Confounded Interest – Anthony B. Sanders
Financial Markets And Real Estate
If this what the Biden Administration had in mind? Soaring labor costs at the same time that labor productivity is falling to its lowest level since 1960?
Powell and the Gang’s monetary approach doesn’t seem to be working for the labor market …
But is working extremely well for asset prices.
Wall Street parties while Main Street suffers worst decline in productivity since 1960.
As we are all painfully aware, The Federal Reserve went on a 2nd money printing spree to allegedly stave-off the economic impacts of the COVID outbreak in March 2020. The first money printing spree took place in late 2008 as The Fed tried to stave-off the economic impacts of the housing bubble burst of 2008 and the ensuing financial crisis.
But for now, we have this horrifying chart showing the exploding margin accounts at security brokers and dealers (not, not the Walter White-type dealers, but Wall Street dealers). Notice the 400% surge in M1 Money stock after COVID struck.
Of course, the soaring stock market is feeding the margin loop, encouraged by The Fed. Check out the Shiller Cyclically Adjusted Price Earnings (CAPE) ratio after The Fed’s M1 printing storm.
What can’t money printing fix? How about CMBS prices (or CMBX BBB- S6 prices … down 30.5% since just before COVID struck.
Let’s see if The Fed sucks the 400% growth back to zero.
Treasury Secretary Janet Yellen said yesterday that “It’s Fed’s Job to Avoid Any Wage-Price Spiral.” Well, The Fed is helping to avoid a wage increase in real terms, since the November jobs report revealed that REAL US Average Hourly Earnings growth YoY fell to -1.378%. In other words, inflation is greater than hourly earnings.
And in other jobs related news, nonfarm payrolls rose by only 210k versus expectations of 550k jobs to be added. Even NOMINAL hourly earnings growth (4.8% YoY) was less than expected (5.0%).
Labor force participation rose a bit to 61.8%, still well below the pre-COVID levels of 63.4% in January 2020.
The U-3 unemployment fell to 7.8%. Still higher than the pre-COVID rate of 7.0% in February 2020, but getting close! As for what this means for The Fed, the new target rate implied by the Taylor Rule is 15.50%.
After this lousy jobs report, 10-year Treasury yields dropped … like Biden’s approval ratings.
The dance number where The Fed keeps their target rate at 25 basis points while the Taylor Rule implies a target rate of 15.50% is the Yellen Boogie. By Powell and the Gang.
The latest scare hitting financial markets is the Omicron Variant (or Oh! Macron! Variant in France). While it caused an initial decline in global equity markets {Dow fell 900 points on early reports on Omicron), the Treasury market has been relatively unscathed.
For example, the US Treasury Actives curve dropped last Friday (the orange line represents the Wednesday before Thanksgiving), while the remaining three lines represent last Friday, Monday and Tuesdays (today). In other words, the US Treasury Actives curve has been quiet so far this week after Friday’s flattening.
The US Dollar Swaps curve shows the same dynamics. The dark blue line is last Wednesday, while the remaining lines are last Friday, this Monday and today. Not a lot happening after the initial Omicron fear factor was priced in.
Federal Reserve Chairman Jerome Powell believes that the omicron variant of Covid-19 and a recent uptick in coronavirus cases pose a threat to the U.S. economy and muddle an already-uncertain inflation outlook.
“The recent rise in COVID-19 cases and the emergence of the Omicron variant pose downside risks to employment and economic activity and increased uncertainty for inflation,” Powell said in remarks he plans to deliver to Senate lawmakers on Tuesday. “Greater concerns about the virus could reduce people’s willingness to work in person, which would slow progress in the labor market and intensify supply-chain disruptions.”
Do I detect FEAR in Powell’s voice? The odds of rate increases for next year just fell to one rate increase at the September 2022 meeting.
On the equity side, it seems to be all about whether The Fed will withdraw its support. Back in early 2018, then Fed Chair Janet Yellen and the FOMC started to shrink the Fed balance sheet (green line). This resulted in the “Smart Money Index” declining. The S&P 500 index received a jolt with the Fed stimulus around the COVID outbreak and have taken off like a jackrabbit. Despite the Smart Money Flow index being lower than in 2017.
The VIX and VVIX are elevated showing fear in the equity markets. But much less than when COVID broke out in March 2020. Each spike in VVIX (or the volatility of VIX) is likely when Dr. Anthony Fauci opened his mouth.
So, is Omicron the “planet killer” or just another mild flu-like outbreak? The data is pointing towards the latter, but FEAR may cause it to be a bigger deal than is warranted.
