Confounded Interest – Anthony B. Sanders
Financial Markets And Real Estate
First, US default risk as measured by credit default swaps remains elevated (primarily because Biden and Democrats refused to cut wasteful spending or reign in non-retirees on Social Security). And NY Fed’s Reverse Repos remain elevated.
And then we have Citi’s economic surprise index for the US at -17 as The Fed slows money growth to 0%.
I wish I knew a place where inflation and insane Federal government spending and policies doesn’t exist.
We got trouble in Potomac City! No, I’m not talking about the numerous Top Secret documents that Biden carelessly left in his garage in Delaware and the UPenn Biden Center. And they found more over the weekend. I’m talking about the US Treasury 10Y-2Y yield curve being inverted for 135 straight days. And thanks to inflation, REAL wage growth has been negative for 21 straight months.
All this is happening while M2 Money growth (green line) stalls to 0% YoY.
Swaps 5Y are rising as The Fed withdraws monetary stimulus.
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?
US headline inflation began to soar as soon as Joe Biden became President. A combination of massive stimulus spending related to the Covid economic shutdown and his war on fossil fuels, driving up gasoline and diesel fuel prices. In other words, headline inflation rose from 1.4% Year-over-year (YoY) at the end of December 2020 to 9.1% YoY in June 2021. It has now simmered down to 7.1% YoY as The Fed continues to remove monetary stimulus.
How have consumers coped with inflation caused by massive Federal spending and Biden’s anti-fossil fuel policies? In November, personal savings dropped -64.8% YoY. This marks 20 straight months of declining personal savings.
US M2 Money growth YoY is now … 0%. That is the lowest in US history.
Wow, when The Fed puts its foot on the brakes, …
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.
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.
One of the big problems with Federal goverment and Federal Reserve monetary stimulus is … it wears out. Just look at M2 Money growth.
US existing homes sales fell -7.70% in November to 4.09 million units SAAR. And since the same month last year, existing home sales are down -35.4% YoY.
Existing home sales were the lowest in November since 2010.
The good news? The median price of existing homes fell to 3.21% YoY. The bad news? The ark is really bad pointing to a bad December. Inventory for sale (orange line) remains below pre-Covid shutdown levels.
Of course, will the Federal government and Federal Reserve come riding to the rescue of the housing market … again? It looks like The Fed is thinking about it.
One of the great ironies of the Sam Bankman-Fried debacle is that while SBF was a generous donor to Democrats (and a few RINOs) and President Biden, it was Biden’s green energy policies that were part of the nail in SBF’s crypto empire. As inflation exploded upon Biden taking office (and massive overspending by Congress), The Federal Reserve jumped in to cool inflation leading to the downfall of cryptos in terms of price.
M2 Money YoY (green line) shows the massive growth money with the Covid economic shutdowns in 2020. Cryptos skyrocketed after that much money was printed by The Fed. Cryptos fell shortly after peaking in April/May 2021, then peaked again in a horrific display of asset volatility in October/November 2021.
What happened in late 2021 to crush cryptos? Ah, expectations of Fed rate increases (red line) started to soar meaning the punchbowl for cryptos was being taken away. The Fed giveth and The Fed taketh away.
The risk management question is … how did SBF and Alameda Research’s Caroline Ellison didn’t notice the relationshop between crypto prices and changing Federal Reserve monetary policy? Even worse, why didn’t investors ask questions??
Take a gander at Bitcoin relative to US diesel fuel prices (orange line) and The Fed’s inflation counterattack (red line). Sam and Sweet Caroline (who was seen walking free in NYC) must not have been monitoring how rapidly rising diesel prices would permeate the entire economy in terms of price increases. M2 Money YoY (green line) has been declining as the expectations of Fed rate tightening (red line) has increased.
SBF donated a huge amount to the midterm elections, the party that went along with Biden’s war on fossil fuels. Then inflation ensued as energy and food prices skyrocketed, leading The Federal Reserve to fight inflation by removing the monetary punchbowl. So, in a sense, SBF donations led to his own collapse.
Apparently, SBF, Caroline Ellison and the other FTXers were engaged in orgies and not paying attention to the impact of inflation and Fed policies on cryptos.
Lastly, how did Gary Genslar and the SEC not see any of this? In the same way that Fed Chair Ben Bernanke didn’t see the financial crisis as it was rapidly unfolding: eyes wide shut.
I read that Nicole Kidman underwent psychiatric treatment after filming “Eyes Wide Shut.” I saw it and was bored out of my mind.
As expected, The Federal Reserve raised their target rate by 50 basis points to 4.50%, the highest Fed target rate since November 2007.
The only thing interesting that happened was Powell’s hawkish statements about The Fed wanting to keep tightening to fight inflation caused under “Inflation Joe” Biden.
But the NEW Fed Dots plot looks like an Olympic Ski jump with expectations of DECLINING Fed target rates.
My take on the steeply downward sloping Dot Plot is a tacit acknowledgement that a recession is headed our way in 2023.
Here is the Lillehammer Olympic ski jump that resembles today’s Fed Dots Plot.
Mortgage applications increased 3.2 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending December 9, 2022.
The Refinance Index increased 3 percent from the previous week and was 85 percent lower than the same week one year ago. The unadjusted Purchase Index decreased 1 percent compared with the previous week and was 38 percent lower than the same week one year ago.
You can see the impact of seasonalilty on mortgage purchase applications (white line). They peaked in the week of May 6, 2022 and have been generally declining since. While refi applications (orange line) increased over the past week, they have been pummelled by The Fed tightening.
It is quiet today as investors wait for The Fed to announce a 50 basis point rate increase. Fed Funds Futures point to almost another 100 basis point hike by May 5, 2023, then a slow decline in The Fed Funds target rate (upper bound).
And here is Sam Bankman-Fried and his high-powered legal defense.
Confounded Interest - Anthony B. Sanders 
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