The Big Short 2? Subprime Credit-Driven Bubble Versus Fed Loose Policy Driven Bubble (Will The Fed Burst Yet Another Housing Bubble? Michael Burry Thinks Not)

The book and movie “The Big Short” revolved around the 2005-2007 housing bubble driven by lending to borrowers with subprime credit (and little or no underwriting). As we know, Bear Stearns, Lehman Brothers and other investment banks too large positions in subprime asset-backed securities (SABS) that became highly toxic once the demand for high-yield subprime ABS dried up. The decline in US home prices coupled with soaring 90-day mortgage delinquencies led to the failure of Bear Stearns and Lehman Brothers along with Fannie Mae and Freddie Mac being put into conservatorship by their regulator.

Fast forward to today. Mortgage originations by credit scores of 620 or less have shriveled while home price growth YoY is even higher than the subprime mortgage crisis of 2005-2007. So, is the US facing another “Big Short” scenario? Yes and no.

The answer is no in that lenders have tightened their credit box sufficiently so that investment banks are no longer buying large quantities of subprime credit paper. The answer is yes if we consider that the current housing bubble is fueled by extraordinary monetary stimulus due to Covid (as well as rampant Federal government stimulus spending).

Following the Federal Reserve of Dallas’ lead, here is a chart of REAL home price growth YoY against REAL average hourly earnings YoY. I added REAL Zillow house rents YoY as well.

Look at the affordability gap during the Subprime Bubble of 2004-2006 and then the Fed Bubble of 2020 to today. Both bubbles show a disconnect between REAL home prices and REAL wages. REAL Zillow home rents are not as high as REAL home price growth, but still how a huge gap in rent affordability.

So, what can upset the apple cart? How about Jay and The Gang jacking up mortgage rates making home affordability even worse (unless it slows home price growth).

Thanks to The Fed’s propose quantitative tightening, mortgage rates are soaring and mortgage costs along with them. Mortgage costs, thanks to The Fed driving up housing prices AND mortgage rates, are substantially higher than during the subprime mortgage housing bubble.

The Fed’s whipsaw approach helped crash home prices during the subprime mortgage crisis by dropping rates too fast at first (helping to ignite a housing bubble) then raising rates too fast (helping to crash housing prices).

Now, Michael Burry of The Big Short fame (portrayed by Christian Bale) thinks that The Fed has no intention of fighting inflation meaning that he doesn’t think The Fed will raise rates all that much. “The Fed’s all about reloading the monetary bazooka. So it can ride to the rescue & finance the fiscal put,” Burry added.

Yikes! Time for investing in cryptocurrencies like Bitcoin and Ethereum?

This scene from the film “The Big Short” won’t be happening again. But I agree that no one is paying attention … again.

Overheated Labor Market? US Capacity Utilization Rises To Near 80% (Fed Too Slow To Remove Stimulus As Supply-Chain Strain Increases)

The good news is that US industrial production rose 0.9% in March. The bad news? US capacity utilization rose to 78.3% indicating that the labor market is overheating.

Notice that prior to Covid, The Fed began rising raising its target rate as capacity utilization was increasing towards 80%. But once The Fed Funds Target rate (upper bound) hit 2.50%, capacity utilization started to cool off. Then Covid stuck.

Since Covid struck and The Fed massively expanded its balance sheet, capacity utilization has increased. But this time around, The Fed has been sloth-like in its removal of monetary stimulus.

Of course, The Fed has been slow to cool inflation which is the highest in 40 years. And supply-chain strains are peaking again (isn’t Mayor Pete in charge of infrastructure?) This is helping to drive prices up.

And don’t forget that REAL average weekly earnings YoY are falling.

Here is Fed Chair Powell explaining how The Fed will withdraw its historic monetary stimulus.

UMich Buying Conditions For Housing Remain Depressed As Mortgage Rates Continue To Rise (Thanks A Boatload, Powell!)

Mortgage interest rates continue their meteoric rise (along with home prices), the result of which is a tanking of consumer confidence in home buying.

The University of Michigan survey of consumers about buying conditions for housing remains depressed due to rising mortgage rates and surging home prices.

Bankrate’s 30Y mortgage rate is down slightly today to 5.06% as the 2-year Treasury yield declines and the anticipated rate hikes have fallen to 9.19.

