The Federal Reserve’s TRUE Dual Mandate! Taylor Rule Suggests Target Rate Of -8.58% As Federal Spending Rages Out Of Control

The Federal Reserve has a dual mandate: stable inflation and low unemployment. Well, core inflation is currently at 1.2% (core PCE growth is at only 0.95%) and unemployment (thanks to Covid-19) is at 11.1%. Not quite on target.

The Taylor Rule model using an aggressive specification suggests that The Fed lower their target rate to -8.58%.

Of course, Congressional spending is out of control with mandatory spending (entitlement programs, such as Social Security, Medicare, and required interest spending on the federal debt) since the days of George HW Bush and Bill Clinton. And especially post financial crisis.

Of course, mandatory spending on Medicare is soaring out of control.

Defense outlays are projected to grow with non-defense outlays declining,

Of course, the TRUE dual mandate of The Federal Reserve is propping up the S&P 500 index and NASDAQ.

Good luck to everyone trying to cope with out of control Congressional spending and Fed money printing.

The question is … will Congress and President Trump/Biden reign in their prodigious spending after Covid-19 passes?

Here is my answer. Where are the Budget Hawks when we need them??

How Low Can It Go? M2 Money Velocity Sinks To 0.7

According to the Atlanta Fed’s GDPNow forecast of Q2 GDP, US GDP is expected to sink -34.7% QoQ. With the blistering growth in M2 Money Stock, the result is a historic low below a reading of 1 … at 0.7.

How low can it go?

And no, I am not going to use Ludacris’ “How Low.”

The M2 Velocity chart is courtesy of my FNAN 311 student Elena Baydina.

First Auction of 20-year Treasury Bonds Since 1986 Has High Yield Of 1.220% (Slightly Higher Than Savings Series I Bonds At 1.06%, But Lower Than a 1Y CD)

The US Treasury, desperate for revenue with the COVID-19 shutdown crushing the economy and tax receipts, has reintroduced something that hasn’t been seen since 1986: the 20-year US Treasury bond.

Today’s auction led to a 1.220% high yield rate, only slightly higher than Series I savings bonds.

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And around 1.35% for a bank certificate of deposit (CD).

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The Martin Luther King Series I savings bond at 1.06% composite rate (the composite rate for Series I Savings Bonds is a combination of a fixed rate, which applies for the 30-year life of the bond, and the semiannual inflation rate).

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US Housing Starts Crash In April Thanks To COVID-19 Lockdown (Despite Declining Mortgage Rates)

US housing starts in April crashed to their lowest level since 2015 despite near-record low mortgage rates.

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1-unit starts declined 25.4% from March to April. But it is the 5+ unit starts (apartment) that suffered a 40.31% MoM decline.

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It appears that The Fed’s snake juice isn’t working.

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U-6 Unemployment Rate Spikes To 22.8% As Average Hourly Earnings Spikes To 7.9% YoY

A sign of the times. As governments around the globe shut down economies to prevent the spread of the Covid-19 condition.

The US unemployment rate rose to 14.7% in April, up from 4.4% in March.

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Yes, 20.5 millions jobs were lost in April.

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The U-6 unemployment rate (or full-time plus partial unemployment rate) rose to an astronomic 22.8%!

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Average hourly earnings YoY rose to 7.9% YoY.

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But look at the US employment total in labor force. Covid-19 / gov’t shutdown has wiped out labor force gains since 1999 and The Clinton Administration.

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I wish I knew a place that was open in Virginia, but I don’t.

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Limbo Rock! Fed Funds Futures Imply Negative Futures US Interest Rates

Fed’s Jerome Powell is watching how low interest rates will go.

Despite Chairman Powell’s claims that the US will never go negative, The Fed Funds Futures rates are signaling YES.

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Negative interests rates are appearing in US Treasury Strips (both coupon and principal strips).

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The short-end of the Treasury curve is flirting with negative yields while the TIPs curve is profoundly negative beyond 3 years.

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How low will interest rates go?

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BlackRock, Voya Revive TALF Trade That Returned Double-Digits

Memories of the housing crash and financial crisis of 2008-2009. A Federal Reserve program to allow some to borrow cheap from The Fed and buy distressed assets that earn double-digit returns.

(Bloomberg) — Money managers are reviving one of the most profitable credit trades of 2009, thanks to the Federal Reserve.

