The Great Dislocation! M2 Money Growth Crashes To 0% As M2 Velocity Near Lowest In History (21 Straight Months Of Negative Weekly Earnings Growth)

The 2020 Covid outbreak and the resulting government shutdowns and school closures begat a Washington DC spending spree and Federal Reserve monetary stimulus barrage unlike anything other time in history. Congress and Administrations love to spend other people’s money, but as Rahm Emanuel once said “You never let a serious crisis go to waste. And what I mean by that it’s an opportunity to do things you think you could not do before” And wow, did they ever binge spend and expand the M2 Money supply. I call it “The Great Dislocation” of the economy and we never recovered from it.

Or as Ray Wylie Hubbard sang, “Drinking with my low life companions, dancin’ with a woman who is not my wife.” This should be the theme song for Washington DC and their manic spending.

But after the massive spending splurges and Fed monetary stimultypto, The Fed finally started withdrawing “the punch bowl” to combat inflation. M2 Money growth year-over-year (YoY) is now 0%. And with inflation, US average weekly earnings growth YoY turned negativc and has been negative for 21 straight months.

After the spending explosion under Pelosi/Schumer and Powell’s monetary, M2 Money velocity (GDP/M2 Money) crashed to it lowest level in history. So now we have depressed money velocity and no M2 money growth. And the US still has 21 straight months of negative weekly earnings growth.

But former Fed Chair and current Secretary of Treasury Janet Yellen is pleased that inflation is FINALLY slowing which Yellen attributes to relaxing supply chains. Or is it declining M2 Money growth, Janet?

Now that the Federal government’s spending spree and The Fed’s monetary stimulypto dislocated the US economy, we are headed for a recession with no ammunition left in The Fed’s arsenal.

After all. The Federal Reserve has been destroying consumer purchasing power since 1913. And we may be at the end of The Fed’s monetary rope.

Even worse, we have Joe Biden as President, who curiously has been found to have classified documents in his possession from when he was Vice President, at least, at two locations (his Wilmington DL home that his son Hunter had access to and the now infamous Penn Biden Center in Washington DC). Even worse, Biden seems to be talking to dead world leaders like Germany’s Schmidt and France’s Mitterand.

Knowing Biden’s penchant for blatant lying and carelessness, I wouldn’t be surprised if this is a stack of classified documents on the table during his meeting with Treasury Secretary Janet Yellen.

Let’s hope Biden isn’t saying that he is talking to late Robert Kennedy, the former US Attorney General.

‘Doomsday Clocks’ Likely Needed Before Congress Hikes Debt Limit (Difficult Questions With $31.5 TRILLION in Federal Debt And A Staggering $173.6 TRILLION in UNFUNDED LIABILITIES (Social Security, Medicare, Etc.))

Its that time again when Congress does its Kabuki Theater drama about raising the US debt limit. Of course, everyone in Congress and the Biden Administration want to spend trillions of dollars so they will hike the debt limit.

With the US government facing the danger of a payments default later this year, Congress has a variety of paths to avert economic disaster and boost the debt ceiling.

All of them would likely involve going right up to the market-rattling brink, according to current and former lawmakers and aides.

The timeline kicks off within weeks, when Treasury Secretary Janet Yellen is expected to advise that the government will deploy extraordinary accounting measures to avoid running out of cash. Those steps are forecast to be exhausted after July.

Republicans now in control of the House are demanding deep spending cuts as the price for an increase in the ceiling, while President Joe Biden and congressional Democrats reject such an outcome.

Nothing has been the same since the financial crisis of 2008 and the ascension of all-time big spender Nancy Pelosi as House Speaker. Budget deficits have never been the same. The last budget surplus was under House Speaker Newt Gingrich. But since the financial crisis of 2008, Federal spending seems to have increased its trajectory.

Note that mandatory spending (Medicare, Social Security, etc) is growing like a wild fire while discretionary spending is seemingly flat. So, it mandatory spending that Congress will pretend to cut.

Yes, it is Medicare for our aging population that has blown out of control.

Then we have defense spending. The Ukraine spending should come from this pot, but forces decisions to make between Ukraine and taking care of our Navy (to compete with the growing Chinese navy).

Of course, as The Fed fights inflation, we are seeing the COST of Federal debt soaring since Covid.

And the US is facing, in addition to $31.5 TRILLION in debt, a whopping $173.6 TRILLION in UNFUNDED LIABILITIES (Social Security, Medicare, etc).

