Confounded Interest – Anthony B. Sanders
Financial Markets And Real Estate
Despite what the talking heads in Washington DC say, the US economy has officially slipped into recession.
US Real GDP for Q2 slumped -0.9% QoQ, the second straight quarter negative GDP growth. Also, known as RECESSION.
The GDP price index rose more than expected (+8.7% versus the expected +8.0%).
The Federal Reserve is not a friend of mine.
Stagflation???
The dollar’s gain is the world’s pain — and based on its current trajectory, the world may be in for a whole lot more discomfort.
Concerns over global growth have recently sent the US Dollar Index to the strongest level on record, with the greenback hitting multi-decade highs against currencies like the euro and the yen.
But the move risks becoming a self-reinforcing feedback loop given that the vast majority of cross-border trade is still denominated in dollars, and a stronger US currency has historically translated into a broad hit to the world economy.
Against the backdrop of higher-than-expected inflation and still-elevated commodities prices, the concern is that we’re in for a dollar ‘doom loop’ like never before, according to Jon Turek, the founder of JST Advisors and author of the Cheap Convexity blog.
With the Federal Reserve hiking interest rates at the fastest pace in decades, he says, it’s much less clear what could break the feedback loop in the next few months.
The Dollar Doom Loop with US inflation causing The Fed to tighten
Under Biden’s policies, inflation hit a 40-year high (blue line), and the US Dollar (green line) is strengthening. Then we have The Fed raising the target rate (purple line) and the probability of recession rising with Fed tightening.
Is a US recession coming? The US Treasury 10Y-2Y yield curve is inverted at almost -20 basis points.
There is a Fed open market committee meeting in one week and they are expected to raise their target rate by 75 basis points according to Fed Fund Futures data. Inflation keeps rising as does the probability of a US recession. So, The Fed will keep on tightening.
In the court of The Copper King!
Copper, one of the economic measures of a growing economy, is down -27% since March 3, 2022 as recession looks more likely.
Let’s compare copper with another famous asset, Bitcoin. Bitcoin, a cryptocurrency, is down 70% since November 9, 2021.
As I discussed yesterday, The Fed’s five-year forward breakeven inflation rate has plunged to its lowest levels under Biden as the global economy is slowing.
Notice that copper prices fit pretty well with The Fed’s 5-year breakeven inflation rate.
It looks like The Fed is killing-off the economy in their quest to tame inflation.
The Biden economy doesn’t hurt so good. It hurts bad!
US pending home sales declined -12% YoY in May as The Fed cranked up mortgage rates. That was 11 out of the last 12 months had declining pending home sales.
How about something a little more upbeat … like Gary US Bonds and New Orleans?
No problemo, says James “Bully” Bullard, President of the St Louis Federal Reserve. Bullard said that US recession fears are overblown with consumers “healthy.”
Really Jim?
Inflation is so bad they REAL average hourly earnings growth keeps falling and is now -3.34% YoY.
Apparently, real GDP growth of ZERO doesn’t bother Bullard either.
Apparently, we are still Under The Thumb of The Federal Reserve.
The US economy is out of time.
As a recession approaches, we are seeing the WIRP implied Fed o/n rate (green line) declining. And with The Fed chickening-out, we saw a surge in equities (NASDAQ composite index in blue).
Gasoline prices are falling too (orange line), but due to rising global economic slowdown. But notice that The Fed’s balance sheet (yellow line) is still growing despite repeated signals that Covid stimulus would be removed (I call this Quantitative Frightening).
As I mentioned above, The Fed has stopped trimming their balance sheet despite signals to the market of getting rid of the Covid stimulus. As Billy Preston sang, “Nothing From Nothing.”
The Atlanta Fed GDPNow Q2 forecast is for … 0% GDP growth despite the massive monetary stimulus and fiscal stimulus from Biden/Pelosi/Schumer.
