Zoltan! US Dollar Purchasing Power For Consumers Sinking Faster Than The Titanic As Zoltan Pozsar Suggests Bretton Woods III With Money Backed By Commodities

(Forbes) – Credit Suisse’s Zoltan Pozsar argues Bretton Woods II crumbled when the G7 countries seized Russia’s foreign exchange reserves. Keeping money inside financial institutions like the IMF was considered risk free. That is clearly no longer the case. Similarly, Bretton Woods I collapsed when Nixon took the US of the gold standard back in 1971 when dollars were convertible to gold at a fixed exchange rate of $35 an ounce. This led to Bretton Woods II, backed by “inside money” or the dollar, which itself is not linked to gold or any other commodity.

Now the basis of this system, which has operated for the past 50 years, is being called into question. The sanctions on Russia, which showed that reserves accumulated by central banks can simply be taken away, raised the question of “what is money?”

That question may explain why Pozsar believes a huge shift in the way the world organizes money and reserves is now underway, “creating a “Bretton Woods III backed by outside money,” (gold and other commodities). Including crude oil and bitcoin.

At least crude oil has fallen below $100 as Biden merrily drains the Strategic Petroleum Reserve (SPR). Gasoline prices have fallen slightly as this is being done before the midterm elections with political, not economic, intent. Once the midterms pass, will Biden continue draining the SPR until there is little left forcing the US to convert to “green energy”?

The purchasing power of the consumer dollar took a plunge under Biden as other commodities such as Bitcoin and crude oil soared.

An alternative asset, gold, have generally risen under Biden’s Reign of Error, but particularly after the Russian invasion of Ukraine.

Politicians love to spend money, often recklessly. And with The Fed monetizing Federal government expenditures, the purchasing power of the US dollar for consumers is sinking faster than The Titanic.

Now A Warning? Dallas Fed Warns That A Housing Bubble Is Brewing (Too Late, Its Already Here!)

This clip from the Bruce Willis and Meryl Streep film “Death Becomes Her” perfectly represents the predicament surrounding The Federal Reserve’s loose monetary policies and housing prices: “Now a warning” after Meryl Streep ingests The Fed’s magic monetary elixir.

The Dallas Federal Reserve issued a warning recently that a housing bubble is brewing … after the economy drank its magic monetary elixir. We can see the housing bubble clearly (defined as the spread between REAL home price growth and REAL average hourly earnings). Notice that the current housing bubble looks similar to the infamous 2005 housing bubble. And the US is seeing several months of the spread between REAL home price growth and REAL hourly earnings be even higher than the peak of the 2005 bubble.

The Federal Reserve is starting to slow down its asset purchases, so we should see a cooling of the housing bubble. Unless, of course, The Fed changes its tune from quantitative tightening (QT) back to quantitative easing (QE) … again.

The Dallas Fed has a measure of housing “exuberance” which shows a bubble forming, but not there yet. I like the spread between real house price growth and real hourly earnings better.

The Dallas Fed also has a price-to-rent chart also showing growing exuberance.

But if we look at the Case-Shiller National HPI YoY to US CPI Urban Consumers Owners Equivalent Rent of Residences YoY we see that the US is currently experiencing a price-to-rent ratio higher than the peak of the 2005 house price bubble. What is the culprit? The vast expansion of monetary and fiscal Stimuylpto surrounding the Covid outbreak in early 2020.

So, the Dallas Fed thinks that is a house price bubble is brewing, but it has actually been in the works since QE3 in 2013 (bubble 2), but really took off with The Fed’s stimulypto and Federal COVID spending surrounding the COVID outbreak in early 2020.

Here is a rare video of Fed Chair Jerome Powell at the recent Fed Open Market Committee meeting deciding on removing the toxic monetary elixir from the system.

Here is a video of Jordan Spieth at the Valero Open engaging in putting errors like The Fed’s policy errors.

Wasting Away In Biden/Pelosiville! US Treasury 10Y-2Y Yield Curve INVERTS As Real Average Hourly Earnings Decline -2.678% YoY (30Y Mortgage Rate Rises To 4.90%)

Wasting away again in Biden/Pelosiville, looking for my lost inexpensive gasoline and food. Some people say that Putin is to blame, but we know its Biden/Pelosi’s fault.

The US Treasury 10Y-2Y yield curve just inverted, generally a precursor to a recession. Called it, nothing but net!

Meanwhile, today’s jobs report shows that Bidenflation is crushing America’s wage growth. While average hourly earnings grew to 5.6% YoY, we are still seeing inflation growing at 7.9% YoY meaning that inflation is reeling hurting the middle class and lower-income households.

The good news is that the U-3 unemployment rate fell to 3.6%, almost back to the Trump-era unemployment rate of 3.5% prior to the Covid outbreak. And the unemployment rate remains below the CBO’s short-term natural rate of unemployment indicating that the labor market is OVERHEATED.