Yes, Congress NEEDS to cut back the spending, particularly on Social Security and Medicare (not to mention Ukraine spending), but it is all Kabuki theater. Queue the screams of “Republicans will take away …”.

I wish everyone in Congress were like Kentucky U.S. Senator Rand Paul, not the other spendaholic Kentucky Senator.

Magic? US Inflation Cools To -0.1% In December, 6.5% Year-over-Year YoY (REAL Weekly Earnings NEGATIVE For The 21st Straight Month At -3.1% YoY)

I don’t think this is a record that Biden can run on for re-election: 21 straight months of NEGATIVE REAL WAGE GRWOTH. Fortunately for Fed Chair Jay Powell, he is not an elected official.

The December inflation report still shows elevated inflation in the US, but only -0.1% since November (MoM), but still high compared to last year (6.5% YoY). That is still over 3x The Fed’s target inflation rate of 2%.

While headline inflation fell to 0.1% MoM, CORE inflation (removing food and energy) rose again 0.3% MoM and 5.7% YoY.

What exactly went up in price in December? Food and energy were all over 10% YoY growth.

At 6.50% YoY headline inflation, the Taylor Rule suggests a Fed Funds Target rate of … 13.13%. Well, I guess that Powell will say there is more rate hikes to be done.

As if The Fed follows any sensible rule. Instead, The Fed relies on magic tricks.

Small Business Optimism Index Plunges Below 90 As Fed Tightens Money With M2 Money Growth YoY Hitting 0% (Baltic Dry Index Continues Downward Descent)

The NFIB Small Business Optimism Index is plunging and just fell below 90. The index was above 100 before the Wuhan virus outbreak in 2020, but has only been at 100 or above for only two months under Biden. And the trend is definitely looking bleak as The Federal Reserve fights inflation with M2 Money growth having collapsed to 0% YoY growth.

And the Baltic Dry shipping index is falling with M2 Money growth YoY.

I wonder what Fed Chair Jerome Powell is thinking?

Zoltan! Fed Will Restart QE to Stabilize Treasury Market During Summer 2023, Credit Suisse Group’s Pozsar Says

Zoltan!

The Federal Reserve will be the backstop of the Treasury market this year to alleviate dysfunction resulting from its increasing size and the retreat of regular buyers.

That’s the view of Credit Suisse Group AG analyst Zoltan Pozsar, who in a note to clients Friday predicted the Fed will restart asset purchases during the summer of 2023.

In Pozsar’s analysis, relative-value funds won’t buy Treasuries unless they cheapen a lot relative to overnight index swaps, and banks with sagging reserves are more likely to tap the funding markets than to buy Treasuries. FX-hedged buyers have been “priced out,” and geopolitical events have reduced large reserve managers’ appetite for US debt, he said.

Flagging demand from marginal buyers will depress demand for Treasury auctions, sparking selloffs in equities, credit and emerging markets, according to Pozsar.

“This is a ‘checkmate-like’ situation,” he wrote. “The Fed won’t be a pivot and the terminal rate may have to go higher still, neither of which augurs well for either risk assets or Treasuries.”

As The Fed started to raise rates (yellow line) to fight inflation (blue dashed line), the S&P 500 index started to fall. Note that The Fed’s balance sheet (purple line) is mirroring the inflation rate.

Fed Funds Futures point to Zoltan’s reversal in June 2023.

Will The Fed pivot? Zoltan says yes, the talking Fed heads say no.

A rare glimpse into The Fed’s open market committee meeting.

Or more explicitly, “Hail Fed” or “Hail Zorp” (Zero interest rate policies (ZoRP)).

Devil’s Tower? ISM New Orders Slump To 45.2 In December As ISM Prices Paid Slumps To 39.4 (Stimulus Is Already Gone, Recession In Sight)

To paraphrase The Eagles, US monetary stimulus is already gone.

And with it, ISM Manufacturing Report for December is showing weakness. New orders (orange line) is down to 45.2 (below 50 is contraction) and the prices paid is down to 39.4 (white line). All this is happening as The Fed raises its target rate (yellow line) and removes monetary stimulus (green line).

This gives us “The Devil’s Tower” looking economic spike after massive Covid-related monetary stimulus and Federal government repeated stimulus.

Biden is probably hoping for MORE stimulus, like in Close Encounters of the Wrong Kind.

Speaking of Already Gone, look at the US Treasury 10Y-2Y yield curve with slowing M2 Money growth. Yield curve inversion is more about vanishing M2 Money growth than it is a forecast of recession.

