2022 is one of the record books and not in a Tiger Woods way. Call it a year of pain.
First, the US enacted policies that drove up energy prices (goin’ green) that reverberated through the entire economy in the form of higher prices. Second, The Federal Reserve, in attempt to combat runaway inflation, started removing the excessive monetary stimulus that had been around since Fed Chair Bernanke initiated QE, the seemingly unlimited purchase of Treasury and Agency MBS securities. Janet Yellen continued the massive asset purchases and zero interest rate policies or ZIRP. Now that inflation has struck the American middle class hard, we are seeing Fed Chair Powell doing what Bernanke and Yellen wouldn’t do — remove the monetary punchbowl.
Using Robert Shiller’s on line data, US stocks and bonds have had an awful year, the worst combined year since 1871.
US equity returns have been demolished under the NEW dual mandate (goin’ green = rising prices = Fed tightening).
Let’s see how two of the most famous investment gurus did in 2022, Warren Buffet and Cathie Wood. Buffet’s Bershire Hathaway Class A equity was UP 4% in 2022, while Cathie Wood’s ARK Innovation ETF collapsed by -67% in 2022.
Here is the clinker. The US economy (as well as the global economy) seem dependent on “cheap money” from Central Banks like The Federal Reserve. So the question is … will The Fed pivot? Fed talking heads are saying no, but Fed Funds investors are saying yes to a pivot after June 2023.
Ulysses S Grant was the President the last time the combined stock and bond market was this bad.
Trying to survive high inflation is difficult, but surviving The Federal Reserve’s counterattack to inflation is even more difficult.
Two people who constantly appear in the business are ARK’s Cathie Wood and TSLA’s Elon Musk. A third we can add is Sam Bankman-Fried of FTX and Alameda Research infamy.
So which one was the best at surviving inflation and The Fed’s counterattack? Answer? None of them.
Since the same day last year, we have seen M2 Money growth plunge and The Fed Funds Target rate rise rapidly from 25 basis points to 4.50%, a rapid increase. But over the last year, Cathie Wood and ARK fell -68.4%, Elon Musk’s Telsa fell -68.9% and Bitcoin fell -65.1%
So, ARK, Tesla and Bitcoin were demolished in 2022 thanks to inflation and The Fed’s counterattack. But the NASDAQ index was down too, but only -35.2% YoY.
US existing home sales in November collapsed by -38.6% YoY as M2 Money growth runs out of gas.
The above chart is similar to yesterday’s “Ski Slope” chart of US home prices YoY.
Unfortunately, pending home sales YoY are the worst in recorded history.
What will President Biden do about this dire situation? Our “Vacationer in Chief” is off on yet another vacation to St. Croix in the US Virgin Islands, so probably nothing. Now that Biden is sunbathing, what will his Treasury Secretary Janet Yellen do?
The market began downshifting earlier this year as the Federal Reserve started hiking its benchmark interest rate, with the goal of easing high inflation that’s been driven in part by skyrocketing housing costs.
Rates for 30-year, fixed mortgages reached 7.08% in October — and again in November — though they have since retreated, Freddie Mac data show. With borrowing costs roughly double where they were at the start of the year, and inflation leaving less savings to put toward a down payment, homebuyers have pulled back. Sellers are also reluctant to list their properties, yet houses that are on the market are lingering and getting discounted as demand slumps.
The Case-Shiller National Home Price Index “cooled” to 9.24% YoY growth as The Federal Reserve tightens its monetary noose.
Of the top twenty metro areas, both Miami and Tampa Florida were up over 20% YoY. Hot ‘Lanta, Charlotte and Dallas were over 10% YoY. Mordor on the Potomac was up “only” 6% and all other metro areas were under 10%.
But if we look at October/September changes, all metro areas are down (MoM) with San Francisco the worst.
Finally, The Federal Reserve’s massive balance sheet is still out in force.
Look at this chart of the Case-Shiller National home price index again The Fed’s balance sheet. Uh-oh.
Let’s look at San Francisco (my hometown) since The Federal Reserve began interest rate tightening.
One of the big problems with Federal goverment and Federal Reserve monetary stimulus is … it wears out. Just look at M2 Money growth.
US existing homes sales fell -7.70% in November to 4.09 million units SAAR. And since the same month last year, existing home sales are down -35.4% YoY.
Existing home sales were the lowest in November since 2010.
The good news? The median price of existing homes fell to 3.21% YoY. The bad news? The ark is really bad pointing to a bad December. Inventory for sale (orange line) remains below pre-Covid shutdown levels.
The highest interest rates in 15 years are delaying home dreams, putting business plans on ice and forcing many Americans to agree to loan terms that would have been unimaginable just nine months ago. Biden’s anti-fossil fuel policies are helping drive up prices and The Federal Reserve is hiking rates to cool it off.
