Confounded Interest – Anthony B. Sanders
Financial Markets And Real Estate
The US economy has a case of the summertime blues.
Bull steepenings in the yield curve are generally seen as a precursor to a recession, but they are often preceded by bear steepenings. The 3m30y curve is currently bear steepening, indicating a recession could begin as early as the summer. In fact, the 3m30y curve is now inverted at -94.628 basis points pointing to a recession in summer 2023.
This is happening as the US house payment to income ratio near all-time highs.
Yesterday, we saw The Federal Reserve release the minutes of the last meeting. In a nutshell, The Fed is going to keep raising rates.
The terminal Fed Funds target rates is now 5.363% for the July FOMC (Fed Open Market Committee) meeting in 2023.
This comes as US Q4 GDP was revised lower on weaker consumer spending, revised downward to 1.4%
With the revision of Personal Consumption, real GDP was revised downward to 2.7% annualized QoQ.
The Taylor Rule estimate for The Fed Funds Target rate is 10.15%. The Fed is only at 4.75%, so there is a long way to go! Except that The Fed doesn’t follow any useful rule like the Taylor Rule. Just the “seat of the pants” rule.
The value of the US housing market shrunk by the most since the 2008 as the pandemic boom (and M2 Money growth) fizzled out.
After peaking at $47.7 trillion in June, the total value of US homes declined by $2.3 trillion, or 4.9%, in the second half of 2022, according to real estate brokerage Redfin. That’s the largest drop in percentage terms since the 2008 housing crisis, when home values slumped by 5.8% from June to December.
Homebuyers, already facing record-high prices, took an additional hit from mortgage rates that more than doubled last year. With less competition in the market, the median US home sale price was $383,249 last month, down from a peak of $433,133 in May.
To be sure, home prices are not collapsing. In December, the total value of US houses was still 6.5% higher than it was a year earlier.
How much homeowners lost depends on where they bought. The biggest declines were in pricey cities like San Francisco and New York, while buyers who moved to pandemic boomtowns are still seeing the returns on their investment, particularly in Florida.
That was especially true in Miami, where the total value of homes ballooned 20% year-over-year to $468.5 billion in December, the largest annual percentage increase among the top metro areas. While the overall US housing market is down, Miami’s market has about the same value as when it peaked at $472 billion in July. Meanwhile, homeowners in North Port-Sarasota, Florida, Knoxville, Tennessee, and Charleston, South Carolina, all saw annual gains above 17% in 2022.
The US economy, despite the tight labor market, has been shot through the heart by Biden’s economic policies. The Biden Administration (aka, Obama’s third term as President) is giving government a bad name.
On the corporate side, US bankruptcies in 2023 had the worst start to a year since 2010 and the financial crisis.
On the personal finance side of the ledger, the delinqueny rate on credit cards is growing at the faster rate since 2010.
Throw in 22 straight months of negative REAL wage growth, and have a scary situation facing middle America.
And the shate of outstanding subprime auto debt (30 days or more delinquent) is up to the highest rate since … well, you know when. The financial crisis of 2009-2010.
The US middle class is living on a prayer, because Washington DC doesn’t care.
But don’t worry. Mayor Pete, the EPA and Ohio governor Mike DeWine claim the air is good to breath and the water safe to drink in East Palestine Ohio.
Why isn’t Greta Thunberg racing to Ohio to protest the dumping of toxic chemicals?
US inflation is causing The Federal Reserve to raise interest rates, and mortgage applications are suffering.
Mortgage applications decreased 7.7 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending February 10, 2023.
The Refinance Index decreased 13 percent from the previous week and was 76 percent lower than the same week one year ago. The seasonally adjusted Purchase Index decreased 6 percent from one week earlier. The unadjusted Purchase Index decreased 5 percent compared with the previous week and was 43 percent lower than the same week one year ago.
The MBA contract rate rose 3.4% from 6.18% to 6.39% as The Fed tightens.
And if you believe the Taylor Rule (as opposed to The Fed’s current politically-based decisions), The Fed’s target rate should be 10.15% and The Fed is less than half way there at 4.75%.
The Fed is expected (by investors in Fed Funds Futures) to rise to 5.283% by the July FOMC meeting, then decline to under 5% by January ’24.
Speaking of Fed rate hikes, January’s red hot retail sales (up 3% MoM) is surely going to drive inflation UP and The Fed will keep raising rates.
Black Knight’s December Mortgage Report is out and the house price graphs show the west is a mess.
While much of the US is down from 2022 peaks in home price. but it is The West where home prices are down the most (just like 2008 where the Inland Empire of California, Phoenix and Las Vegas crashed in term of home prices).
At least Columbus Ohio is down only -2.1% from the 2022 peak. While Austin TX is down almost -10% from 2022 peak.
US inflation numbers are out tomorrow. Let’s check on home price and rent growth tomorrow. But the forecast for January inflation is a increase.
The most recent tightening by the Federal Reserve has pushed the federal funds target rate above mortgage-backed securities yields for the first time in history. Though this poses clear challenges of carry for MBS holders, selective investments in specified pool and collateralized mortgage obligations (CMOs) could provide incremental returns.
