Has The Fed Lost Control With Its Abnormal Policies? $2.7 Trillion in Crisis Savings Stay Hoarded by Wary Consumers

Has The Federal Reserve lost control of the economy? And inflation? The answer is likely yes. Why?

The Covid crisis has been played by the Federal government as an excuse for insane levels for spending coupled with massive monetary stimulus from The Federal Reserve.

As an example of The Fed losing control is US savings. The Fed’s model is to drive savers into consumption, therefore raising production and increasing GDP growth. But alas, The Fed can’t overcome the fear faced by consumers with Covid, Covid shutdowns, and rapidly rising prices.

(Bloomberg) — Consumers in Europe and the U.S. aren’t rushing to spend more than $2.7 trillion in savings socked away during the pandemic, dashing hopes for a consumption-fueled boost to economic growth on both sides of the Atlantic.

In the wake of lockdown easing during the northern hemisphere’s summer holiday season, excess savings in euro-area bank balances declined only marginally in August, and Italy still recorded an increase, according to calculations by Bloomberg Economics. In the U.S. there has also been no drawdown, the figures show.

The absence of a consumption surge that had been anticipated by some economists may speak against the prospect of a lasting inflation shock feared by central banks. While higher balances could help households cope with skyrocketing heating bills, tepid demand might temper businesses’ ability to push through permanent price increases.

In the USA, we see accumulated savings despite near-zero deposit rates at banks.

To be sure, The Fed reacted (or overreacted) to the Covid outbreak by increasing the money supply and their purchase of Treasuries and Agency MBS as the Federal government went on a wild spending spree.

But with trillions in Stimulypto Federal spending and Fed money printing, the bottlenecks in the economy (which apparently weren’t known before … ) have contributed to massive price increases that aren’t going away any time soon.

Notice how Fed monetary policies changed after the housing bubble burst and ensuring financial crisis/Great Recession. Before 2008, The Fed periodically whipsawed their Fed Funds target rate. But since late 2008, we have seen hardly any move from The Fed (except for 2017-2020 while Trump was President). For Obama,

Here is a look at The Fed’s record under Obama, Trump and Biden. The Fed raised their target rate only once under Obama until Trump was elected. Then The Fed raised rates 8 times. Then began lowering them again (5 times) leading to a big drop when Covid stuck. So for Trump, The Fed changed their target rate 13 times compared to 1 rate change under Obama and none under Biden.

And the above chart is only The Fed’s target rate. My point is that Yellen failing to raise rates under Obama has resulted in this over DC-Stimulypto we are seeing today.

Note the difference in Fed policies BEFORE the financial crisis. We need to return to a normal Fed policy rather than the hyper-inflationary zero-rate, QE policies since 2008.

M2 Money velocity (GDP/M2 Money) remains near an all-time low.

But given DC’s spending spree and all-time lows for M2 Money Velocity, The Fed is going to need to keep purchasing trillions in debt at low interest rates. The abnormal Obama years (Bernanke/Yellen) are the NEW abnormal. Or should I say abby normal policies?

Dr. Frederick Frankenstein : Now that brain that you gave me. Was it Hans Delbruck’s?

Igor :No.

Dr. Frederick Frankenstein : Ah! Very good. Would you mind telling me whose brain I DID put in?

Igor : Then you won’t be angry?

Dr. Frederick Frankenstein : I will NOT be angry.

Igor : Abby someone.

Dr. Frederick Frankenstein : Abby someone. Abby who?

Igor : Abby… Normal.

Dr. Frederick Frankenstein Abby Normal?

Igor : I’m almost sure that was the name.

Dr. Frederick Frankenstein Are you saying that I put an abnormal brain into a seven and a half foot long, fifty-four inch wide GORILLA?

So, yes, Bernanke and Yellen put into place abnormal policies that Powell is following into the world’s largest economy (or gorilla).

Only Igor and The Federal Reserve would pick such abnormal policies that ultimately lead to massive misallocations and inflation.

On a side note, do Biden and Transportation Secretary Pete Buttigieg really believe that they can fix the backed-up ports that are flooded with cargo thanks to Stimulypto? By Christmas??

Not with natural gas prices up 90% since January 4th!

Here is a video of where The Fed comes up with their abby normal monetary policies.

Bank of Japan Stops Printing Money, Will The Fed Follow? (US Misery Index Above 10%, Housing Misery Rate At All-time High)

My Kuroda!

金融政策に限界があるとは考えておりません　
(I do not believe that there is a limit to the effect of monetary policy.)

