Newly-minted US House Speaker Kevin McCarthy faces a daunting task: trying to avoid a US debt default. As I have discussed many times before, nothing has been the same since the US housing bubble and near-collapse of the banking system that produced an expensive bailout of seemingly all financial institutions. After 2008, Federal spending has gone out of control. The budgetary hawks (or pigeons) in the US House of Representatives (with Pelosi, Boehner, Ryan then Pelosi again) went on Federal spending sprees of epic proportions.
The Manhattan Institute has a nice chart showing the explosion in the Federal budget since 2008. Of particular note, interest payments on the Federal debt has increased by a staggering 192%. On the non-interest spending front, Social Security and Health Entitlements have increased by 140% while Nondefense Discretionary Spending has increased 76%.
The massive increase in Federal debt interest is due to both increased Federal spending and rising interest rates thanks to The Federal Reserve raising rates to fight inflation.
But what will McCarthy and House Republicans recommend cuts in? Tighter restrictions on who qualifies for Social Security and particularly Social Security Disability payments?
The odd factoid is that Defense and Wars budget is up less than 1% from 2008 to 2032. So, Ukraine military aid is coming from somewhere, but not from the Defense budget. Is Ukraine another entitlement program?
Rest assured that after debate, the House will pass a budget and, provided that virtually nothing was cut, the Senate will gleefully agree to more spending and “Top Secret Documents” Biden will sign it.
After he parks his gorgeous Corvette Sting Ray, that is.
And with it, ISM Manufacturing Report for December is showing weakness. New orders (orange line) is down to 45.2 (below 50 is contraction) and the prices paid is down to 39.4 (white line). All this is happening as The Fed raises its target rate (yellow line) and removes monetary stimulus (green line).
This gives us “The Devil’s Tower” looking economic spike after massive Covid-related monetary stimulus and Federal government repeated stimulus.
Speaking of Already Gone, look at the US Treasury 10Y-2Y yield curve with slowing M2 Money growth. Yield curve inversion is more about vanishing M2 Money growth than it is a forecast of recession.
Today is all quiet of the financial market front since the US stock
Today is all quiet of the financial market front since the US stock and bond markets are closed. But as the new year starts, we have to ask the following question: is the US already in a recession?
A simple measure of IMPENDING recession is the US yield curve which is currently inverted. Typically, a recession occurs within months of the yield curve inverting. But if we look at real GDP growth, the Atlanta Fed GDP tracker is at 3.7%, so no recession there (two consecutive quarters of negative GDP growth is often used as a measure of recession).
But another indicator of “all is not well” is the CBOE Put/Call Ratio. Typically, the Put/Call Ratio spikes during a recession. But on December 28, 2022, the Put/Call Ratio spiked to its highest level since 1996. Although it has calmed down to 0.84 on December 30, 2022. Suffice it to say that there is enormous uncertainty in markets.
Covid begat massive Fed monetary stimulus and an excuse for the Federal government to go on a series of spending sprees (Covid “relief”, Instrastructure, Inflation Reduction, and now the $1.7 Trillion pork-laden Omnibus bill). Now that historic big spender Nancy Pelosi (CA-D) is no longer Speaker, will her successor have such a voracious spending appetite? The US economy is still benefitting from Covid-related stimulus which also helped generate 40-year highs in inflation.
Thanks to inflation, US workers have had 20 consecutive months of negative wage growth. But as M2 Money growth slows to a halt, so will real average hourly earnings.
The traditional measures of recession (unemployment and Real GDP growth) are NOT pointing to recession, but 20 straight months of negative wage growth points to bad news for workers. Throw in an inverted yield curve and massive volatility in the CBOE Put-Call Ratio and we have a party … that I don’t want to attend.
A simple measure of IMPENDING recession is the US yield curve which is currently inverted. Typically, a recession occurs within months of the yield curve inverting. But if we look at real GDP growth, the Atlanta Fed GDP tracker is at 3.7%, so no recession there (two consecutive quarters of negative GDP growth is often used as a measure of recession).
