Confounded Interest – Anthony B. Sanders
Financial Markets And Real Estate
We are closing out the first week of the New Year and 30-year conforming mortgage rates are up slighlty.
Mortgage rate GROWTH is now at 8% year-over-year (YoY). While M2 Money growth has died and is down -3% YoY.
Bank credit growth has been negative since July 2023 and M2 Money growth has been negative for the entirity of 2023.
Mortgage rates should decline in 2024 as The Fed cuts rates to prop up Vacation Joe.
Here is a video of The Federal Reserve managing interest and mortgage rates.
Government power is causing inflation and middle class economic repression.
For example, US credit card debt is at an all-time high as consumers attempt to cope with inflation under Biden.
While inflation RATE is finally cooling off, the LEVEL of inflation remains high. Purchasing power for consumers is down 15% under Vacation Joe.
With structural inflation rising again.
Following yesterday’s hotter-than-expected CPI, this morning’s Producer Price Index was expected to accelerate (headline not core). However, it did not – headline PPI actually decline 0.1% MoM (+0.1% MoM exp). That is the 3rd straight month of ‘deflation’ but inched PPI YoY up to +1.0%
Energy and Construction cost deflation dominated the headline PPI MoM decline…
Energy and Food deflation dominated the slowing of the YoY PPI (though Services is re-accelerating)…
Excluding food and energy, the core PPI was unchanged MoM in December – the third month of unchanged in a row, which dfragged the Core PPI YoY down to +1.8% (the lowest since Dec 2020)…
Goods PPI deflated and Services was unchanged…
Half of the decrease in the index for final demand goods is attributable to prices for diesel fuel, which dropped 12.4%
Over 80% of the decrease in the index for unprocessed goods for intermediate demand can be attributed to a 13.2% drop in prices for crude petroleum.
Reminder, disinflation does not mean lower prices. Core producer prices are up 16.9% since President Biden came into office (and headline PPI up over 18%)…
Finally, the deflationary impulse remains for the headline PPI as ‘intermediate PPI’ remains below zero BUT it is starting to accelerate higher…
That’s a little worrying given The Fed seems adamant it wants to cut in March to save the banking system from collapse.
I am amazed that the Biden family babysitter (Jill Biden) is trashing Trump supporters calling them insurrectionist and dangerous extremists while her demented husband tries to use courts to remove his primary Presidential candidate from the ballot and violates Federal law by leaving the border wide open, letting in millions of unvetted immigrants. Rep Jerry Nadler (D-NY) admitted that he is in favor of open borders because 1) fruits and vegetables need to be picked and 2) Democrats need to import Democrat voters because Americans are fed up with Democrat policies. Like rampant inflation.
And Jill Biden said Joe works hard EVERY DAY! Except for the near 40% of his Presidency spent on vacations to Delaware, Nantucket, Virgin Islands and whereever else large corporate donors live.
Yes, it’s Biden’s fiscal inferno! And getting worse as the Presidential election approaches!
Remember when I showed that the “stealth” secret sauce behind Bidenomics was nothing more than a massive, multi-trillion debt-fueled spending spree, which led to the biggest peactime, non-crisis budget deficit in US history, with the total deficit for fiscal 2023 ending just over $2 trillion, or double the prior year, something which BofA’s Michael Hartnett called the “era of fiscal excess”?
Well, we have news for you: if 2023 was bad, 2024 – an election year of course – is shaping up to be far worse.
Moments ago the US Treasury reported the budget deficit picture for December and it will come as no surprise to anyone that the US has continued to spend like a drunken sailor, or rather, even more. As shown in the chart below, in the month of December, the US collected $429 billion through various taxes, while total outlays hit $559 billion…
… resulting in a December deficit of $129.4 billion.This may not sound like a lot, but December is actually one of those months when the US deficit is relatively tame, or used to be.
As shown in the next chart, traditionally the December deficit was barely in the $10-20BN range… until 2020 when it exploded to an all time high of $140BN. And while it dropped sharply in 2021, it rebounded dramatically in 2022, and rose to just shy of the December crisis high last month!
