The Ravages Of Inflation: US Consumer Credit UP 7.9% YoY In November While Personal Savings Collapses -64.8% YoY

As we are painfully aware, inflation is still high at 7.1% Year-over-year (YoY). To cope with inflation, consumers have been gutting their savings and increasing their use of credit. In November, consumer credit increased 7.9% YoY while personal savings fell -64.8% YoY.

The good news? Inflation month-over-month is expected to be 0% tomorrow.

So, inflation will be gone in November?

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)).

ADP December Report: 235k Jobs Added (Good), But Annual Salary Growth Slows To 7.3% YoY For Job Stayers (Fuel For Fed To Keep Tightening)

December’s ADP jobs report is out and it is a good news. bad news type of report.

First, the good news. 235k jobs were added in December.

Now for the bad news, job stayers saw their annual salary growth fall to 7.3% Year-over-year (YoY).

But while job growth remains good (which will allow The Fed to keep raising rates), the trajectory in the pink box is slowing.

The breakdown from ADP.

How about US Services PMI Business Activity SA? Do I detect a trend??

The Fed’s Dot Plot from December is still pointing to a pivot in 2024.

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.

Wipeout! Global Bonds And Stocks Suffer $18 Trillion Wipeout In 2022 (MSCI All Country World Index Down >20% In 2022)

Wipeout!

More tech tantrums. China’s Covid surge. And above all, no central banks riding to the rescue if things go wrong. Reeling from a record $18 trillion wipeout, global stocks must surmount all these hurdles and more if they are to escape a second straight year in the red.

With a drop of more than 20% in 2022, the MSCI All-Country World Index is on track for its worst performance since the 2008 crisis, as jumbo interest rate hikes by the Federal Reserve more than doubled 10-year Treasury yields — the rate underpinning global capital costs.

And in the US, we have the S&P 500 index being pulverized by Fed rate hikes to in their attempt to slow inflation.

And in the US, mortgage-backed securities and Treasury securities are also getting pulverized by inflation and Fed rate tightening.

We are now left with the leftovers like high inflation.

Speaking of leftovers, …

Surviving Inflation And The Fed: ARK’s Cathie Wood or TSLA’s Elon Musk? Or Bitcoin? (Answer: All Are Down Around -68% YoY)

Trying to survive high inflation is difficult, but surviving The Federal Reserve’s counterattack to inflation is even more difficult.

Two people who constantly appear in the business are ARK’s Cathie Wood and TSLA’s Elon Musk. A third we can add is Sam Bankman-Fried of FTX and Alameda Research infamy.

So which one was the best at surviving inflation and The Fed’s counterattack? Answer? None of them.

Since the same day last year, we have seen M2 Money growth plunge and The Fed Funds Target rate rise rapidly from 25 basis points to 4.50%, a rapid increase. But over the last year, Cathie Wood and ARK fell -68.4%, Elon Musk’s Telsa fell -68.9% and Bitcoin fell -65.1%

So, ARK, Tesla and Bitcoin were demolished in 2022 thanks to inflation and The Fed’s counterattack. But the NASDAQ index was down too, but only -35.2% YoY.