Confounded Interest – Anthony B. Sanders
Financial Markets And Real Estate
That Bidenflation is really hurting Americans.
Start with the UMich Buying Conditions for Houses. It “rose” to 83. Unfortunately, 100 is the baseline and any number below 100 is bad. The reason? The massive increase in US home prices since 2020.
But retail sales are hurting thanks to higher prices. Retail sales less food services and auto are DOWN 3.1% MoM.
Meanwhile, US industrial production fell to -0.3%.
Ever wonder why prices are rising so fast? One reason is that with rapidly rising energy prices under the Biden Administration, the costs are getting passed-through to consumers in the form of higher prices.
According to the Cass Corp Freight Index, the total spent in December on shipping goods to their customers in the US spiked by 43.6% from December 2020 to December 2021. Not surprising since energy prices over the past year have soared by almost 50%.
But at the same time, the Baltic Dry index (The Baltic Dry Index (BDI) is a shipping and trade index created by the London-based Baltic Exchange. It measures changes in the cost of transporting various raw materials, such as coal and steel) is crashing thanks to FEAR created by Omicron.
And yes, energy prices are surging again in 2022 after cooling off in Q4 2021.
Mortgage rates in the U.S. rose for a third straight week, reaching the highest point in almost two years.
The average for a 30-year loan was 3.45%, up from 3.22% last week and the highest since March 2020, Freddie Mac said in a statement Thursday.
Rates tracked a jump in yields for 10-year Treasuries, which climbed to levels not seen since early 2020, before the pandemic roiled financial markets. Signs point to borrowing costs rising further as the job market improves and the Federal Reserve steps up its efforts to tame inflation.
That would increase the burden on homebuyers who are already stretching to afford a purchase. Rates for 30-year mortgages tumbled to a record low of 2.65% a little more than a year ago.
Cheap loans have helped fuel a housing rally that’s still running hot even as home prices soar out of reach for many Americans.
But wait! The REAL 30-year mortgage rate (nominal 30-year rate – CPI YoY) is -3.59%.
Lael Brainard, Biden’s nominee to be Vice Chairman of The Federal Reserve, has been one of the “inflation is transitory” crowd. US Senator Toomey is questioning Brainard in today’s hearing. From Toomey’s opening statement:
Last year, Governor Brainard repeatedly insisted that inflation was transitory. We have now had nine consecutive months where inflation has been more than two times the Fed’s 2% target. That makes it pretty clear that inflation is not transitory. Yesterday’s CPI release of 7.0%—the highest in 40 years—confirms that.
Inflation is a tax that is eroding Americans’ paychecks every day. Even though wages are growing, inflation is growing faster and causing workers to fall further and further behind.
At least the REAL mortgage rate is negative!
I hope Senator Toomey shows Brainard this chart of “transitory” negative wage growth.
Negative wage growth and negative REAL mortgage rates. What a total mess!
This is like the Samuel Beckett play “Waiting For Godot.” Except we are waiting for Jerome Powell and The Federal Reserve to do something.
December’s consumer price index (CPI) is out and its a doozy, though expected. The CPI year-over-year (YoY) rose 7% in December.
If we exclude food and energy, CPI rose by 5.5% YoY.
Thanks to Biden’s assault on the energy sector, energy prices are up nearly 50% YoY.
REAL average hourly earnings YoY? It has crashed to -2.32%.
And with 7% inflation, the Taylor Rule model suggests a Fed Funds Target rate of … 17.84%. Bear in mind that the current target rate is 0.25%.
Meanwhile, grocery store shelves remain empty like we are living in Venezuela. Bidenzuela??
Meanwhile, we are waiting for Godot Powell to start taking action instead of jawboning.
Recently, the White House claimed that the Biden Administration created more jobs (per month) than Trump, Obama, George W Bush, George HW Bush, Clinton and Reagan.
It always helps to be elected President after a recession when the economy naturally snaps back from the economic doldrums (like Obama after the financial crisis, Clinton after the first Gulf War, Reagan after Carter).
So let’s look at job totals under Trump, the COVID lockdowns, the ensuing economic damage, and the Biden “rebound.” In a brief two months in early 2020 thanks to COVID and lockdowns, the US economy lost 22.362 MILLION jobs. But the snap-back effect under Trump was 12.342 MILLION jobs added back by the time Biden was sworn-in as President.