Here is some more context: tax receipts of $429.3BN in December were down 5.6% from the $454.9BN in December 2022 and down a whopping 11.8% from December 2021. On an LTM basis, US total tax receipts were $4.521TN, or down 7.2% YoY. This is now the 9th consecutive YoY decline in LTM tax receipts, something that historically has only taken place when the US was in a recession. As an aside, the “smart economists” were certain that the collapse in tax receipts would reverse after November when the postponed California taxes would be collected. Well, November has come and gone and the big picture is just as ugly.
Looking at outlays, unlike tax receipts, there is danger of a decline… ever; and indeed in December the US spent a total of $559 billion, up 3.5% from the $540BN spent a year ago, and up even more from the $508BN in 2021. On a 6 month moving average basis, we are rapidly approaching the exponential phase even when accounting for the spending burst in 2020 and 2021.
Putting it all together, we get the scariest chart of all: the YTD budget deficit three months into fiscal 2024 is already $509 billion, which would be the biggest deficit in US history after one quarter with the exception of the covid outlier year of 2021 when the US injected multiple trillions in stimmies.
As for the final, and most shocking, data point, the December budget deficit of $129.4 billion was more than $40BN higher than the $87.5BN median estimate, and was more than 50% higher compared to the $85BN December deficit in fiscal 2022.
Needless to say, this is completely unsustainable and assures fiscal collapse for the US, not if, but when. Then again, we already knew this thanks to the CBO which was kind enough to chart the endgame:
What is funniest about all this is that the US is on an accelerating path to ruin less than one year after the imposter in the White House published this laughable propaganda.
We can’t wait to see what really happens to the budget deficit over the next 10 years. Spoiler alert: there won’t be a happy ending.
And here is The Federal Reserve Board coming to the rescue of Biden!
Inflation is feelin’ hot, hot, hot!
Although core inflation declined in December (CPI all items less food and energy), it is still hot, hot, hot at 4% Year-over-year (YoY). This raises the following question: Is The Fed tightening too much? Aka, yet another Fed policy error?? Since The Fed target rate is 5.50% and core inflation is now 4%?
Headline Consumer Price Inflation printed hotter than expected in December, +0.3% MoM vs +0.2% exp and +0.1% prior, pushing the YoY headline CPI up to +3.4% (from +3.1% prior and hotter than the +3.2% exp)…
Services (Shelter mostly) costs re-accelerated and energy deflation stalled in December…
On the brighter side, core CPI according to the BLS rose 0.3% MoM as expected, dropping the YoY change below 4.00% for the first time since May 2021…
Goods deflation has stalled as the used cars and trucks index rose 0.5 percent over the month, after rising 1.6 percent in November.
More problematically for The Fed (and the rate-cut ‘hypers’), is the fact that Core CPI Services Ex-Shelter (SuperCore) rose 0.4% MoM, upticking the YoY rise to +4.09%…
This is a category that Fed Chair Jerome Powell and other policymakers have highlighted as a focus.
All the subsectors of SuperCore rose MoM with the shelter index increased 6.2 percent over the last year, accounting for over two thirds of the total increase in the all items less food and energy index.
But shelter inflation is slowing (slowly):
And the next time someone from the Biden administration says ‘inflation is down’ in an attempt to gaslight the public into believing ‘prices are down’ – show them this chart…
Four of the six major grocery store food group indexes increased over the month.
The index for meats, poultry, fish, and eggs rose 0.5 percent in December, led by an 8.9-percent increase in the index for eggs.
The index for food away from home rose 5.2 percent over the last year.
The index for limited service meals rose 5.9 percent over the last 12 months, and the index for full service meals rose 4.5 percent over the same period.
The White House was quick to note that real hourly earnings was positive in December (+0.8% YoY) but that number is the aggregate of ALL American workers.