Most of all, the surge in borrowing costs is punishing the cash-poor. And it’s about to get worse as the Federal Reserve carries on with its anti-inflation campaign and keeps hiking rates next year.
As the Fed’s most aggressive interest-rate hike cycle in a generation filters through the US economy, the gap is widening between the haves and the have-nots. Even without a recession, households and businesses are feeling the financial pain.
Here’s a look at pockets of the economy that are bearing the brunt of the impact.
Housing in Holding Pattern
Manda Waits from Suwanee, Georgia, feels lucky that she and her husband bought their townhouse near Atlanta a year ago with a 3% loan — less than half of where mortgage rates are now.
To trim expenses amid soaring consumer prices, the couple recently bought a freezer and stocked it with a quarter cow and half a pig sourced from an agricultural school. But they shelved their plan to upgrade to a single-family home for the time being.
“We would like to buy some land to build on, but these rates aren’t making it attractive, so we are in a holding pattern,” said Waits, who receives disability benefits.
Even in the once red-hot market of Tampa, Florida, a few people showing up at an open house is now considered a good day. “People are just waiting on the sidelines,” said Rae Anna Conforti, a realtor with Re/Max Alliance Group.
As mortgage rates hit their highest levels since 2001 this year, real estate agents suddenly found themselves hunting for clients again — if not losing their jobs. Thousands of mortgage employees have already been laid off at lenders including Wells Fargo & Co. and JPMorgan Chase & Co.
The higher rates, coupled with a surge in home values during the pandemic, pushed the monthly mortgage payment on a median-priced house to more than $2,000, up from about $1,100 just before Covid-19 hit.
‘Vicious Circle’ The widening gap between the cash-rich and the cash-strapped is playing out at car dealerships across the nation. The former are paying more upfront, while the latter are stuck with high-rate auto loans that will leave them underwater — or forced to settle for cheaper and less reliable vehicles.
Almost one in three car buyers are now taking out six- to seven-year loans on used vehicles to help lower monthly payments.
When consumers are locked for so long, the outstanding balance quickly exceeds a used car’s value, said Oren Weintraub, whose California-based service helps consumers negotiate better prices with dealers for a fee. When they buy their next car, that balance will get tacked onto to the new loan.
“It’s a vicious cycle,” he said.
Matt Tambornini was hoping to take out a car loan to build his credit history. The 22-year-old, who lives near Knoxville, Tennessee, with his parents, figured he’d be in a position to buy a house when mortgage rates eventually come down.
His plan stumbled when a local car dealership offered a 23% loan rate and a 60-month term, a deal that would’ve had him paying thousands more than he wanted. He bought the car anyway, quickly got buyer’s remorse and returned it for a refund.
For now, he’s driving a 15-year-old pick-up he bought with cash.
“It seems like everything is just unaffordable,” Tambornini said.
Soaring Credit Debt Interest rates on credit cards that averaged 16.3% at the beginning of the year have climbed to just over 19%, according to Bankrate.com, the highest level in data going back to 1985.
That’s a massive increase especially for lower-income consumers, who may be making the minimum payment and carrying a balance for 20 years, said Scott Sanborn, chief executive officer of LendingClub Corp.
“I don’t think consumers have fully internalized yet how much their cost of living has actually increased,” Sanborn said.
The surge in APRs to historical highs isn’t affecting consumers the same way. It makes no difference to those who pay off their balances monthly — many don’t even notice the rate increases — but it’s hitting those who are falling behind.
Mike Lauretti, 24, has about $12,000 in debt on four cards, as well as car, student and private debt. The high school social worker, who lives near Hartford, Connecticut, is working on paying off the card with the smallest amount first before moving to the next — known as the snowball method. He also took an extra job as a coach of the girls basketball team to supplement his income.
“I am using the snowball method to pay off the cards first and then it’ll eventually lead to me paying the private loan,” the largest, he said.
American consumers will end the year with about $110 billion more in credit-card debt than they started with, which would be close to an annual record, according to WalletHub, an online personal finance data firm. The reality may hit next year, when many economists predict the US will enter a recession. Household debt delinquencies are still well below their end of 2019 levels, but they’re picking up.
“We expect delinquencies to continue to increase, with new credit-card and auto delinquencies reaching pre-pandemic levels in the first half of next year,” Moody’s Investors Service said in a report.
Small Businesses
In Dayton, Ohio, Clara Osterhage would love to add to her 82 Great Clips hair salons and she knows people who are looking to sell.
“But I can’t put myself in a place to buy them, because the interest rates on any money that we would borrow would be astronomical,” she said.
Matt Haller, chief executive of the International Franchise Association, said high loan rates will keep smaller buyers of franchises out of the market, while bigger companies with more access to capital consolidate.
Meantime, some would-be buyers are demanding that sellers help finance the deal, said Dustin Zeher of Horizon Business Brokers in Virginia.
