Biden’s Build Back Better Act May Add $3 Trillion To The Federal Deficit (And Cost $4.73 Trillion)

Call it “The Letter That Phil Swagel Wrote.”

The letter from Phil Swagel, Director of the Congressional Budget Office, sent a letter to Congress stating that

“The Congressional Budget Office and the staff of the Joint Committee on
Taxation project that a version of the bill modified as you have specified
would increase the deficit by $3.0 trillion over the 2022–2031 period.”

In short, members of Congress asked the CBO “What would happen if the programs in the bill would be made permanent (which they almost always are made permanent). The result? The Letter That Phil Swagel Wrote: Federal Deficits would increase by $3.0 trillion over the next 10 years.

The Center For A Responsible Federal Budget is even more glaring. The permanent cost of Build Back Better is $4.73 trillion … and a deficit of $3.01 trillion.

Here is all 2,466 pages of the Build Back Better Act (or Build Back Deficits Act).

The Penn-Wharton Budget Model estimates that — if Congress follows White House policy to make most provisions permanent — then Build Back Better will reduce the long-term GDP by 2.8 percent, reduce wages by 1.5 percent, and reduce work hours by 1.3 percent. The only thing it will expand is government debt, by 25 percent.

Build Back Badly?

Inflation Near 40-Year High Shocks Americans, Spooks Washington (As Largest Wealth Redistribution In US History Occurs … Towards The 1%)

The U.S. is poised to enter Year Three of the pandemic with both a booming economy and a still-mutating virus. But for Washington and Wall Street, one Covid aftershock is starting to eclipse almost everything else.

Already-hot inflation is forecast to climb even further when November data comes out on Friday, to 6.8%. That would be the highest rate since Jimmy Carter was president in the early 1980s — and in the lifetimes of most Americans.

And the CPI change since last year, according to the Federal Reserve of St Louis FRED is a staggering 16.262%.

And with U.S. Jobless Claims plunge to 52-year low, its about time that The Fed begins removing the humongous monetary stimulus.

After all, largely thanks to Federal Reserve policies, we have seen the greatest wealth redistribution in US history … to the top 1%.

And away from the bottom 50%.

Way to go Federal Reserve!

UMich Buying Conditions For Housing PLUNGES To 63 Due To Outrageous Home Price Growth & Lessons From The Yellen Pivot

Just look at this chart of the University of Michigan Buying Conditions For Houses index. It was positive (meaning above 100) until shortly after COVID struck and The Federal Reserve rode to the rescue. National home price growth was already at 4.57% YoY in March 2020, then ballooned to 19.51% YoY at the last reading.

Here is the same chart with the broader M2 Money stock and The Fed’s Balance sheet. Same results, just not as dramatic as M1.

We will soon find out if The Federal Reserve will announce a rate hike or taper news. They are likely to confirm tapering, particularly if they believe that tapering won’t roil markets. After all, then Fed Chair Janet Yellen and the FOMC decided to let the Fed’s balance sheet taper (white line) while, at the same time, increasing the Fed’s target rate (yellow line). The S&P 500 index rose 9.5% over the taper/rate increase period of 12/29/2017 to 8/30/2019.

But since Stimulypto (2/28/2020 to 11/30/2021), the Fed’s balance sheet doubled+ from $4,158,637 to $8,681,771. And The Fed Funds Target Rate (UB) immediately fell from 1.75% in February 2020 to 0.25% in March 2020 … and has stayed there ever since. The S&P 500 index rose 54.6% over this Stimulypto period.

But The Fed’s upcoming decision on December 15, 2021 may be a Yellen-pivot (taper balance sheet, but raise The Fed Funds Target rate). But, then again, maybe not. The Fed is getting really bad about forward guidance and choose instead to surprise us. Hence, this is why an a-political rule is preferred (such as the Taylor Rule).

Unfortunately, the Taylor Rule infers a Fed Funds Target rate of 15.50% (using CPI YoY running at 6.20% YoY. If The Fed raises their target rate by 25-50 basis points at the December 15th meeting, color me surprised.

So, the Powell Pivot may just be the Yellen Pivot after all.

