Confounded Interest – Anthony B. Sanders
Financial Markets And Real Estate
The US Empire State Manufacturing Survey General Business Conditions, that is. It just crashed and burned (-31.3) in August, the lowest reading since The Great Covid Shutdown and before that The Great Recession.
The inverted US Treasury yield curve (10Y-2Y) is beginning to make sense.
The 2020 Covid outbreak led to a massive (and generally awful) reaction. There were economic shutdowns that caused extensive damage (particularly to small firms), but it was the massive overreaction by The Federal government in terms of Covid relief and The Federal Reserve’s expansion of the money supply that caused considerable damage.
One truly horrific chart is that of M1 Money and M1 Money Velocity (M1/GDP). M1 Money surged with Covid driving M1 Money Velocity down to levels never seem before.
The broader measure of money, M2, isn’t as dramatic, but we also see that M2 Money VELOCITY has plunged to levels never seen before.
What does low money velocity indicate? Simply put, The Fed is printing trillions of dollars, but GDP isn’t moving much. But that won’t stop Congress from spending (and using The Fed to buy its debt).
So, here we sit. This morning, the US Treasury yield curve (10Y-2Y) remains inverted. This AM, the curve inverted another -.591 basis points to -42.725, a sign of impending recession.
Yes, we are living through Jay Powell’s famous chili episode where money velocity is near historic lows and we have an inverted yield curve.
BTW, congratulations to Will Zalatoris (aka, Happy Gilmore’s caddy) for his first PGA Tour victory at the FedEx St. Jude Championship!
Only in today’s Kafkaesque (having a nightmarishly complex, bizarre, or illogical quality) Federal government would Biden, Schumer and Pelosi cheer about passing a bill hilariously called “The Inflation Reduction Act” that not only will NOT reduce inflation, but also raises taxes on most Americans.
In terms of the inflation tax on the middle class and low-wage workers, we see that FOOD inflation was 10.91% YoY in July and the BLS’s low-ball estimate of “rent” at 5.76% YoY. Odd, since home price growth is 19.75% YoY.
The Fed’s monstrous balance sheet is still near $9 TRILLION (over stimulus) and The Fed’s Overnight Repo Facility remains near $2 TRILLION.
Industrial electricity costs (to be passed on to consumers in the form of higher prices) is up 24.4% YoY. Residential electricity cost is up “only” 7.4% YoY. (Source: Mish GEA)
I loved the Arizona Senator Kyrsten Sinema photo-op at the drought-plagued Lake Mead, where she bragged about $4 billion for drought mitigation. I really do hope that it works, but I fear that it will like Obama’s spending on green energy debacle like Solyndra. That is, billions spent and nothing improves.
Here is a painting of me standing at the Social Security office.
Politicians like to (falsely) take credit for things, such as Biden bragging about gasoline prices declining. Bear in mind that regular gasoline prices were $2.88 when Biden was inaugurated as President, rose to over $5 a gallon in June and now have declined to $3.98 for which Biden is taking credit. So, regular gasoline prices are still up 34% under Biden. Ouch!
But other rates and prices are dropping too. Bankrate’s 30yr mortgage rate started at , broke the 6% plane on June 21, 2022 only to drop to 5.53% on Friday. CRB’s foodstuffs price index started at 370.58 on Biden’s inauguration as President, rose to 606.71 on May 17, 2022 then retreated to 561.32 on Friday, August 13th. Even headline inflation (CPI YoY) is cooling … slightly.
You can see the recent declines in mortgage rates, gasoline and food prices (pink box) that corresponds to a shrinking of the US M2 Money stock growth. M2 Money is still growing at torrid pace (8.5% YoY) almost back to pre-Covid stimulypto levels of 6.8% YoY. So shrinking M2 Money growth is helping reduce mortgage rates and inflation, food/gasoline prices.
Instead of trying to remove Fed stimulus even more, Biden and Congress passed the “Inflation Reduction Act” which will barely scratch inflation and raises taxes across the board (despite Biden’s promise that no one making under $400,000 will see a cent of increase taxes). And Biden’s preposterous promise ignores the inflation tax which has been severe and still growing at 8.5% YoY. Not 0% as Biden and Harris claimed.
But wait for winter as food, gasoline and heating prices start to soar again.
My favorite dim-witted explanation of inflation belongs to Democrat Representative Pramila Jayapal who recently claimed that “inflation is a theoretical word that economists use.” Like the brilliant Milton Friedman???
The University of Michigan consumer survey is out for August and the results show improvement … from disastrous to just plain horrible.
