s half full, this proud to be of Italian American heritage henceforth offers out 13 optimistic observations starting with the markets and ending with what’s really the most important thing to all of us.


  1. Be thankful that some sanity has returned to credit markets. I think we all agree that five percent yields on junk bonds are a bit irrational. It is therefore reassuring to see yields pushing the seven-percent mark reflecting a more realistic risk/return tradeoff. High yield as an asset class has lost about four percent on the year. That’s not so bad considering the weakness in energy prices, which themselves have provided budgetary relief for many households.


  1. News that cracks have started to appear in some of the frothiest coastal housing markets can only be construed as good news to would-be first time homebuyers. At 31 percent of October sales, the ranks of first-timers have improved off their 26-percent December 2013 low. Getting back up to a ‘normal’ 40 percent all but requires home prices to fall, which will naturally follow a slowdown in sales. A bonus: home equity withdrawal has slowed providing evidence that Americans are better preparing for their retirement years.


  1. Location continues to matter in a country where doing business can be a challenging exercise. With that it’s heartening to see so many states competing for new business. A recent study found that the bulk of the 9,000 businesses that have relocated or diverted business from California over the past seven years have landed in the Lone Star State. Rounding out the top ten are Nevada, Arizona, Colorado, Washington, Oregon, North Carolina, Florida, Georgia and Virginia. Bear in mind, these are purely business decisions: the cost savings that resulted amounted to 20 to 35 percent.


  1. A good state in which to conduct business is not necessarily a good state in which to invest one’s hard earned savings. With that, we should be thankful for the opportunities presented in coming years in the municipal bond market. As weak states confront deepening pension challenges, it will be critical to have a strong municipal maverick in your corner. There will be great entry points when good credits get hit with headline contagion. A good primer to familiarize yourself with the lay of the land: http://mercatus.org/statefiscalrankings.


  1. Forget the gridlock in DC. New York City’s traffic gridlock has never been as intense as it is today. With that we should all be thankful for the powerhouse combination of Uber and Waze and all of the other apps we never knew would make our quality of life that much better, or at least more bearable. Give thanks that we remain a nation of innovation and a charitable one at that. Our collective entrepreneurial spirit can never be quashed.


  1. Despite near record valuations in you-name-the-asset-class, a few independent voices manage to be neither hysterical nor delusional about the markets’ prospects. I am thankful to call many my friends including Jim Bianco, Peter Boockvar, Arthur Cashin, Brent Donnelly, Philippa Dunne, Richard Hill, Doug Kass, David Kotok (and the whole Maine fishing crew, especially my capable and economically well-versed fishing guide J.R.), Michael Lewitt, Michelle Meyer, Oleg Melentyev, John Mousseau, Barry Ritholtz, David Rosenberg, Josh Rosner, Tiina Siilaberg, Liz Ann Sonders and Chris Whalen, among others.


I would add that I am deeply grateful for having had the privilege of working with Richard Fisher, David Luttrell, Zoltan Pozsar, Harvey Rosenblum, Jeremy Stein, Joshua Zorsky and Teresa Bermensolo-Cutler.


  1. In a world overrun by mad scientist central bankers, we should all be thankful for the Reserve Bank of Australia. There’s been no such thing as a perfect backdrop for monetary policymakers in recent years. The global economy has hurled from boom to bust and back again buffeted most recently by a commodity supercycle unwind. It would have been all too easy for Australian central bankers to respond by injecting stimulus into the economy. Leaning against the wind, however, was their chosen path. How very luxurious to have two whole percentage points at their disposal in the event of a true economic calamity.


  1. Our nation should be thankful to live in an “era of energy abundance,” basking in the riches we’ve produced on the path to independence. So says resident expert and friend Randy Randolph of Southern Gas Association. That’s not to say the Shangri la of energy independence is not in the cards. Achieving this ultimate goal requires a comprehensive and visionary energy policy that recognizes the eventual benefits of exporting and investing in a natural gas grid. In the meantime, the U.S. is the largest producer of petroleum and natural gas hydrocarbons ensuring a permanent shift in the balance of power on the world stage.


  1. The terrorist attacks in France have given politicians worldwide a new standard to which to aspire. French President Francois Hollande may not jump to mind as a national hero in this country but he should. Hollande’s immediate imposition of a state of emergency and declaration that the attacks were, “an act of war perpetrated by a terrorist army” left no doubt he’s a man of action. He’s taken advantage of the latitude availed him by the French constitution to attack Syria as it should have been long ago. Hollande has added that Assad cannot be part of the future and that the Kurds must be supported. Solidarity will not suffice, he rightly says. The world must act together. How can we not be thankful for decisiveness in the face of evil?


