The hawkish drumbeat from central bankers is raising fears of a downturn, with global bonds joining US peers in signaling a recession, as a gauge measuring the worldwide yield curve inverted for the first time in at least two decades.
The US Treasury 10Y-2Y yield curve, on the other hand, has been inverted for 107 straight months.
And in Europe, 10-year sovereign yields are dropping like a paralyzed falcon.
The world and US yield curves are pointing to trouble. And drums along the Potomac (DC) and East River (NYC).
Deutsche Bank, my former employer, said that The Fed will slash rates by 200 basis points by mid-2024 after staying hawkish in the short term.
Deutsche Bank increased its view on the terminal rate and now sees it hitting 5.1% in May.
The Federal Reserve will remain hawkish in the short term but will cut benchmark rates sharply after that, according to a Monday note from Deutsche Bank.
The central bank has hiked rates by 375 basis points so far this year, with another half-point increase widely expected next month. Even more tightening will come, with analysts at Deutsche Bank increasing their view on the terminal rate, which they now see hitting 5.1% in May.
“Risks remain skewed to the upside, and we caution that the transition to pausing and eventual cuts may not be entirely linear,” the note said. “If elevated inflation and labor market imbalances persist, or financial conditions fail to tighten, a higher terminal rate could be needed.”
Meanwhile, the economy will slow down amid the aggressive tightening, and Deutsche Bank sees an 80% probability of a recession in the next year.
Analysts anticipate a moderate recession beginning mid-2023, with real GDP falling about 1.25 percentage points over three quarters and the unemployment rate reaching a peak of 5.5%.
“With a sharp rise in the unemployment rate and inflation showing clearer signs of progress, the Fed should cut rates by 200bps by mid-2024 when it approaches a neutral level around 3%,” analysts said. “QT should cease when the Fed cuts rates, to ensure both tools are not working in competing directions. Balance sheet drawdown could be modified or halted earlier if reserves continue to fall faster than expected.”
The first rate cut will be 50 basis points in December 2023, followed by 150 basis points of cuts into 2024, the note said.
The last Fed Dots Plot shows the next leg of The Fed Rollercoaster.
In the short term, Fed Funds Futures are pointing at another 106 basis point increase by June 2023.
Due to high inflation, reduced consumer spending, higher rents and other economic pressures, U.S.-based small business owners’ rent problems just escalated to new heights nationally this month, based on Alignable’s November Rent Poll of 6,326 small business owners taken from 11/19/22 to 11/22/22.
Unfortunately, 41% of U.S.-based small business owners report that they could not pay their rent in full and on time in November, a new record for 2022. Making matters worse, this occurred during a quarter when more money should be coming in and rent delinquency rates should be decreasing. But so far this quarter, the opposite has been true.
Last month, rent delinquency rates increased seven percentage points from 30% in September to 37% in October. And now, in November, that rate is another four percentage points higher, reaching a new high across a variety of industries.
All told in Q4 so far, the rent delinquency rate continues to increase at a significant pace, up 11 percentage points from where it was just two months ago.
Well, this is not good.
And on the mortgage front, not all is quiet.
Commercial bank holding of Agency mortgage-backed securities (MBS) has collapsed with Fed tightening and mortgage rate increases.
Why is this terrifying? Blockchain technology is a fantastic innovation for processing payments given its ledger capabiliities. But that means that The Federal Reserve might be able to look at your complete history of expenditures. Or worse, perhaps even shut down your ability to make payments, This may lead to a China-style “social credit score” where the Fed and the Federal government punish people for driving “too much” increasing your carbon footprint or eating non-Federal government approved foods and lowering your social credit score.
Will there be safeguards? Allegedly, but remember the FBI hid Hunter Biden’s laptop prior to the Presidential election of late 2020. And HOW did our nation’s regulators completely drop the ball on Sam Bankman-Fried (or Spam Bankfraud)?
With an impending railroad strike that can torpedo the US economy (but if that is possible, why is the Biden Clan vacationing in Nantucket for Thanksgiving weekend when Joe should be talking with railroads and the unions to not let this happen?), let’s see what interest rates are telling us.
