Happy New Year! And Treasuries are off to fast start with investors bailing on Treasuries and buying stocks. AND the expectation that The Fed will raise rates 3 times this year.
The 10-year Treasury Note yield rose above 1.60% this morning.
And the US Treasury 10Y-2Y curve rose to 80.601 basis points.
Fed Funds Futures data is showing 3 rates hikes in 2022. May, September and December.
The Fed Dots project is definitely showing an upward trend in the Fed Funds Target rate with FOMC member forecasting the median target rate to be above 2% by 2024.
Of course, Fed reverse repo activity grew to an all-time high (but it is expected to pare-back).
How about mortgage rates? I expect mortgages rates to rise over 2022 as the 10-year Treasury Note rises.
Cautionary note: The Fed is likely to protect economic growth and ignore inflation. So I expect FOMC will continue to reinvest prepayments into Treasury and MBS, pro-rata to the current portfolio.
A good quote from The Hill story: “Under Biden, the American economy has recovered from its Trump-era lows with remarkable speed.” As Leslie Knope said “That seems like an unfair phrasing.”
Hmm. Well, here is a chart that best explains the “Biden Miracle.” It shows the growth in Federal expenditures from the previous year during the banking crisis and then the COVID crisis. During the banking crisis, the increase in Federal expenditures (red) was normal. It was the increase in The Fed’s balance sheet (blue) that was staggering. But for the mini-recession related to COVID (only two months so you can barely see it on the chart below), it was the growth in Federal expenditures (red) combined with another round of staggering Federal Reserve stimulus (blue).
A different view of Federal “Stimulypto” is show below. Since COVID and the election of Joe Biden as President, Fed monetary stimulus is at an all-time high and Federal expenditures, while they have slowed, are still above the pre-COVID spending levels.
Please note that the massive surge in Federal expenditures and Fed monetary stimulus began under Trump, but were only continued under Biden. That is why no one notices … it was Trump.
And if we look at the 10Y-2Y Treasury curve slope, the US is slippin’ into darkness since the slope typically rises after a recession, then falls. And we are in the falling (or slippin’) stage.
So, President Biden is benefiting from Trump’s and The Fed’s Stimulypto. I don’t expect partisan outlets like The Hill or crooner Barbra Streisand to look at the data.
With Build Back (Inflation) Better not passing in the US Senate, I fully expect The Federal Reserve to continue “low riding” interest rates. Inflation will probably cool as well as Federal expenditure growth slows.
So, Streisand’s statement should have said “Joe Biden’s economic record in his first year is the best in 40 years. The media largely ignores this … because the unsustainable Federal stimulus began under Trump, not Biden.”
Another thing The Hill and Barbra Streisand left out was declining REAL average hourly earnings growth (that is, average hourly earnings YoY – inflation).
Biden’s real contribution? Anti-fossil fuels actions have driven up energy prices. Regular gasoline prices, for example, are up 45% under Biden.
If The Fed actually follows through and removes COVID stimulus and Congress doesn’t keep the incredible rate Federal spending growing, I sincerely doubt that GDP will continue at this hot pace.
2021 saw the S&P 500 index generate a return of 28.7%. Much of it thanks to The Federal Reserve “stimulypto” or excessive monetary easing.
But only three hedge funds beat the S&P 500 index: Senvest, Impala and SR. Thanks to fees (trading and management), the other hedge funds underperformed the S&P 500 index. And underperformed The Fed!
Melvin Capital was the worst performing hedge fund of the ones examined.
The global economy has certainly been turned on its head by the COVID outbreak in early 2020. Not so much by the virus itself, but by Central Bank hysteria in terms of rate lowering and balance sheet expansion. Which The Fed has not yet unwound.
Let’s look at what has happened since the mini-recession caused by COVID in early 2020. The shortest recession in US history, a measly 2 months. The Fed expanded its balance sheet from $4.17 million in February 2020 to $8.79 million today. That is, The Fed over doubled the size of their balance sheet in reaction to the shortest recession in US history. Overreaction much?
What has happened since the mini-recession and The Fed’s massive overreaction?
First, gold (gold line) surged then calmed down. Then cryptocurrency Bitcoin (while line) surged, then calmed down, then surged again only to calm down again. Then crypto Ethereum surged, calmed, surged, calmed. Meanwhile the US Dollar Index crashed only to start rising again.
