Fed Rollercoaster! Fed Will Slash Rates By 200 Basis Points by Mid-2023 Says Deutsche Bank

Fed Rollercoaster!

Deutsche Bank, my former employer, said that The Fed will slash rates by 200 basis points by mid-2024 after staying hawkish in the short term.

Deutsche Bank increased its view on the terminal rate and now sees it hitting 5.1% in May.

The Federal Reserve will remain hawkish in the short term but will cut benchmark rates sharply after that, according to a Monday note from Deutsche Bank.

The central bank has hiked rates by 375 basis points so far this year, with another half-point increase widely expected next month. Even more tightening will come, with analysts at Deutsche Bank increasing their view on the terminal rate, which they now see hitting 5.1% in May.

“Risks remain skewed to the upside, and we caution that the transition to pausing and eventual cuts may not be entirely linear,” the note said. “If elevated inflation and labor market imbalances persist, or financial conditions fail to tighten, a higher terminal rate could be needed.”

Meanwhile, the economy will slow down amid the aggressive tightening, and Deutsche Bank sees an 80% probability of a recession in the next year.

Analysts anticipate a moderate recession beginning mid-2023, with real GDP falling about 1.25 percentage
points over three quarters and the unemployment rate reaching a peak of 5.5%.

“With a sharp rise in the unemployment rate and inflation showing clearer signs of progress, the Fed should cut rates by 200bps by mid-2024 when it approaches a neutral level around 3%,” analysts said. “QT should cease when the Fed cuts rates, to ensure both tools are not working in competing directions. Balance sheet drawdown could be modified or halted earlier if reserves continue to fall faster than expected.”

The first rate cut will be 50 basis points in December 2023, followed by 150 basis points of cuts into 2024, the note said.

The last Fed Dots Plot shows the next leg of The Fed Rollercoaster.

In the short term, Fed Funds Futures are pointing at another 106 basis point increase by June 2023.

Yes, its The Fed Rollercoaster!

US Mortgage Rate Declines To 6.77% As European Yields Increase (Fed Starts Digital Dollar Experiment … In Terror!)

Despite The Federal Reserve removing some of the monetary punch bowl, Bankrate’s 30-year mortgage rate declined to 6.77% yesterday.

Catch a rising yield and put it your pocket. European sovereign yield are up over 10 basis points today.

On this side of the pond, The Federal Reserve has begun their experiment with big banks using digital currency. This is a step towards going to a cashless economy.

Why is this terrifying? Blockchain technology is a fantastic innovation for processing payments given its ledger capabiliities. But that means that The Federal Reserve might be able to look at your complete history of expenditures. Or worse, perhaps even shut down your ability to make payments, This may lead to a China-style “social credit score” where the Fed and the Federal government punish people for driving “too much” increasing your carbon footprint or eating non-Federal government approved foods and lowering your social credit score.

Will there be safeguards? Allegedly, but remember the FBI hid Hunter Biden’s laptop prior to the Presidential election of late 2020. And HOW did our nation’s regulators completely drop the ball on Sam Bankman-Fried (or Spam Bankfraud)?

Thus, it is an Experiment in Personal Liberty Terror.

Sorry, the poster for Experiment In Terror looks like Biden sniffing a teenager girl.

The Deep! The US Treasury 10Y-2Y Yield Curve Keeps Going Deep Into Inversion As M2 Money YoY Collapses

The US economy is in “The Deep.” Deep into yield curve inversion, that is.

The US Treasury 10Y-2Y yield curve swam deeper into inversion at -75 basis points. The deepest inversion since just before The Great Recession and housing market crash.

Trabucco Road? US Consumer Credit Outstanding SOARS As Inflation Soars And Personal Savings Collapses (Cryptos Rally As Jim Cramer And ARK’s Cathie Wood Buy The Dip!)

Wasting away again in Biden’s inflationville.

During the Covid crisis of 2020 (red box). consumer credit declined and households were saving. But following the end of US Covid economic shutdowns, we saw inflation soaring to 40-year highs as Biden declared war on fossil fuels and a Pelsoi-led Congress went on an epic spending spree. But with soaring inflation, came a decline in personal savings and soaring consumer credit outstanding in an attempt to cope with Bidenflation.