First, the US Treasury 10Y-2Y yield curve continues to descrend into the abyss (now at -80 basis points).
Second, the latest Fed Dot Plot (from September, new one will be issued during December) show that The Fed thinks that their target rate, while rising in 2023, will likely start falling again in 2024.
Third, since it is Thanksgiving Day, US bond markets are closed. But in Europe, the 10-year sovereign yields are falling, a sign that the ECB is reversing course by increasing monetary stimulus and/or a European are slow down.
Fourth, US mortgage rates have cooled since peaking (locally) at 7.35% on November 3, 2022 and now sit at 6.81%, a decline of 54 basis points. A clear sign of cooling.
Fifth, how about Fed Funds Futures data? It is pointing to a peak Fed Funds Target rate of 4.593% at the June FOMC meeting. Then a decline in rates to 2.301% by January 2024.
Now, go and enjoy your Thanksgiving dinner with friends and family (up 20% since last year), courtesy of Jerome Powell, Joe Biden, Nancy Pelosi and Chuck Schumer.
Again, why did people with professional investment managers not look under the hood, so to speak, when touting FTX and Sam Bankman-Fried’s scam? Or why didn’t Washington DC politicians like Maxine Water (D-CA) look into what was going on with their second largest donor after George Soros?
Former FTX Trading CEO Sam Bankman-Fried, NFL quarterback Tom Brady, supermodel Gisele Bundchen and comedian Larry David are among a celebrity-studded list of people accused of defrauding investors who lost money in the cryptocurrency exchange’s sudden collapse.
A proposed class-action filed in federal court in Florida late Tuesday names those four, along with other athletes and entertainers, as defendants in the case. All promoted FTX, one of the world’s largest crypto trading platform exchanges before it declared bankruptcy on November 11, with the company now under investigation for possible securities violations.
“It is still very difficult to comprehend that just one company defrauded more than $11 billion dollars from consumers, all from our backyard here in Miami,” Adam Moskowitz, the attorney leading the class action, said in an email.The suit seeks unspecified damages and is the first filed against Bankman-Fried and his companies since FTX filed for bankruptcy protection. BECAUSE MR MOSKOWITZ, NOBODY LOOKED UNDER THE HOOD.
Other current and former athletes named in the suit are NBA star Stephen Curry; NFL quarterback William Trevor Lawrence; baseball player Shohei Ohtani; tennis player Naomi Osaka; and broadcaster and former basketball player Shaquille O’Neal. Kevin O’Leary, a host of “Shark Tank,” is also named in the complaint, which was filed Nov. 15 in the Southern District of Florida.
The exchange shuffled customer money between affiliated entities, using new investor funds and loans to pay interest to the old ones in an attempt “to maintain the appearance of liquidity,” Moskowitz alleged, adding that FTX used public figures to give the operation an air of credibility.
Larry David, Trevor Lawrence and Naomi Osaka got stung by SBF like Tom Brady and Step Curry in a fraud scheme. True, celebrities should have excercized caution with dealing with SBF (I would love to see SBF’s investor presentation, but there may not have been one).
Or did SBF show this Bitcoin chart with Fed tightening? Or did ARK’s Cathy Wood look at this chart?/
Despite the recent FTX-fueled crypto market collapse, Cathie Wood, founder and CEO of Ark Invest Management, stood by her prediction that Bitcoin would reach $1 million by 2030.
$16,500 to $1,000.,000 by 2030? In 8 years??
“FTX were geniuses at public relations and marketing, and knew that such a massive Ponzi scheme — larger than the Madoff scheme — could only be successful with the help and promotion of the most famous, respected, and beloved celebrities and influencers in the world,” he said.
FTX did not reply to a request for comment.
FTX’s creditors will be first in line to get whatever assets a bankruptcy judge deems appropriate to distribute as the company seeks to restructure as part of its Chapter 11 filing. Investors in the Bahamas-based company, which had raised some $2 billion in venture capital, come next.
That means FTX account holders, who used the platform to trade bitcoin, ethereum and other digital currencies, may have to wait years to get their money back – if they ever do.
