Fed Is Losing Billions, Wiping Out Profits That Funded Spending (Agency MBS Prices Falling While Duration And Convexity Soar)

As I told my Chicago, Ohio State and George Mason University finance and real estate students, repeatedly, “Watch out when The Fed begins to tighten monetary policy. It will be a bloodbath for taxpayers.”

Well, here we are. I argue that Biden’ green energy knucklehead policies are driving inflation, or it could be the insane level of Federal spending that Obama economist Larry Summers warned us about, or rising wages (in part due to Federal spending) is to thank for inflation. Or all of the above.

Regardless of the cause, the bond market is enduring its worst selloff in a generation, triggered by high inflation and the aggressive interest-rate hikes that central banks are implementing. Falling bond prices, in turn, mean paper losses on the massive holdings that the Fed and others accumulated during their rescue efforts in recent years.

Rate hikes also involve central banks paying out more interest on the reserves that commercial banks park with them. That’s tipped the Fed into operating losses, creating a hole that may ultimately require the Treasury Department to fill via debt sales. The UK Treasury is already preparing to make up a loss at the Bank of England.

The Reserve balance has crashed into negative territory.

And Fed losses are skyrocketing.

Agency MBS prices are up today, but are down since August 2022. But risk measures duration and convexity are zooming upwards.

Deceleration Nation! US Home Price Growth Slows Most On Record In August As Fed Hits Brakes, But Still Growing At 12.99% YoY (US Treasury 10-yr Yield DOWN -17 BPS Today)

Alarm! US home prices are decelerating as inflation rages and The Fed tightens.

Home price growth in the US slowed the most on record as a doubling of borrowing costs (thanks to the US Federal Reserve) has sapped demand.

A national measure of prices increased 13% in August from a year earlier, but is down from 20.79% in March, the S&P CoreLogic Case-Shiller index showed Tuesday. That’s the biggest deceleration in the index’s history.

The housing market has started to slump as the Federal Reserve hikes interest rates to curb the hottest inflation in decades. Even with the deceleration, prices remain high compared to last year. Coupled with mortgage rates that are edging closer to 7%, many would-be buyers have been shut out, while some sellers have retreated.

While 13% growth sounds good, it is not good for renters looking to buy a home.

According to S&P/CoreLogic/Case-Shiller, Southern (red) cities Atlanta, Charlotte, Dallas, Miami and Tampa all still grew at over 20% YoY. Other cities like blue cities Detroit, Minneapolis, Portland, San Francisco, Seattle and Washington DC are grew at UNDER 10% YoY.

It looks like some people have taken three steps and left blue states for red states.

On related news, I always said in my classes that +/- 10 basis point in the US Treasury yield is a big deal. This morning, the US Treasury 10-year yield is DOWN -16.1 bps. In fact, the 10-year yields are down across the board globally.

Its that smell of impending recession.

Well, they certainly aren’t calling Biden “The Breeze.” Except for the recession that is going to clobber the US.

Blackhawks! Where Interest Rates Are Headed In One Chart (Fed Blackhawks Versus Doves)

The Federal Reserve’s DOTS PLOT shows where each Fed official’s projection for the central bank’s key short-term interest rate is headed. As of the September 21, 2022 Fed Open Market Committee (FOMC) meeting, the prediction of future Fed target rates is decidedly DOWNWARD SLOPING.

The Fed hawks, those that want to tighten monetary policy, are Bowman, Waller, Kashkari, Mester and George. The Fed doves (or those who are neutral) are Biden recent appointees Barr, Cook, Jefferson, Logan, Collins. Note that Brainard and Bostic are the only technical doves.

I call the hawks at The Fed “The Blackhawks” since their mission of fighting inflation may lead to a recession. And Bowman, Mester and George are Lady Blackhawks.

On a different note, I am always amazed at First Lady Jill Biden’s wardrobe. She looks like she shops as La-Z-Boy furniture stores.

25 Days Later! US Has Only 25 Days of Diesel Supply (Shortage Could Cripple Economy) Biden Hates Diesel So Bad

25 days later. A real-life horror created by The Federal government.

Yes, according to the US Department of Energy, the US has only 25 days of diesel supply left.

The diesel crunch comes just weeks ahead of the midterm elections and has the potential to drive up prices for consumers who already view inflation and the economy as a top voting issue. Retail prices have been steadily climbing for more than two weeks. At $5.324 a gallon, they’re 50% higher than this time last year, according to AAA data.

Notably, National Economic Council Director Brian Deese recently commented on the emerging crisis. Deese said diesel inventories are “unacceptably low” and added that “all options are on the table.”

Everything EXCEPT abandoning green energy policies that is. Because Biden and Democrats hate diesels so bad.

Yesh, diesel fuels prices are surging again as diesel inventory is shockingly low.

At least the US gets to live out a horror story created by The Federal government because failed Presidential candidate Al “The Snore” Gore and a teenage Swedish girl (Greta Thunberg) told Biden and Democrats to hate fossil fuels.

How dare you … drive inflation through the roof because of your green energy lunacy.

See you at the truck stop at the end of the world! Hopefully, they have diesel fuel!!

US New Home Buyer Traffic DOWN -64% YoY (Bank Deposits DOWN The Most Since 1973)

Everything is NOT beautiful with the US economy.

Another crack in the dam (US economy) is buyer traffic for new homes. They are now down -64% since last year (YoY).

Of course, The Federal Reserve is removing its massive monetary stimulus. BUT commercial bank deposits have declined the most since 1973.

