Between The Federal Reserve’s unorthodox monetary policy and insane spending from Congress and Biden Administration, we are seeing a near 20% rise in home prices for August.
Please note that pre-COVID the Case-Shiller home price index (national) was growing at 4%. Thanks to Fed Stimulypto, home prices are roaring at near 20% YoY.
Phoenix AZ home prices are growing at a 33.31% pace. The slowest growing? The US “shoot ’em up” capital, Chicago, is growing at 12.72% and is the slowest growing Case-Shiller 20 city.
I feel like I am living in the movie “Cloverfield” with The Federal Reserve as the uncontrollable monster.
UPDATE: Columbus Ohio as of Q2 2021 is growing at a 13% YoY pace.
The Federal Reserve is helping to create inflation, particularly since their unorthodox surge in money supply around the Covid outbreak in early 2020. Home prices as of the latest Case-Shiller report are rising at nearly 20% year-over-year.
To add to the problem of The Fed’s overzealous money printing we have The Biden Administration (and puppy-torturer/killer Anthony Fauci) issuing Covid vaccine edicts that are wreaking havoc in labor markets further clogging the economic pipelines.
Between The Fed ZIRP policies and Biden/Fauci’s vax mandates, we are starting to see the rise (again) of the infamous MORTGAGE TILT EFFECT!
The Tilt Effect comes about as expected inflation gets priced into mortgage rates, the mortgage payment rises as the mortgage rate rises (of course), but the higher mortgage payment occurs with EXPECTED inflation in the future.
But not quite yet. Despite CPI inflation growing at 5.4% YoY, Freddie Mac’s 30-year mortgage survey rate is only 3.01% … for now.
As inflation continues to rise (thanks to ongoing Fed ZIRP policies and governments mandating Covid vaccine in order to keep your job, we should eventually see mortgage rates rise … leading to a return of THE TILT EFFECT. Which in turns make housing even MORE unaffordable.
We have tried numerous mortgage contracts in the past (mostly to offset Carter-era inflation) such as the PLAM (price-level adjusted mortgage) and the GPM (graduated payment mortgage). Now we have the PLUM (price level unadjusted mortgage) which is subject to the TILT EFFECT.
https://www.redfin.com/news/housing-market-update-pending-sales-up-47pct-from-2019/According to Redfin, forty-four percent more homes are pending sale than at this time in 2019, but only 3% more homes recently hit the market—down from 12% growth over 2019 just 7 weeks prior. As a result of the severe imbalance between the number of homes for sale and the number of buyers, the pace of the market is picking up at a time when it typically slows. A third of homes are finding buyers within a week of hitting the market, up from 30.8% at the end of the summer. This week, we’re comparing today’s market with the pre-pandemic fall market of 2019 to highlight how hot the market remains, even as most measures are settling into typical seasonal patterns.
“Comparing today’s sales and new listings numbers to the 2019 levels helps to reveal the stark shortage of supply we are facing,” said Redfin Deputy Chief Economist Taylor Marr. “The boost of housing supply that came on the market during the summer has already faded away, even as demand tapers off as we expected it to in the fall. Relative to the last ‘typical’ fall of 2019, demand remains steady and strong thanks to the increased urgency many buyers have as mortgage rates inch up. Rising rates also make buyers more price sensitive, so homes that are priced right are increasingly likely to receive offers right away.”
Shortage of supply, indeed. It is a mystery to me why the supply of homes for sale is not matching the demand.
But what happened after 2019? COVID and the entrance of massive Federal Reserve and Federal government stimulus. With limited supply hitting the market, home prices soared with the government stimulus.
We are likely to see rising prices until Federal Stimulypto stops or at least slows.
I remember my academic colleague at The Ohio State University (now at Notre Dame), Paul Schultz saying “Why do you find fixed-income and the yield curve interesting?” I have always found the yield curve to be interesting … at least until The Federal Reserve hammered down the short-end with it zero-interest rate policy (ZIRP) and tried manipulating the 10-year Treasury Note yield through Quantitative Easing (QE) meaning The Fed’s purchase of Treasuries and Agency Mortgage-backed Securities (MBS). No, I still think the manipulated yield curve is interesting.