Today’s jobs report was pretty good, as we would expect from a recovery caused by governments shutting down economies, then reopening them. 431k jobs were added, but less than last month’s jobs added of 678k and less than the forecast 490k.

The number of people NOT in the labor force fell slightly, but it still around 100 million. The number of people holding multiple jobs to overcome Bidenflation rose to 7.5 million.

On the mortgage front, Bankrate’s 30-year mortgage rate rose to 4.90% as the 2-year Treasury rate (yellow) rises and the number of expected Fed rate hikes over the coming year is 9.26%.

Run, Runaway! February PCE Core Deflator YoY Rises To 5.4%, Highest Since 1983, As Fed Keeps Foot On Monetary Gas Pedal (Spread Between PCE Core Deflator And Fed Funds Target Rate Highest Since 1970)

Run, runaway!

February’s Core Personal Consumption Expenditures (PCE) price YoY grew to 5.4%, the highest since 1983. The spread between the PCE Core Deflator and The Fed Funds Target Rate (upper bound)

In terms of the spread, it is the highest since the 1970s.

The Taylor Rule (which Jerome Powell probably thinks is the New Jersey breakfast meat “Taylor Ham”) indicates that The Fed’s target rate should be 12.21%. This is using the Rudebusch specification of the Taylor Rule.

Now that the Biden Administration is going gangbusters on building electric cars, lithium prices are going through the roof.

The Federal Reserve’s new theme song is “Come Feel The Inflation!”

Noddy Powell?

Alarm! Massive Divergence Between US Treasury Yield Curve And Near-term Forward Spread (Biden Considers Releasing HUGE Oil Release To Control Inflation)

Alarm!

There is a massive divergence between the collapsing US Treasury 10Y-2Y yield curve and the near-term forward spread. The near-term forward spread is the difference between the implied
interest rate expected on a three-month Treasury bill six quarters ahead and the current yield on a three-month Treasury bill.

As we already know, the 10Y-5Y yield curve has inverted signaling a coming recession.

This divergence between the Treasury yield curves and the near-term forward spread is occurring as US inflation hits the highest rate in 40 years.

Now President Biden is considering “Releasing the Kraken!” That is, releasing a huge amount of crude oil from the nations Strategic Petroleum Reserve (SPR) in order to combat inflation. If the purpose of Biden’s executive orders were to limit fossil fuel production and consumption, why doesn’t Biden simply rescind his executive orders and allow the construction of the Keystone Pipeline?

The Powellenburg Omen! Will Powell Pop The Asset Bubble Created By The Fed’s Repeated Policy Errors? (Blackrock Rises, NVR Homes Gets Crushed)

As of today, Jerome “Nero” Powell and The Gang at The Federal Reserve have not trimmed the Fed’s balance sheet and have only raised their target rate once under President Biden.

Here is the Hindenburg Omen, named for the catastrophic explosion on May 6, 1937 at Lakehurst Naval Air Station in New Jersey. The Hindenburg Omen was flashing red before the stock market correction of late 2007-2009. But, the Hindenburg Omen has flashed red repeatedly since the financial crisis, yet the S&P 500 index has kept rising. The reason? Repeated policy errors by The Fed leaving monetary stimulus in place for too long leading to a bubble forming in the stock market.

The Shiller CAPE (Cyclically-adjust price-earnings) ratio is at the second highest level since the 1800s. The highest point was the infamous Dot.com bubble and bust in 2000/2001.

Since The Fed continues to say “We have a plan!” to slow/shrink The Fed’s balance sheet and raise their target rate … it has not done anything yet (other than a 25 basis point bump at the March meeting).

I am not advocating technical analysis for stocks, but the Bollinger Band analysis for the S&P500 index is showing the S&P 500 index near the top band indicating that a decline in likely.

Today, the US equity market in essentially flat given the massive uncertainty about the Russia/Ukraine situation and whether the US economy is slipping into darkness. But this morning, Federal government blessed companies (healthcare, solar energy and Blackrock) are doing quite well, while homebuider NVR is taking it on the chin thanks to hints that The Fed will raising rates.

Now, NVR (Northern Virginia Homes, Ryan Homes) had explosive earnings growth in their February 1, 2022 report.

But the market is pricing in the crushing Fed rate hikes that are expected.

So, will Foul Powell pull a Volcker and raise rates and crush the economy (and stocks)? Or will Foul Powell And The Fed gang let inflation burn out of control, but preserve the massive asset bubbles?

Mortgage Refi Applications Drop 15% Since Last Week As Fed Rate Hikes Cool Market (But MBA Purchase Applications Rose 1% WoW)

Anticipation about Federal Reserve rate hikes over the next 12 months are seeding mortgage rates soaring and mortgage refinancing applications plummeting.

Mortgage applications decreased 6.8 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending March 25, 2022.

The Refinance Index decreased 15 percent from the previous week and was 60 percent lower than the same week one year ago.