Meanwhile, in the crypto universe, CNBC’s Jim Cramer and ARK’s Cathie Wood are going big for cryptos. With Wood buying Bitcoin and Cramer touting Coinbase.

Hmmm.

But at least Litecoin and the others are up today. Likely because Cramer and Wood are touting cryptos with “buy the dip!” strategy.

And on the Sam Bankman-Fried fiasco front, I am watching the deflection of wrongdoing from SBF to his girlfriend and now the co-CEO of Alameda Research, Sam Trabucco.

Bloomberg: He has a degree from MIT and cut his teeth as a trader at Susquehanna International Group. Yet the former co-head of Alameda Research made it clear that poker and black-jack tables were where he honed the gambler’s instincts he applied to cryptocurrency trading.

“I may or may not be banned from 3 casinos for this,” Sam Trabucco once tweeted about counting cards at black jack tables.

Trabucco Road?

Limbo Rock! How Low Can The Treasury Yield Curve Go? (Now At -70 Basis Points, Most Inverted Since 1981)

How low will the US Treasury 10y-2y yield curve go?

As of today, the US Treasury 10yr-2yr yield curve is the most inverted since 1981 at -70 basis points.

Meanwhile, equity put/call ratio from CBOE spiked yesterday to highest since 1997.

I am disappointed that The New York Times cancelled their $2,400 event to listen to Sam The Sham Bankman-Fried, Vlad “Show my your money!” Zelensky, Larry “The Big Fink” Fink and Janet “We never saw it coming” Yellen. I would have loved to do the New York Times job for them and ask hard questions to Sam The Sham and Zelensky about money laundering.

Larry Summers Says FTX Meltdown Has ‘Whiffs’ of Enron-Like Scandal (Or Solyndra, A Democrat Boondoggle) Bitcoin Falls Another -6%

Former Obama economist and Harvard University President Lawrence Summers says that the FTX meltdown whiffs on an Enron-like scandal.

“A lot of people have compared this to Lehman. I would compare it to Enron,” Summers told Bloomberg Television’s “Wall Street Week” with David Westin. “The smartest guys in the room. Not just financial error but — certainly from the reports — whiffs of fraud. Stadium namings very early in a company’s history. Vast explosion of wealth that nobody quite understands where it comes from.”

Lehman, Enron? How about Solyndra, one of the biggest political boondoggles in US history.

About two years after the Obama administration co-signed $535 million loans to Solyndra, the company filed for bankruptcy on September 1, 2011. A 2015 report from the Department of Energy found major flaws in Solyndra’s business practices and claimed the company made “inaccurate and misleading” statements to obtain the loan guarantees, and also found fault with Department of Energy oversight.

Which brings us to FTX and Sam Bankman-Fried (the son of Stanford law professor Barbara Fried and co-founder of the political fundraising organization Mind the Gap, which advocates for progressive political candidates and funds get-out-the-vote groups). Sam Bankman-Fried was a big Biden donor. What are the odds that The Federal government will impartially investigate SBF and the FTX fiasco? ZERO!

Why did FTX run into trouble?

FTX has a native cryptocurrency token called FTT, which traders use for operations like paying transaction fees. Last year, Mr. Zhao sold his stake in FTX back to Mr. Bankman-Fried, who paid for it partially with FTT tokens.

On Nov. 2, the crypto publication CoinDesk reported on a leaked document that appeared to show that Alameda Research, a hedge fund run by Mr. Bankman-Fried, held an unusually large amount of FTT tokens. FTX and Alameda are meant to be separate businesses, but the report claimed that they had close financial ties.

Binance announced on Nov. 6 that it would sell its FTT tokens “due to recent revelations.” In response, FTT’s price plummeted and traders rushed to pull out of FTX, fearful that it would be yet another fallen crypto company.

FTX scrambled to process requests for withdrawals, which amounted to an estimated $6 billion over three days. It seemed to enter a liquidity crunch, meaning it lacked the money to fulfill requests.