Here is today’s Treasury actives curve (green) versus the yield curve at the peak of the previous housing bubble in 2005 yellow). That is a 300 basis point shift as the short-end. And a 243 basis point shift for the 10-year Treasury Note.
(Bloomberg) — The yield curve is one of the most-powerful forces in the observable financial universe. While much of the price action that we see on a day-to-day basis may be driven by some sort of dark energy, the curve provides a highly visible lodestone indicating the state of policy settings and the likely trajectory of the economy. That being said, the curve is often misunderstood — a bear flattening often produces plenty of hand-wringing, when it’s the bull steepening that you should really worry about. In fact, referring to “the curve” itself is something of a misnomer — while different iterations of the yield curve often travel in tandem, sometimes their paths diverge. That has been the case recently, though perhaps not for much longer. The recent rise in two-year yields looks more than justified, as various fixed income models demonstrate in a roundabout way.
For the past year and a half or so, most of the focus on the yield curve in this column has been on the 5s-30s iteration. The rationale for this has been relatively straightforward: With the Fed funds rate locked in near zero for the foreseeable future, the two-year note has been moribund. As such, 2s-10s has really just been another articulation of the 10-year yield. And much like recent price action vis-a-vis my 10-year model, the curve briefly traded where it “ought” to in March before once again becoming too flat in recent months.
At least 5s-30s has had the benefit of containing a useful forward-looking component on both legs of the spread. Yet even as I type that, it is interesting to note that 2s-10s and 5s-30s exhibited virtually identical price action at virtually identical levels earlier this year. While they remain positively correlated, of course, a clear wedge has emerged between the two curves as five-year yields have broken decisively through 1%, pricing greater conviction that a monetary tightening cycle will fully emerge over the next half-decade.
Yet I am left to wonder about the two-year note. The eurodollar strip is pricing that the bulk of monetary tightening will come by the end of 2023, a period that’s now largely captured by the shortest-maturity coupon security. To be sure, the appropriate level for 2s is a function not only of the ultimate magnitude of monetary tightening, but when it begins. After all, a 150 bp hike in Q4 of 2023 carries very different implications for the current two-year note than a 25 bp rate rise every three months from Q3 of next year onwards.
It occurred to me that I could back out a model for two-year yields by simply subtracting the output of my yield curve model from that of the 10-year model. I had no real idea of what to expect from this exercise, but even with the proviso that short-end yields rarely stray too far from the policy rate, I was pleasantly surprised at how close the fit is from this “derivative” model for the two-year.
The question then arose, naturally, of what actually went into the calculation of this “model.” After all, knowing the formulae of the two constituent models — for the 10-year and the yield curve– should allow for the distillation of a separate equation for the two-year note. Because that sort of thing is more fun than unpacking more boxes, that’s how I spent a few minutes on Wednesday night. The outcome isn’t necessarily an optimal model for the two-year, but more of an accidental one.
A bit of high school algebra
For what it’s worth, the resultant formula is 2y = 1.24 * FDTR + 1.3 * (ED2 – ED6) -0.015 PCE CYOY + 0.08 * USURTOT – 0.25 * (10y average of FDTR) + 0.12 * (10y average of USURTOT) – 1.27. I am pretty sure that one could get similar results with a simpler framework; the notion that a 2% rise in core inflation is worth just 3 bps on the two-year yield, all else being equal, leaves me simultaneously amused and bemused.
What does seem evident, however, is that henceforth there is going to be considerably more signal generated from two-year yields than has been the case in recent quarters. As such, 2s-10s are going to be worth following again, just as much if not more than 5s-30s. Both nominal yields and the curves are clearly constrained by the notion that all of this inflation kerfuffle really is transitory at its heart, and that, with r* remaining in the gutter, the long-run lid on nominal policy rates is going to be extraordinarily low.
That’s probably as good a null hypothesis as any, and possibly better than most. That being said, if we’re still having a lot of the same inflation conversations a year from now, we’re gonna need a long hard think about whether some of the post-GFC lessons need to be unlearned. In the meantime, at least fixed income is interesting again. I wonder where the yield curve and the model will eventually meet up to shake hands again… -Cameron Crise
The yield curve will become more interesting if Powell and The Gang take their foot off the monetary accelerator pedal.