Turkey Prices UP 73% Since Last Year As Biden Takes Credit For Biggest Deficit Reductions In US History (Economy NOT “Strong As Hell!”, But Rapidly Approaching Recession)

Like virtually everything in Biden’s economy, the price of turkey (often the main staple for Thanksgiving dinner) is way up in price. Turkey prices are UP 73% since last year. The price per pound of an 8- to 16-pound turkey has risen to $1.99, a 73% increase from $1.15 last year, according to USDA data.

Speaking of turkeys, in recent speeches, President Joe Biden has been misleadingly taking credit for cutting federal deficits by historic amounts, though most of the reduction in deficits is the result of expiring emergency pandemic spending. Deficits fell between fiscal year 2020 and 2021 far less than initially projected after Biden added to them with more emergency pandemic and infrastructure spending.

And apparently Biden (or Jill) haven’t looked at the data recently. While there was a momentary budget surplus in April 2022, the Federal budget deficit has increased dramatically in September 2022 to the worst deficit since March 2021 shortly after Biden took office.

The only thing that is strong under Biden is the labor market. But even the accomplishment is grossly misleading. Under Trump, the U-3 unemployment rate was 3.5% in February 2020 just before Covid-13 struck and the Fauci-ites shut down the economy causing unemployment to rise to 14.7% in April 2020. Most of the reduction in the unemployment rate was the result of the economy slowly opening back up under Trump. When Biden took over, the unemployment rate was 6.4% and it is finally back to Trump’s 3.5% in September 2022. At least Biden didn’t screw that up, as Obama has said. Perhaps that should be his new midterm campaign slogan!

But Biden DID screw up the labor market with Bidenflation. REAL average hourly earnings growth (yellow line) is NEGATIVE..

And yes, the US is rapidly approaching recession which will result in a spike in unemployment. So much for Biden’s “Strong as hell!” economy.

Two turkeys taking a stroll, but I would rather listen to the shorter turkey. At least the speeches would be coherent.

My Kuroda! Dow UP 774 Points And 10Y Treasury Yield Down -2.2 BPS As Japan’s Central Bank Intervenes To Prop Up Currency (Options Expiration Likely Explanation For Stock Surge)

My Kuroda!

Wall Street saw another day of stunning reversals, with stocks rallying after a Treasury selloff sputtered. The yen jumped as Japan intervened again to prop up the currency.

After many twists and turns, the S&P 500 pushed solidly into the green and headed for its best week since June as 10-year yields fell from the highest since 2007.

Probably because The Fed is likely to pivot with impending recession. The Dow is up 774 points this Friday. And today was a huge option expiration day!!

And the 10-year Treasury yield fell -2.2 basis points.

Here is the result of Japan’s intervention.

But today’s numbers were largely monthly stock index option expiration.

Why did it fall upon Powell to be the wielder of the Fed tightening scimitar? Why didn’t Yellen? Because “Good Girls Don’t.” But Powell did.

Have a nice weekend. I will be rooting for Ohio State to annihilate the Iowa Hawkeyes at noon on Saturday.

Bloomberg Recession Probability Is 100% Over Next 12 Months, Conference Board Registers Third Straight Negative Read (Here Comes The Night!)

To quote Van Morrison, “Here comes the night.”

Bloomberg’s recession probability over next 12 months is … 100%.

And how about the Conference Board’s Leading index of 10 economic indicators YoY? Third negative read ALWAYS followed by recession.

The Federal Reserve may be forced to pivot. This may be one reason why the Dow is up 565 points today (+1.86%) as recession and pain become ever more likely.

Look at commercial banks deposits. Wonder why liquidity is drying up?

And to paraphrase Van Morrison, Biden/Pelosi/Schumer please go.

And to paraphrase Van Morrison, Biden/Pelosi/Schumer please go. Powell too.

Need to hear Them’s “Gloria” for the weekend.

Pension Fund Blues! Agency MBS Prices And Mortgage REITs Declining As Fed Withdraws Monetary Stimulypto (Duration Risk Increasing)

Pension funds have long been investing in “safe” agency mortgage-backed securities.

But as The Fed does its “tighten up”, we are seeing agency MBS prices falling and duration risk rising.

I remember showing my Fixed-income class at Chicago and George Mason the “MBS doom chart” showing the perils of The Fed pushing rates so low that the risk of rising rates becomes a serious problem when rates start to rise. Well, here we are … after I have retired from teaching.

Note the double whammy of Fed rate increases and the gradual shrinking of The Fed’s balance sheet as The Fed withdraws it ample stimulus. But while The Fed was overstimulating markets, it was quite a rush.

But the rush is gone … for the moment. But “Feddie Krueger” is waiting in the wings to do it all over again!

The Thrill Is Gone! US Existing Home Sales Plummet -23.79% YoY, Median Price Drops To 8.07% YoY (Longest Decline In EHS Since 2007)

The thrill is gone … from all the Covid stimulus out of Washington DC.

Today’s existing home sales were … gruesome. While EHS month-over-month were down only -1.5%, on a year-over-year basis EHS was down a staggering -23.79%.

If you look at the declining growth rate of M2 Money (green line) and rising mortgage rates (yellow line), we can see why the housing market is struggling.

How about median price? That dropped to 8.07% YoY as inventory for sale remains lower than before Covid and Covid stimulypto.

With Fed tightening and historic inflation, we are all living under a bad sign.

The NEW logo for The Federal Reserve! If it wasn’t for The Fed, we would have no luck at all.