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.
‘‘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.”
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!
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.
US mortgage applications just hit the lowest levels in 22 years, January 2000 as The Federal Reserve continues monetary tightening to combat Bidenflation.
Mortgage applications decreased 1.2 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending August 19, 2022.
The Refinance Index decreased 3 percent from the previous week and was 83 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 21 percent lower than the same week one year ago.
Notice that The Federal Reserve is slower than the Geico Sloth is removing balance sheet stimulus.
MBA mortgage applications just declined to their lowest level in 22 years (January 2000) as The Fed has begun raising rates to fight inflation caused by 1) excessive monetary stimulus since late 2008, 2) Biden’s green energy policies driving up transportation costs, 3) distortionary Federal spending (e.g., Covid relief, infrastructure bills and now green energy/IRS spending by Biden/Pelosi/Schumer).
Here is the data summary for the latest MBA applications report.
Fed Chair Jerome Powell shrinking The Fed’s balance sheet.
Dear Mr. Fantasy, play us a tune, something to make us all happy (like hitting 2% inflation WITHOUT crashing the economy).
Do anything take us out of this gloom (caused by The Fed, Biden’s energy policies and Federal spending).
Sing a song, play guitar, Make it snappy. Or in the case of housing, make it crappy.
(Bloomberg) — Federal Reserve Bank of Richmond President Thomas Barkin said the central bank was resolved to curb red-hot inflation, even if that meant risking a US economic recession.
“We’re committed to returning inflation to our 2% target and we’ll do what it takes to get there,” Barkin said Friday during an event in Ocean City, Maryland. He said that this could be achieved without a “tremendous decline in activity” but acknowledged that there were risks.
“There’s a path to getting inflation under control but a recession could happen in the process,” he said.
The US central bank hiked interest rates by 75 basis points in July for the second straight month as policy makers tackle inflation that’s running near 40-year highs. Fed officials speaking in recent days have said more rate increases are needed, but they are still deciding how big to move at their next policy meeting.
St. Louis Fed President James Bullard, one of the most hawkish policy makers, on Thursday urged another 75 basis-point move while Kansas City’s Esther George struck a more cautious tone.
Well, The Fed (aka, Der Kommissars) let the monetary stimulus blow out of control since 2000.
With the 2001 recession, The Fed crashed the target rate (white line) causing home price growth (blue line) to soar. Then The Fed decided that the economy was overheated and cranked up their target rate. This sudden rise in The Fed’s target rate helped to slow/crash housing prices. Resulting in … a frantic decrease in the target rate (late 2007- late 2008) and the adoption of asset purchases of Treasury Notes/Bonds and Agency Mortgage-backed Securities in late 2008.
The Bernanke/Yellen “loose as a goose” policies from late 2008 to Feb 2018 created a total mess. Bernanke/Yellen raised the target rate only one before Trump was elected President, and 8 times AFTER Trump was elected. And Yellen’s Fed began to let the balance sheet shrink a bit before Covid struck in early 2020. And with Covid came another massive expansion of The Fed’s Balance Sheet WHICH HAS NOT YET BEEN WITHDRAWN (despite Fed talking heads saying it would be reduced).
Here we sit with The Fed NOW trying to extinguish inflation (yellow line) by raising their target rate (white line) but NOT shrinking the balance sheet (orange line).
Wonder why this is a horrible homeless problem in the US, particularly in California? While Stanford University has an excellent study of the causes of California’s homeless problem, there is another cause of homelessness … The Federal Reserve’s insane monetary policies since late 2008. The Case-Shiller National Home Price Index is 65% higher in May than during the calamitous home price bubble of 2005-2007, helping to exacerbate the homeless problem.
One of the many problems created by the reckless Bernanke/Yellen/Powell monetary policies is the M2 Money Velocity is near an all-time low making a return to “easy money policies” far more difficult.
I won’t post any photos of the homeless encampments in Los Angeles since it is very sad. But here is a photo of the Dunder-Mifflin paper company “office” on Saticoy Street. The point is that thanks to The Federal Reserve’s loose monetary policies, housing is unaffordable for millions of households forcing many to live on the streets.
Figure 2: Median Rent for a Two-Bedroom Apartment, California, 2022
And a point of trivia. The Office’s Charles Miner (played by the GREAT Idris Elba) was allegedly hired from Saticoy Steel. The Dunder-Mifflin paper company site was on Saticoy Street in sunny LA, not Scranton PA.
Good luck to The Federal Reserve in combating inflation without causing a recession.
Under President Biden, inflation has soared and The Federal Reserve claims that they want to extinguish the inflation fire by tightening monetary policy … resulting in rising mortgage rates. Under Biden, mortgage purchase applications are DOWN -41.5% while mortgage rates are UP 96%.