It used to be that capacity utilization was a signal for The Federal Reserve to raise or lower their key target rate. When capacity utilization rose above 80%, the economy was deemed to getting “hot” and The Fed would raise rates. And vice-versa.
But then mass outsourcing occurred, primarily to China and southeast Asia. Since the 1970s, the general trend in US capacity utilization has been downward. But the last time the US saw capacity utilization of above 80% in Q4 2007. Capacity utilization almost hit 80% in August 2018
Oddly, The Fed started raising their target rate in 2015 under Fed Chair Janet Yellen AS CAPACITY UTILIZATION WAS FALLING. Capacity utilization hit almost 80% as The Fed put the brakes on rate hikes before Covid struck.
So, capacity utilization was obviously not on the mind of Yellen and the FOMC. Call it the new abnormal.
With capacity utilization falling, the path of Fed policy rate has shifted sharply over the past couple of weeks, to currently pricing first hike into the September 2022 FOMC meeting and second hike by February 2023 — there are now 100bp of rate hikes priced by the end of 2023, in line with the Fed’s dot-plot forecast.
Short-dated volatility on front-end U.S. rates — known as the upper left corner of the volatility surface — continues to catch a bid over the U.S. morning session, spurred by a sharp hawkish re-pricing of the Fed’s policy stance.
Has The Federal Reserve lost control of the economy? And inflation? The answer is likely yes. Why?
The Covid crisis has been played by the Federal government as an excuse for insane levels for spending coupled with massive monetary stimulus from The Federal Reserve.
As an example of The Fed losing control is US savings. The Fed’s model is to drive savers into consumption, therefore raising production and increasing GDP growth. But alas, The Fed can’t overcome the fear faced by consumers with Covid, Covid shutdowns, and rapidly rising prices.
(Bloomberg) — Consumers in Europe and the U.S. aren’t rushing to spend more than $2.7 trillion in savings socked away during the pandemic, dashing hopes for a consumption-fueled boost to economic growth on both sides of the Atlantic.
In the wake of lockdown easing during the northern hemisphere’s summer holiday season, excess savings in euro-area bank balances declined only marginally in August, and Italy still recorded an increase, according to calculations by Bloomberg Economics. In the U.S. there has also been no drawdown, the figures show.
The absence of a consumption surge that had been anticipated by some economists may speak against the prospect of a lasting inflation shock feared by central banks. While higher balances could help households cope with skyrocketing heating bills, tepid demand might temper businesses’ ability to push through permanent price increases.
In the USA, we see accumulated savings despite near-zero deposit rates at banks.
To be sure, The Fed reacted (or overreacted) to the Covid outbreak by increasing the money supply and their purchase of Treasuries and Agency MBS as the Federal government went on a wild spending spree.
But with trillions in Stimulypto Federal spending and Fed money printing, the bottlenecks in the economy (which apparently weren’t known before … ) have contributed to massive price increases that aren’t going away any time soon.
Notice how Fed monetary policies changed after the housing bubble burst and ensuring financial crisis/Great Recession. Before 2008, The Fed periodically whipsawed their Fed Funds target rate. But since late 2008, we have seen hardly any move from The Fed (except for 2017-2020 while Trump was President). For Obama,
Here is a look at The Fed’s record under Obama, Trump and Biden. The Fed raised their target rate only once under Obama until Trump was elected. Then The Fed raised rates 8 times. Then began lowering them again (5 times) leading to a big drop when Covid stuck. So for Trump, The Fed changed their target rate 13 times compared to 1 rate change under Obama and none under Biden.
And the above chart is only The Fed’s target rate. My point is that Yellen failing to raise rates under Obama has resulted in this over DC-Stimulypto we are seeing today.
Note the difference in Fed policies BEFORE the financial crisis. We need to return to a normal Fed policy rather than the hyper-inflationary zero-rate, QE policies since 2008.
M2 Money velocity (GDP/M2 Money) remains near an all-time low.
