Ever since the financial crisis of 2008 and the election of President Obama and a Democrat Congressional sweep, the US has embraced Modern Monetary Theory (MMT or borrow, print and spend without consequence). And between the financial crisis and the Covid crisis of 2008, we have seen an increase in US public debt from $10.7 trillion in Q4 2008 to a staggering $30.6 trillion as of Q2 2022. That is a staggering increase of 186% in only 14 years.
How about US Money stock? M2 Money stock has grown by 162.5% since the beginning of 2009 and the “Blue Wave” of 2008. And nothing has been the same.
The Covid outbreak in early 2020, we saw Fed money printing that has never seen before … or since. But one thing is for sure, M2 Money Velocity (GDP/M2) is near all-time lows.
Then we have headline US inflation as a function of M2 Money growth YoY.
And it is the midterm election “silly season” where no politician will discuss the complete and utter mess they have made. According to US Debt Clock, US national debt is already up to $31.26 trillion (OMG!), but the REALLY scary number that not a single politician will address is UNFUNDED LIABILITIES OF $172.4 TRILLION.
Can we go back to the gold standard? Or silver standard? Or ANY standard for that matter??
Instead, we have porous borders and patently UNSOUND money, thanks to MMT.
It has been a wild and mostly negative ride under Biden’s Reign of Error. 40-year highs in inflation (caused by Biden’s fossil fuel mandates and Federal spending) have left the US mortgage market FINALLY seeing positive REAL mortgage rates (now 0.32%), even though the REAL 10yr Treasury yield is still negative (-2.50%).
On a YoY basis, US Productivity is down for the 3rd straight quarter (and 4th quarter of the last 5).
On the mirror image of productivity, unit labor costs rose 3.5% QoQ (a notable slowing from the 8.9% QoQ growth in Q2). This was the 6th quarter in a row of rising unit labor costs (but was less than the +4.0% QoQ expected)…
However, on a YoY basis, that is the fastest growth since Q3 1982.
Yikes! The 2s10s Yield Curve Inversion Is the worst since the 1980s.
The Bank of England followed the Fed’s 75 basis-point increase with an equivalent hike on Thursday, but strongly pushed back against market expectations for the scale of future increases, warning that following that path would induce a two-year recession. The pound fell 1.8% to $1.1183.
Stocks and bonds fell as Jerome Powell’s warning that the Federal Reserve would raise interest rates more than previously anticipated sapped risk appetite. The dollar gained.
Futures on the S&P 500 fell 1% in the wake of Wednesday’s 2.5% drop. The selloff spread to Europe and Asia, where China’s affirmation of its Covid-Zero stance dashed hopes of a reopening. Lumen Technologies Inc., Peloton Interactive Inc., Moderna Inc. and Qualcomm Inc. tumbled in premarket trading, while Etsy Inc. and EBay Inc. rose.
So, the BofE, Fed and ECB are back to 2008/2009 era central bank rates.
But the US Fed is slow to shrink its enormous balance sheet.
US mortgage applications declined for the sixth consecutive week despite a slight drop in rates.
Mortgage applications decreased 0.5 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending October 28, 2022. This week’s results include revised data to reflect an update to last week’s survey results.
The Refinance Index increased 0.2 percent from the previous week and was 85 percent lower than the same week one year ago. The seasonally adjusted Purchase Index decreased 1 percent from one week earlier. The unadjusted Purchase Index decreased 2 percent compared with the previous week and was 41 percent lower than the same week one year ago.
This morning’s WIRP (Fed Funds Futures data) is pointing to a 75 basis point increase from The FED FOMC (open market committee) at 2pm EST, rising to over 5% by the May 2023 meeting before declining again.
The next Federal Reserve Open Market Committee (FOMC) meeting in on Wednesday, November 2nd. Let’s see what The Fed does with its BIG GREEN BAG … OF MONEY.
As I set here on Sunday morning waiting to see how the Cleveland Browns will lose to cross-state rival Cincinnati Bengals, I see that both the US Treasury 10yr-2yr and 10yr-3mo yield curves are inverted (below zero).
Core inflation (CPI less food and energy) YoY (blue line) was only 1.3% in February 2021 shortly after Biden was sworn-in as President and is now 6.6% in September 2022. That is over a 400% increase in core inflation!
We have this tantalizing headline on Bloomberg:
Goldman Sachs Now Sees Fed Rates Peaking at 5% in March By Simon Kennedy(Bloomberg) —
Goldman Sachs Group Inc. economists said they now expect the US Federal Reserve to raise interest rates to 5%, higher than previously predicted.
The central bank will lift its benchmark rate to a range of 4.75% to 5% in March, 25 basis points more than earlier expected, economists led by Jan Hatzius wrote in an Oct. 29 research report.
