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.
I thought US House Speaker Nancy Pelosi was going to retire, but now it looks like she wants to keep inside trading with information about regulation and government spending that investors don’t have.
Largely, her investments were in call options for Disney, Saleforce, Roblox, Micron and Google (Alphabet).
I would prefer that she retire and replace Cramer on CNBC’s Mad Money. So she could bang the gong instead of her gavel. Or call it CNBC Investing Club with Nancy Pelosi.
Her defense that she should be allowed to invest in stocks and options since the US is a free-market economy was comical at best, and extremely hypocritical at worst.
It has been almost a year since Joe Biden has been President of the United States and a Democrat majority took control of The House and Senate. And what has happened to the US Treasury yield curve slope over the past year?
The yield curve is back where it started. There was the “honeymoon effect” where the curve slope rose. After all, Biden was Obama’s Vice President for 8 years and The Democrats has promised so much in the 2020 election. But by early April, the reality of the massive Federal spending (combined with Fed Stimulypto) began showing what was feared: inflation (blue line) started to grow at a rapid rate of speed. With inflation now at 6.8% YoY,
In fairness to Biden, The Federal Reserve has been overstimulating the economy since The Federal Reserve since Ben Bernanke and the Fed Open Market Committee (FOMC) dropped the hammer on The Fed Funds Target Rate once the rate hit 5.25% in September 2007. They kept cutting it reached 25 basis points (or 0.25%) in December 2008. In August 2008, Bernanke and Company began their “Quantitative Easing” or asset purchasing programs. Between The Fed’s Target Rate and QE, The Fed has continued to overstimulate markets ever since. Under Biden, The Fed Funds Target Rate remains at 0.25% and The Fed’s Balance sheet has grown to $8.79 Trillion (bigger than the entire economies of Japan and Germany put together!).
How about housing? Home prices are growing at 19% YoY while rents are growing at 12.65% YoY.
Energy prices have risen dramatically under Biden. Gasoline is up 46% despite a slight reprieve recently. WTI crude prices are up 64%.
How about food? Beef prices are up 20% and chicken prices are up 10%.
On a positive note, the S&P 500 index has soared … thanks has soared during Biden’s term thanks to Fed stimulus and Federal spending on COVID.
The Build Back Better Act if passed (in its entirety or on a piecemeal basis) will lead to even MORE inflation.
Perhaps Biden’s spokesperson Jen Psaki can recreate the Biden Administration as a lovable, hilarious family like the comic strip Gasoline Alley with old Joe Biden as Skeezix. And insider-trading star, House Speaker Nancy Pelosi as the family matriarch.
There is a lot going on in the US housing market. Excessive monetary stimulus keeping mortgage rates low, historically low inventory available for sale, and FOMO (fear of missing out … on rapidly rising home prices).
By metro area, Phoenix AZ once again leads with 32.3% YoY. Minneapolis MN is the slowest growing metro area in terms of home prices at 11.5% (tied with Chicago, IL).
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.
Housing in the US is getting “simply unaffordable.” And it has gotten far worse over the past year. Thanks to BAD government policies.
While wage growth is positive, inflation is sucking the life from consumers. REAL average hourly earnings growth is -2.0133%. Even worse, home prices are rising at a 14.12% pace in REAL terms. So, wages are losing to inflation and housing is pulling away from renters in terms of affordability.`
So it is not surprising that the University of Michigan consumer survey for “Buying Conditions For Housing” remains below 100 (meaning that more people think buying conditions for housing are negative than positive). With the Case-Shiller National home price index growing at a 19.51% YoY pace, it is no wonder that consumers are getting scared of the housing market.
Yes, US inflation is at a 40-year high and the 30-year Treasury Inflation Protected (TIP) yields is at -0.424%. That says quite a bit about the pickle US consumers are in.
US consumer confidence overall has declined to the lowest level since just after the financial crisis and housing bubble burst of 2008-9.
Doctor, Doctor (Yellen), please don’t try to make housing more “affordable” which will result in housing being even LESS affordable.
But I do like how Biden took credit for lowering gasoline prices a little after his anti-energy policies drove up gasoline prices in the first place from $2.20 to $3.40 a gallon, a 55% price increase. Thanks for nothing, Joe!
And with Omicron raging (with few reported deaths), Anthony Fauci, President Biden’s top medical adviser, indicated support for making vaccinations a requirement for domestic fights.
2021 has been a very weird year. Inflation has boomed (highest in 40 years) after the election of Joe Biden as President of the USA (call it Bidenflation). Then we have The Federal Reserve barely acting on the booming inflation (keeping rates at 25 basis points while withdrawing the COVID-related monetary stimulus).
Given the volatility of GameStop (Reddit-inspired), you can see the strange shape of GameStop’s volatility surface.
By contrast, gold is now where it was was at the beginning of 2021 and the surge of Bidenflation.
Here is volatility surface for gold.
So, there are a number of meme stocks (GameStop is just one example), gold, silver, cryptos such as Bitcoin and Ethereum. But gold seems to be placid with respect to inflation, but the meme stocks and cryptos seem to be motoring. Or is it rage against the financial machine? Or rage against Bidenflation??
The US stock and bond markets are closed today and tomorrow, Christmas day.
Have a Merry Christmas! And celebrate the “Santa Pause” as Powell refuses to raise rates to combat inflation until 2022.
Confounded Interest - Anthony B. Sanders 
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