  1. Where is the American Dream? The answer to this question was demanded by thousands of single African American mothers who marched across the Brooklyn Bridge in October. Their plea was a simple one: Find the space to open more charter schools that outperform the public schools. Quit leaving so many American students behind. The stakes are enormous. According to a new study, one in five American families led by those with college degrees attain millionaire status by age 40. At a minimum, liberate future generations with the literacy to choose their path, whether it be vocational or a four-year degree. Closing the inequality gap for the greater good, for the country’s long term prosperity requires we educate each and every American and do it well. Be thankful for parents who have hit their pain threshold on their children’s behalf.


  1. Forget for a moment their colorful or not-so-colorful personalities. Ask yourself what it means that so many outsiders have garnered so much support in the current presidential election. It can’t be as simplistic as angry, uneducated Americans drinking spiteful Kool-Aid. That doesn’t capture the breadth of supporters. Perhaps Americans across the entire income strata have begun to sense that the present path has little to do with what our founding fathers envisioned.


  1. Life is funny in the way you don’t appreciate some of the most important episodes you’re taking a part in until many years later. With that in mind, I will never not be thankful for having taken a first amendment class in the year 2000 with Anthony Lewis and Vincent Blasi. The Columbia Journalism School academic experience, if you could call it that, left an indelible mark on my identity as a citizen of this country. Blasi’s greatest conviction: the abuse of official power to achieve an end is the gravest of sins. The remedy: a strong and well-financed media to always shine a bright light.Lewis, a man of many wise words, captured the very essence of what it is we all must hold dear and true and for which we must be ultimately thankful: “With one terrible exception, the Civil War, law and the Constitution have kept America whole and free.”


  1. The last, lucky 13th gift this Thanksgiving is the most cherished — family, faith and friends. They are the ties that bind, our past, present and future, both in this world and beyond.


I will add that I am thankful for you, those who have become loyal and steadfast readers over the past five months. The feedback has been humbling and endearing and I do give thanks knowing you take the time week in and week out. Happy Thanksgiving.


Last Sighting at the Machus Red Fox

Machos Red FoxDid the mafia assassinate JFK? Was Jimmy Hoffa the man behind the setup? Does the government put fluoride in our water to gain control of our minds? Was the lunar landing staged in a Hollywood studio? Is Elvis alive? Is Paul McCartney dead? Did President Roosevelt plan Pearl Harbor? Does a lightbulb exist that never burns out? Has oil peaked? Are companies brainwashing us with subliminal advertising? Are the Freemasons intent on creating a New World Order? Did aliens land in Roswell? Is everything a conspiracy, including conspiracies themselves? Will we ever know?

Conspiracy theories are a form of high or maybe low mental entertainment. Still, perhaps it’s best to let all of those sleeping dogs lie and focus on what we do know. After nearly a decade on the inside of a highly secretive institution, a.k.a. the Federal Reserve, it came as quite a shock to have several theories assumed to be dreamed up by crackpots validated by fact. Not only are Federal Open Market Committee (FOMC) meeting minutes methodically manipulated, the actual transcripts of the meetings contain overt omissions.

Bear in mind, the Fed was never legally obligated to release the full contents of the audio-recorded transcripts. In fact, it wasn’t until 1993 that the central bank bowed to Congressional pressure to be more forthright about its deliberations. Even so, the five-year lag time (ahem) between meeting and transcript release provides ample time to ensure history is properly recorded.

According to the Fed website, the FOMC Secretariat is quite the taskmaster:

“Beginning with the 1994 meetings, the FOMC Secretariat has produced the transcripts shortly after each meeting from an audio recording of the proceedings, lightly editing the speakers’ original words, where necessary, to facilitate the reader’s understanding (emphasis added). Meeting participants are given an opportunity within the subsequent several weeks to review the transcript for accuracy.”

So the transcriber has leeway to ensure the public is not confused. And participants can make sure they really meant what they said over the ensuing five-year stretch.

News that transcripts are subject to redaction highlights the importance of what is permitted to remain in the public purview. Take this insightful suggestion, recorded as having been said by now Chair Janet Yellen in a transcript from the December 16, 2008 FOMC meeting: “We could also consider using the FOMC minutes to provide quantitative information on our expectations.”