The route to the new peak includes increases of 75 basis points this week, 50 basis points in December and 25 basis points in February and March, they said.
The economists cited three reasons for expecting the Fed to hike beyond February: “uncomfortably high” inflation, the need to cool the economy as fiscal tightening ends and price-adjusted incomes climb, and to avoid a premature easing of financial conditions.
Well, not exactly earth-shattering. Fed Funds Futures data point to a peak of near 5% (4.905%) for the May 2023 FOMC meeting, so Goldman Sachs is calling for an earliest peak at the March 2023 FOMC meeting,
Regardless of what Goldman Sachs thinks, Fed officials are expecting a peak in 2023 followed by a decline to 2.5%.
Brainard and Bostic are the only “doves.” Which is silly because Chicago’s Evans is a perma-dove. Let’s see how the Dots Plot changes at the November 2nd meeting.
America’s distressed debt pile is biggest since September 2020.
(Bloomberg) — To understand the highest mortgage rates in two decades, look to the intricacies of the market for bonds backed by home loans.
So says Guillermo Roditi Dominguez, managing director at New River Investments LLC. On the latest episode of the Odd Lots podcast, he describes how the surging cost of home loans can be traced to changes in the market for mortgage-backed securities, or MBS. The average rate on a 30-year fixed mortgage jumped above 7%, according to data released on Wednesday. That’s the highest since 2001.
Of course, mortgage rates are supposed to rise as the Federal Reserve hikes benchmark interest rates. That’s how tighter monetary policy works — by making the cost of credit more expensive. But the average borrowing cost on a 30-year fixed-rate mortgage now far exceeds the yield on equivalent US Treasuries, with the difference between the two at the highest level on record.
At issue is the changing nature of the market for mortgage bonds, and who’s buying them. Once the center of the housing bubble that burst in 2008, the vast majority of mortgage-backed securities come with guarantees from the US housing agencies, meaning investors aren’t necessarily worried about people paying back their loans. Yet their exposure to movements in US interest rates (known as “duration”) means they can still carry significant risks for investors.
“It’s not because people are afraid house prices are going to go down,” Dominguez says. “Mortgage-backed securities went from being effectively short-lived assets because we went through a pretty epic refinancing boom in 2020 and 2021, to all of a sudden rates going up very, very, very quickly — faster than anybody expected.”
Most buyers of MBS — which range from big banks to bond funds and the Fed itself — understand there’s a risk of early repayment. People might refinance their home loans during periods of low interest rates, or simply move and sell their house. Dominguez estimates that some 17% of home-loan balances were extinguished in 2019, compared to 36% in 2020 and 2021 as the Fed pushed interest rates to historic lows.
Mortgage refi activity exploded in early 2020, when rates were cut to basically zero.
In times of low rates, MBS investors who get their loan principal paid back early have to reinvest that money at potentially lower yields. But the transition from low rates to higher ones means that suddenly investors are left with longer-term assets, as borrowers hold onto the lower mortgage rates they locked-in previously. In times of higher interest rates, early repayments disappear and investors don’t have as much money to invest at higher yields. That means many buyers are shying away from the mortgage market, which Dominguez describes as “broken,” even as spreads go higher. Adding to the pressure on mortgage rates is the fact that the Federal Reserve is now reducing its balance sheet after buying the debt as part of its emergency monetary easing.
“A mortgage-backed security is essentially similar to a covered call in equity terms,” Dominguez says. “And that means that you have all of the downside and, you know, very, very little of the upside and you trade that in for a little bit of extra coupon. And when rates were going down, everybody was upset about it because Treasury bonds were going up in price. People were making money there. If you held MBS, you got your money back and then when you went to buy new bonds, you bought them at a lower yield. And right now what we’re seeing is all of a sudden bond prices are going down, yields are going up and you’re not getting any cash flows so you don’t get to reinvest that money.”
But mortgage purchase and refi applications are showing a strongly negative trend as The Fed tightens.
As the midterm elections get close, the news for Americans gets worse.
On the housing/mortgage front, Bankrate’s 30-year mortgage rate (yellow line) just hit 7.20%, the highest since 2000. Also, the US Treasury 10yr-3mo yield curve (white line) inverted, historically a precursor to recession, before barely climbing back above 0%.
Meanwhile, M2 Money growth has collapsed to the lowest level since 2010.
US GDP numbers are due out at 8:30AM EST for Q3. The numbers are expected to show slow growth (around 2.4%) with rapid inflation (5.3%). While the GDP numbers are better than Q2’s numbers, they are still pretty lousy.
Confounded Interest - Anthony B. Sanders 
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