Confounded Interest – Anthony B. Sanders
Financial Markets And Real Estate
Appropriately, the song “The Morning After” is from the liquidity disaster film “The Poseidon Adventure.”
Here is chart of Bitcoin, Ethereum and the US Dollar Index after The Fed’s announcement yesterday at 2pm EST. The US Dollar fell and Bitcoin/Ethereum rose.
And then we have Evergrande bonds, hovering around $30 (down from par of $100). Waiting for the next shoe to drop.
This will make Fed Chair Powell smile along with Treasury Secretary Janet Yellen!
(Bloomberg) — The Federal Open Market Committee directed the New York Fed’s Desk to increase the size of the counterparty limit for the overnight reverse repo facility, according to a statement.
Per-counterparty limit increased to $160b/day from $80b/day, with the change taking effect Sept. 23
“The increase in the per-counterparty limit from the current level of $80 billion per day helps ensure that the ON RRP facility continues to support effective policy implementation,” according to statement. “All other ON RRP operation parameters remain the same”
And banks didn’t wait long to park $135.2b overnight at The Fed.
When combined with the ongoing expansion of the Fed’s balance sheet, we are seeing to see the expansion of the United States on Liquidity.
The Fed is providing a sea of liquidity. What are the banks afraid of?
Since Q2 2020, US homeowners have been big winners in terms of home price gains and equity in their homes. Unfortunately, this means that renters are big losers. Once again, The Federal Reserve is benefiting once segment of the population while punishing the other segment.
*Homeownership mortgage source: 2016 American Community Survey.
In the second quarter of 2021, the average homeowner gained approximately $51,500 in equity during the past year.
California, Washington, and Idaho experienced the largest average equity gains at $116,300, $102,900 and $97,000 respectively. Meanwhile, North Dakota experienced the lowest average equity gain in the second quarter of 2021 at $10,600.
CoreLogic provides homeowner equity data at the metropolitan level, in this graphic 10 of the largest cities, by housing stock are depicted.
Negative equity has seen a recent decrease across the country. San Francisco-Redwood City-South San Francisco, CA, is the least challenged, with Negative Equity Share of all mortgages at 0.6%.
The graph represents National Homeowner Equity Distribution across multiple LTV Segments.
Since growing home equity lead to lower default risk (or at least losses to the mortgage holder), we are seeing mortgage delinquencies fall after the Covid surge.
Of the top ten cities, Chicago leads in negative equity.
Maybe Fed Chair Jerome Powell is trying to soothe us, like Sam and Dave.
I certainly hope The Federal Reserve starts normalizing interest rates. Hold that Fed tiger!
(Bloomberg) — Sales of previously owned U.S. homes fell in August, suggesting that demand is moderating as lean inventory and high prices squeezed out some buyers.
Contract closings decreased 2% from the prior month to an annualized 5.88 million, in line with economists’ estimates, figures from the National Association of Realtors showed Wednesday.
“Clearly the home sales are settling down but above pre-pandemic conditions,” Lawrence Yun, NAR’s chief economist, said on a call with reporters.
Lawrence Yun is correct. There was a huge spike in existing home sales (EHS) following the Covid outbreak and the overreaction by The Federal Reserve (aka, when the ain’ts went marching in). Despite continuing stimulus, but EHS has simmered down.
At least the median price of EHS YoY slowed to 12.1% YoY as The Fed slows M2 Money growth.
Inventory remains relatively low compared to historic levels while price zooms with Fed stimulus.
Want home price growth to slow its insane growth? Hold that tiger! That is, The Fed has to start normalizing interest rates.
The stock market mildly rebounded from yesterday’s mild correction, but a glaring problem remains: S&P 500 real earning yields are negative.
With all the Federal government fiscal stimulus and Federal Reserve monetary stimulus, we are seeing inflation and that inflation is eating away at S&P 500 earnings yield.
The S&P 500 is still well above key technical support levels.
However, the Buffet ratio is raging along with Fed stimulus.
And the Hindenburg Omen is flashing RED!
The mystery of the Flying Fed is whether they will withdraw their massive monetary stimulus or not.
The unorthodox monetary stimulus from The Federal Reserve and stimulypto-level spending by the Federal government has resulted in a surge in US housing starts. But that thrill may be gone if the stimulypto is removed.
(Bloomberg) -By Olivia Rockeman- U.S. housing starts rose by more than expected in August, suggesting that the supply and labor constraints that have been holding back construction eased in the month.
Residential starts rose 3.9% last month to a 1.62 million annualized rate after an upwardly revised July print, according to government data released Tuesday. The median estimate in a Bloomberg survey called for a 1.55 million pace.
Building permits, meanwhile, increased 6% in August, the biggest gain since January, reflecting a sizable jump in multi-family units. Permit applications for single-family homes also edged higher.
The data suggest that builders are making some construction headway despite limited availability of land, labor and materials, which has slowed residential starts from a 15-year high in March. Despite the bottlenecks, housing starts remain mostly above pre-pandemic levels, which is expected keep construction activity elevated for some time.