If we drill down to the ‘average joe’ – production and non-supervisory jobs – their wages are up 17% since Biden was elected… The only problem is, the cost of food since then has surged almost 21%…
Is this a pause before the re-plunge? M2 thinks so…
Not so much Goldilocks perfection.
Powell is in a real pickle now – does the Fed begin shrinking QT in March (which it has to if it is terminating BTFP and Reverse Repo is drained) without starting rate cuts.
Nobody manipulates markets like The Federal Reserve! Nobody but The Fed.
Here we sit with core inflation rate BELOW the current Fed Funds Target Rate (upper bound). So is it time to start withdrawing its more than ample monetary stimulus. Like the Bank Term Funding Program.
The Federal Reserve is likely to retire the Bank Term Funding Program in March. This would entail an additional ongoing headwind for reserves, and thus liquidity, through 2024. At the margin, this adds weight to the case for the Fed cutting interest rates sooner in the year.
The BTFP was created in the wake of the SVB crisis to help struggling banks get access to liquidity when bond prices were dropping. However, its use in recent months has jumped to over $140 billion. That is not, however, a sign of banking stress.
The chart below shows the usage of the BTFP along with the rate paid at the 99th percentile in the fed funds market relative to the upper bound of the range for fed funds.
As can be seen, this is under zero, i.e. banks are not having to pay up to get liquidity.
This is in stark contrast to last March at the time of SVB’s fall when some banks were having to pay 15 bps above the fed funds upper bound for liquidity.
This time the rise in BTFP usage is good old-fashioned arbitrage. After the Fed’s pivot, term rates have come down relative to the policy rate. The cost to use the BTFP is 1y OIS + 10 bps, which is ~4.90%. Banks can post USTs at par as collateral, borrow at this rate, then deposit the funds back at the Fed at the IORB rate (interest on reserve balances), i.e. 5.40%, for a juicy risk-free profit.
This is not good optics, so it is unlikely the program will be renewed when it is due to expire on March 11. Michael Barr, the Fed’s vice chair for supervision, hinted as much on Tuesday when he emphasized the BTFP is an “emergency program.”
And it seems clear the emergency is over. Deposits of small banks (for whom the program was aimed at) have been rising since their drop after SVB’s collapse (both on a seasonally and non-seasonally adjusted basis). That, along with the quiescent fed funds market, suggests banks are not facing stress. Furthermore, the Fed’s pivot has also increased collateral values, making banks’ hold-to-maturity portfolios less underwater.
The BTFP’s expiry would mean another ongoing drain on reserves as the loans expire over the year.
With the Fed now seemingly focused on liquidity in this new paradigm, this adds to reasons why the central bank may cut earlier in the year.
The market is currently pricing 17 bps of cuts for the March 20 meeting, so that’s not an attractive risk-reward, but at under ~7 bps or so that proposition changes – more so if the BTFP is no more.
Meanwhile, the futures market is forecasting rate cuts of over 200 basis points!
The Federal Reserve is a private enterprise that works with The Federal government like in the film “Prometheus” or “Chariots of the Clods.”
The US economy is under a bad sign. And if it wasn’t for The Fed’s money printing, we would have no economy at all!
Unfortunately, that period of relative stability appears to be ending.
The pace of layoffs really seemed to pick up steam at the end of 2023, and the outlook for the coming year is not promising at all. In fact, a survey that was just conducted by Resume Builder discovered that a whopping 38 percent of U.S. companies anticipate that they will conduct layoffs in 2024…
If you currently have a job that you highly value, try to hold on to it as tightly as you can.
Because the employment market is starting to shift in a major way.
In recent weeks, so many large U.S. companies have been announcing layoffs…
Nike has announced a $2 billion cutback over the next three years, with an uncertain number of job cuts included. Toy giant Hasbro will cut nearly 20% of its workforce in 2024, according to reports from the Wall Street Journal. Music service Spotify announced a third round of layoffs. A recent email from CEO Daniel Ek says the company plans to cut its workforce by nearly 20%. Roku is going to be limiting new hires, and laying off about 10% of its workforce, while Amazon layoffs are effecting its new gaming division (all 180 jobs there are being eliminated). Citi CEO Jane Fraser announced layoffs in September, and sources have told CNBC that the bank could let go of at least 10% of its workforce, across several business lines. Flexport Logistics plans to cut up to 30% of its employees, and financial services company Charles Schwab is cutting back by 5-6% of its workforce, according to reports from Business Insider.