The Fed’s overreaction and failure to withdraw excessive stimulus has led to the rise of alternatives to the deflating dollar due to inflation.
When will The Fed ACTUALLY start removing the overreaction stimulus? Let’s get it started.
Perhaps only April Ludgate can kill The Fed’s overreaction stimulus.
(Bloomberg) — The amount of money that investors are parking at a major central bank facility climbed to yet another all-time high as supply-demand imbalances continue to dog U.S. dollar funding markets.
Eighty-one participants on Monday placed a total of $1.758 trillion at the Federal Reserve’s overnight reverse repurchase agreement facility, in which counterparties like money-market funds can place cash with the central bank. That surpassed the previous record volume of $1.705 trillion from Dec. 17, New York Fed data show.
Demand for the so-called RRP has climbed further as principal and interest payments from government-sponsored enterprises has entered short-end funding markets. However, that cash is expected to exit the overnight space by the end of the week as the Treasury ramps up its issuance of Treasury bills now that Congress has increased the debt limit.
Overall volume has been rising this year as a flood of cash continues to overwhelm the U.S. dollar funding markets due to central-bank asset purchases and the drawdown of the Treasury’s cash account, which is pushing reserves into the system. The larger takeup looks set to persist even as the Fed tapers its asset-purchase program — something it began this month — because the supply-demand imbalances in short-end securities are likely to persist.
Then we have the Turkish Lira volatility hitting an all-time high.
And finally we have the US Current Account Balance rising to levels last seen in 2006 just after the peak of the US housing bubble.
While the Chinese Wuhan virus (aka, the Fauci Flu) has plagued the world, another Chinese “export” is also suffering what is known as contagion: China’s real estate sector.
Real estate companies Evergrande, Kaisa, Shimao and Chinese Estates are falling like a rock today.
But it has been a steady decline since Q1 2021 except for Chinese Estates. But they have resumed their death dive.
On the debt side, Evergrande is down to 18.856 while Kaisa has lost less (but still quite a bit) and Shimao’s bond look almost like a good investment, relative to Kaisa and Evergrande. But they are all sucking wind. Maybe they all have the Fauci Flu?
Let’s see if this latest Chinese “export” washes ashore in the USA.
I love how The Federal Reserve talking heads, the media, economists like Paul Krugman, all refer to inflation as “transitory” and excessive liquidity as “temporary.”
Let’s look at a variety of alternative investments to the S&P 500, GameStop, Bitcoin, Ethereum and Gold after The Federal Reserve’s and Federal government massive (over)reaction to COVID in early 2020. Gold is the first asset to surge after M2 Money surged, but has declined since. Game Stop had a big surge (likely due to positive vibes on Reddit), but has been volatile and generally falling since “The Surge.” Bitcoin had a delayed surge as did Ethereum. Despite fear about government regulation, Ethereum in particular remains elevated.
The “temporary” stimulus has resulted in the lowest M2 Money velocity in history. And we will have to see if the “temporary” excess liquidity in the financial system is truly temporary.
Here is a chart to show the “Stimulytpo” effect on commercial and industrial loans which surged (including PPP loans) but have simmered down to pre-COVID levels.
The earnings for GameStop were terrible (down 39.7% YoY). But at least Christmas season is upon us and maybe GameStop will surge with a good retail spending season.
But what happens to markets if the Federal government “stimulypto” is removed? If it ever is.
Like John Belushi from The Blues Brothers, Fed Chair Jerome Powell is saying that the markets lackluster response in terms of bond yields to his “hawkish” announcement yesterday “isn’t his fault.”
(Bloomberg)Federal Reserve boss Jerome Powell appears unperturbed by the fact that longer-term bond yields remain low even as officials lay the ground work for tighter policy and inflation is ticking higher.
While the drop in longer-term rates may be viewed by some as indicative of where so-called terminal rates for U.S. policy might ultimately lie, Powell on Wednesday emphasized the impact of ultra-low yields in places like Japan and Germany in helping to keep them anchored.
