United States Yield Curve 3M10Y Most Inverted In 30+ Years! (But Other Assets Signaling Cooling Odds Of Recession)

The first headline I saw when I turned on Bloomberg.com was “DOJ Officials Find More Classified Documents at President Biden’s Home.” This is an improvement! So far, the task has been handled by Biden’s private attorneys who don’t have proper security clearance; at least the Justice Department is finally getting involved!

But back to the US yield curve. It is now the most inverted in 30+ years as M2 Money growth stalls. Inverted yield curves have preceded recessions in the past.

But as China reopens and Europe is experiencing a warmer winter than expected (meaning that Europe has sufficient natural gas reserves) and US inflation cooling,

we are seeing market-implied odds of a recession falling in January.

I am still betting on a recession in the second half of 2023.

US Default? Since 2008, Net Interest Costs UP 192%, Social Security And Health Entitlements UP 140%, Nondefense Discretionary Spending UP 76% Based On 2032 Federal Budget

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.

Devil’s Tower? ISM New Orders Slump To 45.2 In December As ISM Prices Paid Slumps To 39.4 (Stimulus Is Already Gone, Recession In Sight)

To paraphrase The Eagles, US monetary stimulus is already gone.

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.

Biden is probably hoping for MORE stimulus, like in Close Encounters of the Wrong Kind.

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.

Is The US Economy Already In A Recession? Put/Call Ratio, US Yield Curve And 20 Straight Months Of Negative Wage Growth Say Yes, Real GDP And Unemployment Rate Say No

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?

Well, if you follow the NBER business cycle tracker, the answer is no. Unfortunately, the NBER only tells us if we are in a recession after it has already happened.

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.

In other news, the Washington Commanders football team unveilved a new hog mascot. Of course, the Washington Hogs mascot could also apply to the Federal government with their incessant pork-barrel spending. Nancy Pelosi (D-CA) is the honorary hog.

Hey big spenders, spend TRILLIONS on Ukraine and pork barrel projects.

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?

Well, if you follow thme NBER business cycle tracker, the answer is no. Unfortunately, the NBER only tells us if we are in a recession after iti has already happened.

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.

In other news, the Washington Commanders football team unveilved a new hog mascot. Of course, the Washington Hogs mascot could also apply to the Federal government with their incessant pork-barrel spending. Nancy Pelosi (D-CA) is the honorary hog.

Hey big spenders, spend TRILLIONS on Ukraine and pork barrel projects.

A Year Of Pain! Investors Struggle In A New Era Of Higher Rates And Goin’ Green, Worst Combined Stock And Bond Returns Since 1871 (Buffet’s Berkshire Hathaway Was UP 4% In 2022, Cathie Wood’s ARK Innovation Was DOWN -67%)

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.

US Home Price Growth “Slows” To 9.24% YoY As Fed Tightens Noose (But Fed’s Balance Sheet Remains Elevated)

The US housing market continued to sag in October as the impact of higher mortgage rates and concerns over the economy rattled buyers and sellers.

Prices fell 0.5% from September, the fourth consecutive monthly decline for a seasonally adjusted measure of home prices in 20 large cities, according to the S&P CoreLogic Case-Shiller index.

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.

Stimulypto! US REAL 10Y Yield, REAL Fed Funds Target Rate And REAL Wage Growth Have Been Negative Under “Inflation Joe” Biden And An Overly Generous Fed

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??

Behind Closed Doors? Sam Bankman-Fried Arrested In Bahamas Prior To House Hearing On FTX Collapse (Will He Testify Via Zoom?)

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!

Does this mean that SBF will testify from behind closed doors?

According to Reuters, FTX’s Bankman-Fried says he will testify remotely at congressional hearing.

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?

Blackrock’s Dire Forecast For 2023 And FAANG’s Loss Of >$3 Trillion In 2023 (M2 Money Velocity Near Lowest In History, US Yield Curve STILL Inverted)

Blackrock has a grim presentation on investing in 2023. Particularly with regards to The Federal Reserve and their ability to stave-off a recession (comin’ at you!).

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.

Shotgun Joe! Shooting down freedom of speech.

The Last Time (For Fed Hikes Rates)? Fed Forecasts SLOW Growth 1.2% YoY In 2023 As CMBS Are Getting Hit (Investors Worry About Credit Risk As Economy Weakens)

This will be the last time (Fed rate hikes) as the US economy is forecast to either go into a recession in 2023 or slow down to an anemic 1.20% Real GDP YoY. Even the Fed is forecasting 3.10% core inflation in 2023, still higher than their target rate of 2%.

One of the sectors that is suffering is commercial real estate.

Commercial mortgage bonds could get clobbered in the coming months, and investors are backing away from the securities. 

