The Federal Reserve has a dual mandate: stable inflation and low unemployment. Well, core inflation is currently at 1.2% (core PCE growth is at only 0.95%) and unemployment (thanks to Covid-19) is at 11.1%. Not quite on target.
The Taylor Rule model using an aggressive specification suggests that The Fed lower their target rate to -8.58%.
Of course, Congressional spending is out of control with mandatory spending (entitlement programs, such as Social Security, Medicare, and required interest spending on the federal debt) since the days of George HW Bush and Bill Clinton. And especially post financial crisis.
Of course, mandatory spending on Medicare is soaring out of control.
Defense outlays are projected to grow with non-defense outlays declining,
Of course, the TRUE dual mandate of The Federal Reserve is propping up the S&P 500 index and NASDAQ.
Good luck to everyone trying to cope with out of control Congressional spending and Fed money printing.
The question is … will Congress and President Trump/Biden reign in their prodigious spending after Covid-19 passes?
Here is my answer. Where are the Budget Hawks when we need them??
Yikes! According to the Federal Reserve of St Louis FRED, the velocity of M2 Money Stock (Nominal GDP / M2 Money Stock) just crashed to 1.097, the lowest in modern history.
As of today, Bankrate’s 30-year mortgage rate just hit an all-time low (thanks to The Fed’s massive reaction to Covid-19 virus economic shutdown. Note: Bloomberg has not updated its M2 Money Velocity chart which is now 1.097.
Many thought that a housing price crash and another financial crisis was a long shot. Until Q2 GDP crashed by 32.9%. And it turns out that the FHFA purchase-only house price index declined by -0.3% in May.
On the commercial real estate side, multifamily and hotel (both hit hard by the Covid-19 shutdown) are in CMBX series 9 while CMBX series 6 has a large share of retail properties.
While CMBX BBB- S9 is ad 79.360, CMBX BBB- S6 is down to 67.310. March and Covid were a disaster.
The Federal Reserve Open Market Committee (FOMC) decided to do nothing, except say that ZIRP (zero interest rate policies) are going to continue for a long time. And that MORE fiscal stimulus is needed. As long as Mayors and Governors continue their economic lockdown policies, more monetary and fiscal stimulus will be needed.
Where does The Fed go from here (given that Covid-19 seems to be growing still)? The implied Fed policy rate looks to be negative by 2021.
Gold is surging as investors figure out that our fiat currency cannot support the reckless spending in Washington DC.
Let’s see what Fed Chair Jay Powell (aka, Thurston Powell III) comes up with. Hint: Fed buying stocks and going to negative rates.
The Case-Shiller repeat home sales numbers are out for May (yes, it is almost August). It shows home price growth slowing to 3.69% YoY in May.
The smallest gain in home prices is in Chicago (1.3% YoY) while the largest gain is in Phoenix AZ (9.0% YoY).
You can see the enormous home price bubble in both Chicago and Phoenix in 2005-2007 but the Phoenix bubble is far greater. Phoenix has recovered almost to bubble highs while Chicago is suffering from an exodus due to a broken pension system and plague-like taxes.
Chicago is going to need Snake Plisken to escape Mayor Lori Lightfoot, the Duke of Chicago.
The U.S. dollar’s decline may be just getting started, according to a widely-watched technical indicator. The Bloomberg Dollar Spot Index, which tracks the greenback against 10 of its major peers, formed a death cross pattern on Friday, with its 50-day moving average dropping below its 200-day one. The gauge has tumbled more than 3% this month amid concern over the spread of the coronavirus in the U.S. and wrangling between lawmakers over the next stimulus package.
But against gold …
(Bloomberg) — Bond investors keep getting bombarded with fresh reasons to stay bullish after another record-breaking week in Treasuries.
As the five-year yield plumbs near all-time lows, the 10-year benchmark is again testing levels notched in the depths of the pandemic despair. Leveraged-funds keep pulling back their bearish bets to the lowest since early 2018.
With U.S-China tensions raging again, Wall Street is telling clients to stay constructive and investors are finding it tough to wager against securities they deem the most overvalued in decades.
And Fed policies are likely to keep Treasuries yielding less than the inflation rate.
According to the Atlanta Fed’s GDPNow forecast of Q2 GDP, US GDP is expected to sink -34.7% QoQ. With the blistering growth in M2 Money Stock, the result is a historic low below a reading of 1 … at 0.7.
There is no doubt that The Federal Reserve panicked over Covid-19 by setting interest rates near zero and printed money like there is no tomorrow. The TED spread is now at 13.92, about where it was pre-Covid breakout.
(Wikipedia)The TED spread is an indicator of perceived credit risk in the general economy, since T-bills are considered risk-free while LIBOR reflects the credit risk of lending to commercial banks. An increase in the TED spread is a sign that lenders believe the risk of default on interbank loans (also known as counterparty risk) is increasing. Interbank lenders, therefore, demand a higher rate of interest, or accept lower returns on safe investments such as T-bills. When the risk of bank defaults is considered to be decreasing, the TED spread decreases. Boudt, Paulus, and Rosenthal show that a TED spread above 48 basis points is indicative of economic crisis.
Well, the TED 3-month spread is only 13.29 which is far below the 48 basis point spread indicative of an economic crisis.
But The Fed hasn’t killed gold speculation. In fact, The Fed is likely scaring everyone into buying gold and silver.