“A lot of things go into the long rates and the place I would start is just look at global sovereign yields around the world,” Powell said at a news conference following the Fed’s final scheduled policy meeting for the year, which saw officials ramp up the pace of stimulus withdrawal and boost predictions for rate hikes in 2022. The Fed Chair noted that rates on Japanese and German government bonds are “so much lower” than those on Treasuries and that with currency hedging taken into account American debt provides investors with a higher yield. “I’m not troubled by where the long bond is,” he said.
This stands as something of a contrast to the view expressed back in 2005 by one of Powell’s predecessors. Back then, Fed chief Alan Greenspan described a decline in long-term bond yields even in the face of six policy rate increases as a “conundrum.”
Or it could be that no one REALLY believes that Central Banks will ever cut interest rates, despite surging inflation.
The US Treasury 10-year yield dropped 7 basis points overnight and remains just south of 1.50%. The Eurozone remains below 1% (with Germany at -0.358% and France at -0.009% at the 10-year mark). Japan is at 0.039%. This is what Powell means by low global rates keeping US long-term rates down.
The 10-year Treasury term premium (measured before Powell’s head fake on raising rates) has returned to pre-Biden levels.
Meanwhile, global equities futures are up across the board (well, except for Mexico).
The Fed could have raised their target rate if they were REALLY interested in cooling inflation. The Taylor Rule remains at 14.94% while The Fed is stalled at 0.25%. Even if you don’t like the Taylor Rule, it still highlights how ridiculous Fed Stimulypto is.
Well, we do have a government-propelled economic recovery, but at a cost of declining REAL wages thanks to the highest inflation rate in 40 years.
If price stability is squandered, financial stability is put at risk. If financial stability is lost, the economy is imperiled and the social contract is threatened.
During the past several quarters, U.S. inflation has surged—now running about triple the Federal Reserve’s 2% target. The surge in prices is unlikely to reverse on its own. The longer that prices are unstable, the greater the challenge to the conduct of macroeconomic policy. The last thing the country needs is its third major economic upheaval in a decade and a half.
The consequences of inflation—and the attendant risks—have long been understood. In 1898 economist Knut Wicksell explained: “Changes in the general level of prices have always excited great interest. Obscure in origin, they exert a profound and far-reaching influence on the whole economic and social life of a country.”
I agree with the op-ed, but as Paul Harvey liked to say, “And now for the rest of the story.”
The Federal Reserve is only half of The Federal government “Stimulypto.” Starting in late 2008, The Fed crashed their target rate to 25 basis points and began their quantitative easing (QE) program where The Fed purchased Treasuries and Agency Mortgage-backed Securities (MBS) amongst other assets. Notice in the chart below that QE was adjusted, but never went away and The Fed’s target rate only was increased once before Trump’s election as President, then raised eight times then decreased five times. And no rate increases under Biden. So The Fed scorecard is Obama/Biden: 1 rate increase. Trump: 13 rate changes. And The Fed’s balance sheet has gone bananas since the COVID outbreak.
Inflation, as measured by the Consumer Price Index (CPI) didn’t really take-off until March 2021 as a result of STIMULYPTO (excessive monetary stimulus + Federal government spending).
Here is the Federal government spending surge that helped generate the highest inflation in a generation.
So while the op-ed author blames inflation solely on The Federal Reserve, The Fed was unable to achieve its inflation goal for much of the post-financial crisis period. It was the double whammy of Fed monetary stimulus + Federal government stimulus (spending) that pushed inflation to 6.8%.
Following Paul Harvey’s “The Rest of the Story,” I choose baseball player Whammy Douglas to represent the double whammy of Fed + Fed government stimulus to produce inflation. THAT is the rest of the story.
Throw in the Biden Administration’s war on fossil fuels (driving up energy costs by over 50%) and we have a TRIPLE WHAMMY!!
The WSJ op-ed author was focused only blaming The Fed. Sorry, it was a Double Whammy.
According to Markets Insider, lumber prices are up 127% from its most recent low. With demand high and supplies low, record low interest rates still drive homeowners to the market, so much that builders are struggling to keep up.
Note the surge in lumber futures prices back in April and May 2021 that eased. But lumber futures prices are gaining steam again.
Let’s see what happens to lumber prices and new home prices if and when The Federal Reserve decides to takes its gargantuan foot off the monetary accelerator pedal.
In other housing-related news, China’s Evergrande remains in the news as its stock price founders.
Confounded Interest - Anthony B. Sanders 
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