As I mentioned earlier, mortgage credit availability hasn’t recovered from the “Covid Correction.”

Going Down! Export Prices Rise To 18.8% YoY (Highest In History) While Import Prices Rise To 12.5% YoY (Mortgage Credit Availability Plunge With Covid)

Like what Freddie King sang (Going down), we are going down the drain.

Export prices by end us YoY is up to 18.8%, the highest in recorded history (or since 1983 when they started recording export prices).

Import prices by end use rose to 12.5% YoY.

Unrelated to US export and import prices, the MBA’s mortgage credit availability index slumped with the Covid outbreak and the explosion of The Fed’s Balance Sheet. As I have said before, nothing has been the same since Covid.

Like Freddie King, “I’m Feeling Torn Down” by rising prices.

Biden’s Fastest Economic Recovery In History? Or Recession? Flexible Inflation Rate Hits 20% And Q1 GDP Stalled At <1% (Real Average Hourly Earnings Dive To -2.72% YoY) As Fed Drive Rates Up

Government response to COVID in the form of business shutdowns resulted in massive job losses, then as governments opened the economy up again, job gains were incredible. The Hill had an article discussing the whipsaw in jobs entitled “Biden is delivering the fastest economic recovery in history. Why hasn’t anyone noticed?”

Well, the US have gone from “fastest economic recovery in history” to real GDP growth of less than 1% (Atlanta Fed GDPNow for Q1). In addition, the flexible price CPI less food and energy is a whopping 20%.

You can see “The Biden Miracle!” in the following chart. Hires (red line) dropped with Covid shutdowns, then spiked when governments opened economies again. Throw in the trillions of Federal government Covid stimulus and trillions in Fed monetary support, the Biden Miracle sees less like a miracle and more like an extremely expensive way to add jobs. But the interesting problem facing the Administration is the massive spike in job openings relative to hires (again, governments opening-up plus Federal Stimulypto).

Now for a real downer of a chart. Inflation is so toxic that REAL average hourly earnings YoY is down -2.72%. Hardly the best economic growth in history.

Now we have Jerome Powell and The Blackhearts threatening quantitative tightening starting in May. Here is The Fed’s theme song “We love printing money.”

But The Fed is already slowing the growth of monetary base, although this Fed Stimulypto is still growing much faster than pre-Covid.

At least the 10Y-2Y Treasury curve is back above 0 bps as the Atlanta Fed’s GDPNow Q1 forecast falls to under 1%.

Remember, The Fed is planning on shrinking the balance sheet by $95 billion. The Fed’s balance sheet is just shy of $9 trillion. Which is around 1% per month.

With rising expectations of Fed quantitative tightening (QT), residential mortgage rates keep climbing.

Despite a slowing economy teetering on recession and a war raging in Europe, The Fed is tightening monetary policy. Allegedly to fight red-hot inflation.

Euphoria! CoreLogic February Home Price Index UP 20% While Real Hourly Wages Decline (Wine Prices UP 25.1%, Foodstuffs UP 52.7 Under Biden)

Euphoria!

CoreLogic’s Home Price Insights revealed that home prices rose 20% YoY in February despite REAL average hourly earnings declining -2.678% YoY. THAT is euphoria! Or Stimulypto, as I like to call it.

No, The Federal Reserve still hasn’t removed its staggering monetary stimulus. Notice that M2 Money Stock is still growing at a torrid 11% pace.

20% YoY home price growth in February? CoreLogic has increased their forecast of home price growth to 5%, likely because The Federal Reserve is imitating a sloth in removing its monetary Stimulypto.

Of course, there are other assets growing at lightning speeds. US Regular gasoline prices are UP 75.4% under Biden. Foodstuffs are UP 57.2% since Biden was installed as President. At least ground beef is only up 16.8% while the fine wine index is up 25.1%.

Speaking of wine, Hitching Post II in Buellton, CA must be suffering from rising food and grape costs too (I highly recommend eating there and using their HP Magic Stuff at home). Not to mention their spectacular wines. Roast artichokes anyone??

The Powellenburg Omen! Will Powell Pop The Asset Bubble Created By The Fed’s Repeated Policy Errors? (Blackrock Rises, NVR Homes Gets Crushed)

As of today, Jerome “Nero” Powell and The Gang at The Federal Reserve have not trimmed the Fed’s balance sheet and have only raised their target rate once under President Biden.