The University of Michigan Buying Conditions for Houses remained depressed and didn’t improve.
Bear in mind that today’s consumer sentiment reading in the lowest since 1970, lower than during any recession.
The Conference Board’s leading economic indicator plunged in June despite nearly $8 trillion in Fed stimulus still outstanding.
The good news? President Biden and his son Hunter boarded Air Force One for a carbon-spewing plane trip to South Carolina for a one-week vacation. At least he can do less damage to the US while on vacation.
Mike Lea and I wrote a paper entitled “Do We Need The 30yr FRM (Fixed-rate Mortgage)”. We argue that millions of Americans would benefit from an adjustable-rate mortgage like the 5/1 ARM for a host of reasons.
One good reason for a 5/1 ARM is the fact that it 134 basis points less expensive than the 30yr fixed-rate mortgage.
Mortgage rates have risen dramatically with the expectation of Fed rate tightening (green line).
Yes, there is a “fear factor” built in the 30r FRM (“OMG! The mortgage market will collapse without the 30yr FRM!!!!) Hogwash. Or malarkey, as Joe Biden likes to say. The mortgage market actually see the US join the rest of the world in having adjustable-rate mortgage being the predominant mortgage product.
US ARM share peaked at 10.8% in June 2022 before retreating to 7.4% as the 30yr mortgage rate retreated.
The 5/1 ARM product can help the affordable housing crisis in the US if we just let markets work. But in Washington DC, the term “free markets” is like the old Dobie Gillis character Maynard G. Krebs and the word “Work.”
I scratch my head when I here Fed talking heads discuss how to get inflation back down to 2%.
Of course, the easiest way is to 1) remove Biden’s anti-fossil fuel executive orders that limit the supply of crude oil and natural gas, but that isn’t going to happen. 2) stop Federal spending, but Manchin and Sienma enabled Biden/Schumer/Pelosi’s “drunken sailors in port” spending sprees, so Federal spending is likely to not be stopped. 3) raise taxes (Larry Summer’s suggestion) to cool-off demand. And give MORE money our Federal government? No thanks. 4) raise The Fed target rate to 22%.
Yes, the Taylor Rule suggests a target rate of … 22% to tame the savage inflation beast, based on 8.50% CPI YoY.
The problem, of course, is that 22% is higher than the previous high of 20% under Fed Chair Paul Volcker in 1981. And Volcker didn’t have the Bernanke Bonanza (aka, quantitative easing). Look at the monetary stimulypto, since 1981 and particularly since Covid.
Will The Fed raise rates to 22%? Well, Fed Futures is pointing at the target rate hitting 3.6% by March 2023, then falling again.
Its mission impossible to get to 22%, particularly since Biden/Schumer/Pelosi won’t cool it on Federal spending.
Somehow I doubt if Biden, Harris and Jean-Pierre (Biden’s Press Secretary) will go on the talk show circuit talking about the Producer Price Index Final Demand at 9.8% YoY, meaning that inflation is still raging.
But the curious thing about the PPI Final Demand numbers. While lower than June’s reading of 11.3% YoY, it also coincides with declining gasoline prices and declining growth in M2 Money stock. Which is still growing at 5.9% YoY. The probability of recession is rising (even though technically the US is in recession after 2 consecutive quarters of negative GDP growth.
Here is the more striking chart.
So is the US “improving” on prices because of brilliant Biden strategies (I just laughed at my own “bon mot”)? Or are prices (PPI, gasoline) slowing because of declining demand as the US slips into recession?
Lawrence Summers was once again in the news saying that the way to cool inflation is to raises taxes (and cool demand). Only a true Statist would say something like that. Larry, how about Biden and Congress stop spending so much money that is helping to fuel inflation?
One Washington DC types would rest their hopes on cooling inflation by having the US slip into recession AND raises taxes.
Biden looking for a way out.
Agency mortgage-backed securities (MBS) prices started to degrade as The Federal Reserve started to try to combat inflation caused by Biden’s energy policies and rampant Federal spending. That is, under June when the implied Fed O/N rate (red line) cooled and the 30-year mortgage rate (blue line) has come down a little.
In terms of duration risk, the FNCL 3% MBS duration has risen with anticipated Fed tightening.
So, further Fed tightening will result in greater MBS losses AND rising duration risk.
Fannie Mae’s Home Purchase Sentiment index has declined from 81.7 shortly after Biden was sworn-in as President to a meager 62.8 in July 2022.
Of course, mortgage rates have risen quite rapidly and home price growth remains elevated as The Fed still has not trimmed its balance sheet as promised.
Confounded Interest - Anthony B. Sanders 
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