Under his term as President, Biden has benefited from “Snap-back inertia” and saw 6.215 MILLION jobs added in just a year. Pretty impressive, except that it is about half the snap-back effect experienced under Trump.
How about REAL wage growth (nominal wage growth less inflation)? Real wage growth was higher under Trump and has been declining under Biden. Strange that the White House isn’t bragging about declining real wage growth under Biden.
Let’s see how Omicron impacts the labor market and whether Biden/Psaki will take credit for the snap-back from Omicron.
Call this the Biden malaise (or Ka-malaise) for wage growth. Where inflation nukes positive wage gains.
Here is Vice President Ka-mailse singing “He’s me pal!” about Biden’s fantastic jobs recovery.
According to Attom, US home prices are growing faster than rents in nearly 90 percent of the nation; but prices are still more affordable in almost 60 percent of U.S. markets; Renting remains more financially viable in most-populous urban areas.
If we look at Attom’s map of affordability, you can see that in western states, it is more affordable to rent. And in megalopolis (Boston, New York, Philadelphia, Washington DC). And Miami. But elsewhere in the eastern states, it is more affordable to buy than to rent.
Of course, any where I live like Phoenix, Fairfax VA, Chicago IL, and Columbus OH it is more affordable to rent than to own.
You will notice that the areas where buying is more affordable than renting tend to be smaller towns with slower growth, while larger cities tend to be more affordable to rent.
People Get Ready! There’s a train a coming. Its called The Federal Reserve.
The market is pricing in 3 rate increases in 2022. And perhaps a faster than expected withdrawal of balance sheet stimulus.
As a result, The Russell 2000 Growth index is plunging (orange line) relative to the Russell 2000 Value index (white line) which is down in 2021.
The Société Générale (SGI) US value and “quality” indices are telling the same story. The SGI US “Quality” index is falling like a paralyzed falcon while the SGI US Value index is up for 2022.
It is somewhat mystifying that markets would be soooooo sensitive to 3 rate increases from The Fed, particularly since the Taylor Rule suggests that The Fed’s target rate should be 17.36%. Even if you don’t like the Taylor Rule or disagree with its inputs, you must admit that the gap between where The Fed is (0.25%) and where they should be (17.36%) is … k-razy.
But here is where we sit.
It looks like markets are buying into the prospect of The Federal Reserve raising rates three times (Bob) in 2022. And ceasing COVID monetary stimulus.
Today, the 10-year Treasury yield rose to PRE-COVID levels of 1.783%. And the Freddie Mac 30-year mortgage commitment rate rose to 3.22%, the highest since May 2020.
Today’s rising wage rates (although negative in terms of REAL wage rates) will likely put a Peruvian fire under The Fed’s behind. As of this morning, Fed Funds Futures are still pointing to three rate increases in 2022 (May, July and December).
And The Fed is supposed to be winding down the COVID monetary stimulus.
Why a Peruvian fire? Even Peru’s central bank is raising its key interest rate to 3% after soaring inflation.
Let’s see if Powell and The Gang follow through … or reveal themselves to be Peruvian Chickens.
The November jobs report is out and the highlight is that US Average Hourly Earnings GREW at a rate of 4.7% YoY. Unfortunately, inflation is still raging resulting in REAL US Average Hourly Earnings DECLINING at a rate of -1.71% YoY.
REAL US home price growth is slowing and is at 12.856% YoY as REAL average hourly earnings slowed to -1.7094% YoY.
The lowlight of the November jobs report is that only 199K jobs were added versus the 450K jobs expected to be added. At least the unemployment rate fell to 3.9%.
WHERE we the jobs added? Leisure and hospitality led the way! Hey bartender.
Yes, REAL wage growth and REAL home price growth are slowing.
The world has become a wild and wacky place since COVID was unleashed on an unsuspecting population. Since the massive spending spree by The Federal government in the USA coupled with extraordinary monetary stimulus from The Federal Reserve, US inflation has shot up to 6.8% YoY.
German is also having an inflation moment. With their CPI YoY running at 5.3%, faster than the anticipated 5.1%.
At least the German 10-year sovereign yield is ALMOST back to 0%.
France, on the other hand, is seeing inflation rising to 2.70% YoY.
While the French 10Y sovereign yield rose to 0.2531%.
France’s Macron certainly likes to have his photo taken as if he wants to go 10 rounds with UK’s Tyson Fury.
Confounded Interest - Anthony B. Sanders 
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