Dear Mr. Fantasy! Richmond Fed’s Barkin Says Fed Will Curb Inflation Even at Risk of Recession (Does The Fed Contribute To Homelessness?)

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.

Margin Call! Mortgage Lenders Are Starting to Go Broke as Loan Volumes Plunge (Fed Chasing Inflation Crushing Mortgage Industry As Mortgage Purchase Applications Are DOWN -41.5% Under Biden While Mortgage Rates Are UP 96%)

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.

What Biden Meant When He Said Zero Inflation (July CPI Rose 0% In July) While REAL Earnings Growth Remains Negative And Rent CPI Soars

Joe Biden is without a doubt the worst communicator in Presidential history.

Here is clip of him explaining how wonderful the US economy is under his leadership. 0% CPI growth in July after a great jobs report where 528k jobs were added.

While President Biden is technically correct (CPI didn’t increase from June to July), he left out that headline inflation was still painful at 8.5% YoY and core inflation was 5.9% YoY. He also left out that CORE inflation rose 0.3% in July. And he left out that REAL earnings growth was still negative.

The midterm elections are approaching fast and, of course, Biden and his crew have to put the best face of his and the Democrats accomplishments. But seriously Joe, REAL weekly earnings growth is negative meaning that inflation is crushing wage growth. Meanwhile, CPI rent is skyrocketing and was 5.8% YoY in July.

As we know, the CPI measure of rent is terrible and does not reflect the actual rise in rents. Zillow’s Rent index YoY is slowing, but remains at 14.75% YoY, far higher than the CPI rent measure of 5.8%.

So, the Federal Government and Federal Reserve keeps pumping trillions into the economy, so it is not surprising that we have rampant inflation crushing renters.

Zoltan! Pozsar Says L-Shaped Recession Is Needed to Conquer Inflation (US 10Y-2Y Curve Inverts To -31.69 BPS)

Fed may have to hike to 5% or 6% as inflation now structural

Zoltan!

The US economy may need to undergo a deeper and longer recession than investors currently anticipate before inflation can be brought under control, according to Zoltan Pozsar of Credit Suisse Group AG.

Markets expect the surge in consumer prices will soon peak and central banks will become less hawkish, but there’s a high risk that global cost pressures will remain elevated, Pozsar, global head of short-term interest-rate strategy at Credit Suisse in New York, wrote in a client note.

The world is being wracked by an economic war that’s undermining the deflationary relationships that have prevailed in recent decades where Russia and China supplied cheap goods and services to more developed nations such as the US and those in Europe, he said.

Markets priced for inflation to come back down very fast

“War is inflationary,” Pozsar wrote. “Think of the economic war as a fight between the consumer-driven West, where the level of demand has been maximized, and the production-driven East, where the level of supply has been maximized to serve the needs of the West.” That pattern held “until East-West relations soured, and supply snapped back,” he said.

The result is that inflation is now a structural problem, rather than a cyclical one. Supply disruptions have arisen from the changes in Russia and China, along with tighter labor markets due to immigration restrictions and a reduction in mobility caused by the coronavirus pandemic, Pozsar said.

There’s now a risk the Federal Reserve under Chair Jerome Powell has to raise interest rates to 5% or 6% and keep them there to create a substantial and sustained reduction of aggregate demand to match the tighter supply profile, he said.

‘More Misguided’

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Pozsar’s warning that inflation will stay elevated puts him at odds with the Treasury market, which rallied last month as investors switched their focus to recession risks from inflation concern. While an economic slowdown typically weighs on consumer prices, the latest annual US inflation reading of 9.1% for June remains far above the Fed’s 2% goal, although the price surge is forecast to slow for the first time in three months to 8.8% in July according to a Bloomberg poll of economists.

The bond market is more misguided now than at any other time this year as traders wager the US central bank will start cutting rates in early 2023, Bloomberg Economics’ chief US economist Anna Wong and her colleagues said this week. Money markets are wagering on almost one percentage point of hikes by year-end followed by a quarter-point cut by June.

“Interest rates may be kept high for a while to ensure that rate cuts won’t cause an economic rebound (an ‘L’ and not a ‘V’), which might trigger a renewed bout of inflation,” Pozsar wrote in his note. “The risks are such that Powell will try his very best to curb inflation, even at the cost of a ‘depression’ and not getting reappointed.”

Speaking of “recession,” the US Treasury 10Y-2Y yield curve has inverted even further to -31.69 BPS.

Zoltan!

Mr. Freeze! June JOLTs Job Openings Cool -5.4% From May, Home Price Growth Cools As Fed Tightens

Is Fed Chair Jerome Powell “Mr. Freeze?”

We are seeing a slowing of the US economy. For example, the JOLTs (job openings) numbers are out for June and they are down -5.5% from May. And from April to May, JOLTs declined -3.2% MoM. That is a clear slowing trend.

And on the housing front, the CoreLogic HPI Forecast indicates that home prices will increase on a month-over-month basis by 0.6% from June 2022 to July 2022 and on a year-over-year basis by 4.3% from June 2022 to June 2023. But rose +18.3% YoY in June. Also a clear cooling trend.

And its “Escape From Blue States” (perhaps a new Kurt Russell movie), with home prices rising fastest in red states (primarily The South). And contiguous migration from California to Nevada and Arizona.

The Fed Funds Futures market is pricing in rate hikes until the March 2023 FOMC meetings. After all, Prince Imhotep (aka, Minneapolis Fed’s Neel Kashkari) is screaming for more rate hikes to fight inflation … caused by 1) loose monetary policies since late 2008 and 2) insane Federal government spending.

Let’s see if “Mr. Freeze” (aka, Jerome Powell) relents on Fed rate increases before the March 2023 FOMC meeting.

