Dazed And Confused! Treasury Flows Show Bullish $2.5 Billion Shift to ST Sovereigns Versus S&P 500 (Credit ETFs Hammered by Record Outflows of Almost $12 Billion As Fed Worries About Inflation)

The Federal Reserve is dazed and confused about inflation.

As The Federal Reserve reaffirms their draining of the monetary punch bowl, we are seeing investors flock towards the bond market. Particularly the iShares Short Treasury ETF. $2.5 BILLION to be exact.

Meanwhile, credit ETFs are hammered by record outflows of almost $12 Billion.

The reason why? Inflation remains elevated which is leading The Fed to keep their foot on the monetary brake pedal.

I’m an economist.

Terminal Velocity! Fed Implied Terminal Rate Now 5.363% At July ’23 FOMC Meeting As US GDP Report Revised Lower On Weaker Consumer Spending In Q4 ’22 (GDP PRICE Index Revised UP To 3.9%)

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.

Don’t Be Misled By The Low US Unemployment Rate, It Goes Low Just Prior To A Recession (Treasury Curve Remains Deeply Inverted, Mortgage Rates Rise)

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.

Help US, McCarthy! Price of Insuring Against US Debt Default Remains Elevated As No End In Sight (Effective Rate Of Interest On US Mortgage Rate Rises)

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.

Just Like The Fed! Despite Cooling Inflation, Forecasts Of Fed Rate Hikes Increase To Peaking In July 2023

It’s just like The Fed to ignore what is going on and do something else.

The one statement that Biden made in his State of the Union Address that was factually accurate was that inflation is coming down. Of course, he then blew it by saying he inherited inflation from Trump which was not true. Headline inflation (CPI YoY) was only 1.4% when Biden was sworn-in as President and rose to 9.1% YoY by June 2021 before finally starting to decline.

But despite the cooling of inflation (and M2 Money growth), The Fed seems hell bent on increasing their target rate, now forecast by Fed Funds Futures to peak in July 2023 at 5.123% before pivoting.

The Fed’s themesong. Drinking with my low-companions, dancing with a woman that’s not my wife, laughing at a joke I’ve heard before, welcome to a night in their life.

The Tighten Up! Banks Tightening Credit Boxes As Median Age Of US Homebuyers Rises From 31 To 47

The Federal Reserve is doing Archie Bell and The Drells “Do The Tighten Up!”

Over the fourth quarter, significant net shares of banks reported having tightened standards on C&I loans to firms of all sizes.

Banks also reported having tightened all queried terms on C&I loans to firms of all sizes.

Actually, banks are tightening standards across the various credit boxes.

And as banks tighten up their credit box, we are seeing the median age of US homebuyers rising from 31 to 47 years.

As banks tighten, we are seeing a slow down in the growth rate for C&I lending and 1-4 unit mortgage lending.

This is reminding me of Germany where you save for your entire life to buy a home.

Somehow, I don’t think Biden will mention any of this is his State of the Union address tonight.

Just Like The Fed! M2 Broad Money Supply Growth Falls To -1.8% YoY, M1 Money Growth Falls To -3.6% YoY As US Job Layoffs Accelerate

Its just like The Federal Reserve to be cutting US money growth as US jobs cuts accelerate.

The latest US money growth numbers are out and they are daunting. M2 Money growth YoY is now negative at -1.8%.

M1 money, a narrower defition of money, is now down -3.6% YoY.

This is happening as the labor market is seeing a wave of layoffs.

As M2 growth YoY and The Fed balance sheet shrinks, so does Cathie Wood’s AARK.

We are just the stepping stone for The Fed.

As The Fed ponders inflation versus job growth, its a case of “Him or Me, What’s it going to be?”