Haruhiko Kuroda, Bank of Japan, 13 April 2016

The Bank of Japan is one of the top three Quantitative Easing (QE) Monsters in terms of the absolute amount of assets it purchased. The Fed and the ECB round out the trio. The BoJ started QE over 20 years ago, and went hog wild under Abenomics, which became the economic religion of Japan in 2013. But the era of Prime Minister Shinzo Abe ended in September 2020, and Abenomics is now finished.

What’s left of it is that the BoJ (and Bank of Japan Governor Haruhiko Kuroda) now holds about half of the huge pile of the central government’s debt. With their target rate at -0.10% and a gargantuan balance sheet, what could go wrong?

But BOJ’s QE has ended. The BoJ’s overall assets stopped growing, and its holdings of government bonds have started to decline.

As of the BoJ’s balance sheet dated September 30, released on Thursday, total assets declined to a still monstrous ¥724 trillion ($6.4 trillion), below where it had been in May 2021.

But look at Japanese home prices with the growth of the BOJ’s balance sheet and general decline in mortgage rates. Like the USA, there was a balance sheet spike associated with Covid and a resulting spike in home prices.

The USA? We also saw a surge in home prices following The Fed’s monetary “stimulypto.”

But will The Fed follow BOJ’s lead and stop asset purchases? Not yet, anyway. It seems that The Fed can’t turn market forces loose and let interest rates rise.

Bear in my that the US Misery Index is above 10% (U-3 unemployment + inflation).

And if I define the US Misery Index as U-3 unemployment + home price growth, we can see we are at record misery rates. Miserable for households that don’t own a home or are trying to move to a higher housing price area).

What I like about The Fed’s monetary policies?? Nada.

Bizarro World! 1-month T-bill Yield Lower Than 1-year T-bill Yield (U.S. Faces A Recession If Congress Doesn’t Address The Debt Limit Within 2 Weeks, Yellin’ Yellen says)

Treasury Secretary Janet “Go big or go home” Yellen is beating the hysteria drum by saying that the US faces a recession if Congress doesn’t increase the debt ceiling.

Well, Janet, we are headed there anyway with GDP crashing to a measly 1.33%.

The fear of not approving a debt ceiling increase (laughable since Democrats can do it on their own) has caused there to be a “little dipper” in the US Treasury actives curve. Meaning that the 1-month T-bill yield is higher than the 1-year T-bill yield.

How bizarre is this getting?

Stimulypto! US GDP Q3 Tracker Slumps To 2.3% Despite Massive Monetary Stimulus (Down From 13.7% On May 5th, 2021 Despite MORE Stimulus)

Can you say “All the king’s horses and all the king’s men ..” Or “All The Fed’s stimulus and all of Biden’s jobs bills ..”

Yes, the Atlanta Fed’s GDPNow Q3 tracker slumped to 2.3% despite the massive stimulus coming from The Federal Reserve and the Biden Administration. Down from 13.7% GDP growth as of 5/5/2021.

Mortgage Lender Offering 105% LTV Loan With $500 Down And Downpayment Assistance, FICO Down From 660 To 620 (Into The Storm!)

I call this “lending into the storm.”

A national mortgage lender has just introduced a 105 Loan-to-value (LTV) ratio loan and a lowering of FICO scores from 660 to 620.

Now, the loan still requires 97% LTV with downpayment assistance and gift funds permitted to boost CLTV to 105%.

With The Fed helping to raise home prices at a whopping 20% YoY, …

lenders are trying to find loan products for lower-income households so they can get in on the bubble! Hence, a 105% CLTV mortgage product with reduced credit requirements and increased Debt-to-income requirement rising from 43% to 45%. Also, borrowers can avoid the 3% downpayment requirement and put down only $500.

This is lending into the storm: softening of underwriting requirements as the house price bubble surges. Sound like 2005. This was not supposed to happen. After the housing bubble burst and the financial crisis, The Fed was supposed to encourage counter-cyclical lending (tighten credit standards as a housing bubble worsens). Instead, lenders are lowering credit standards, feeding the house price bubble.

If this was just one lender, I would have barely noticed. But this mortgage is being offered by most banks. And then sold to our GSEs: Fannie Mae and Freddie Mac.

Government mortgage giant Fannie Mae purchases these mortgages in their 3% down programs.

Eligibility and Terms

Desktop Underwriter^® (DU^®) underwriting required
1-unit principal residence, including eligible condos, co-ops, PUDs, and MH Advantage^® (Standard manufactured housing: max. 95% LTV/CLTV)
Fixed-rate mortgages with a maximum term of 30 years and ARMs are eligible (restrictions apply)
Reserves (if required per DU) may be gifted
Combined LTV up to 105% provided subordinate lien is an eligible Community Seconds^® loan
Downpayment assistance found here.