But another indicator of “all is not well” is the CBOE Put/Call Ratio. Typically, the Put/Call Ratio spikes during a recession. But on December 28, 2022, the Put/Call Ratio spiked to its highest level since 1996. Although it has calmed down to 0.84 on December 30, 2022. Suffice it to say that there is enormous uncertainty in markets.
Covid begat massive Fed monetary stimulus and an excuse for the Federal government to go on a series of spending sprees (Covid “relief”, Instrastructure, Inflation Reduction, and now the $1.7 Trillion pork-laden Omnibus bill). Now that historic big spender Nancy Pelosi (CA-D) is no longer Speaker, will her successor have such a voracious spending appetite? The US economy is still benefitting from Covid-related stimulus which also helped generate 40-year highs in inflation.
Thanks to inflation, US workers have had 20 consecutive months of negative wage growth. But as M2 Money growth slows to a halt, so will real average hourly earnings.
The traditional measures of recession (unemployment and Real GDP growth) are NOT pointing to recession, but 20 straight months of negative wage growth points to bad news for workers. Throw in an inverted yield curve and massive volatility in the CBOE Put-Call Ratio and we have a party … that I don’t want to attend.
2022 is one of the record books and not in a Tiger Woods way. Call it a year of pain.
First, the US enacted policies that drove up energy prices (goin’ green) that reverberated through the entire economy in the form of higher prices. Second, The Federal Reserve, in attempt to combat runaway inflation, started removing the excessive monetary stimulus that had been around since Fed Chair Bernanke initiated QE, the seemingly unlimited purchase of Treasury and Agency MBS securities. Janet Yellen continued the massive asset purchases and zero interest rate policies or ZIRP. Now that inflation has struck the American middle class hard, we are seeing Fed Chair Powell doing what Bernanke and Yellen wouldn’t do — remove the monetary punchbowl.
Using Robert Shiller’s on line data, US stocks and bonds have had an awful year, the worst combined year since 1871.
US equity returns have been demolished under the NEW dual mandate (goin’ green = rising prices = Fed tightening).
Let’s see how two of the most famous investment gurus did in 2022, Warren Buffet and Cathie Wood. Buffet’s Bershire Hathaway Class A equity was UP 4% in 2022, while Cathie Wood’s ARK Innovation ETF collapsed by -67% in 2022.
Here is the clinker. The US economy (as well as the global economy) seem dependent on “cheap money” from Central Banks like The Federal Reserve. So the question is … will The Fed pivot? Fed talking heads are saying no, but Fed Funds investors are saying yes to a pivot after June 2023.
Ulysses S Grant was the President the last time the combined stock and bond market was this bad.
The market began downshifting earlier this year as the Federal Reserve started hiking its benchmark interest rate, with the goal of easing high inflation that’s been driven in part by skyrocketing housing costs.
Rates for 30-year, fixed mortgages reached 7.08% in October — and again in November — though they have since retreated, Freddie Mac data show. With borrowing costs roughly double where they were at the start of the year, and inflation leaving less savings to put toward a down payment, homebuyers have pulled back. Sellers are also reluctant to list their properties, yet houses that are on the market are lingering and getting discounted as demand slumps.
The Case-Shiller National Home Price Index “cooled” to 9.24% YoY growth as The Federal Reserve tightens its monetary noose.
Of the top twenty metro areas, both Miami and Tampa Florida were up over 20% YoY. Hot ‘Lanta, Charlotte and Dallas were over 10% YoY. Mordor on the Potomac was up “only” 6% and all other metro areas were under 10%.
But if we look at October/September changes, all metro areas are down (MoM) with San Francisco the worst.
Finally, The Federal Reserve’s massive balance sheet is still out in force.
Look at this chart of the Case-Shiller National home price index again The Fed’s balance sheet. Uh-oh.
Let’s look at San Francisco (my hometown) since The Federal Reserve began interest rate tightening.
Like the Mel Gibson movie “Apocalypto!”, we are seeing the US middle class and low-wage workers being economically sacrificed by The Federal Reserve, the Biden Administration and Congress.