Some $34 billion of the bonds come due in 2023, and refinancing property loans is difficult now. Property prices could fall 10% to 15% next year, according to JPMorgan Chase & Co. strategists. And some types of properties seem particularly vulnerable as, for example, city workers are slow to come back to their offices full time. 

That may be why spreads on BBB commercial mortgage bonds have widened by about 2.7 percentage points this year through Thursday to around 6.6%, for the securities without government backing. They are now at their widest since January 2021. They’ve been getting hit particularly hard in the last few months, even as risk premiums on investment-grade and high-yield corporates have been shrinking on hopes the Federal Reserve will scale back its tightening campaign.  

“For CMBS investors, there’s lots of uncertainty, especially around whether maturing loans are going to get refinanced or not, and if not, what the resolution will be,” said David Goodson, head of securitized credit at Voya Investment Management, in an interview. “Layering in risk from lower office utilization makes the assessment even tougher.”

The trouble that the bonds face won’t necessarily translate to a surge in defaults in the near term, which is part of why betting against them is so difficult. When property owners can’t refinance mortgages that have been bundled into bonds, noteholders have a difficult choice to make. They can seize the buildings and liquidate them, or they can extend the debt and accept repayment later. They usually go for the second option. 

Extending maturities allows bondholders to kick the can down the road and potentially recover more later, said Stav Gaon, head of securitized products research at Academy Securities. The question is whether properties have permanently lost value as, for example, people reorder their lives after the pandemic, or whether declines may be more temporary because of higher rates. 

“Foreclosing on a loan, rather than granting an extension, can be really messy — that’s a lesson that was learned during the great financial crisis,” said Gaon. “The lenders also recognize that today’s higher interest rates are a very sudden development that many high-quality borrowers need time to adjust to.” 

Some investors that are still buying are focusing on higher-quality borrowers and properties, that are likelier to withstand any downturn in real estate prices without having to seek extensions on loans. 

“We think trophy properties will fare better due to better access to the debt markets, lower potential property declines, and a continued tenant flight to quality,” said Zach Winters, senior credit analyst at USAA Investments.

He acknowledges that this strategy isn’t always popular now, even if it turns out to make sense. 

“When we go out and bid on a bond tied to a trophy office building now, usually the number of buyers is significantly less than before,” Winters said.

After the Pandemic

The market for commercial mortgage bonds without government backing was about $670 billion as of the end of 2021, and although the securities soared in the second half of 2020 as the Fed opened the money spigots, they’re facing more difficulty now. With office occupancy still below 50% in many cities as more people work from home, corporate buildings may see their values drop. Retail space is similarly under pressure as consumers have grown used to buying more online. And while travel volume is rising, many hotels are struggling to reach 2019 levels for room charges.  

A survey of institutional real estate market professionals in November found that firms expect office values to fall about 10% next year, and overall commercial property declines of 5%, according to the Pension Real Estate Association.    

The $34 billion of bonds due next year includes mostly fixed-rate CMBS bonds sold without government backing. It’s a steep increase from the $24.4 billion of such bonds maturing this year, according to Academy Securities. 

There’s another $103 billion of a type of CMBS known as single-asset single-borrower bonds maturing next year, according to Academy — although most of that debt pile has a built-in contractual ability to extend loans, meaning they’ll be able to seek extensions more easily. 

Next year won’t be the first time that CMBS bondholders and servicers have faced tough choices about whether to allow en masse extensions to the underlying borrowers. After the 2008 financial crisis, commercial property values plummeted and many lenders chose to give owners of those properties more time to pay back their loans. As a result they ended up getting more money back than if they’d immediately foreclosed on the loans and liquidated the properties, said Jeff Berenbaum, head of CMBS and agency CMBS strategy at Citigroup.  

In terms of watchlisted CMBS loans, currently most of the USA is in the green (good) except for San Francisco, New Orleans, Memphis and Chicago all have elevated commercial loans on the watchlist (loans being watched for going late and into default). Puerto Rico is also in the red (>25%) watchlisted commercial loans, so I expect AOC to be asking for a bailout.

On the office property front, we can see red (>25% of commercial loans watchlisted) pretty much across the board.

The leading metro area in terms of watchlisted office property loans is … Virginia Beach-Norfolk-Newport News VA-NC at 66.49% (that is pretty bad). Providence RI is second and San Juan Puerto Rico is third followed by Charlotte NC in fourth place. The only Ohio city in top 15 is Cincinnati, home of Skyline Chili and Montgomery Inn.

While most are calling for more rate hikes in 2023, I predicted that December’s likely 50 basis point hike with be the last one for a while as the US economy grinds to a halt. Or it’s all over now for Fed rate hikes.

While The Fed predicts slow growth, markets are pointing to recession. The Fed is out of touch with reality. As is the US Secretarty of Treasury, “Too low for too long” Janet Yellen.