(Bloomberg) The US mortgage industry is seeing its first lenders go out of business after a sudden spike in lending rates, and the wave of failures that’s coming could be the worst since the housing bubble burst about 15 years ago.
There’s no systemic meltdown coming this time around, because there hasn’t been the same level of lending excesses and because many of the biggest banks pulled back from mortgages after the financial crisis. But market watchers nonetheless expect a string of bankruptcies broad enough to trigger a spike in layoffs in an industry that employs hundreds of thousands of workers, and potentially an increase in some lending rates. More of the business is now controlled by independent lenders, and with mortgage volumes plunging this year, many are struggling to stay afloat.
Please note that mortgage purchase applications are DOWN -41.5% under Biden while mortgage rates are UP 96%.
Margin Calls
Many other lenders have seen the value of their loans drop, said Scott Buchta, head of fixed-income strategy at Brean Capital, an independent investment bank. The Federal Reserve has tightened rates by 2.25 percentage points this year in an effort to tame inflation, and 30-year US mortgage rates have surged above 5% for government-backed loans. That’s close to their highest levels since the financial crisis, from around 3.1% at the end of last year.
That’s beaten down the value of home loans made just a few months ago. A mortgage made in January and not eligible for government backing could have traded in early August somewhere around 85 cents on the dollar. Lenders usually try to make loans worth somewhere around 102 cents to cover their upfront costs.
For a lender whose loans dropped to 85 cents, the losses can be debilitating, even if they aren’t realized yet. On top of that, business is broadly plunging. Overall mortgage application volume has plunged by more than 50% this year, according to the Mortgage Bankers Association. These business conditions are spurring banks that provide lines of credit known as warehouses to make margin calls and cut credit.
“The warehouse lenders in this industry seem to be extremely on top of things in this downturn, unlike in ‘08,” said bankruptcy attorney Mark Power, who is representing creditors in the First Guaranty bankruptcy. “They are making margin calls quickly.”
Banks have emergency funding they can tap in times of crisis, which can often allow them to stay afloat in hard times. But not always: emergency financing from the Federal Reserve is usually only available for solvent institutions with a chance of recovering. In the last downturn, so many banks had so many soured loans and struggling assets of all kinds that hundreds failed. Nonbanks went bust as well.
In honor of Wolfgang Peterson who passed away yesterday, the Director of the classic WWII movie “Das Boot!” …. ALARM!
Sales of previously owned US homes fell for a sixth straight month in July in the latest indication of how high borrowing costs and waning demand are propelling the housing market’s rapid decline. In fact, existing home sales fell -19% YoY in August.
Contract closings fell 5.9% in July to an annualized 4.81 million, the weakest since May 2020, figures from the National Association of Realtors showed Thursday. The median estimate called for 4.86 million in a Bloomberg survey of economists. Sales fell 22.4% from a year ago on an unadjusted basis.
The nearly 26% decline in previously owned home sales since January marks the steepest six-month plunge in records back to 1999 and underscores a housing market that’s reeling from elevated mortgage rates and prices. The industry is also experiencing a slowdown in construction, and more buyers are backing away from deals.
Weaker demand has led to a pickup in inventory, which may help to cool home prices in coming months.
The median price of existing home sales growth fell to 10.55% YoY as M2 Money growth slows.
Its all about The Federal Reserve.
Real estate investment trusts (REITs) are an interesting asset class, allowing investors to purchase shares in large-ticket assets like multi-family properties or shopping centers. But given the changing landscape due to online shopping (aka, the Amazon effect), Covid economic shutdowns, etc., REITs should be having a hard time. But aren’t. How come?
Covid economic shutdowns definitely took its toll on retail shopping centers, as an example. And you can see the plunge in the NAREIT All equity index in early 2020. But the NAREIT All-equity index rallied … until The Federal Reserve started tightening their loose monetary policy. Note that as the implied O/N rate rose (orange line), REIT shares declined.
But as the WIRP implied O/N rate settled (pink box), the NAREIT index began to climb again. It is clear that REITs, like other equities, benefit from Fed easing. But how long will The Fed continue tightening?
As of this morning, The Federal Reserve is anticipated to raise their O/N rate to 3.738% by March 22, 2023. Then begin lowering their target rate … again.
Sadly, REITs, like other equity investments such as the S&P 500 index, are sensitive to The Fed’s easing/tightening. Look for REITs to struggle as The Fed tightens, then rally as The Fed eases again.
Here is the (in)famous Hindenburg Omen. Notice how the Hindenburg Omen alarm bells (yellow and red dots) have been silenced by The Fed. But as The Fed tightens (at least until March ’22), we may see the Hindenburg Omen flashing again. Call it the Powellburg Omen.
The NCREIF property index had a decline in the Covid-outbreak era (early 2020) and you can see a slight slowdown in the NCREIF index as The Fed started tightening to fight inflation.
Confounded Interest - Anthony B. Sanders 
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