Unfortunately, this is just the tip of the iceberg.
Many more layoffs are on the way.
Meanwhile, retailers continue to close stores at an astounding pace…
With the continued rise of online shopping, along with record inflation, it’s no wonder that retailers are suffering steep financial losses. Unfortunately, this means that companies all across the U.S. are downsizing brick-and-mortar storefronts to make ends meet. In 2023, we’ve seen closures from big-name retailers and local shops alike—and the shutdowns don’t appear to be easing up anytime soon.
More than 3,000 retail locations were shut down in 2023, but that is nothing compared to what is coming…
According to UBS equity analyst Michael Lasser, the U.S. remains over-retailed. Lasser estimated that the U.S. will shed almost 50,000 retail stores by 2028. He cites rising operating costs and a higher proportion of e-commerce sales, causing retailers to look closely at store locations and performance.
Can you imagine what our communities will look like if that projection is even close to accurate?
As economic conditions deteriorate, people are going to get more desperate and the conditions in our streets will become even more chaotic.
You may not have heard about this yet, but earlier this week a giant mob of more than 100 young people savagely looted a bakery in Compton, California…
A mob of over 100 looters purposefully crashed a Kia into a small bakery in Compton, Calif., before they flooded in and ransacked the store during a night of rampage on the streets earlier this week.
The thieves had gathered in the area for an illegal street takeover around 3 a.m. Tuesday before making the mile-long trek to Ruben’s Bakery & Mexican Food.
When they got to the locked store, a white Kia backed into the front doors, clearing an entryway for the crowd of pillagers to get to their loot.
And so it goes. Lawlessness is bad for retail businesses. Not to mention the morale of US citizens.
And then we have the office market. The office space vacancy rate in the US has reached its highest level since 1979. In the fourth quarter of 2023 19.6% of office space in major US cities was not leased according to data collected by Moody’s Analytics.
The increase in remote work since the COVID-19 pandemic has caused a large decline in demand for office space, despite increasing attempts to get Americans back in the office. What’s more, on the demand side the stock of office space in the US is the result of earlier booms in commercial real estate construction. The last boom took place between 2012 and 2017, when demand for commercial real estate loans strengthened. On the supply side, lending standards loosened between 2012 and 2015. This era coincides with a strong rise in the commercial real estate price index, which may have motivated banks to expand lending. Loan standards tightened during the pandemic, then loosened again when the economy rebounded, but have tightened since 2021.
Since the Great Recession, commercial real estate prices have more than doubled in nominal terms, but have moved sideways since 2021. This suggests that prices have reached a plateau. However, in recent years inflation has obscured the movement of commercial real estate prices in real terms, which shows a peak in 2021, but since then there has been a decline, almost to the level during the COVID-19 pandemic. In other words, commercial real estate prices are already failing to keep up with inflation. Is this an indication that the commercial real estate bubble is already deflating? With nominal commercial real estate prices remaining elevated, most of the nominal price correction is likely still to come. Since small banks are heavily exposed to commercial real estate, the enduring problems at small banks and the fragility of commercial real estate could provide a dangerous mix that could explode during a recession. For more details, we refer to The commercial real estate-small bank nexus.
I noticed that The Administration has handed propaganda duties off to John Kirby and relegated KJP to relief pitching away from Peter Doocey!
Hey, at least KJP can speak. Unlike Hillary Clinton, the worst public speaker in the world.
Joe Biden can be called “Sloppy Joe” because of the economic havoc he has sprung on an unsuspecting middle class. The following seven charts are what keeps me up at night (unlike what keeps multimillionaire Michelle Obama up at nights).
