Confounded Interest – Anthony B. Sanders
Financial Markets And Real Estate
As Parks and Recreation’s Martin Housely said, “Weird, wacky stuff.”
We now have the S&P 500 REAL earnings yield at -2.33%.
REAL US average hourly wage growth is at -1.43% and the REAL 30-year mortgage rate is at -3.11%.
The cause of this weird and wacky economic stuff? How about the surge in M1 Money and The Fed Balance Sheet?
I can almost see Fed Chair Jerome Powell imitating Martin Housely and saying “Weird, wacky stuff” in his testimony before Congress.
If this what the Biden Administration had in mind? Soaring labor costs at the same time that labor productivity is falling to its lowest level since 1960?
Powell and the Gang’s monetary approach doesn’t seem to be working for the labor market …
But is working extremely well for asset prices.
Wall Street parties while Main Street suffers worst decline in productivity since 1960.
As we are all painfully aware, The Federal Reserve went on a 2nd money printing spree to allegedly stave-off the economic impacts of the COVID outbreak in March 2020. The first money printing spree took place in late 2008 as The Fed tried to stave-off the economic impacts of the housing bubble burst of 2008 and the ensuing financial crisis.
But for now, we have this horrifying chart showing the exploding margin accounts at security brokers and dealers (not, not the Walter White-type dealers, but Wall Street dealers). Notice the 400% surge in M1 Money stock after COVID struck.
Of course, the soaring stock market is feeding the margin loop, encouraged by The Fed. Check out the Shiller Cyclically Adjusted Price Earnings (CAPE) ratio after The Fed’s M1 printing storm.
What can’t money printing fix? How about CMBS prices (or CMBX BBB- S6 prices … down 30.5% since just before COVID struck.
Let’s see if The Fed sucks the 400% growth back to zero.
The latest scare hitting financial markets is the Omicron Variant (or Oh! Macron! Variant in France). While it caused an initial decline in global equity markets {Dow fell 900 points on early reports on Omicron), the Treasury market has been relatively unscathed.
For example, the US Treasury Actives curve dropped last Friday (the orange line represents the Wednesday before Thanksgiving), while the remaining three lines represent last Friday, Monday and Tuesdays (today). In other words, the US Treasury Actives curve has been quiet so far this week after Friday’s flattening.
The US Dollar Swaps curve shows the same dynamics. The dark blue line is last Wednesday, while the remaining lines are last Friday, this Monday and today. Not a lot happening after the initial Omicron fear factor was priced in.
Federal Reserve Chairman Jerome Powell believes that the omicron variant of Covid-19 and a recent uptick in coronavirus cases pose a threat to the U.S. economy and muddle an already-uncertain inflation outlook.
“The recent rise in COVID-19 cases and the emergence of the Omicron variant pose downside risks to employment and economic activity and increased uncertainty for inflation,” Powell said in remarks he plans to deliver to Senate lawmakers on Tuesday. “Greater concerns about the virus could reduce people’s willingness to work in person, which would slow progress in the labor market and intensify supply-chain disruptions.”
Do I detect FEAR in Powell’s voice? The odds of rate increases for next year just fell to one rate increase at the September 2022 meeting.
On the equity side, it seems to be all about whether The Fed will withdraw its support. Back in early 2018, then Fed Chair Janet Yellen and the FOMC started to shrink the Fed balance sheet (green line). This resulted in the “Smart Money Index” declining. The S&P 500 index received a jolt with the Fed stimulus around the COVID outbreak and have taken off like a jackrabbit. Despite the Smart Money Flow index being lower than in 2017.
The VIX and VVIX are elevated showing fear in the equity markets. But much less than when COVID broke out in March 2020. Each spike in VVIX (or the volatility of VIX) is likely when Dr. Anthony Fauci opened his mouth.
So, is Omicron the “planet killer” or just another mild flu-like outbreak? The data is pointing towards the latter, but FEAR may cause it to be a bigger deal than is warranted.
