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.

Alarm! US Existing Home Sales Fall For A Sixth Month (-19% YoY), Median Price Growth Of EHS Falls To +10.55% YoY As M2 Money Growth Slows

In honor of Wolfgang Peterson who passed away yesterday, the Director of the classic WWII movie “Das Boot!” …. ALARM!

Sales of previously owned US homes fell for a sixth straight month in July in the latest indication of how high borrowing costs and waning demand are propelling the housing market’s rapid decline. In fact, existing home sales fell -19% YoY in August.

Contract closings fell 5.9% in July to an annualized 4.81 million, the weakest since May 2020, figures from the National Association of Realtors showed Thursday. The median estimate called for 4.86 million in a Bloomberg survey of economists. Sales fell 22.4% from a year ago on an unadjusted basis.

The nearly 26% decline in previously owned home sales since January marks the steepest six-month plunge in records back to 1999 and underscores a housing market that’s reeling from elevated mortgage rates and prices. The industry is also experiencing a slowdown in construction, and more buyers are backing away from deals.

Weaker demand has led to a pickup in inventory, which may help to cool home prices in coming months.

The median price of existing home sales growth fell to 10.55% YoY as M2 Money growth slows.

Its all about The Federal Reserve.

How Fed Tightening Of Rates, Not Balance Sheet, Impacts Mortgage Rates (NAHB Traffic Tanks In August)

The US housing market is sensitive to Fed “catch-up” monetary tightening. For example, the NAHB’s traffic of prospective homebuyers declined rather dramatically in August as The Fed tightened rates and the 30yr mortgage rate rose. That is what I call a “Nestea Plunge.”

How are mortgage rates impacted by Fed monetary policy? While The Fed began really “sloshing” markets with excess stimulus (QE in late 2008), the latest round of QE (or asset purchases) came with the US Covid shutdowns (what genius thought of that??) and that stimulus has NOT been withdrawn yet. Only the Fed Funds Target rate has tightened.

The 30yr mortgage rate rose with Fed rate tightening, but the Fed’s System Open Market Holdings (SOMH) of Treasury Notes and Treasury Bonds has come down a bit. But not the pare-down The Fed has hinted at. The 30yr mortgage rate is cooling as the prospect of future Fed rate hikes declines.

As of this morning, The Fed Funds Futures market points to rates rising until March 2023 … then easing again.

One reason The Fed has been slow to sell assets off its balance sheet is that a large chunk of T-Notes and T-Bonds are maturing shortly. It will be a matter of whether The Fed reinvests the proceeds or lets the balance sheet wind-down.

The Magic Formula For REIT Investing (What Will The Fed Do?) Powellburg Omen??

Real estate investment trusts (REITs) are an interesting asset class, allowing investors to purchase shares in large-ticket assets like multi-family properties or shopping centers. But given the changing landscape due to online shopping (aka, the Amazon effect), Covid economic shutdowns, etc., REITs should be having a hard time. But aren’t. How come?

Covid economic shutdowns definitely took its toll on retail shopping centers, as an example. And you can see the plunge in the NAREIT All equity index in early 2020. But the NAREIT All-equity index rallied … until The Federal Reserve started tightening their loose monetary policy. Note that as the implied O/N rate rose (orange line), REIT shares declined.

But as the WIRP implied O/N rate settled (pink box), the NAREIT index began to climb again. It is clear that REITs, like other equities, benefit from Fed easing. But how long will The Fed continue tightening?

As of this morning, The Federal Reserve is anticipated to raise their O/N rate to 3.738% by March 22, 2023. Then begin lowering their target rate … again.

Sadly, REITs, like other equity investments such as the S&P 500 index, are sensitive to The Fed’s easing/tightening. Look for REITs to struggle as The Fed tightens, then rally as The Fed eases again.

Here is the (in)famous Hindenburg Omen. Notice how the Hindenburg Omen alarm bells (yellow and red dots) have been silenced by The Fed. But as The Fed tightens (at least until March ’22), we may see the Hindenburg Omen flashing again. Call it the Powellburg Omen.