And so it goes. I doubt that Maxine Waters House Financial Services Committee will do anything constructive. The hearing will be a battle cry for more regulation and perhaps even paint SBF as victim of volatility.
The really sad part of this story is that SBF is still trying to raise money to do it all over again. But there are always investors who want to buy a piece of the blue sky, or a bridge in Brooklyn.
The global economic slowdown has one nice unintended consequence: as the 10-year Treasury yield softens, mortgage rates decline.
US mortgage rates retreated sharply for a second week, hitting a two-month low and providing a bit of traction for the beleaguered housing market.
The contract rate on a 30-year fixed mortgage decreased 23 basis points to 6.67% in the week ended Nov. 18, according to Mortgage Bankers Association data released Wednesday.
Rates have plunged nearly a half percentage point in the past two weeks, the most since 2008, as recession concerns mount, inflation shows signs of cooling and a number of Federal Reserve officials say it may soon be appropriate to slow the pace of monetary tightening.
The slide in borrowing costs helped stir demand as the group’s index of applications to buy a home climbed 2.8%. That marked the third-straight increase since the gauge stumbled to the weakest level since 2015.
The pickup in demand allowed the overall measure of mortgage applications, which includes refinancing, to rise for a second week, but it still remains depressed. The index of refinancing activity edged up from a 22-year low.
The Refinance Index increased 2 percent from the previous week and was 86 percent lower than the same week one year ago.The unadjusted Purchase Index increased 9 percent compared with the previous week and was 41 percent lower than the same week one year ago.
But you need an electron microscope to see the increase in both purchase and refi apps.
One indicator of a slowing global economy is the decline of FANG (Facebook, Amazon, Netflix, Google) with declining liquidity.
The US economy is in “The Deep.” Deep into yield curve inversion, that is.
The US Treasury 10Y-2Y yield curve swam deeper into inversion at -75 basis points. The deepest inversion since just before The Great Recession and housing market crash.
During the Covid crisis of 2020 (red box). consumer credit declined and households were saving. But following the end of US Covid economic shutdowns, we saw inflation soaring to 40-year highs as Biden declared war on fossil fuels and a Pelsoi-led Congress went on an epic spending spree. But with soaring inflation, came a decline in personal savings and soaring consumer credit outstanding in an attempt to cope with Bidenflation.
Meanwhile, in the crypto universe, CNBC’s Jim Cramer and ARK’s Cathie Wood are going big for cryptos. With Wood buying Bitcoin and Cramer touting Coinbase.
Hmmm.
But at least Litecoin and the others are up today. Likely because Cramer and Wood are touting cryptos with “buy the dip!” strategy.
And on the Sam Bankman-Fried fiasco front, I am watching the deflection of wrongdoing from SBF to his girlfriend and now the co-CEO of Alameda Research, Sam Trabucco.
Bloomberg: He has a degree from MIT and cut his teeth as a trader at Susquehanna International Group. Yet the former co-head of Alameda Research made it clear that poker and black-jack tables were where he honed the gambler’s instincts he applied to cryptocurrency trading.
“I may or may not be banned from 3 casinos for this,” Sam Trabucco once tweeted about counting cards at black jack tables.
As Americans prepare to hit the road for Thanksgiving, average gas prices will be at their highest seasonal level ever, according to GasBuddy.
GasBuddy says the national average is projected to stand at $3.68 on Thanksgiving Day. This is nearly 30¢ higher than last year, and over 20¢ higher than the previous record of $3.44 set in 2012.
And diesel prices, the life blood of the shipping industry, relative to gasoline prices, are soaring. Highest since 2004.
As we approach Thanksgiving Day, it is important to be thankful … that things aren’t even worse under Billions Biden. US CRB foodstuffs are up 49% under Biden while diesel fuel is up 102%.
Now, gasoline prices fell recently as WTI crude prices slipped on slowing demand. And as stimulus wears out.
And its now only food.
Have a holly jolly Thanksgiving!!
My Thanksgiving dinner, because of the cost, will be a Jersey Mike’s turkey and provolone sub (mini). Or this canned dinner.
Confounded Interest - Anthony B. Sanders 
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