But given DC’s spending spree and all-time lows for M2 Money Velocity, The Fed is going to need to keep purchasing trillions in debt at low interest rates. The abnormal Obama years (Bernanke/Yellen) are the NEW abnormal. Or should I say abby normal policies?
Dr. Frederick FrankensteinAre you saying that I put an abnormal brain into a seven and a half foot long, fifty-four inch wide GORILLA?
So, yes, Bernanke and Yellen put into place abnormal policies that Powell is following into the world’s largest economy (or gorilla).
Only Igor and The Federal Reserve would pick such abnormal policies that ultimately lead to massive misallocations and inflation.
On a side note, do Biden and Transportation Secretary Pete Buttigieg really believe that they can fix the backed-up ports that are flooded with cargo thanks to Stimulypto? By Christmas??
Not with natural gas prices up 90% since January 4th!
The US Producer Price index (Final Demand) rose to a blistering rate of 8.6% YoY.
Will this translate to higher consumer prices? Of course it will.
When The Fed or the Biden Administration says that inflation is transitory and will be fixed once we unclog the shipping pipes, remember this warning from the UN that global warming will wipe out entire nations if not reversed by 2000. So, it is too late! I am buying a gas-guzzling Cadillac Escalade with a monster V-8 engine!! (Not really, I am more of a Ford kind of person).
At least the Atlanta Fed’s President Raphael Bostic finally admitted that inflation isn’t as transitory as he previously believed. The Fed dumped trillions in liquidity into an economic system that was unprepared for it, and he is surprised that prices are going nuts?
The consumer price index increased 0.4% from August, according to Labor Department data released Wednesday. Compared with a year ago, the CPI rose 5.4%, matching the largest annual gain since 2008. Excluding the volatile food and energy components, so-called core inflation rose 0.2% from the prior month.
Price Pressures Persist
U.S. headline inflation rose more than forecast in September.
Source: Bureau of Labor Statistics, Bloomberg survey
The median estimate in a Bloomberg survey of economists called for a 0.3% monthly gain in the overall measure and a 0.2% advance in the core rate.
A combination of unprecedented shipping challenges, materials shortages, high commodities prices and rising wages have sharply driven up costs for producers. Many have passed some portion of those costs along to consumers, leading to more persistent inflation than many economists — including those at the Federal Reserve — had originally anticipated.
The pickup in price growth seen last month reflected higher food and shelter costs. Meantime, measures of used cars and trucks, apparel and airfares cooled.
U.S. equity futures fluctuated and Treasury yields were little changed following the report.
Hotels, Rents
The CPI data reflects crosscurrents in the economy. Hotel fares fell, reflecting the impact of the delta variant on travel, but inflation is broadening out beyond categories associated with reopening.
Higher home prices are now starting to filter through in the data. Rent of primary residence jumped 0.5%, the most since 2001, while a measure of homeowners’ equivalent rent posted the biggest gain in five years. Shelter costs, which are seen as a more structural component of the CPI and make up about a third of the overall index, could prove a more durable tailwind to inflation.
Non-reopening components in CPI have larger contribution to September increase
The report will likely reinforce the Fed’s inclination to soon start tapering its asset purchases, especially as the supply-chain challenges plaguing businesses show little signs of abating. Minutes from last month’s Federal Open Market Committee meeting — out Wednesday afternoon — will provide further insight on policy makers’ views toward progress on employment and inflation goals for tapering.
A New York Fed survey out Tuesday showed U.S. consumers’ expectations for inflation continued to rise in September, with 1-year and 3-year expectations accelerating to record highs.
American consumers are also experiencing higher prices for new vehicles and household furnishings and supplies, which increased by a record 1.3%, the report showed. And looking ahead, elevated energy prices are set to take an additional bite out of workers’ paychecks.
While we know that apartment rents are growing at 15.5% YoY, the CPI for Owner’s Equivalent Rent only rose by 3.2% YoY.
Everyone seems worried about it. Bridgewater Associates co-Chief Investment Officer Greg Jensen says spiraling prices that choke off growth are a “real risk” that many portfolios are massively overexposed to. A “fairly strong consensus” of market professionals believe that some kind of stagflation is more likely than not, according to a Deutsche Bank AG survey. And while Goldman Sachs Group Inc. urged investors to buy the dip, strategists said “stagflation” was the most common topic in client conversations.