I have written numerous times about nothing has been the same since the housing bubble burst and ensuing financial crisis of 2008. The crisis led to bank bailouts (TARP) and banking legislation (Dodd-Frank) giving The Federal Reserve even more power. And then the COVID lockdowns led to even MORE power for The Fed. And a horrid decline in money velocity (the ability of printing money to increase economic growth … or GDP).
But let’s take one step backwards. One the causes of the housing bubble that burst was President Clinton’s infamous National Homeownership Strategy that encouraged “partners” with the Federal government to soften underwriting standards for mortgage lending, particularly for minority households. The intent was to increase the homeownership rate in the US and it worked! Too well. Along with increasing the homeownership rate came rising home prices, culminating with home price growth reaching 14.5% YoY in September 2005. Only to start slowing to a crash.
Of course, the housing bubble was associated with no/low documentation and subprime mortgage lending. But the relaxing of underwriting standards by the National Homeownership Strategy helped fuel the no/low doc and subprime lending crisis. But weakening underwriting standards to increase homeownership rates is a dangerous strategy.
Note the surge in M1 Money Velocity (GDP/M1) starting in 1994. M1 Velocity grew until Q4 2007, then crashed along with home prices. The second and more sudden crash in M1 Velocity occurred with the COVID outbreak in March 2020 and the ensuing economic lockdowns and the intervention of The Federal Reserve in terms of money printing. M1 Money surged 173% from October 2008 to February 2020 and then another 369% from March 2020 to today. THAT is a Fed Storm Surge!!
M2, the broader definition of money, has not grown as rapidly as M1, but it still grew at an alarming rate. Atlanta Fed President Raphael Bostic blamed inflation on COVID but not The Fed’s insane money printing or government lockdowns. C’mon man!
Finally, the banking crisis (and TARP bailouts) along with COVID have made consumer purchasing power of King Dollar even worse.
Be careful of government strategies to make housing more “affordable” because they seem to make housing more expensive and can help crash the financial system.
Renters in the US are getting clobbered by inflation.
The US Zillow Rent Index All Homes YoY + CPI YoY is one measure of renter misery.
The classic misery index (CPI YoY + U-3 unemployment rate) is 10.80%.
Then there is inflation in food prices, gasoline, heating oil, natural gas, etc.
While Biden is releasing the Strategic Petroleum Reserves (SPR) in order to mitigate the problem that he created by terminating the energy pipelines and oil/natural gas drilling permits in the name of “Going Green!” But on the announcement of tapping the SPR, crude oil futures actually rose.
But never fear! Biden claims that his $5 TRILLION Build Back Better Boondoggle (BBBB) will ease inflation … over 10 years. And he claims that “17 Nobel Prize winners in economics have said that my plan will “ease inflationary pressures.”” I sincerely doubt that any of them actually read the 2,500 page BBBB. Rather, they likely just read the White House talking points and said “Hey, that sounds good!” Mo money, less problems?
Here is Joe Biden breaking the legs of America’s renters. Or is that multi-millionaire Nancy Pelosi?
I remember the surge in securitization of loans, receivables, etc during the housing bubble of the mid-to-late 2000s. Today seems like 2007 all over again.
(Bloomberg) — Bankers are repackaging everything from fast food franchises to fitness-center fees into bonds at the fastest clip since the global financial crisis as investors chase yield and inflation protection.
This year’s sales of U.S. asset-backed securities have already surpassed $300 billion, according to data compiled by Bloomberg — and more is expected by year-end. Post-crisis issuance records have also been set in private-label commercial mortgage bonds and collateralized loan obligations, which are also seen accelerating.
“Solar, consumer loans, container lease and whole business transactions to some degree all offer attractive yields and spreads,” said Dave Goodson, head of securitized credit at Voya Investment Management. “These so-called esoteric sectors remain well supported with plenty of money to invest.”
On Monday, Self Esteem Brands, a franchiser of businesses including its flagship gyms Anytime Fitness, priced a $505 million ABS that was backed by franchise agreements, royalties and fees. In whole business securitizations like these, companies mortgage virtually all their assets.