In other words, the verbiage of the minutes can be deployed in the same manner as any other tool at policymakers’ disposal. That was presumably good news to the monetary powers that were as their traditional capabilities to relieve the stresses ravaging the economy were pressing their outer limits.

Consider the historic backdrop of the meeting; it cannot be underemphasized. The economy was in full-blown meltdown mode. Lehman Brothers had failed in September followed immediately by AIG being saved. The unemployment rate had hit 6.7 percent and was rising fast: it would peak at 10.0 percent nine months later. Investment activity was plunging as was the stock market on its way to its March 2009 lows. And those home prices the very same Fed authorities said would never decline on a nationwide basis were crashing. Meanwhile, most of the world’s economies were also in recession.

As for policymakers, they stood at the precipice of the unknown. Their conventional tool of positive interest rates had been all but depleted. Recall that Yellen’s words were said at the meeting at which interest rates were voted to the zero bound. Just days before, on November 25, 2008, the Fed had announced plans to begin purchasing up to $600 billion of securities backed by mortgages to try to loosen the vise of nonexistent mortgage credit availability. Unconventional policy had officially left the launch pad.

When the December 2008 meeting minutes were released, with their usual three-week lag, they painted a harmonious picture of camaraderie and congeniality. Take this case in point which elaborates on the collective thinking behind the crossing of the policy Rubicon:

“Participants emphasized that the ultimate objective of special lending facilities and asset purchases was to support overall market functioning, financial intermediation, and economic growth. Participants acknowledged that the effective federal funds rate probably would need to remain very low for some time.

However, they also recognized that, as economic activity recovered and financial conditions normalized, the use of certain policy tools would need to be scaled back, the size of the balance sheet and level of excess reserves would need to be reduced, and the Committee’s policy framework would return to focus on the level of the federal funds rate.”

It’s hard to believe that nearly seven years have passed lending new meaning to, “remain very low for some time.” As for the federal funds rate at which banks lent each other money in the overnight market, it’s become a financial relic few contemporary bond traders can contemplate.

Not surprisingly, each FOMC minutes release is more anticipated than the last. With the markets and the economist community in sync with their expectation that the Fed is at its first major crossroads in nearly a decade, all hands are on deck.

Few doubts remain about the probability of the first increase in interest rates in nine years on December 16. Some had anticipated that the tragic assaults on the City of Lights would trigger panic in the markets sending the Fed to the sidelines. But that didn’t happen. Confounding many market watchers, the stock market rallied hard on the Monday after the attacks.

The Financial Times’ John Authers tweeted out the following in response to the surreal market behavior: “Paris attacks have had little or no impact on markets so far. Perhaps that’s a little worrying.”

Yours truly re-tweeted Authers’ post adding, “It is unsettling that nothing unsettles markets.”

God help us if the buoyancy in stock prices reflects anticipation that the European Central Bank will expand its own securities purchase campaign to offset the inevitable economic consequences of the terrorist attacks. When will markets wake up to the fact less just might be more in the end?

As for the Fed, it can and will take the opportunity of the release of the minutes of its October deliberations to crystallize its intentions. In deliberately subtle fashion, the lengthy minutes should lean away from an overemphasis on labor market metrics paying after-the-fact homage to the latest job creation figures.

By the opposite token, the persistent weakness in retail sales and manufacturing activity outside of the auto sector should be hinted at. The renewed decline in oil prices, which promises to shrink further the ranks of the handsomely compensated and keep a lid on inflation for a bit longer, can also be alluded to.

What the minutes can’t do is time travel in anticipation of future events. No acknowledgement of the attack on France can thus be on display.

The October meeting minutes are as good as the Fed’s last dance. On this stage, policymakers can reinforce the FOMC statement’s pointed message that December will mark lift-off barring a calamity in the economic data and/or financial markets.

It’s imperative to understand that the Fed is not alone in operating in obscurity. If anything, its international central banking counterparts are less transparent with regard to their decision-making processes.

But that doesn’t make business as usual all good and well. The decisions of central banks directly affect their de facto constituents, especially in a world in which they wield more power than elected officials. The individual contributors who are the building blocks of a country’s economic output can handle, and more importantly, deserve the truth.

Demanding accountability of the Fed is in no way borne of a conspiracy hatched by pot stirrers. It’s one thing for enthusiasts to relish in speculating what became of Jimmy Hoffa after that last sighting at Detroit’s Machus Red Fox restaurant. It’s a much more serious matter to be dismissive of the legitimate need to communicate clearly the method to the “magic” of central banking.