First, US interest payment on Federal debt is rising faster than our bloated military budget. Thanks mostly to The Fed raising rates to fight inflation under Biden.
Second, contrainer shipping rates are soaring thanks to Iran’s interference in the Middle East and Biden’s failed diplomacy with Iran.
Third, food prices are over 20% more expensive under Biden while gasoline prices are over 28% more expensive under Biden. Housing is also more expensive under “Sloppy Joe” as in 33.5% more expensive.
Fourth, Bidenomics is about adding more non-productive government jobs.
Fifth, Department of Homeland Insecurity Secretary Alejandro “Cuba Pete” Mayorkas just admitted that 85% of illegal border crossers are released into the general public. I was stunned by this revelation. I just assumed that Mayorkas waived EVERYONE through. Frankly, I think Mayorkas meant he stopped 85 migrants out of the millions who has crossed the border under Sloppy Joe.
Sixth, Grayscale Bitcoin Trust $GBTC traded close to half a billion on Monday. Which shows the lack of confidence in Biden’s handling of the economy.
Seventh, purchasing power of the US Dollar is down 15% under Sloppy Joe.
While some may view Biden’s policies are planned destruction of the US economy, it could simply be that Biden (who is one of the stupidest people in Washington DC) simply is grossly incompetent and … sloppy.
Bidenomics has taken the US economy to the underworld. Where households have to run up credit cards to ridiculous levels to cope with inflation under Bidenomics. Under Bidenomics, food prices are up 20.4%, home prices are up 33.5% and regular gasoline prices are up 28.2%. Whip out those credit cards!!!!!
According to the latest monthly consumer credit report from the Fed, in November, consumer credit exploded higher by $24.75BN, blowing away expectations of a “modest” $9BN increase after the surprisingly subdued $5.8BN (upward revised from $.5.1BN) in October and the $4.3BN average of the past 6 months. This was the biggest monthly increase since last November, and was the first $20BN+ print since Jan 2023.
When looking into the details we find something remarkable: while non-revolving credit rose a modest $4.6BN…
… in keeping with the subdued increase in recent months as rates on auto loans make them prohibitive for most consumers while student loans are actually shrinking for the 2nd quarter in a row…
… what was the big shock in today’s data was the blowout surge in revolving credit, which in November exploded by a whopping $19.133BN, a record surge from the $2.9BN in October, and the second biggest monthly increase in credit card debt on record!
This, despite the average interest rate on credit card accounts in Q4 flat at a record high 22.75% for the second quarter in a row.
What is especially surprising about this conirmation that the bulk of holiday spending was on credit is that it takes place after several months of relative return to normaly, when consumers appeared increasingly reluctant to max out their credit cards due to record high rates, and at a time when the personal savings rate in the US has collapsed back near multi-decade lows in recent months.
Well, it now appears that Americans have once again done what they do so well: follow in the footsteps of their government and throw all caution to the wind, charging everything they can (and whatever they can’t put on installment plans which also hit a record late last year) including groceries, on their credit card, and praying for the best… or not even bothering to worry about what comes next.
In addition to massive debt to cope with Bidenomics, we now have Soylent Green.
While ”Angry Joe” Biden screams about democracy (while having his attorney general prosecute his likely Presidential election opponent), and he and Congress continue to spend and borrow like there is no tomorrow (not a bad assumption since Biden is a sickly 81, Pelosi is 83 and assorted other aging policitians in the District of Corruption will never live beyond 10 more years), we are now seeing more attention to the boiling frog problem facing our children and grandchildren. I call this “Biden Stew.”
The country’s soaring national debt — which recently surpassed a record-high $34 trillion — is akin to a “boiling frog” for the economy and Wall Street investors, a senior analyst at JPMorgan Chase warned.
Michael Cembalest, who runs JPMorgan’s market and investment strategy unit in the bank’s asset management division, predicted dire consequences for the economy if the Biden administration doesn’t start tackling the debt.