1-unit (single family detached) starts got a tremendous jolt from The Fed’s monetary stimulus and Federal governments fiscal stimulus. But government stimulus wears out.
Given the high cost of housing in the USA, particularly in coastal metro areas, we see home price growth raging at over 4 times hourly earnings growth.
As a result, we are seeing a burst of 5+ unit (multifamily) housing starts. Note the burst of 5+ housing starts prior to Covid striking in early 2020.
Permits for 1-unit housing are up only slightly but 5+ unit permits are up 19.7%.
Remember, the withdrawal of fiscal stimulus will lead to a big fiscal cliff.
Is the thrill gone from owning a single-family detached home?
Chubby Checker sang “The Limbo Rock” with the tag line “How low can you go?”
With the help of the European Central Bank’s endless monetary stimulus,
twenty Europeans nations have negative sovereign yields. That is negative NOMINAL yields.
(Bloomberg) — The S&P 500 Index extended its decline past 2% Monday afternoon amid growing investor jitters about China’s real estate crackdown potentially sparking a financial contagion. And the Hang Seng fell 3.30% overnight.
The benchmark gauge was down 2.1% as of 12:08 p.m. in New York. All of the 11 major industry groups declined, with the energy, financials and materials sectors leading the losses. The tech-heavy Nasdaq 100 index slumped 2.4%, while the blue-chip Dow Jones Industrial Average retreated 1.9%.
By 2:33pm, the Dow is down 2.55%, NASDAQ down 3.15%.
Volatility also soared, with the Cboe Volatility Index — often called Wall Street’s “fear index” — jumping as much as 29% to 26.75, the highest level in over four months.
“While the Evergrande situation is front and center, the reality is, stock market valuations are overstretched and the market has enjoyed too long of a break from volatility and Monday’s stock market declines are not surprising,” said David Bahnsen, chief investment officer at the Bahnsen Group, a wealth management firm.
As Evergrande bonds continue to tank.
Meanwhile, most commodity prices are falling … except for UK Natural Gas Futures which are up 16.5%!
Pop goes the weasel!
Kind of a drag … when Federal government stimulus fades just as The Fed tries to decide on slowing its balance sheet expansion.
(Bloomberg) — In the coming Year of the Taper, it’s the fiscal version that will really bite.
The chatter in U.S. financial markets is all about the Federal Reserve’s yet-to-be-announced reduction of its bond purchases. That’s obscuring something important: the already-under-way cutback of the federal government’s budgetary support — which is likely to have a much bigger impact on economic growth next year.
The U.S. expansion looks set to slow sharply in the second half of 2022 as measures that propped up the economy during the pandemic — from stimulus checks for households to no-cost financing for small companies — fade from view.
That will be the case even if President Joe Biden manages to win Congressional approval for the bulk of his $3.5 trillion Build Back Better agenda. The spending will stretch over years, with limited impact in 2022. It will also be at least partly paid for by tax increases that slow the economy down rather than speed it up.
And then the is Treasury Secretary Janet Yellen renewing her call for Congress to raise or suspend the U.S. debt ceiling, saying the government will otherwise run out of money to pay its bills sometime in October.
We can see the CDS market reacting … slightly … to Yellen’s concerns.
But next to Argentina’s CDS, the US looks positively tame.
And there is a little disturbance in the Fed Funds Futures volatility.
Then we have the volatility cube showing The Fed’s rate suppression at the short end and expected volatility in the future.
And there we have The Fed’s temporary repo facility hitting an all-time high.
The next Federal Reserve Open Market Committee (FOMC) meeting is next week with an announcement on Wednesday, September 22nd.
(Bloomberg) — Volume in the December 2024 eurodollar futures contract has surged Friday, approaching 200k, highest in the strip. Weekly volume exceeds 800k ahead of next week’s FOMC meeting. The December 2024 contract is a proxy for the Fed’s taper timeline, similar to the belly of the Treasuries curve (aka, the belly of the beast).
As of 2:30pm ET, nearly 197k Dec24 eurodollar contracts had traded, bringing weekly total to 816k, third most in its lifetime; notable flows on the day have included three block trades for 5k each:
The contract also appeared in curve trades including 9.3k Sep24/Dec24 3-month, 18.9k Dec23/Dec24 12-month and 24.8k Dec22/Dec24 24-month
The Dec22/Dec24 eurodollar spread has been in the spotlight since Morgan Stanley recommended the steepener in June as a way to exploit the disconnect between expectations for the pace and timing of Fed rate increases
As of today, we see a kink in the US Dollar Swaps curve at 21m.
With inflation the highest since 2008, and M2 Money still growing at 12.1% YoY, it is time for The Fed to take it foot off the accelerator pedal.
The Fed’s Dots Plot as of the last FOMC meeting indicates a willingness to let the Fed Funds Target rate start rising again after over a decade of rate suppression.
Given the fear of The Fed tapering (eventually), is it any wonders alternative investments such as Bitcoin have risen as The Fed cut rates?
Will Fed Chair Jerome Powell and the gang announce a change on September 22nd? Probably need a fortune teller to answer that question.
Confounded Interest - Anthony B. Sanders 
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