Here is the Hindenburg Omen, named for the catastrophic explosion on May 6, 1937 at Lakehurst Naval Air Station in New Jersey. The Hindenburg Omen was flashing red before the stock market correction of late 2007-2009. But, the Hindenburg Omen has flashed red repeatedly since the financial crisis, yet the S&P 500 index has kept rising. The reason? Repeated policy errors by The Fed leaving monetary stimulus in place for too long leading to a bubble forming in the stock market.

The Shiller CAPE (Cyclically-adjust price-earnings) ratio is at the second highest level since the 1800s. The highest point was the infamous Dot.com bubble and bust in 2000/2001.

Since The Fed continues to say “We have a plan!” to slow/shrink The Fed’s balance sheet and raise their target rate … it has not done anything yet (other than a 25 basis point bump at the March meeting).

I am not advocating technical analysis for stocks, but the Bollinger Band analysis for the S&P500 index is showing the S&P 500 index near the top band indicating that a decline in likely.

Today, the US equity market in essentially flat given the massive uncertainty about the Russia/Ukraine situation and whether the US economy is slipping into darkness. But this morning, Federal government blessed companies (healthcare, solar energy and Blackrock) are doing quite well, while homebuider NVR is taking it on the chin thanks to hints that The Fed will raising rates.

Now, NVR (Northern Virginia Homes, Ryan Homes) had explosive earnings growth in their February 1, 2022 report.

But the market is pricing in the crushing Fed rate hikes that are expected.

So, will Foul Powell pull a Volcker and raise rates and crush the economy (and stocks)? Or will Foul Powell And The Fed gang let inflation burn out of control, but preserve the massive asset bubbles?

Inversion! US Treasury 10Y-5Y Curve Inverts As Investors Flee Treasury Market As Mortgage Rates Hit 4.42%

The US Treasury 10Y-5Y curve (aka, the belly of the Treasury beast) has inverted.

It is more about the 10Y Treasury yield rising more slowly than the 5Y yield.

Freddie Mac’s 30Y mortgage commitment rate rose to 4.42%.

Today’s initial jobless claims came in at 187k, the lowest in modern history!! Overheated much?

More fuel on The Fed Fire to raise rates above 0.50%.

Fixed-income trading floors:

Headaches On Headaches! 10Y Treasury Rates Rises 8.6 BPS, But REAL 10Y Is -5.50% Thanks To 40-Year High Inflation

Headaches on headaches.

Overnight, the US Treasury yield rose to 2.38% as the number of forecast Fed rate hikes rose to 8.211. So, enjoy “low” rates while you can.

If we back out the highest inflation rate in 40 years, the REAL 10Y Treasury yield is -5.50%.

And the REAL 30Y mortgage rate is -3.57%.

Of course, the meteoric rise in inflation is due largely to Biden’s attack on the fossil fuel industry (until Russia’s invasion of Ukraine distracted from Biden’s inflation fiasco). Remember, Russia didn’t invade Ukraine until February 2022.

But rather than relax Biden’s anti-fossil fuel executive orders, Congress is now considering the “Gasoline Rebate Act” to give people gasoline stimulus checks to offset the alarming rise in gasoline prices. California governor Gavin “Nancy Pelosi’s nephew” Newsome is proposing a similar measure to give auto owners a $400 rebate to cover rising gasoline prices. Of course, Newsome is up for reelection and there are the midterm elections approaching, so I rule out true concern for citizens as a motive.

Wait. I thought the purpose of Biden’s executive orders was to reduce dependence on fossil fuels by driving up gasoline and natural gas prices producing a shift to “green energy.” Won’t these “gas rebates” simply continue the consumption of gasoline and natural gas? And increase inflation??

As Winston Churchill once said, “Never let a crisis go to waste.”

Fed Expected To Raise Rate 8+ Times Over Next 12 Months Leading To Surge In 2-year Treasury Yield And Mortgage Rates (Powell’s Money Gun To Slow Rate Of Fire)

This is the chart from hell as The Fed is expected to take interest rates higher.

At least mortgage rates are down slightly today.

With 8+ rate hikes forecast over the next twelve months. Meaning that Powell’s Fed money gun is going to slow.