US Unit Labor Costs SOAR 9.60% QoQ As Labor Productivity DECLINES 5.20% QoQ (Worst Since 1960)

If this what the Biden Administration had in mind? Soaring labor costs at the same time that labor productivity is falling to its lowest level since 1960?

Powell and the Gang’s monetary approach doesn’t seem to be working for the labor market …

But is working extremely well for asset prices.

Wall Street parties while Main Street suffers worst decline in productivity since 1960.

Alarm! Treasury Dealer Short Positions Another Red Flag for Liquidity As Stock Market Surges On Realization The Fed May NOT Taper (And Fausti Oversold Omicron Threat)

Alarm!

(Bloomberg) — The recent drop in primary-dealer holdings of front-end Treasuries is another warning of potential market dislocation heading into the year-end liquidity vacuum.

As of Nov. 24, primary dealers — which are mostly the large banks — were on the whole betting against two- to three-year Treasuries rather than buying. They had net short positions of just over $9 million, near the most bearish levels since 2017, signaling a pullback by buyers that provide crucial liquidity for older Treasury issues.

The positioning in the front-end of the curve “suggest less demand from the dealer community to fund off-the-run long positions,” Barclays strategists Anshul Pradhan and Andres Mok say in a Dec. 3 note. Off-the-run Treasuries are notes and bonds created in past years and traded less frequently than the newest issues; they’re the biggest part of the market and make up most of the Federal Reserve’s daily asset purchases, which are being scaled back.

Short positioning increased on a relative basis as a result, “which may also have crowded demand to borrow particular issues over others,” the analysts wrote.

Those forces together could contribute to an increase in market dislocations.

Jerome Powell’s hawkish pivot shocked financial markets. A week later, stocks are higher.
The S&P 500 staged its biggest rally since March to wipe out losses from the past week. The speculative fringe that was a smoldering wreck Friday was soaring Tuesday. An index of meme stocks rallied more than 4%, while one composed of airlines added 1.6%. A gauge of newly public companies advanced more than 4%, SPACs jumped more than 2% and even cryptocurrencies rallied, with Bitcoin powering back above $51,000.

It’s a stunning about-face for risk assets that went into a tail spin after the Federal Reserve chair suggested he favored accelerating the removal of monetary support. What follows are takes from market-watchers on why the market is looking past the Fed’s potential change in policy.

Also, the realization that Fausti was chicken-little and Omicron is not the planet killer.

Or could it be that with China easing, the US will be forced NOT to taper. Or taper only ever-so-slightly.

With the Dow up another 500+ points, it looks like no one is taking Powell and the Gang seriously about tapering. Or Fausti for that matter.

NIAID Director Anthony Fausti.

China’s Central Bank (PBOC) Cuts Reserve Requirements By 50 Basis Points To Stem Tide Of Economic Slowdown And Real Estate Development Problems (Big Trouble In Big China?)

Big Trouble In Big China?

China cut the amount of cash most banks must hold in reserve, acting to counter the economic slowdown in a move that puts the central bank on a different policy path than many of its peers.

The People’s Bank of China will reduce the reserve requirement ratio by 0.5 percentage point for most banks on Dec. 15, releasing 1.2 trillion yuan (US$188 billion) of liquidity, according to a statement published Monday.

The reduction was signaled by Premier Li Keqiang last week when he said that authorities would cut the RRR at an appropriate time to help smaller companies, and is the second reduction this year.

The decision comes after recent data showed the economy and industry stabilizing, although Beijing’s tightening curbs on the property market have led to a slump in construction and worsened a liquidity crisis at developer China Evergrande Group and other real estate firms.

Evergrande’s ADR is collapsing (now 5.975) along with Evergrande debt falling to 23.12 (versus 100 par).

China’s credit impulse has nosedived (see pink box) as the PBOC drops bank reserve ratios to lowest level since 2007 in an effort to float the boat. Will the PBOC drop in reserve ratios stem the tide? Or is it peasant magic?

Yes, its big trouble in big China. Let’s hope it isn’t the Three Storms (commercial real estate bubble, low Central Bank reserve ratios and … fear).

Is The US Engaged In A Monetary Cold War With Russia? (Or Will The US Become A Tightener Rather Than A Loosener?)

Is the US engaged in a monetary cold war with Russia? It looks that way if we consider the Index of Global Easing and Tightening from the Council of Foreign Relations.