Mortgage Applications Dropped To Lowest Since 1996 As Purchase Applications Drop -22.2% WoW, -38.5% 2WoW, -42% YoY (Refi Apps Down -87% YoY)

Mortgage applications generally nosedive in the last two weeks of the year (seasonality effect), but Federal Reserce monetary tightening to fight inflation is making the last two weeks worse than usual.

Mortgage applications decreased 13.2 percent from two weeks earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending December 30, 2022. The results include adjustments to account for the holidays. It marked the lowest mortgage applications since 1996.

The Market Composite Index, a measure of mortgage loan application volume, decreased 13.2 percent on a seasonally adjusted basis from two weeks earlier. On an unadjusted basis, the Index decreased 39.4 percent compared with the two weeks ago. The holiday adjusted Refinance Index decreased 16.3 percent from the two weeks ago (2WoW) and was 87 percent lower than the same week one year ago (YoY). The seasonally adjusted Purchase Index decreased 12.2 percent from two weeks earlier. The unadjusted Purchase Index decreased 38.5 percent compared with the two weeks ago and was 42 percent lower than the same week one year ago.

Notice that purchase applications are declining with slowing M2 Money growth showing the impact of The Fed trying to remove the punchbowl.

The week-over-week (or WoW) numbers are pretty bad.

Something Happening? Fed Repos Soar To $2.55 Trillion As US Treasury Yields Tank -14.5 Basis Points (Mortgage Rates To Decline)

There is something happening in markets this morning. And its not good.

First, banks are stashing cash with the New York Fed on an “overnight basis” although it is looking pretty permanent to me. Repos (or repuchase agreements) soared to $2.55 TRILLION as of 12/30/22.

But this morning we see the US Treasury 10-year plummeting -15 basis points. As I used to tell my University of Chicago, Ohio State and George Mason finance students, any 10 basis point shift (plus or minus) is a big deal. Something is happening.

The 10-year Treasury yield plunging -15 bps is a “good thing” for the mortgage market in that US mortgage rates will likely follow suit and fall.

US Housing Leading Growth Index Slumps To Lowest Since 1982 And 2008 Recessions (Fed Pivot Coming?)

As we begin 2023 (and I am still bummed-out over Ohio State University losing a nail-bitter to Georgia in the Peach Bowl), we need to look at the condition of one of the most important sectors of the US economy.\, housing.

If we look at the US Housing Leading Growth index (courtesy of RecessionAlert.com) has slumped to its worst reading since the recessions of 1982 and 2008.

And then we have the OCED leading indicators for the US falling as M2 Money growth slows.

My favorite chart shows US home price growth falling faster than University of Michigan football team’s national championship home hopes.

Will this prompt The Federal Reserve to pivot? Only time will tell.

A Year Of Pain! Investors Struggle In A New Era Of Higher Rates And Goin’ Green, Worst Combined Stock And Bond Returns Since 1871 (Buffet’s Berkshire Hathaway Was UP 4% In 2022, Cathie Wood’s ARK Innovation Was DOWN -67%)

2022 is one of the record books and not in a Tiger Woods way. Call it a year of pain.

First, the US enacted policies that drove up energy prices (goin’ green) that reverberated through the entire economy in the form of higher prices. Second, The Federal Reserve, in attempt to combat runaway inflation, started removing the excessive monetary stimulus that had been around since Fed Chair Bernanke initiated QE, the seemingly unlimited purchase of Treasury and Agency MBS securities. Janet Yellen continued the massive asset purchases and zero interest rate policies or ZIRP. Now that inflation has struck the American middle class hard, we are seeing Fed Chair Powell doing what Bernanke and Yellen wouldn’t do — remove the monetary punchbowl.

Using Robert Shiller’s on line data, US stocks and bonds have had an awful year, the worst combined year since 1871.

US equity returns have been demolished under the NEW dual mandate (goin’ green = rising prices = Fed tightening).

Let’s see how two of the most famous investment gurus did in 2022, Warren Buffet and Cathie Wood. Buffet’s Bershire Hathaway Class A equity was UP 4% in 2022, while Cathie Wood’s ARK Innovation ETF collapsed by -67% in 2022.

Here is the clinker. The US economy (as well as the global economy) seem dependent on “cheap money” from Central Banks like The Federal Reserve. So the question is … will The Fed pivot? Fed talking heads are saying no, but Fed Funds investors are saying yes to a pivot after June 2023.

Ulysses S Grant was the President the last time the combined stock and bond market was this bad.