Winter Is Coming! Richmond Fed Outlook Declines To -11 As Philly Fed Outlook Down To -8.9 And NY Empire State Outlook Down To -32.9 (US 10Y-3M Yield Curve Inverts To -126.5 Basis Points)

Three regional Fed reports I like to watch are New York’s Empire State Outlook, Philly Fed’s Outlook and Richmond Fed’s outlook. Today, The Richmond Fed released their manufacturing outlook and … it declined to -11.

So the big three are all down (Philly down to -8.9 while NY’s Empire State outlook is down to -32.9.

On the Treasury front, the US 10Y-3M yield curve inverted further (a signal of impending recession) just tanked to -126.462 basis points.

Winter is coming!

Markets Are Strange! Mortgage Applications Rise 27.9% Since Previous Week, But Purchase Applications Remain 35% Lower Than Last Year (Refi Apps 81% Lower Than Last Year)

Markets are strange.

Mortgage applications increased 27.9 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending January 13, 2023. But mortgage applications are 60% lower than the same week last year.

The Refinance Index increased 34 percent from the previous week and was 81 percent lower than the same week one year ago. The seasonally adjusted Purchase Index increased 25 percent from one week earlier. The unadjusted Purchase Index increased 32 percent compared with the previous week and was 35 percent lower than the same week one year ago.

Here are the stats.

One lender in particular, Wells Fargo, smells blood in the economic waters, and has cut back mortgage originations.

Just remember, mortgage applications generally rise in the first part of the year until May, then start slowing until the last week of the year. This is called seasonality. But despite the fast growth this year, purchase applications are still down -35% compared to last year at this time.

The Great Dislocation! M2 Money Growth Crashes To 0% As M2 Velocity Near Lowest In History (21 Straight Months Of Negative Weekly Earnings Growth)

The 2020 Covid outbreak and the resulting government shutdowns and school closures begat a Washington DC spending spree and Federal Reserve monetary stimulus barrage unlike anything other time in history. Congress and Administrations love to spend other people’s money, but as Rahm Emanuel once said “You never let a serious crisis go to waste. And what I mean by that it’s an opportunity to do things you think you could not do before” And wow, did they ever binge spend and expand the M2 Money supply. I call it “The Great Dislocation” of the economy and we never recovered from it.

Or as Ray Wylie Hubbard sang, “Drinking with my low life companions, dancin’ with a woman who is not my wife.” This should be the theme song for Washington DC and their manic spending.

But after the massive spending splurges and Fed monetary stimultypto, The Fed finally started withdrawing “the punch bowl” to combat inflation. M2 Money growth year-over-year (YoY) is now 0%. And with inflation, US average weekly earnings growth YoY turned negativc and has been negative for 21 straight months.

After the spending explosion under Pelosi/Schumer and Powell’s monetary, M2 Money velocity (GDP/M2 Money) crashed to it lowest level in history. So now we have depressed money velocity and no M2 money growth. And the US still has 21 straight months of negative weekly earnings growth.

But former Fed Chair and current Secretary of Treasury Janet Yellen is pleased that inflation is FINALLY slowing which Yellen attributes to relaxing supply chains. Or is it declining M2 Money growth, Janet?

Now that the Federal government’s spending spree and The Fed’s monetary stimulypto dislocated the US economy, we are headed for a recession with no ammunition left in The Fed’s arsenal.

After all. The Federal Reserve has been destroying consumer purchasing power since 1913. And we may be at the end of The Fed’s monetary rope.

Even worse, we have Joe Biden as President, who curiously has been found to have classified documents in his possession from when he was Vice President, at least, at two locations (his Wilmington DL home that his son Hunter had access to and the now infamous Penn Biden Center in Washington DC). Even worse, Biden seems to be talking to dead world leaders like Germany’s Schmidt and France’s Mitterand.

Knowing Biden’s penchant for blatant lying and carelessness, I wouldn’t be surprised if this is a stack of classified documents on the table during his meeting with Treasury Secretary Janet Yellen.

Let’s hope Biden isn’t saying that he is talking to late Robert Kennedy, the former US Attorney General.