Dozens of firms, from BlackRock Inc. and Voya Financial Inc. to credit specialists Palmer Square Capital Management and Varadero Capital, are raising funds to deploy into a central bank lending program that’s being resurrected to support the flow of consumer credit, according to people with knowledge of the matter.

They’re seeking to replicate the windfalls many enjoyed in the aftermath of the financial crisis when, by taking advantage of low-cost loans via the Term Asset-Backed Securities Loan Facility, they were able to notch double-digit returns purchasing top-rated ABS as the economy recovered.

It’s the latest example of how credit managers who spent much of the past decade battling low yields are now raising cash to seize on deep discounts created by the economic fallout from the coronavirus pandemic.

Investors, for their part, have been happy to oblige, piling billions of dollars into funds targeting distressed and dislocated securities as they aim to make up for steep losses elsewhere.

“If you look at what you’re getting an opportunity to invest in, it’s AAA rated paper that’s offering really healthy yields for the risk,” said Chris Long, president and founder of Palmer Square. “This go around, the TALF program is a bit more of a known entity. The fact that TALF proved so successful in 2009 really bodes well for demand.”

Still, some market watchers are already warning that replicating the gains of the last crisis may prove easier said than done.
On the heels of the U.S. housing collapse, asset-backed securities looked a lot more fragile in early 2009 than they do today. Average risk premiums on AAA rated ABS deals reached nearly 8%, according to Bloomberg Barclays index data. This year, they peaked around 3% in March and have since fallen to about 1.4%.

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“You’re not going to get 20% to 25% returns like you did in 2009,” said Greg Leonberger, director of research at investment consulting firm Marquette Associates. “The return potential is lower because spreads are lower.”

An example of the availability of distressed assets available is the TRACE number of distressed bonds traded.

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Here is the latest TALF term sheet.

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WTI Cushing Oil Plunges Below $11, Hotel Occupancy Rate Declines 69.8% YoY To 21% (All Time Record Lows)

My Corona!

The lack of demand for oil (and incredible supply build-ups) had led to WTI Crude oil to fall below … $11!

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WTI Crude (Cushing, OKLA) is now at an all-time low.

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Crude oil prices in the Middle East are … negative?

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On the hotel front (government lockdowns are pretty bad for travel and hotels!), in comparison with the week of 7-13 April 2019, the industry recorded the following:

Occupancy: -69.8% to 21.0%
• Average daily rate (ADR): -45.6% to US$74.18
• Revenue per available room (RevPAR): -83.6% to US$15.61

What I like about the government shutdown of the US economy? NOTHING!

Even Jack Torrance can’t get a drink from Lloyd in the shutdown.

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Dow Closes Friday Down 915 (Or 4%) As 10-Year Treasury Yield Drop 17 BPS (Fed Announces Reduction In QE)

Despite titanic intervention by The Federal Reserve and $2 trillion Congressional spending bill (packed with pork-barrel spending unrelated to the coronavirus), the Dow continued to nosedive.

Or as Buzz Lightyear once said “To infinity … and beyond!” He was referring to government  spending and The Fed’s balance sheet.

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The Dow has whipsawed over the week, but particularly Friday. When The Fed announced it will reduce Treasury QE from $75BN to $60BN per day, the Dow dropped.

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Oddly, the Dow has been fairly predictable .. until The Fed/Congress got involved.

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According to the Elliott Wave, the Dow has broken from the major wave.

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Equity markets are still hypersensitive to coronavirus news and its impact on the economy.

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At least Chilean markets are up!

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The Morning After! US Treasuries Surge, Mortgage Rate Spread Highest Since Q4 2008

It is the morning after the Fed panicked and lowered its lower bound for The Fed Funds Target rate to … 0%. Here is Fed Chair Jerome Powell calling to The Fed to take evasive action!

The result? US Treasuries yields are falling like a rock. US Treasury 10Y yields are down around 20 basis points this morning.

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And unless lenders lower their 30-year mortgage rates, the spread between Bankrate’s 30 year average mortgage rate and the 10 year Treasury yield is at its highest level since Q4 2008, the epicenter of the financial crisis.

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This morning before the US equities markets open, Europe is already down around 7% – 8%.

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Here is Fed Chair Jerome Powell wishing us all the best!

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