Not Always Sunny! Philly Fed Business Conditions Declines To -16.6 In June (Powell Aka Green Man Faces Tricky Task of Explaining Rate Pause in Congress)

As I discussed yesterday, the Misey Index under Biden remains elevated compared to that of Trump pre-Covid despite massive financial stimulus from Green Man (The Federal Reserve under Jerome Powell).

Now we have more evidence of an impending recession with the Philly Fed General Business Conditions index falling to -16.6 in June as Green Man (M2 Money growth) stalls.

Federal Reserve Chair Jerome Powell (aka, Green Man) will have an opportunity this week to clarify what many found a confusing message on the path of interest rates, with the added task of assuring Democrats and Republicans the economy is on track.

The Fed chief will face questions from lawmakers on Wednesday and Thursday, his first testimony on Capitol Hill since early March, before banking-sector turmoil prompted sharp criticism of the Fed and forced officials to rethink their policy strategy. Since then, the most acute financial strains have eased, but questions remain about the extent to which tighter credit will weigh on the economy, and what that means for the Fed.

Powell will need to reassure Republicans the Fed is not backing down from its campaign to contain price pressures, while pointing Democrats to the resilience of the economy as officials prepare to raise rates further this year.

“The Democrats are nervous because they would rather declare victory and move on,” said Stephen Myrow, a managing partner at Beacon Policy Advisors and a former George W. Bush Treasury official. “I think they’re going to try to caution this time against further increases. But Republicans are just going to hammer away and act like inflation hasn’t come down.”

Powell will be fresh off the Fed’s June 13-14 meeting, where he and his colleagues left rates unchanged for the first time in 15 months but signaled they may deliver two more hikes this year. Fed watchers and investors struggled to digest the message from Powell’s post-meeting press conference, and lawmakers last week said they planned to press him for an explanation.

“Right now there’s a lot of confusion about the next step,” Thom Tillis, a Republican senator from North Carolina, said Thursday.

Well, Senator Mel Tillis, there is no confusion. The DC Elites and Big Banks don’t want to disrupt the flow of money to the political donor class (including China and Ukraine payments to Biden’s family, now up to $30 million). The Fed may raise rates one more time and claim victory again their “War on Inflation!” then start cutting again as the Presidential election approaches.

Jerome Powell (aka, Green Man).

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.

The Amazing, Disappearing Jumbo/Conforming Mortgage Spread Since Covid And Fed Intervention (Jumbo Spread At 1.67 Basis Points After Covid Fed Reaction)

Years ago, Brent Ambrose, Michael Lacour-Little and I wrote a paper on the US 30-year jumbo mortgage spread over conforming 30-year mortgage rates entitled “The effect of conforming loan status on mortgage yield spreads: a loan level analysis.” But that paper was written before Covid and the dramatic distortion caused in mortgage markets by The Federal Reserve’s massive increase in money.

Here is the spread between Bankrate’s 30-year mortgage rate and their 30-year JUMBO mortgage. Notice that between 2007 and early 2020, the median “jumbo spread” was 49 basis points. But after Covid and The Fed’s counterattack (by printing M2 Money), the median Jumbo spread from 4/1/2020 to today is only 1 basis point.

In the following chart, you can see the jumbo mortgage rate (yellow) against the conforming mortgage rate (white) and there is almost always a spread between the two UNTIL 2020 where we saw M2 Money growth (green line) spike and The Fed increased their purchases of Agency MBS (purple line). Since Covid and The Fed’s massive reaction, the jumbo rate and conforming rate are virtually the same. In fact, the latest jumbo spread is 1 basis point over the conforming rate.

Why is this happening? One explanation is that demand from the investors who ultimately buy jumbo mortgages. The strong demand by investors appears to have driven down the yields on jumbos relative to conventional loans, especially as the use and accessibility to jumbos has grown.

A second explanation is that Loan Level Price Adjustments that were added to conforming loans post-financial crisis never went away (until just recently on selected loans). This makes jumbos and conforming loans very close in yield.

So, when will the mortgage market return to normal and jumbo mortgages go back to the normal 50 basis point spread? We may see normalization if The Fed speeds up its withdrawal from markets. Also, getting rid of Loan Level Price Adjustments would help normalized the mortgage market.

But things are getting stressed in jumboland (California) where home prices are crashing in 5 of the top 8 metro areas.

Harry Houdini couldn’t have created a more tantalizing mystery … and one I wish would go away.

Inflation Is SO Bad That REAL Home Price Growth Has Slowed To 2.23% YoY While REAL Wage Growth Is -3.31% YoY (As Fed’s M2 Money Growth Slows)

When inflation is so bad that REAL wage growth is negative (-3.31% YoY), I would hardly call that a strong economy for the middle class and low-wage workers.

We also see that REAL home price growth (existing home sales median price YoY – CPI YoY) has slowed to only 2.23% YoY in July.

As The Fed tightens, it is only growing to get worse.

Perhaps Biden can enthrall us with yet another “Corn Pop was a bad dude” story.