The NCREIF property index had a decline in the Covid-outbreak era (early 2020) and you can see a slight slowdown in the NCREIF index as The Fed started tightening to fight inflation.

MBA Mortgage Purchase Applications Down 2% WoW, Down 18% YoY (Refi Apps Down 5% WoW, Down 82% WoW)

Mortgage banking in today’s environment reminds me of downhill skiing. Lots of danger lurking ahead.

Mortgage applications decreased 2.3 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending August 12, 2022.

The seasonally adjusted Purchase Index decreased 1 percent from one week earlier. The unadjusted Purchase Index decreased 2 percent compared with the previous week and was 18 percent lower than the same week one year ago.

The Refinance Index decreased 5 percent from the previous week and was 82 percent lower than the same week one year ago.

Please bear in mind that we are in the “dog days” of mortgage applications. Purchase applications usually peak in April/May, then it is all down hill until the end of the year.

US Industrial Production Slows Slightly To 3.90% YoY As Capacity Utilization Rises To 80.27% In July (But M2 Money Growth Is Shrinking Awfully Fast And 10Y-2Y Yield Curve SCREAMS Impending Recession!)

Today’s US industrial production and capacity utilization numbers showed a nice “steady as she goes” slow decline from previous months, though still positive at 3.90% YoY.

And it is difficult to argue that the US is in a recession when capacity utilization is at 80.27%.

Notice that industrial production growth falls below 0% during a recession and capacity utilization slumps. We are NOT there … yet.

However, M2 Money growth is shrinking awfully fast.

While the US is technically in default (two consecutive quarters of negative GDP growth), it doesn’t FEEL like a recession with 3.90% YoY industrial production growth and capacity utilization above 80%. During the Covid recession in early 2020, industrial production growth YoY had declined to -17.65% and capacity utilization shrank to 64.53%.

Speaking of a recession SIGNAL, the 10Y-2Y Treasury yield curve is SCREAMING impending recession.

Meet Me At The Bottom? US Housing Starts (1-Unit) Tank -18.5% YoY In July (Down -10.11% MoM, Apartment Starts Down -10% MoM)

Meet Me At The Bottom … of the housing market?

As The Federal Reserve fights inflation (caused by too much Fed stimulus for too long) and Federal energy policies, we are seeing mortgage rates rising and the housing market decaying.

1-unit (single family detached) housing starts dropped -18.5% YoY in July as mortgage rates rose in 2022. Note the impact of the Covid stimulus (green line) and the resulting surge in housing starts in April 2021, but housing starts have decayed as M2 Money growth slows.

5+ unit (apartment) starts were down -10% MoM in July, but at least permits for apartments rose +2.51% MoM.

Well, we at least know why the NAHB Homebuilder index sucked wind so badly yesterday.

Perhaps the housing market needs a little spoonful of QE.

US Home-Sale Cancellations Soar in July (16% Of Properties That Went Into Contract) As Buyers Pull Back

The number of US home-purchase deals that fell through jumped in July as buyers continued to back away from the market amid rising mortgage rates.

Roughly 63,000 home-purchase agreements were cancelled in July, equal to about 16% of properties that went into contract that month, according to an analysis by Redfin Corp. That was up from 15% of deals that fell apart in June. A year earlier, when the housing market was running hot, it was about 12.5%.

The pandemic housing frenzy has cooled off amid the Federal Reserve’s efforts to control inflation by increasing interest rates. Mortgage costs have also jumped, sidelining many potential buyers who can no longer afford properties after a sudden run-up in borrowing costs.

Alarm! US Home Builder Index Falls Below 50 As Fed Tightens Monetary Noose

Alarm!

The National Association of Home Builders Market Index slipped into darkness … that is, dropped below 50 to 49 in August as The Federal Reserve continues to tighten its uber-loose monetary policy, resulting in rising mortgage rates.

Note the plunge in the NAHB market index as mortgage rates began rising.