Confounded Interest – Anthony B. Sanders
Financial Markets And Real Estate
While the Bureau of Labor Statistics uses a lame measure of house price inflation, US existing home sales MEDIAN PRICE YoY is growing at 13.9%.
US existing home sales rose by 6.46 million units SAAR, less than the expected 6.53 million units SAAR.
Where is the inventory increases that various talking heads were predicting would emerge? Maybe they meant SUBMERGE?
The good news is that US Real GDP grew at 2.3% QoQ in Q3 thanks to massive Federal government and Federal Reserve stimulus. The bad news? Prices are growing at rate of 6% QoQ, three times higher than the growth of real personal consumption.
Runaway inflation, cooling personal consumption. This is the definition of “stimulyltpo”: the excessive spending by Washington DC in conjunction with excessive monetary stimulus from The Federal Reserve.
Let’s see if Christmas season is jolly with Sewage Joe trying to scare everyone about Omicron.
(Bloomberg) — The amount of money that investors are parking at a major central bank facility climbed to yet another all-time high as supply-demand imbalances continue to dog U.S. dollar funding markets.
Eighty-one participants on Monday placed a total of $1.758 trillion at the Federal Reserve’s overnight reverse repurchase agreement facility, in which counterparties like money-market funds can place cash with the central bank. That surpassed the previous record volume of $1.705 trillion from Dec. 17, New York Fed data show.
Demand for the so-called RRP has climbed further as principal and interest payments from government-sponsored enterprises has entered short-end funding markets. However, that cash is expected to exit the overnight space by the end of the week as the Treasury ramps up its issuance of Treasury bills now that Congress has increased the debt limit.
Overall volume has been rising this year as a flood of cash continues to overwhelm the U.S. dollar funding markets due to central-bank asset purchases and the drawdown of the Treasury’s cash account, which is pushing reserves into the system. The larger takeup looks set to persist even as the Fed tapers its asset-purchase program — something it began this month — because the supply-demand imbalances in short-end securities are likely to persist.
Then we have the Turkish Lira volatility hitting an all-time high.
And finally we have the US Current Account Balance rising to levels last seen in 2006 just after the peak of the US housing bubble.
While the Chinese Wuhan virus (aka, the Fauci Flu) has plagued the world, another Chinese “export” is also suffering what is known as contagion: China’s real estate sector.
Real estate companies Evergrande, Kaisa, Shimao and Chinese Estates are falling like a rock today.
But it has been a steady decline since Q1 2021 except for Chinese Estates. But they have resumed their death dive.
On the debt side, Evergrande is down to 18.856 while Kaisa has lost less (but still quite a bit) and Shimao’s bond look almost like a good investment, relative to Kaisa and Evergrande. But they are all sucking wind. Maybe they all have the Fauci Flu?
Let’s see if this latest Chinese “export” washes ashore in the USA.
The Freddie Mac 30-year mortgage commitment rate rose to 3.12%. But once we subtract the gut-wrenching inflation rate, the REAL 30-year mortgage rate is -3.689%.
The nominal Freddie Mac 30-year commitment rate rose to 3.12% which is still lower than 3.18% back on April 1, 2021 after surge in rates following Biden’s taking the office of Presidency in January.
Meanwhile, the REAL Case-Shiller National home price index (CS National YoY – CPI YoY) is growing at the fastest rate in history. Great if you already own a home, but lethal if you are renting and want to move to homeownership.
Meanwhile, REAL wage growth is at -1.94% YoY.
Well, Chairman Powell and The Gang failed to raise the Fed Funds Target Rate yet again, but let us know that they will tighten someday soon. The Fed Funds Futures are signalling a rate hike at the June 2022 meeting and another at the November meeting.
While The Fed couldn’t care less about the Taylor Rule, it is still interesting to note just how out of touch The Fed FOMC is with reality. The Taylor Rule indicates that their target rate should be 16.94% rather than the current target rate of 0.25%.
Keeping the target rate unchanged in the face of gut-wrenching inflation is a bold strategy, Cotton.
Let’s see if it pays off.
Fed Chair Jerome Powell is the God of Hellfire!
The Federal Reserve’s massive stimulus combined with Federal spending has led to US housing starts rising 11.8% in November. Housing starts remain elevated compared to pre-COVID levels.
1-unit starts rose 11.29% while 5+ (multifamily) starts rose 12.1% in November. All areas in the US saw growth except for the Midwest where starts fell by 7.27%.
Yes, with Powell leaving rates untouched … again … in The Fed’s effort to … not scare markets. Inflation be damned. Powell is the God of Hellfire!
Like John Belushi from The Blues Brothers, Fed Chair Jerome Powell is saying that the markets lackluster response in terms of bond yields to his “hawkish” announcement yesterday “isn’t his fault.”
(Bloomberg) Federal Reserve boss Jerome Powell appears unperturbed by the fact that longer-term bond yields remain low even as officials lay the ground work for tighter policy and inflation is ticking higher.
While the drop in longer-term rates may be viewed by some as indicative of where so-called terminal rates for U.S. policy might ultimately lie, Powell on Wednesday emphasized the impact of ultra-low yields in places like Japan and Germany in helping to keep them anchored.