While Biden brags (redundant) about lowering inflation (that his energy policies and massive Federal spending caused), apparently he never learns. Now we learn from Mish that the Biden Administration is ready to unleash a $27 billion green slush fund on the US middle class.
Inflation started under Biden, but the massive expansion in money supply (M2) begin with Covid in 2020.
Once this latest spending splurge kicks in, we will see rising inflation again. After all, Biden and Congress have gotten the taste for massive spending bills (like vampires) and spending likely won’t slow down.
Nothing has been the same since Nancy Pelosi (CA-D) became Speaker of the House in January 2007. In fact, US public debt was at $8.68 trillion when she was handed the gavel and US public debt now sits at $31.55 trillion. That is a whopping 264% increase in the nation’s debt under free-spending SanFranNan. To Pelosi, there is no such thing as too much debt.
To be fair, Pelosi had plenty of help. We had Barack Obama and Joe Biden assume the Presidency in 2009 and in between we had RINOs (Republicans in name only) John Boenher and Paul Ryan as House speakers. In the Senate, the US has had Harry Reid (NV-D), Chuck Schumer (NY-D) and breifly Mitch McConnell (KY-R) as majority leaders. Of course, he had Donald Trump as President for 4 years then a return to the Obama-Biden Presidency with Old Joe as President for the past 2 years.
This chart show how deranged Congress and the Administration became since 2007. On October 3, 2008, President George W. Bush signed the $700 billion Emergency Economic Stabilization Act (EESA) of 2008 after Treasury Secretary Henry Paulson asked Congress to approve a bailout to buy mortgage-backed securities that were in danger of defaulting.
I find it sad that a House panel voted to designated Pelosi as House Speaker Emerita for her “leadership” in helping to spend the US into bankruptcy. Look at the trajectory of public debt since Pelosi assumed the position of Spender of The House in 2007.
Since 2007, the US has expereienced a housing bubble burst and ensuing financial crisis (2008/2009), then a Covid economic shutdown in 2020 requiring (in the mind of Statists) massive Federal spending in the form of Covid Relief (aka, the American Rescue Plan) for $1.9 TRILLION, then Infrastructure Spending bill for $1 TRILLION, the Inflation Reduction Act (really a green energy spending bill dressed up as an inflation reduction measure) and the infamous pork-laden Omnibus bill. All this Federal spending has driven up M2 Money by 200% since Pelosi first became House speaker.
Look at the chart of M2 Money Velocity (GDP/M2 Money) since Pelosi became House Speaker. It has collapsed.
Pelosi is also notable for her “You have to pass the bill to see what’s in it” speech on the Affordable Care Act and childishly tearing up on camera a copy of Donald Trump’s State of the Union address.
Meanwhile, the US has $181.5 Trillion in UNFUNDED LIABILITIES that will require MORE debt to be issue. Social Security unfunded liability is now $22.46 trillion and Medicare unfunded liability is up to $35 trillion. But if you dare mention “reform” to these massive entitlement boondoggles, President Biden and Senate Majority Leader Chuck Schumer will say “Republicans want to take away your Social Security!” That isn’t what Rick Scott (FL-R) said.
Unfunded liabilities per citizen is now $542,457. I propose that all illegal immigrants crossing the Mexican border (or Canadian border) per forced to pay their share of unfunded liabilities as an entry fee..
While Congress debates cutting spending (Hint: Childish Biden and Schumer said no to any cuts to spending), the US Debt Star gets closer to completion.
Biden’s State of the Union address saw him bragging about his record job creation (actually, it was the private sector, not Biden than created jobs) and historic unemployment rate. What Biden didn’t mention (along with not discussing the porous Mexican border with fentanyl pouring across or why he failed to shoot down a Chinese spy balloon until after it has passed over numerous military reservation) is that the unemployment rate always hit a low point just prior to a recession.
So, here we sit at 3.4% unemployment. But we also see the US Treasury yield curves (10Y-3M and 10Y-2Y) remaining deeply inverted.
The US Treasury 10-year yield is up 5.5 basis points today.
And Bankrate’s 30-year mortgage survey rate is up slightly today.
Everyone seems to have amnesia about Joe Biden’s hatred of Social Security and Medicare. He has tried to cut Social Security, Medicare and Veteran’s benefits as a US Senator. In addition, it was Biden that led the charge to TAX Social Security benefits for seniors. Now Biden has pivoted and is claiming that Republicans are the ones that want to cut Social Security. Wow. Biden simply goes where the political winds blow.
Here is where we set today. The cost of insuring for a US debt default remains elevated as the US has hit its statutory debt limit. This is happening at the effective rate of interest on US mortgage debt is rising.
Help us McCarthy! Because Biden and Schumer don’t want to cut ANY spending.
We need somebody like Mr. Garvey from Key and Peele to lead the debt ceiling debate.
But never fear! Congress LOVES to spend your money, so will eventually raise the debt ceiling.
Confounded Interest - Anthony B. Sanders 
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