Confounded Interest – Anthony B. Sanders
Financial Markets And Real Estate
The Federal Reserve’s overnight repo facility where banks park their money is seemingly becoming permanent.
As inflation has soared near the highest in 40 years, banks are increasingly parking their money at The Federal Reserve.
To quote Joe Biden, “All is well in the garden.” But apparently, not is all well in the banking industry or with the mortgage industry.
I remember appearing on Fox Business’ Varney and Company about The Federal Reserve. When Stuart Varney asked me what will happen when The Fed finally removes the monetary stimulus, I made an explosion gesture. Well, its starting to happen.
(Bloomberg) The rally that’s bolstered risk assets over the past month was just a blip in a bear market that’s likely to worsen from here.
That’s the view of investors who seem to be finally getting the message that a resolutely hawkish Federal Reserve and central bank peers are planning to raise interest-rates at all costs to combat the hottest inflation in a generation.
Monday’s trading give credence to that prospect: equities, developed and emerging-market currencies and even haven Treasuries tumbled as fund managers digested Fed Chair Jerome Powell’s stern message that rates would keep going up even if it spells pain for households and businesses everywhere.
“The environment has changed,” said Kim Fournais, founder and chief executive of Saxo Bank A/S. “I just have a hard time seeing how this market, that is still trading close to all-time highs, can stay at those levels. There will be a period of great volatility.”
Goldman Sachs Group Inc. pegs the dollar as the main beneficiary amid the market chaos, Westpac Banking Corp. warns of fresh yen pressure and BNP Paribas Wealth Management sees more losses for developing-nation assets.
Almost every equity benchmark tumbled in Asia trading Monday as the fallout from the Fed’s hawkish rhetoric ripped through markets. S&P 500 futures dropped as much as 1.3%, indicating that US stocks are poised to extend a rout that saw the index erase $1.2 trillion on Friday.
Yields on two-year Treasuries jumped to the highest since 2007 as traders ratcheted up rate hike bets, while the yen hurtled toward the closely-watched 140 level. The risk-sensitive Korean won led losses among emerging peers, tumbling to a 13-year low.
Oddly, the Fed Funds Futures market wasn’t rattled by Powell’s announcement at Jackson Hole. The Fed’s target rate is 2.50% and is expected to rise to 3.863% by March then cool-off. The Cleveland Fed’s Mester said 4% then keeping it at 4% for an extended period of time.
But it is in Europe where Lagarde and company where the REAL action was. The ECB’s target rate is at 0% with a negative effective rate of -0.08%. But the ECB is expected to keep raising their target rate to 2.136% by July 2023.
Sovereign yields are rising across the board. Except for jolly old England.
Global equity futures are down across the board as well. But not like Friday’s plunge.
It is amazing that Biden is rising in the polls, simply because he got several inflation-generating, crony pay-off bills passed through a Democrat-controlled Congress. Even more amazing is that Americans aren’t more furious with Biden given that inflation is still raging at 8.5% YoY and the US Personal Savings Rate to cope with raging prices is at -51.5% YoY.
It looks like one quick fix to the inflation problem is for The Federal Reserve to shrink its balance sheet. But they are taking their own sweet time doing it.
And then we have the S&P 500 index which has done poorly since Powell and The Fed have undertaken their “fight inflation” mantra caused by their own folly and Biden’s green, anti-fossil fuel policies. Not to mention Congress spending like drunken sailors in port.
But the same is going on in Europe where inflation is even higher than in the USA and the EUR/USD is plunging like a paralyzed falcon.
And then we have Biden shrinking the Strategic Petroleum Reserve (orange line).
And in Europe, we have Germany suffering through a horrible energy price spike.
Finally, here is a baseball card of former Dodger pitcher Billy Loes. He almost reminds me of Biden trying to think through a complex problem like student loan debt forgiveness that may cost taxpayers an average of $2,000 yet buy votes for Democrats at the midyear elections.
‘‘We will keep at it until we are confident the job (i.e. killing inflation) is done.’’
Jerome Powell, Jackson Hole speech
Interviewer : What’s your prediction for the market?
Clubber Lang (Mr T) : My prediction?
Interviewer : Yes, your prediction.
Clubber Lang : Pain!
Of course, Friday was one of those “Black Fridays” for investors. And pension funds.
The Dow Jone Industrial Average fell -1008.38 points after Powell’s “Mr T” remarks on pain. That was a whopping -3%. The NASDAQ composite index fell almost -4%.
Equity markets struggled in Europe as well, particularly the German DAX index.
The UMich Buying conditions for houses rose slightly, but remains near the lowest level since 1982.
Clubber Powell, Federal Reserve Chairman.
The Case-Shiller house price numbers are due out Tuesday for June and it is expected that they will show a significant slowing in home prices. Biden and Clubber Powell could then take “credit” for slowing “inflation.”
Foul Powell on the prowl … at Jackson Hole.
Federal Reserve Chair Jerome Powell signaled the US central bank is likely to keep raising interest rates and leave them elevated for a while to stamp out inflation, and he pushed back against any idea that the Fed would soon reverse course.
“Restoring price stability will likely require maintaining a restrictive policy stance for some time,” Powell said Friday in remarks at the Kansas City Fed’s annual policy forum in Jackson Hole, Wyoming. “The historical record cautions strongly against prematurely loosening policy.”
“Restoring price stability will likely require maintaining a restrictive policy stance for some time,”says Federal Reserve Chair Jerome Powell.