Speaking of lending into a storm, as part of the raft of new legislation designed to spur first-time homeownership in America, a remarkable bill has joined the fray: its sponsors propose creating a new subsdizied 20-year-fixed-rate mortgage program through Ginnie Mae, HousingWire reports.

According to the bill, Ginnie Mae in tandem with the Department of the Treasury would subsidize the interest rate and origination fees associated with these 20-year mortgages, so that the monthly payment would be in line with a new 30-year FHA-insured mortgage. The move – which is an explicit subsidy of one share of the population by another – could, in theory, “allow qualified homebuyers to build equity-and wealth- at twice the rate of a conventional 30-year mortgage.” Instead, what it will do is lead to is an even bigger housing bubble.

As I said, lending into a storm.

The Fed Helped Create Housing Bubble I And Then Helped Create Housing Bubble II: The Sequel (Case Study Of Phoenix AZ Home Price Bubble)

Phil Hall of Benzinga wrote a series of excellent articles in four parts for MortgageOrb (although “The Orb” has removed his name). Here are the links to his stories.

https://mortgageorb.com/the-fall-and-rise-of-the-housing-market-part-one

https://mortgageorb.com/the-fall-and-rise-of-the-housing-market-part-two

https://mortgageorb.com/the-fall-and-rise-of-the-housing-market-part-three

https://mortgageorb.com/the-fall-and-rise-of-the-housing-market-part-four

After re-reading these excellent articles on the housing bubble and crash, I thought I would take the opportunity to present a few charts to highlight the housing bubble, pre-crash and post-crash.

Here is a graph of Phoenix AZ home prices. Note the bubble that peaked in mid 2006. The Phoenix bubble correlates with the large volume of sub-620 FICO lending and Adjustable-rate mortgage (ARM) lending. Bear in mind, many of the ARMs prior to 2010 were NINJA (no income, no job) ARM loans.

What happened? Serious delinquenices at the national levels spiked as The Great Recession set in and unemployment spiked.

Since the housing bubble burst and surge in serious mortgage delinquencies, The Federal Reserve entered the economy with a vengeance. And have never left, and increased their drowning of markets with liquidity.

The Fed whip-sawing of interest rates in response to the 2001 recession was certainly a problem. They dropped The Fed Funds Target rate like a rock, then homebuilding went wild nationally and home prices soared thanks to Alt-A (NINJA) and ARM lending. But now The Fed is dominating markets like a gigantic T-Rex.

Oddly, then Fed Chair Ben Bernanke never saw the bubble coming. Or the burst.

Speaking of pizza, Donato’s from Columbus Ohio is my favorite. Founder’s Favorite is my favorite, but they do offer the dreaded Hawaiian pizza (ham, pineapple, almonds and … cinnamon?)

Bleech!

Hold That Tiger! US Existing Home Sales Decline As Prices Soar Thanks To Limited Inventory And Fed Stimulus

I certainly hope The Federal Reserve starts normalizing interest rates. Hold that Fed tiger!

(Bloomberg) — Sales of previously owned U.S. homes fell in August, suggesting that demand is moderating as lean inventory and high prices squeezed out some buyers.

Contract closings decreased 2% from the prior month to an annualized 5.88 million, in line with economists’ estimates, figures from the National Association of Realtors showed Wednesday.
“Clearly the home sales are settling down but above pre-pandemic conditions,” Lawrence Yun, NAR’s chief economist, said on a call with reporters.

Lawrence Yun is correct. There was a huge spike in existing home sales (EHS) following the Covid outbreak and the overreaction by The Federal Reserve (aka, when the ain’ts went marching in). Despite continuing stimulus, but EHS has simmered down.

At least the median price of EHS YoY slowed to 12.1% YoY as The Fed slows M2 Money growth.

Inventory remains relatively low compared to historic levels while price zooms with Fed stimulus.

Want home price growth to slow its insane growth? Hold that tiger! That is, The Fed has to start normalizing interest rates.

Urkel Economy! US Consumer Confidence Lowest In Decades Thanks To Rising Prices (Home Buying Conditions Fall To 60)

This is the Steve Urkel economy where The Federal Reserve and Federal government screw everything up with their policies (or follicies) and say “Whoops! Did I do that?”