How did Binance intervene?

On Tuesday, Binance said it had reached an agreement to bail out FTX by buying the company. But, Mr. Zhao added in the announcement, “Binance has the discretion to pull out from the deal at any time.”

In a concurrent announcement, Mr. Bankman-Fried said the deal would protect customers and allow FTX to finish processing their withdrawals. He attempted to dispel rumors of conflict between FTX and Binance, adding, “we are in the best of hands.”

His last quote made me laugh.

Bitcoin plunged another -6% today as gold (gold line) and the S&P 500 (yellow line) rose. Moral to the story? Nothing has been the same since The Fed started tightening.

All cryptos are down today (except Litecoin). The three biggest, Bitcoin, Ethereum and Binance Coin are all down over 5%.

Why does Sam Bankman-Fried remind me of the late John Belushi?

Here is Sam Bankman-Fried defending his actions to his law professor Mom.

The Gap! US Mortgage Demand Crashes As Fed Tightens (Taylor Rule Estimate Now 13.85% Versus 4.00% Current Target Rate)

The October Senior Loan Officer Opinion Survey on Bank Lending Practices came out yesterday and its a doozy.

The Net Percentage of Domestic Banks Reporting Stronger Demand for Mortgage Loans is sinking faster than Joe Biden’s oratory skills as The Fed tightens their monetary belts.

Jumbo mortgages, those that are greater than FHFA’s conforming loan limit, are tanking as well.

And today, the University of Michigan (BOOO!!) consumer survey for housing buying conditions fell to the lowest level in recorded history.

Given the latest inflation numbers (improving from disastrous, 8.2% YoY to really horrible, 7.70% YoY), and unemployment rate rising from 3.5% to 3.7%, we now see that Taylor Rule estimate for Fed Funds is now … 13.85%. The US is currently at 4.00%. THAT is a big gap!

Yes, The Fed will not be able to fill the gap between the Taylor Rule and the current Fed Funds Target Rate, without incredible damage being done.

Unfortunately, this is an ACTIVE FAILURE for The Fed which has left monetary stimulus too high for too long since late 2008.

On a personal note, I am glad the midterm elections are over. We saw John Fetterman arguing until he was blue in the face that he loved fracking and will continue to let Pennsylvania frack. Then PA governor-elect Josh Shapiro came out yesterday and said that PA will end all fracking. And we are to believe that Lt Gov Fetterman did not talk with PA Attorney General Shapiro about fracking? To quote Joe Biden, “C’mon man!”

Double Whammy! Mortgage Holders Lose $1.3 Trillion in Equity in Q3 As Price Correction Continues (Nationally, Homes Shed 2.6% of Value Over Past Three Months As Treasury Yield Curve Remains DEEPLY Inverted)

Yes, this is an economic double whammy!

First, according to Black Knight, US home values declined -2.6% over the past three months.

Second, the US Treasury 10Y-2Y yield curve remains near 1980s low.

There is a third whammy, rising utility costs (highest in a decade).

Yes, its a double whammy!

Terminal Velocity? Bank of England Raises Rates By 75 Basis Points, Biggest Hike in 33 Years (Follows US Fed Is Tightening, But Fed Still Slow To Shrink Balance Sheet As M2 Money Growth Collapses)

The Bank of England followed the Fed’s 75 basis-point increase with an equivalent hike on Thursday, but strongly pushed back against market expectations for the scale of future increases, warning that following that path would induce a two-year recession. The pound fell 1.8% to $1.1183.

Stocks and bonds fell as Jerome Powell’s warning that the Federal Reserve would raise interest rates more than previously anticipated sapped risk appetite. The dollar gained.

Futures on the S&P 500 fell 1% in the wake of Wednesday’s 2.5% drop. The selloff spread to Europe and Asia, where China’s affirmation of its Covid-Zero stance dashed hopes of a reopening. Lumen Technologies Inc., Peloton Interactive Inc., Moderna Inc. and Qualcomm Inc. tumbled in premarket trading, while Etsy Inc. and EBay Inc. rose.

So, the BofE, Fed and ECB are back to 2008/2009 era central bank rates.