Russia and Brazil are tightening along with Mexico, Colombia, Peru, Argentina and Chile. Add Pakistan, The Czech Republic and Poland to the list of tighteners.

The looseners? The US, of course, with Canada, Australia, China, India, Western Europe, Turkey and Nigeria. New Zealand is the quickest loosener.

This looks very cold war-like. But a monetary cold war.

Let’s see if The Fed becomes a tightener rather than a loosener.

REAL Average Hourly Earnings Growth Falls To -1.378% YoY In November Jobs Report (Jobs Added Missed BIG At Only 210K, New Taylor Rule Estimate Is 15.50%)

Treasury Secretary Janet Yellen said yesterday that “It’s Fed’s Job to Avoid Any Wage-Price Spiral.” Well, The Fed is helping to avoid a wage increase in real terms, since the November jobs report revealed that REAL US Average Hourly Earnings growth YoY fell to -1.378%. In other words, inflation is greater than hourly earnings.

And in other jobs related news, nonfarm payrolls rose by only 210k versus expectations of 550k jobs to be added. Even NOMINAL hourly earnings growth (4.8% YoY) was less than expected (5.0%).

Labor force participation rose a bit to 61.8%, still well below the pre-COVID levels of 63.4% in January 2020.

The U-3 unemployment fell to 7.8%. Still higher than the pre-COVID rate of 7.0% in February 2020, but getting close! As for what this means for The Fed, the new target rate implied by the Taylor Rule is 15.50%.

After this lousy jobs report, 10-year Treasury yields dropped … like Biden’s approval ratings.

The dance number where The Fed keeps their target rate at 25 basis points while the Taylor Rule implies a target rate of 15.50% is the Yellen Boogie. By Powell and the Gang.

Powell, Yellen Say They Underestimated Inflation And Supply Snarls (M1 Money Grew At 369% With Rates Near Zero Since COVID And They Didn’t See Inflation Coming???)

The Dream Team (Fed Chair Jay Powell and Treasury Secretary Janet Yellen) just can’t believe that inflation struck even after M1 Money Stock increased by 369% from March 2020 to today while interest rates remained near zero.

From The Hill: Federal Reserve Chairman Jerome Powell and Treasury Secretary Janet Yellen on Wednesday said they underestimated how quickly the U.S. economy would rebound from the COVID-19 recession and strain supply chains.

During a Wednesday hearing before the House Financial Services Committee, the top two U.S. economic policymakers acknowledged that high inflation has risen higher and lingered much longer than they expected.

“We understood demand would be strong,” Powell said. “We didn’t understand [the] significant problems of the supply side.”

Both Yellen and Powell said substantial fiscal and monetary stimulus played a role in stoking the higher demand that fueled inflation, but they called it a challenging side-effect of an otherwise fast recovery.

Seriously? The Fed and the Federal government dumped trillions of dollars into an economic system and didn’t think there would be negative consequences??

Look at the surge in M1 Money Stock at the same time asset-backed commercial paper rates are 0.08%. That is, about 1/3rd The Fed Funds Target rate (upper bound). None of this concerned The Dream Team?

An example of what The Dream Team didn’t see happening was the explosion of home prices. Home price growth was about 4% YoY prior to COVID, and is now 19.51% YoY.

Now we have the US Treasury Actives curve inverting like the US Dollar Swaps curve after 20 years.

Here is a composite photo of Jay Powell and Janet Yellen (to save space). Here is a video of Powell/Yellen composite trying to control inflation.

US Mortgage Refinancing Applications Index PLUNGES 40.3% WoW (Purchase Apps Index Plunges 30.4%)

Its that time of year for mortgage purchases applications! Purchase applications usually decline during December and start to rise after the beginning of the year.

Mortgage purchase applications (white line) dropped -30.4% from the previous week, not usual for December. But what is surprising is the drop in REFINANCING applications: down -40.3% from the previous week.

30-year mortgage rates rose 2.16% from the previous week.

But between Omicron (or as the French say, “Oh! Macron!”) and The Federal Reserve, there is a good chance that mortgage rates will fall this week putting a quick end to refi application plunge.

Purchase applications? Nope, it is that time of the season when purchase applications drop like a rock.