Despite the rhetoric that Fed stimulus (aka “Stimulypto!”) is being removed, the US remains plagued by NEGATIVE real 10-year Treasury yields, NEGATIVE real Fed Funds Target rate and NEGATIVE real average hourly earnings growth under Inflation Joe.
This chart demonstrates the Stimulytpo problem. Prior to Covid, US wage growth was consistently higher than headline inflation. But starting in March 2021, three months after Biden became President, headline inflation became higher than wage growth.
Even with all these negative REAL rates, the US economy is forecast to have almost no growth in 2023.
To quote Peggy Lee, Is That All There Is? Trillions in Federal spending and Fed monetary stimulus and all we get it 0.50% Real GDP??
First, Sam Bankman-Fried agreed to testify in the House Financial Services Committee meeting on December 13, 2021. Then Bankman-Fried said he would testify remotely. Then ,,, he was arrested by the Bahama’s police. How convenient!
WASHINGTON, Dec 12 (Reuters) – Sam Bankman-Fried, the founder and former CEO of now-bankrupt crypto exchange FTX, on Monday said he would testify remotely at Tuesday’s U.S. House Financial Services Committee hearing to examine the collapse of the company.
FTX filed for U.S. bankruptcy protection last month and Bankman-Fried resigned as chief executive, triggering a wave of public demands for greater regulation of the cryptocurrency industry.
That might be kind of difficult, since Sam Bankman-Fried has been arrested in the Bahamas.
Perhaps, The SEC Gary Genslar will testify as to why he met with SBF and gave him the green light for his trading? And why did Genslar erase Hillary Clinton from his schedule after meeting with her? And why was Genslar meeting with Hillary in the first place since she is now just an American cititzen??
Will SBF be extricated by tomorrow morning hearing time?
Central bankers won’t ride to the rescue when growth slows in this new regime, contrary to what investors have come to expect. They are deliberately causing recessions by overtightening policy to try to rein in inflation. That makes recession foretold. We see central banks eventually backing off from rate hikes as the economic damage becomes reality. We expect inflation to cool but stay persistently higher than central bank targets of 2%.
For some investors, this year’s rout in high-flying technology stocks is more than a bear market: It’s the end of an era for a handful of giant companies such as Facebook parent Meta Platforms Inc. and Amazon.com Inc.
Those companies — known along with Apple Inc., Netflix Inc. and Google parent Alphabet Inc. as the FAANGs — led the move to a digital world and helped power a 13-year bull run. And FAANG drawdown have reached over $3 trillion.
FAANGs (Meta, Amazon, Apple, Alphabet, Netflix) are getting clobbered in 2022.
Typically, when The Fed prints too much money, such as 10% or higher (red line), inflation follows. Particularly when The Fed prints at 25% YoY in Q4 2020, it was followed by the highest inflation rate in 40 years. But if M2 Money continues to slow, inflation will likely slow, but not to The Fed’s target of 2%.
Despite what Minneapolis Fed’s Neal Kashkari said about The Fed having infinite printing resourses, The Fed is going to fight inflation THAT THEY HELPED CAUSE. Biden’s energy policies (did you see that Elon Musk has a car that uses plentiful hydrogen?), and excessive Federal spending by Biden/Pelosi/Schumer, are culprits in creating the supply chain problems facing America. BUT after the 25% surge in M2 Money in 2020 and 2021, we saw M2 Money VELOCITY crash and burn to its lowest level in history. Which means the “bang for the buck” for printing more money is negligible.
Of course, big tech firms got caught influencing the 2020 Presidential election (see Musk’s release of Twitter files) and engaged in restriction of the 1st Amendment (Freedom of Speech). How much will that impact FAANG stocks going foward?
And yes, the US Treasury yield curve is inverted pointing to a recession in 2023.
And yes, apparently Biden was complicit in the Twitter fiasco.
The Federal Reserve is removing the massive punch bowl from the US economy and markets. And with the rising US mortgage rates, we got crashing buying conditions for housing.
The UMich consumer survey for buying conditions for house rose slightly in December to 36, well below 100 (the baseline).
Confounded Interest - Anthony B. Sanders 
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