(Bloomberg) — U.S. consumer sentiment rose slightly in early September but remained close to a near-decade low, while buying conditions deteriorated to their worst since 1980 because of high prices.

The University of Michigan’s preliminary sentiment index edged up to 71 from 70.3 in August, data released Friday showed. The figure trailed the median estimate of 72 in a Bloomberg survey of economists.

Buying conditions for household durables, homes and motor vehicles all fell to the lowest in decades. The report said the declines were due to complaints about high prices. Consumers expect inflation to rise 4.7% over the coming year, matching the highest since 2008.

September’s UMich Buying Conditions for Houses fell to 60 … thanks to superheated house prices.

I can just picture Fed Chair Jerome Powell channeling Steve Urkel and saying “Whoops!! Did I do that?”

Covid Blues! 1.6 Million Loans Remain In Forbearance With FHA/VA Leading (Fannie Mae Reports $7.2 Billion In Net Income In Q2 Report)

The Covid epidemic hit the single-family mortgage market hard in early 2020, leading mortgage lenders and servicers to offer FORBEARANCE to borrowers who were having trouble making their mortgage payments due to loss of hours or a loss of job.

Black Knight offers an excellent summary of the forbearance data.

The good news? Active forbearance plans are much lower today than at their peak after the Covid epidemic struck in early 2020 with active forbearance plans peaking in May 2020.

Forbearance plans are due to expire in

What is forbearance, you ask? Forbearance is when a mortgage servicer or lender allows a borrower to temporarily pay their mortgage at a lower payment or pause paying your mortgage. The borrower will have to pay the payment reduction or the paused payments back later.

Despite forbearance, Fannie Mae still reported $7.2 billion in net income in Q2 2021. Notice the difference between single-family SDQ and the SDQ rate without forbearance. Freddie Mac reported $3.7 billion in Q2 2021 net income.

Here is a look at Fannie Mae’s net income over the past year and SDQ rates.

Under the existing seller/servicer eligibility requirements, the Agency SDQ Rate is defined as 100 multiplied by (the UPB of mortgage loans 90 days or more delinquent or in foreclosure for Fannie Mae, Freddie Mac, and Ginnie Mae/Total UPB of mortgage loans serviced for Fannie Mae, Freddie Mac, and Ginnie Mae). Beginning with the financial quarter ending Jun. 30, 2020, the Agency SDQ Rate will include an adjustment for mortgage loans in a COVID-19-related forbearance plan that are 90 days or more delinquent and were current at the inception of the COVID-19-related forbearance plan. The UPB of such mortgage loans shall be multiplied by .30 and added to the UPB for SDQ mortgage loans for the purposes of determining the numerator in the calculation of the Agency SDQ Rate.

Retail REITs TRIPLE Whammy: House Bubble Burst, Online Shopping, COVID

It is tough to operate a retail Real Estate Investment Trust (REIT) in the face of the triple whammy that hit retail shopping. First, there was the housing bubble/subprime crisis of 2008-2009. Then there was the advent of on-line shopping, then COVID.

I look at the NAREIT retail index and two retail REITs for comparison: Simon Property Group and Washington REIT. And as a proxy for online shopping, I compare them to Amazon. Both Washington REIT and the NAREIT retail index were at loft valuations at the peak of the housing bubble, but crashed with the onset of the housing bubble burst and ensuing financial crisis. But following The Great Recession, both recovered by 2016 (along with Simon Property Group which actually far exceeded their pre-Great Recession peak.

But then retail mall disaster struck. In the form of on-line shopping. I use Amazon to represent on-line shopping. While NAREIT Retail and Simon fell from their 2016 peak, Washington REIT got clobbered.

Then Covid struck. When combined with on-line shopping and fear mongering by Anthony Fauci, retail REITs got hit hard. But all three have rebounded slightly since their nadir in 2020.

An interesting case study is Glimcher REIT, a formerly privately-held commercial real estate development company from Columbus Ohio. Like other retail REITs, Glimcher was crushed by the financial crisis and Great Recession. Glimcher’s share price fought back to $14.06 per share (down considerably from $29.28 in February 2007).

Washington Prime Group Inc. acquired Glimcher Realty Trust for $4.3 Billion in stock and cash Including the assumption of Glimcher’s debt. Right as on-line shopping took off. And the Covid struck a death blow leaving Washington Prime trading at $0.98. Washington REIT is transforming into a multifamily REIT given the overbuilding of DC area office space and the triple whammy of retail centers.

Retail REITs have almost recovered from Covid, thanks to the massive monetary stimulus from The Federal Reserve. Not to mention fiscal stimulus from DC.