Last month, fried chicken restaurant chain Church’s Chicken sold a $250 million securitization backed by franchise and royalty collateral. Golden Pear Funding recently securitized litigation fees related to financial settlements on everything from personal injury cases to wrongful convictions. And Oasis Financial priced a similar deal linked to payments on medical liens.
Then we have this headline that will send chills through the CMBS market for retail space, particularly at a time when commercial real estate (particularly RETAIL) are trying to recover from COVID lockdowns and the growth of online shopping.
“Retailers Sound Alarm on Organized Theft as States Warn of Rise”
Retailers say shoplifting is getting more brazen in the U.S.: A California Nordstrom store was recently hit by a flash mob of more than 80 people who made off with designer goods, while more than a dozen people pilfered from a Louis Vuitton location in a suburb of Chicago.
On Tuesday, the impact of shoplifting reached Wall Street, with Best Buy Co. shares plunging after the electronics retailer said widespread theft contributed to a decrease in one gauge of profitability. Last month, Walgreens said it would close five San Francisco stores after theft rates there spiked.
Seemingly, no one learns from history. Or as the zen master Yogi Berra once said “It’s like déjà vu all over again.”
Or “You better cut the pizza in four pieces because I’m not hungry enough to eat six.”
US housing starts for October were less than expected. A 1.5% increase MoM was expected, but housing starts actually fell -0.7% MoM.
5+ unit (multifamily) starts were up 6.82% MoM. 1-unit single family detached units were down -3.89% MoM. Permits to build were up 4% MoM.
On a YoY basis, 1-unit start declined -10.6% as M2 Money growth continues to fall.
And 1-unit housing starts have fallen with the rapid decline in home buying sentiment.
1-unit starts have slowed to pre-COVID levels, thanks in part to The Federal Reserve’s money printing bonanza which may never end.
As housing sentiment crashes (due to rapid home price growth), we are seeing the demand for multi-family housing rise. 5+ unit (multifamily) starts were up 6.82% MoM in October.
It is October after all as winter sets in.
Now that President Biden is interviewing Lael Brainard for Federal Reserve Chair, I am really getting a peaceless, uneasy feeling that The Fed will NEVER raise rates and inflation will be perpetual. To whit, …
Prices paid to U.S. producers accelerated in October, largely due to higher goods costs, fueling concerns about the persistence of inflationary pressures in the economy.
The producer price index for final demand increased 0.6% from the prior month and 8.6% from a year earlier, matching forecasts, Labor Department data showed Tuesday. The annual advance was the largest in figures back to 2010.
Excluding the volatile food and energy components, the so-called core PPI rose 0.4% and was up 6.8% from a year ago.
More than 60% of the headline increase was due to goods, which jumped 1.2%. Higher energy costs, including that for gasoline, drove the gain. The cost of services rose a more moderate 0.2% for a second month, reflecting a further pullback in the cost of securities brokerages and investment advice.
The report underscores how transportation bottlenecks, materials shortages and increasing labor costs have sent prices soaring across the economy in recent months. Trucking freight costs jumped a record 2.5% from September.
Inflation is a tax created by printing too much money and stupid Federal economic policies (or follicies).
Lael Brainard? Discussing the chairmanship with Brainard could signify that the Biden team is weighing how a break with Powell might help advance their goals for the central bank. Brainard and Powell work closely together on multiple issues and are viewed as holding similar views on monetary policy, but she’s favored a tougher stance on big banks.
Remember, The Federal Reserve is a privately-owned entity independent of The Federal Government. A Brainard appointment would make The Fed the financing arm of the Democrat Party.
Nothing has been the same since Covid struck in early 2020.
CMBX BBB-, the reference basket for CMBS 6, was climbing to around $95 prior to the Covid outbreak and resulting recession. The CMBX reference basket is now at $72.25.
CMBX 6 is largely composed of retail and office, both hit hard by Covid and the ensuing lockdowns and fearmongering by the Federal government and main street media.
Confounded Interest - Anthony B. Sanders 
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