“We’re talking about 50% to 80% of the transaction, because they are cognizant and aware of the rising interest rates and how that has effectively reduced their buying power and has increased the cost of the transaction,” Zeher said.
Greg Vojnovic, owner of a small fast-food chain in the Youngstown, Ohio area, said the debt service — or debt payments — on his Small Business Administration loan has risen by $70,000 annually, and he expects it to climb at least another $15,000 as the Fed continues to raise rates. He’ll have to cut two part-time corporate-office positions to lower costs.
“If bacon goes up, people understand if you raise prices,” said Vojnovic, owner of the Hot Dog Shoppe. “If chicken goes up, people understand that. If debt service goes up, you just kind of have to eat that.”
Here is Joe Biden, shooting the hopes of millions of Americans in the tuchus.
The Federal Reserve forecast for the US economy is a dismal 0.50% YoY. Do I detect a trend?
The FOMC forecast for 2023 and 2024. Core PCE YoY (inflation) is forecast to drop to 3.50%, still considerably higher than The Fed’s target rate of inflation of 2%. And unemployment is forecast to be 4.60%.
To cope with Bidenflation, US personal savings rate as of October is -67.9% YoY. The “good” news is that rents YoY are crashing. But food prices under Inflation Joe remain very high. But most everything is slowing down, not due to Biden’s policies, but a global and US economic slowdown.
With a big slowdown coming our way, you can understand why The Fed’s December Dot Plot is showing declining Fed Funds Target rate starts declining in 2024.
Even US mortgage rates are headed down.
Speaking of going down, cryptos are down across the board with Cardano leading the decline at -6.91%.
Years ago, Brent Ambrose, Michael Lacour-Little and I wrote a paper on the US 30-year jumbo mortgage spread over conforming 30-year mortgage rates entitled “The effect of conforming loan status on mortgage yield spreads: a loan level analysis.” But that paper was written before Covid and the dramatic distortion caused in mortgage markets by The Federal Reserve’s massive increase in money.
Here is the spread between Bankrate’s 30-year mortgage rate and their 30-year JUMBO mortgage. Notice that between 2007 and early 2020, the median “jumbo spread” was 49 basis points. But after Covid and The Fed’s counterattack (by printing M2 Money), the median Jumbo spread from 4/1/2020 to today is only 1 basis point.
In the following chart, you can see the jumbo mortgage rate (yellow) against the conforming mortgage rate (white) and there is almost always a spread between the two UNTIL 2020 where we saw M2 Money growth (green line) spike and The Fed increased their purchases of Agency MBS (purple line). Since Covid and The Fed’s massive reaction, the jumbo rate and conforming rate are virtually the same. In fact, the latest jumbo spread is 1 basis point over the conforming rate.
Why is this happening? One explanation is that demand from the investors who ultimately buy jumbo mortgages. The strong demand by investors appears to have driven down the yields on jumbos relative to conventional loans, especially as the use and accessibility to jumbos has grown.
A second explanation is that Loan Level Price Adjustments that were added to conforming loans post-financial crisis never went away (until just recently on selected loans). This makes jumbos and conforming loans very close in yield.
So, when will the mortgage market return to normal and jumbo mortgages go back to the normal 50 basis point spread? We may see normalization if The Fed speeds up its withdrawal from markets. Also, getting rid of Loan Level Price Adjustments would help normalized the mortgage market.
But things are getting stressed in jumboland (California) where home prices are crashing in 5 of the top 8 metro areas.
Harry Houdini couldn’t have created a more tantalizing mystery … and one I wish would go away.
Apparently, despite the denials from the Biden Administration, someone at Bureau of Labor Statistics or someone in Congress or the Federal Reserve or the Biden Admininstration itself likely tipped the wink on the soft CPI report on Tuesday.
Treasuries were well on the front-foot in the lead up to the below-estimate November CPO print, as a surge of buying took place seconds before the official 8:30 am New York release time. Over a 60 second period before the data, 13,518 March 10-year futures traded as the contract moved from 114-04+ up to 114-22. Gains were then extended up to 115-11 session highs once the data was released.
On the equity side, stock futures suddenly spiked more than 1%. Trading in Treasury futures surged, pushing benchmark yields lower by about 4 basis points. Those are major moves in such a short period of time — bigger than full-session swings on some days. And they should get scrutinized by regulators, long-time market observers say, even if a leak is only one of several possible explanations for why traders suddenly started buying right before the report was published.
Remember that current Treasury Secretary Janet Yellen was accused of leaking information to a NY hedge fund ahead of the Fed Open Market Committee meeting? And then we have the Wolf of Wall Street.
I wonder if the REAL Wolf of Wall Street did this?
Confounded Interest - Anthony B. Sanders 
You must be logged in to post a comment.