He said restoring inflation to the 2% target is the central bank’s “overarching focus right now” even though consumers and businesses will feel economic pain. He reiterated that another “unusually large” increase in the benchmark lending rate could be appropriate when officials gather next month, though he stopped short of committing to one.
And on the ramblings from Foul Powell, the NASDAQ dropped -2.58%.
Mortgage rates? Will likely rise further on Foul Powell’s statements.
University of Chicago economist and Nobel Laureate Richard Thaler says he doesn’t see anything that resembles a recession in the U.S.
It used to be that economists would see two consecutive quarters of negative Real GDP growth and say “recession.” But apparently not economists like Thaler. But at least the Atlanta Fed’s GDPNow real GDP tracker is pointing to weak growth for Q3 at 1.379%.
So, if 1.38% real GDP growth holds up, the US is technically no longer in a recession. So, Thaler would be correct. However, the US Treasury yield curve 10Y-2Y (blue line) remains inverted and the Conference Board’s Leading Indicators (yellow line) is growing at 0.0% YoY.
And for those expecting interesting news from The Fed’s Jackson Hole conference, I expect Powell to say that The Fed is going to have to jack-up rates to fight inflation (which is crushing the middle class and low wage workers).
Unlike Thaler, I don’t see a strong economy, just a weak economy except for employment (at negative wage growth). And declining savings.
The elite class “economists” (aka, cheerleaders) are meeting at Jackson Hole, Wyoming this week. But while they are planning our future, the revision to the miserable Q2 Real GDP report came out this morning.
Real gross domestic product (GDP) decreased at an annual rate of 0.6 percent in the second quarter of 2022, according to the “second” estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP decreased 1.6 percent.
So, the second pass at measuring Real GDP produced a slightly better number (-0.6% vs -0.9%).
But the GDP PRICE index revision worsened from 8.7% to 8.9%. Look at REAL personal consumption (yellow line) as M2 Money growth slows.
Let’s see how things go at The Fed party at Jackson Hole, Wyoming. It is appropriate for The Fed to hold their party/meeting at Jackson Hole (Teton County) since it has the highest concentration of wealth per household than any other county in the nation.
Yee-haw!
Biden is the opposite of the miserly Scrooge McDuck. He gives billions to Ukraine and spends trillions on various Federal projects without batting an eye as to how and who is going to pay for all the spending. And Biden’s latest election pandering is no different.
Speaker Pelosi claims that Biden’s bold action on student loan forgiveness is a strong step in Democrats’ fight to … make college even MORE expensive and lead to colleges hiring even MORE administrators (aka, apparatchiks) making colleges even MORE bogged-down in red tape.
And Speaker Pelosi, the costs of Biden’s midterm election buy of votes is estimated to be $300 BILLION. And a report from the Brookings Institution observed that one-third of student debt is owed by the wealthiest 20% of households, while only 8% is owned by the bottom 20%.
So, Biden is letting AOC write-off $10k of her student loan obligation. Bear in mind that the $10k forgiveness is taxed by The Federal government as income.
It looks like The Fed will have to expand the M2 Money supply to pay for “Billions Biden’s” spending spree.
I wish Biden, Pelosi and Schumer were more like Dwight Schrute from Dunder-Mifflin.
At The Fed continues to tighten to fight inflation, pending home sales in July crashed and burned. That is, pending home sales fell -22.5% in July as M2 Money growth slowed
If I was still teaching at Ohio State or Chicago, I would ask the students if they see the relation between M2 Money growth and pending home sales.
At least 20 million households — or about 1 in 6 American homes — are behind on their power bills as soaring electricity prices spark what is said to be the worst-ever crisis in late utility payments, according to Bloomberg, citing data from the National Energy Assistance Directors Association (Neada).
Neada said electricity prices had increased significantly since 2020 after a decade of stagnation. The steep rise has resulted in billions of dollars in overdue power bills.
Electricity inflation is being propelled by soaring costs of fossil fuels, such as natural gas, coal, and petroleum.
NatGas fuels about 40% of the US power grid and soared to the highest levels since 2008 on Tuesday.
The chart below shows for the two decades, real electricity prices were relatively flat, except for the commodity boom times around the 2008 GFC. Now CPI less energy has peaked, though electricity continues to rise to a blistering 30% year on year.
Utility shutoffs have become more common across the US as some lower-tier households are thousands of dollars behind on their power bills.
Jean Su, a senior attorney at the Center for Biological Diversity, which tracks utility disconnections across the US, warned of a “tsunami of shutoff” as the highest inflation in forty years eats away wages and has financially devastated the working poor.
Adrienne Nice is one of those struggling Americans who is more than $3,000 behind on utility bills. Last month, she received a “final notice” from power company Xcel Energy Inc., who turned off the electricity to her studio apartment in Minneapolis as temperatures approached near triple digits.
Nice found it near impossible to save money for utility expenses that have doubled over the past year as food, shelter, and gas prices have also skyrocketed. Her low-paying job as a housecleaner has left her in energy poverty.
I am sure that the Biden Administration talking heads will point to the fact that the US has lower YoY electricity prices than the UK and Euro area.
Suffice it to say, Biden’s “Goin’ Green!!” is very costly to the middle class and low-wage workers. But since the House of Lords (aka, the US Senate) and the Biden Administration are bought-out by billionaires like Bill Gate and Mark Zuckerberg, there is little hope that the middle class will be helped.
Confounded Interest - Anthony B. Sanders 
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