The seasonally adjusted Purchase Index increased 1 percent from one week earlier. The unadjusted Purchase Index increased 1 percent compared with the previous week and was 10 percent lower than the same week one year ago.

Yes, I am surprised at the rise in mortgage purchase applications with rising mortgage rates, unless, of course, people are trying to buy ahead of Fed rate increases.

While The Federal Reserve led to a scorcher in asset prices since 2008, rapid rate increases and quantitative tightening (QT) will have a chilling effect on the housing market.

Derek Zoolander? Inflation Roaring, Fed’s Harker Worries About Inflation … In Private Golf Club Membership Fees (As Q1 Real GDP Sinks To Less Than 1%)

Inflation is roaring along caused by government spending and energy policies, hurting the American middle class and lower-income groups.

Now we see the US Treasury 10Y-2Y flattening towards zero and the10Y-5Y curve slipping deeper into inversion as Q1 GDP growth slows to 0.867.

The US yield and dollar swap curves remain steeply upward sloping, but with the dollar swap curve around 120 basis points high than the Treasury yield at the 6-month tenor.

Various Federal Reserve talking heads are sounding like Derek Zoolander.

“With inflation at a four-decade high, Fed Chair Jerome Powell has set the central bank on course for a series of interest-rate increases this year. He has stressed the toll that price increases are taking on lower-income Americans.” (No duh, Jay!)

“We understand that high inflation imposes significant hardship, especially on those least able to meet the higher costs of essentials like food, housing, and transportation,” Powell said after the Fed’s interest-rate decision this month (of only a 25 basis point increase).

Philadelphia Fed’s Patrick Harker, in a speech Tuesday, said “One of our contacts, for instance, mentioned whopping membership fee increases at his golf club, suggesting this summer may be a good time to play at your local muni instead,” said Harker, a former University of Delaware president and dean of the Wharton School of the University of Pennsylvania.

Perhaps Harker wins the Derek Zoolander award for his remarks on how the rich are impacted by inflation too.

Fire! Case-Shiller National Home Price Growth Accelerates To 19.17% YoY In Spite Of Mortgage Rate Increases (Phoenix, Miami And Tampa Biggest Gainers)

As The Federal Reserves twiddles it thumbs, US housing continues to burn … hot!

The Case-Shiller National home price index (HPI) grew at a 19.17% YoY rate in January despite mortgage rate increases.

Where? Phoenix, Tampa and Miami lead the way with Dallas, San Diego and Las Vegas close behind.

And Fed Chair Jerome “Nero” Powell continues to let housing prices burn red-hot!

By the time I get to Phoenix … home prices will completely unaffordable.

Fear! Adjustable-rate 30Y Mortgages (ARMs) Are 130 Basis Points Lower Than 30Y Fixed-rate Mortgages, But ARMs Are Only 7.9% Of Mortgage Originations

Michael Lea and I wrote a paper several years ago arguing that most borrowers would be better-off with an adjustable-rate mortgage than a fixed-rate mortgage. The US is one of the few countries in the world where the 30-year fixed-rate mortgage is dominant. Why is this the case? FEAR of rising mortgage payments with adjustable-rate mortgages (ARMs) while the fixed-rate mortgage (FRMs) have constant payments over the 30-year term.

The reason why the fear of ARMs is unwarranted is that ARMs generally have CAPS on rate increases, either in a given period or over the life of the loan. Of course, READ the loan terms to ensure that the ARMs has restrictive caps on rate increases.

Currently, the 5/1 ARM is at 3.26% while the 30-year FRM is at 4.56%, a spread of 130 basis points.

Mortgage rates of all flavors are rising rapidly with the expectation of Federal Reserve Quantitative Tightening (QT). There are several headwinds that could counter The Fed’s QT efforts such as low GDP growth (Atlanta Fed’s GDPNow real-time GDP tracker is at 0.9% for Q1), the Russia-Ukraine invasion, approaching midterm elections, etc. But as of today, The Fed seems on a collision course with rising mortgage rates.

With the increasing likelihood of Fed rate hikes over the next year, we are seeing an increase in US ARM loan share from 4% to 7.9%, almost a doubling of ARM share. But FRMs are still over 90% of all mortgage originations.

Lending institutions would prefer consumers to use ARMs rather than FRMs since ARMs allow for the transfer on long-term interest rate risk to the borrower, while the FRM sticks the lender with long-term interest rate risk. Hence, we have Fannie Mae and Freddie Mac, the Government Sponsored Enterprises (GSEs) that allow lenders to originate FRMs and sell them to F&F. We are the only country with twin GSEs.

So, while most consumers would be better-off with an adjustable-rate mortgage, the structure of the mortgage market (particularly after the financial crisis) encourages lenders to originate FRMs and sell them to Fannie Mae and Freddie Mac.

But FEAR drives many US mortgage borrowers into the FRM space rather than getting an ARM with a lower interest rate, even if ARM caps would prevent the mortgage rate from rising more than 100 basis points over the life of the loan.