“A lot of things go into the long rates and the place I would start is just look at global sovereign yields around the world,” Powell said at a news conference following the Fed’s final scheduled policy meeting for the year, which saw officials ramp up the pace of stimulus withdrawal and boost predictions for rate hikes in 2022. The Fed Chair noted that rates on Japanese and German government bonds are “so much lower” than those on Treasuries and that with currency hedging taken into account American debt provides investors with a higher yield. “I’m not troubled by where the long bond is,” he said.
This stands as something of a contrast to the view expressed back in 2005 by one of Powell’s predecessors. Back then, Fed chief Alan Greenspan described a decline in long-term bond yields even in the face of six policy rate increases as a “conundrum.”
Or it could be that no one REALLY believes that Central Banks will ever cut interest rates, despite surging inflation.
The US Treasury 10-year yield dropped 7 basis points overnight and remains just south of 1.50%. The Eurozone remains below 1% (with Germany at -0.358% and France at -0.009% at the 10-year mark). Japan is at 0.039%. This is what Powell means by low global rates keeping US long-term rates down.
The 10-year Treasury term premium (measured before Powell’s head fake on raising rates) has returned to pre-Biden levels.
Meanwhile, global equities futures are up across the board (well, except for Mexico).
Gold rose on Powell’s “Tomorrow” talk while the US Dollar fell.
The Fed could have raised their target rate if they were REALLY interested in cooling inflation. The Taylor Rule remains at 14.94% while The Fed is stalled at 0.25%. Even if you don’t like the Taylor Rule, it still highlights how ridiculous Fed Stimulypto is.
Well, we do have a government-propelled economic recovery, but at a cost of declining REAL wages thanks to the highest inflation rate in 40 years.
According to Markets Insider, lumber prices are up 127% from its most recent low. With demand high and supplies low, record low interest rates still drive homeowners to the market, so much that builders are struggling to keep up.
Note the surge in lumber futures prices back in April and May 2021 that eased. But lumber futures prices are gaining steam again.
Let’s see what happens to lumber prices and new home prices if and when The Federal Reserve decides to takes its gargantuan foot off the monetary accelerator pedal.
In other housing-related news, China’s Evergrande remains in the news as its stock price founders.
Perhaps Evergrande should declare bankruptcy.
The U.S. went on a borrowing binge last year and the hangover could make it harder for the Federal Reserve to fight inflation without crashing the economy.
Corporate debt has surged $1.3 trillion since the start of 2020 as borrowers took advantage of emergency Fed action as the pandemic spread, slashing interest rates and backstopping financial markets to keep credit flowing. More debt held by more companies suggests potential risks as borrowing costs rise from currently low levels.
That could create financial stability concerns for Fed Chair Jerome Powell and his colleagues as they debate removing pandemic support in the face of what a report Friday showed were the hottest price rises in almost 40 years. And a tough task: Not since Alan Greenspan’s time has the U.S. central bank tried to navigate the economy back to price stability from too-high inflation.
Powell’s challenge is to try to curb price pressures without large costs to employment or growth, a move that would likely anger both political parties and blotch his record with the first Fed-assisted hard landing since the 1990-1991 downturn.”
The Fed’s Financial Stability Report on Nov. 2 noted that key measures of vulnerability from business debt, including leverage and interest cover ratios, were back at pre-pandemic levels.
To be sure, big firms that used the opportunity to issue longer-dated bonds at lower rates have strengthened their balance sheets.
Source: Moody’s Investors Service
The Federal Reserve is laying the groundwork for the start of a cycle of interest-rate hikes that the bond market warns might be unusually constrained in how far it can go, setting the two on a collision course where one will eventually have to give.
The Treasuries yield curve — or the spread between short-term and long-term interest rates — looks set to be the flattest at the beginning of a Fed tightening cycle in a generation if the central bank begins raising its benchmark overnight rate in mid-2022 as now forecast. The two-year, 10-year spread is about 83 basis points, with futures indicating 55 basis points in June.
The problem facing Powell and The Fed is that they are stuck in a trap. They can’t raise their target rate more than just a little (say 50 basis points) and shrinking their enormous balance sheet is really their only option. And that may fail if the 10 year Treasury yield starts to rise too rapidly or gets too high.
Here is one of the traps facing Powell and the Gang after their Covid printing splurge: dying M2 Money Velocity.
It will only get worse as Congress and the Biden Administration keep spending like drunken ORCs from Lord of the Rings. Particularly when the Penn-Wharton Budget Model finds that Build Back Better will reduce the long-term GDP by 2.8 percent, reduce wages by 1.5 percent, and reduce work hours by 1.3 percent. The only thing it will expand is government debt, by 25 percent.
The Washington DC spending Gollums need to control their urges.
Inflation keeps rising and consumers keep getting hurt. No wonder President Biden’s team sent out a media splash asking them to put a smile on that face and hype the economic recovery.
Real wage growth fell to -1.9% YoY in the latest Consumer Price release. As The Fed keeps its massive foot on the monetary gas pedal.
The overall Consumer Price Index (CPI) rose 6.8% YoY.
The biggest gains in Consumer Prices were for energy with gasoline rising 58.1% YoY. But almost nothing was spared the rod of government policies.
Core inflation (CPI – energy – food) rose to 4.9% YoY, the highest since 1991.
The Taylor Rule, what The Fed Funds Target rate SHOULD be, rose to 16.94%. Versus the current rate of 0.25%. Its as if The Fed Open Market Committee is watching Tik-Tok instead of the economic numbers.
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