Wherever you fall on the debate, alarm bells are ringing as energy prices head toward multiyear highs and persistent shortages crimp supply chains worldwide. That’s fueling price pressures and pushing up bond yields just as economic growth is cooling and central banks such as the Federal Reserve weigh scaling down pandemic-era stimulus. And after a second straight month of disappointing U.S. jobs gains, the stakes are rising heading into this week’s inflation report.
“The reality that inflation is more persistent and sustainable than the ‘transitory’ camp thought, and that inflation and its causes are in turn slowing economy growth,” said Peter Boockvar, chief investment officer for Bleakley Advisory Group.
Energy Epicenter
Much of the stress is emanating from the energy market, where West Texas Intermediate crude oil broke above $82 per barrel for the first time since 2014 on Monday amid a power crisis from Europe to Asia. Prices of coal and natural gas have also jumped, with demand ahead of winter whittling worldwide stockpiles.
The commodity surge has thrust stagflation fears front-and-center in markets, given that higher energy prices have the potential to pinch consumers, according to Principal Global Investors. Gains in consumer spending are already expected to slow, leading Goldman economists to slash U.S. growth estimates over the weekend.
“The idea was already starting to take shape. The increase in commodity prices has just formalized those fears,” said Seema Shah, Principal’s chief global strategist. “While there have been complaints around higher food prices, higher lumber prices, higher clothes prices, it’s the increase in household bills that has really put fear into peoples’ minds, because it is so visible and rising gas prices are difficult to substitute away from for an average household.”
Murky Bond Picture
Sky-high commodity prices have filtered through to the Treasury market, where yields on benchmark 10-year notes broke above 1.6% for the first time since June last week. Driving the gain is an increase in breakeven inflation rates, while so-called real yields — often viewed as a proxy of growth expectations — have retreated so far this month.
“If we look at the composition within the TIPs market, we see an increase in breakevens to the detriment of real yields,” BMO strategist Ian Lyngen said on the firm’s “Macro Horizons” podcast. “We read this as the market’s focus on longer-term inflation has taken some of the optimism out of the growth profile going forward.”
Morgan Stanley strategist Andrew Sheets disagrees. Breakeven rates are still below their May peaks, while the cross-asset landscape is distinct from the stagflationary setup of the 1970s, he argued. Data compiled by Bloomberg shows gross domestic product is forecast by economists to rise 5.9% this year, 4.1% next year and 2.4% in 2023.
“Asset pricing also couldn’t be more different. Over the last century, the 1970s represented an all-time high for nominal interest rates and an all-time low for equity valuations,” Sheets wrote in a note Sunday. “Today we’re near a low in yields and a high in those valuations.”
Stocks Still Serene
Equity investors so far seem unperturbed. That’s the view of Matt Maley, chief market strategist for Miller Tabak + Co., given that the S&P 500 is just 3.9% lower from its all-time high. However, the mood music could change as the third-quarter reporting season kicks off and corporate executives sound off on supply chain issues and rising input costs, he said.
“The key should be this earnings season,” Maley said. “If a lot of companies start talking about margin pressures, the stock market will start pricing in stagflation rather quickly.”
So far, balance sheets have been resilient. Operating margins for the S&P 500 clocked in at 14.4% last quarter, a record high, with companies in many cases actually benefiting from the inflation uptick.
But should stagflation fears start to meaningfully rattle equity markets, shares of companies with higher pricing power — the ability to pass on costs — should profit, according to Goldman, after several weeks of underperformance.
“Stocks with strong pricing power have recently lagged but appear attractive if stagflationary concerns continue to build,” strategists led by David J. Kostin wrote. “If inflation remains high alongside a weakening economic growth outlook, firms with strong pricing power should be best positioned to maintain profit margins despite slowing revenue growth and rising input costs.”
Not to mention real-time GDP of 1.3%. And falling!
Of course, there will be cries in Washington DC to spend trillions … and trillions … and trillions.
Confounded Interest - Anthony B. Sanders 
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