It has been a grim Friday. The Dow fell 900 points, 10Y Treasury yields fell 16.1 basis points and West Texas Crude fell to $68.17.
Bitcoin tumbled 20% from record highs notched earlier this month as a new variant of the coronavirus spurred traders to dump risk assets across the globe.
The world’s largest cryptocurrency fell as much as 8.9% to $53,624 on Friday during London trading hours. Ethereum, the second-largest digital currency, dropped more than 12%, while the wider Bloomberg Galaxy Crypto Index declined as much as 7.5%. On the other hand, gold rose as cryptos fell, then retreated as cryptos rebounded.
A new variant identified in southern Africa spurred liquidations across markets, with European stocks falling the most since July and emerging markets also slumping.
The Dow is down around 900 points … and look at Europe!
The 10-year Treasury yield is down 16.1 basis points. Most of Europe is down around 8-9 basis points while the UK is down 14.5 BPS.
And West Texas Intermediate crude futures are down to 68.17 from 78.39. No Jen Paski, this isn’t due to Cousin Eddie (Biden) releasing the Strategic Petroleum Reserve (SPR).
Maybe it was all the tryptophan released by eating turkey.
A day to remember.
While some economists are cheering the post-COVID economic recovery, I am not among them. Rampant inflation and bad economic policies are plaguing the non 1% of the population.
For example, new home sales dropped -23.1% YoY in October. As consumer sentiment for housing crashed to 63 (baseline of 100).
Why are consumers bummed-out about buying housing? How about rapidly accelerating new home prices???
Welcome to The Fed’s Gilded Age … for housing! The gilded age refers to the thin-veneer of gold covering up problems in the late 1800s.
Today’s gilded age is largely fueled by The Federal Reserve’s uber-easy monetary policies combined with absurd Federal government policies. The result? Thanks to inflation, REAL home prices are growing at 14.6% YoY while REAL hourly earnings are declining (-0.41% YoY).
Redfin predicts a more balanced housing market in 2022. Part of their rationale is that they predict mortgage rates will rise to 3.6%. This growth in the mortgage rate is predicted to slow home price growth to 3.2% from double digit growth currently.
While this scenario is plausible, it will require a change in direction of the 10-year Treasury yield which has been declining since 1981. 5.39% YoY inflation may encourage The Fed to raise rates.
Today’s REAL 30-year mortgage rate is -3.08% while the REAL 10-year Treasury yield is -4.67%. It will require a reduction in inflation AND an increase in the nominal rate to get to 3.6%.
With the Freddie Mac 30-year survey rate at 3.10, will a 50 basis point increase in mortgage rates send the market crashing? Not likely.
After all, the US economy is under the thumb of The Federal Reserve.
The Marty Stuart/Travis Tritt song “This One’s Gonna Hurt You (For A Long, Long Time)” seems appropriate for the plight of the middle and lower income classes in the face of high inflation. How do you spell the combination of President Biden’s policies and The Fed’s inaction on inflation? T-R-O-U-B-L-E … for the middle and lower income classes.
Over the past year, since the election of Joe Biden, the household consumption bundle (food, rent, heating, gasoline) have all risen dramatically in terms of prices. Food is up 33%, heating oil is up 89%, regular gasoline is up 61%, and effective apartment rents are up 33%.
Meanwhile, the 1% are sitting high on a mountain top obvious to the pain caused by The Federal Reserve and Biden Administration. Here is the growth in wealth by the 1% since the housing bubble burst and financial crisis compared with the bottom 50%.
A problem facing renters is the rapid growth of home prices particularly since the COVID epidemic. At least M2 Money has “slowed” to 12.80% YoY while home prices are raging at almost 20% YoY. But hopefully home price growth will slow with declining M2 growth.
Compendium of Fed Chair Jerome Powell and President Biden on vacation.
When something is wrong with the economy.
Banks park funds at The Federal Reserve in an attempt to soothe themselves.
Nothing has been the same since the housing bubble of the 2000s, the resulting banking meltdown and the takeover of the economy by The Federal Reserve.
And since the 2000s housing bubble and financial crisis, The Federal Reserve has taken control of the economy resulting in M2 Money Velocity crashing to historic lows.
UBS ran a simulation that shows stocks could lose up to 50% under rare stagflation scenario.
And The Fed says “Hold on, we’re coming!”
My reaction to Biden’s Build Back Better spending spree and The Fed keeping rates repressed.
As inflation seems unstoppable by The Federal Reserve, we are seeing the US Dollar, Gold and Ethereum soaring in price.
Persistent inflation is here to stay.
Yup, The Fed is firing blanks.
Confounded Interest - Anthony B. Sanders 
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