And yes, the S&P 500 has officially entered a bear market under the leadership of Joe “The Bear” Biden.
So, Biden’s economic agenda (read, just spend more money and inflation declines?) is failing. Hence, The Fed is backing off a bit helping to drive up stock prices.
US markets are addicted to gov.
Where is Stanford’s John Taylor when we need him?
Even since the housing bubble burst and ensuing financial crisis on 2007-2008, The Federal Reserve under Ben “The Savior!” Bernanke, Janet Yellen and Jerome Powell let their zero/low interest rate policies be too low for too long that anyone with common sense knew would lead to serious problems when The Fed was forced (this time by inflation) to end the massive OVER monetary stimulus. We are now living through The Great Reset of the US economy.
Since Biden was sworn-in as President (or El Presidente) in January 2021, 30-year mortgage rates are up 108% to 6%, regular gasoline prices are up 108% to $5 a gallon nationally. Inflation is up to 8.6% YoY.
Bernanke, Yellen and Powell did not follow any rule per se, just a “seat of the pants” panic button approach. Using the Mankiw specification of the Taylor Rule model, the Fed Funds target rate should be 13.25% based on CORE PCE. Notice starting in 2014, The TR suggested target rate started to be higher than the actual Fed target rate. And since the Covid monetary blast of 2020, the gap between the Taylor Rule and Fed target rate (red area) has grown to near the highest level in history. Even now Mohamed A. El-Erian, Chief Economic Advisor at Allianz, is starting to admit that The Fed’s ZIRP policies are beginning to hurt.
But if we use total inflation rather than core inflation, the measure that picks up the actual pain that Americans are feeling from rising gasoline prices and mortgage rate, we get a Fed Target rate of 22.10%. Since The Fed’s current target rate is only 1.75%, The Fed has “Room To Move.”
And in a painful. bad way.
Bernanke, Yellen and Powell must think that The Taylor Rule is the New Jersey ham pork roll.
Like in the movie The Poseidon Adventure, we can all sing “The Morning After.”
On the heels of The Fed’s 75 basis point surge in the target rate, the US Treasury yield jumped +11.5 BPS as of 8:30 AM EST. The S&P 500 E-mini futures contract is down -1.8%.
As investors brace for a recession, mortgage rates dropped to 6.03%.
Gasoline prices remain near $5 per gallon, diesel prices are near $6 per gallon and The Fed’s massive balance sheet is still in force.
On the housing front, US housing starts plunged -14.4% MoM in May, the biggest decline under Biden.
While housing starts were down -14.4% MoM in May, single-family detached home were down only -9.16%. It was 5+ unit (multifamily) starts that were down -26.83% MoM.
Good morning peeps! Reality is dawning after the market surge yesterday after investors celebrated that The Fed could have raised rates even more.
I just read that President Biden has never been more optimistic about the US economy than he is now.
Well, today’s closing bell is not optimistic and is downright bearish.
The US Treasury 10-year yield rose … ANOTHER … 11.3 basis points as rumors circulate that The Fed might actually raise their target rate by 75 basis points.
And the venerable Dow (DJIA) is down -152 points today.
Markets are anticipating an increase of The Fed Funds target rate from 1% to 1.568%, less than the rumored 75 basis point increase being bandied about.
At least Columbus Ohio home prices are growing slower than the national average.
If Biden is wildly optimistic about the economy, then he needs to get out of The White House and talk to average Americans and not people like Robert De Niro.
It was closing hell for a terrible day in markets as investors struggle to process the dreadful and seemingly endless inflation report on Friday.
What happened today? The NASDAQ tanked -4.58% and the 10-year Treasury yield jumped 22.2 basis points. Gulp.
The 22.2 bps jump in the 10-year Treasury yield has led to Agency MBS prices pulling a Titanic and sank.
Somehow, I don’t think that Biden and Congress are going to help the middle class and low-wage workers.
Confounded Interest - Anthony B. Sanders 
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