Cembalest wrote in a newsletter published last week by JPMorgan that the country cannot sustain higher deficits and ballooning net interest payments, which are soon expected to exceed the federal government’s total revenue by early next decade.
“The problem for the US is the starting point; every round of fiscal stimulus brings the US one step closer to debt unsustainability,” Cembalest wrote in the newsletter titled “Pillow Talk.”
“However, we’re accustomed to deteriorating US government finances with limited consequences for investors, and one day that may change (the boiling frog analogy).”
The “boiling frog” concept comes from a metaphor used to describe a situation whereby an undesirable set of circumstances is tolerated for an extended period of time — such as a frog that is thrown into water that is gradually heated.
Once the circumstances become too dire — and the water is heated to a boil — it is too late for the frog to act and it is cooked alive.
Cembalest predicted that by early next decade, “all Federal government revenues will be consumed by entitlement payments and interest on the Federal debt.”
“Entitlement payments” refer to Medicaid, Medicare, Social Security, unemployment insurance and other aspects of the federal welfare safety net.
Cembalest wrote that before the next decade he anticipates that “a combination of market pressure and rating agency downgrades” will “force the US to make substantial changes to taxes and entitlements.”
In November, Moody’s lowered the US government’s credit ratings outlook from “stable” to “negative.”
Last summer, Fitch Rating downgraded the federal government’s long-term credit rating from AAA to AA+.
The national debt, which is the total amount of outstanding borrowing by the federal government, stood at $34.006 trillion as of Monday, according to the Treasury Department’s official debt tracker. And growing REALLY fast!!
While Biden pushes for MORE Ukraine war funding and cancelling student debt (like a demonic Daddy Warbucks from Little Orphan Annie), he ignores unfunded entitlements of $213 TRILLION.
To be sure, the Biden Stew has been a trainwreck for decades, but Biden has the golden opportunity to act like a leader instead of “Angry Joe” screaming about Democracy as he and his minions attempt to cancel their politicial opponents.
It doesn’t help that The Federal Reserve Board of Governors seems like the cast of the ice hockey flick “Slap Shot.”
California is experiencing a pension inferno!
One of the biggest public pension plans in the US plans to borrow tens of billions of dollars to maintain liquidity instead of triggering a fire-sale of its assets.
Bloomberg reports the roughly $318 billion California State Teachers’ Retirement System (CalSTRS) plans to borrow $30 billion, or about 10% of its portfolio, instead of raising funds through an asset sale that might trigger fire sales.
Borrowing to lever up its real estate-laden portfolio when CRE returns are negative??
Calstrs board members will review the first draft of the policy next Thursday. If approved, the leverage would be used “on a temporary basis to fulfill cash flow needs in circumstances when it is disadvantageous to sell assets,” a CalSTRS policy document stated.
According to Calstrs consultant Meketa Investment Group, the public pension fund already deploys leverage upwards of 4% of its portfolio, adding the proposed increased leverage won’t be used for a new asset allocation policy but rather used to smooth cash flow and as an “intermittent tool” to manage the portfolio.
The need to increase leverage comes after a report from the Financial Times last April explained that CalSTRS was planning to write down the value of its $52 billion commercial real estate portfolio after high interest rates crushed the values of office towers.
At the time of the FT report, CalSTRS Chief Investment Officer Christopher Ailman told the media outlet that:
“Office real estate is probably down about 20 percent in value, just based on the rise of interest rates,” adding, “Our real estate consultants spoke to the board last month and said that they felt that real estate was going to have a negative year or two.”
For Calstrs, CRE was one of the best-performing asset classes until Covid and the Fed embarked on the most aggressive interest rate hiking cycle in a generation. Real estate had delivered double-digit returns over a 10-year period for its million-member plan, according to an update last March.
FT noted real estate makes up about 17% of Calstrs’ overall assets.
We’re sure Calstrs is one of many pension plans under pressure from the CRE downturn. Also, regional banks have high exposure to CRE and are still not out of the woods.
Remember these “best minds in real estate.”
Confounded Interest - Anthony B. Sanders 
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