Heartaches By The Number! Mortgage Applications Declined For Third week In A Row, Lowest Level Since 2000 (Applications DOWN -71% Under Biden, Mortgage Rates UP 99%)

Heartaches by the number!

Mortgage applications declined for the third week in a row, reaching the lowest level since 2000.

Mortgage applications decreased 6.3 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending July 15, 2022.

The Refinance Index decreased 4 percent from the previous week and was 80 percent lower than the same week one year ago. The seasonally adjusted Purchase Index decreased 7 percent from one week earlier. The unadjusted Purchase Index increased 16 percent compared with the previous week and was 19 percent lower than the same week one year ago.

Heartache #1: Mortgage rates have risen 99% under Biden.

Heartache #2: Mortgage application have fallen -71% under Biden.

As The Federal Reserve continues to fight inflation caused by 1) excessive stimulus by The Federal Reserve and Federal government surrounding Covid and 2) Biden’s energy policies, we are seeing the mortgage market as collateral damage.

NOT Beautiful! US Mortgage Rates Decline Slightly To 5.73% As Fed Raises Rates And Recession Probability Increases (30Y Rate UP 99% Under Biden)

Everything is NOT beautiful for the mortgage market. In fact, the 30-year mortgage rate is up 99% since Biden took office as President.

Mortgage rates are rising in part thanks to The Federal Reserve trying to control inflation (caused by Biden’s energy policies and spending). But mortgage rates are down slightly today.

Bear in mind that REAL wage growth is negative, thanks to Bidenflation.

Joe Biden’s policies are a real heartbreaker for millions of Americans. And Jill Biden is the living, loving baby sitter.

Doom Loop? The US Dollar Is Booming, But Will A Doom Loop Follow? (US Treasury Yield Curve Inverted At -20 BPS)

Here we go doom loop de loop?

The dollar’s gain is the world’s pain — and based on its current trajectory, the world may be in for a whole lot more discomfort.

Concerns over global growth have recently sent the US Dollar Index to the strongest level on record, with the greenback hitting multi-decade highs against currencies like the euro and the yen.

But the move risks becoming a self-reinforcing feedback loop given that the vast majority of cross-border trade is still denominated in dollars, and a stronger US currency has historically translated into a broad hit to the world economy.

Against the backdrop of higher-than-expected inflation and still-elevated commodities prices, the concern is that we’re in for a dollar ‘doom loop’ like never before, according to Jon Turek, the founder of JST Advisors and author of the Cheap Convexity blog.

With the Federal Reserve hiking interest rates at the fastest pace in decades, he says, it’s much less clear what could break the feedback loop in the next few months.

The Dollar Doom Loop with US inflation causing The Fed to tighten

Under Biden’s policies, inflation hit a 40-year high (blue line), and the US Dollar (green line) is strengthening. Then we have The Fed raising the target rate (purple line) and the probability of recession rising with Fed tightening.

Is a US recession coming? The US Treasury 10Y-2Y yield curve is inverted at almost -20 basis points.

There is a Fed open market committee meeting in one week and they are expected to raise their target rate by 75 basis points according to Fed Fund Futures data. Inflation keeps rising as does the probability of a US recession. So, The Fed will keep on tightening.

Buckaroo! Why The Fed Won’t Be Able To Contain Inflation (Taylor Rule Suggests A Target Rate Of 23.30%, A Bridge Too Far)

The Federal Reserve has behaved like buckaroos! Why? Since the financial crisis, The Fed has left its enormous monetary stimulus outstanding for too long.

The Fed initiated asset purchases in a series of moves (aka, QE) culminating in Covid QE that has been barley removed. With The Fed’s stimulypto (and Federal spending), we have seen the S&P 500 index soar along with home prices.

Of course, this begs the question as to whether the stock market and housing market can withstand The Fed’s tightening plans.

A closer look at the S&P 500 index and the Case-Shiller National home price index under Biden. The S&P 500 has been declining since The Fed started their monetary tightening. But the Case-Shiller National home price index as of April ’22 was still soaring.

With inflation at a 40-year high, the Taylor Rule suggests a Fed target rate of … 23.30%. It is currently at 1.75%. That is an unrealistic target rate that The Fed will never do. It is, in fact, a Bridge Too Far.

How about the Taylor Rule using Core PCE? It is still 12.71%. Still a bridge too far!

Markets are conditioned to massive Fed stimulypto, so how will markets react to stimulus reduction?

While The Fed is intent on withdrawing SOME of the enormous monetary stimulus, they are still buckaroos. And Biden/Congress still want to distort markets by Federal spending such as the Build Back (Inflation) Better bill that Manchin has blocked … so far.

The Core? Flexible Price Inflation Rises To 18.74% While Core Inflation Plunges To 8.40%, “Fats” Waller Backing 75 Basis Point Hike (30Y Mortgage Rate Rises To 5.83%)

As Americans are painfully aware, inflation is the highest in 40 years prompting The Federal Reserve to remove the massive punch bowl. In fact, Federal Reserve Governor Christopher “Fats” Waller backed raising rates by 75 basis points this month.

How hot was the recent inflation report? The Atlanta Fed’s flexible price index rose to 18.74% YoY. On the other hand, the CORE flexible price index (less energy and food) plunged to 8.46% YoY. The 30-year mortgage rate from Bankrate rose slightly to 5.83% as the implied overnight rate for the July FOMC meeting rose to 3.45%.

Inflation is ravaging consumers with the savings rate falling by -46.3% YoY while consumer credit rose 7.3% YoY. Yes, thanks to high inflation, consumers are saving less and borrowing more.

When even CORE flexible price inflation is 8.40% YoY, you know that The Fed and Federal government have made serious policy errors.