Confounded Interest – Anthony B. Sanders
Financial Markets And Real Estate
The Covid outbreak of early 2020 begat a massive surge in monetary stimulus which has dissipated. Notice that home price growth is dissipating as well.
Also causing problems for housing is NEGATIVE REAL WAGE GROWTH. While the US is suffering from inflation and decling real wage growth, trading partner Germany has even a worse REAL WAGE GROWTH problem.
Where? Florida is doing great!!
Do I detect a trend?
Do I hear Drums Along The Potomac or East River??
The hawkish drumbeat from central bankers is raising fears of a downturn, with global bonds joining US peers in signaling a recession, as a gauge measuring the worldwide yield curve inverted for the first time in at least two decades.
The US Treasury 10Y-2Y yield curve, on the other hand, has been inverted for 107 straight months.
And in Europe, 10-year sovereign yields are dropping like a paralyzed falcon.
The world and US yield curves are pointing to trouble. And drums along the Potomac (DC) and East River (NYC).
What interest rates are telling us is a bad sign.
With an impending railroad strike that can torpedo the US economy (but if that is possible, why is the Biden Clan vacationing in Nantucket for Thanksgiving weekend when Joe should be talking with railroads and the unions to not let this happen?), let’s see what interest rates are telling us.
First, the US Treasury 10Y-2Y yield curve continues to descrend into the abyss (now at -80 basis points).
Second, the latest Fed Dot Plot (from September, new one will be issued during December) show that The Fed thinks that their target rate, while rising in 2023, will likely start falling again in 2024.
Third, since it is Thanksgiving Day, US bond markets are closed. But in Europe, the 10-year sovereign yields are falling, a sign that the ECB is reversing course by increasing monetary stimulus and/or a European are slow down.
Fourth, US mortgage rates have cooled since peaking (locally) at 7.35% on November 3, 2022 and now sit at 6.81%, a decline of 54 basis points. A clear sign of cooling.
Fifth, how about Fed Funds Futures data? It is pointing to a peak Fed Funds Target rate of 4.593% at the June FOMC meeting. Then a decline in rates to 2.301% by January 2024.
Now, go and enjoy your Thanksgiving dinner with friends and family (up 20% since last year), courtesy of Jerome Powell, Joe Biden, Nancy Pelosi and Chuck Schumer.
There is no doubt that Biden is the Cousin Eddie of politics with his gifts that keep on giving. Like rampant inflation, soaring food, gasoline and diesel prices, and Pelosi/Schumer’s helping hand in creating price controls that will kill potential cures for illnesses.
In addition to rampant 40-year highs in inflation, we have the Clark Griswold of the economy, Fed Chair Jerome Powell, slamming his foot on the economic breaks to combat inflation created by Biden’s energy mandates and reckless Federal spending (like the aforementioned, laughable “Inflation Reduction Act.”
So, Biden helps creates massive inflation and Powell and the Gang counterattacked by raising their target rate with more to come (at least until May 2023). And with the implied Fed Funds rate soaring (red line), we are seeing the FANG stocks (Facebook or Meta, Amazon, Netflix and Google) falling more rapidly (white line) than the S&P 500 index. Which is also falling like a rock (yellow line). All this is happening as M2 Money YoY crashes and burns.
How about growth versus value under Cousin Eddie and Clark Griswold? The Vanguard Growth ETF and Vanguard Real Estate ETF are plunging with Fed tightening (red line). Vanguard’s Value ETV (yellow line) is down too, but not by as much.
Yes, Washington DC elites. The gift that keeps on giving … bad things.
Thanks to my former GMU student Andrew Edwards for the Cousin Eddie suggestion!
US Q3 GDP numbers are out and they are … meh. Only Biden and Karine Jean-Pierre would cheer about 1.8% real GDP growth. At least real GDP growth wasn’t negative!
Real GDP rose 2.6% after -0.6% in Q2 and 1.8% YoY. But the most interesting data bit is the GDP Price Index. It fell to 4.1% in Q3 down from a whopping 9.0% in Q2.
But wait! Also declining at a stall speed is M2 Money.
And brace yourself for a cold winter. Heating oil is UP 162% under Biden.
Alarm! US home prices are decelerating as inflation rages and The Fed tightens.
Home price growth in the US slowed the most on record as a doubling of borrowing costs (thanks to the US Federal Reserve) has sapped demand.
A national measure of prices increased 13% in August from a year earlier, but is down from 20.79% in March, the S&P CoreLogic Case-Shiller index showed Tuesday. That’s the biggest deceleration in the index’s history.
The housing market has started to slump as the Federal Reserve hikes interest rates to curb the hottest inflation in decades. Even with the deceleration, prices remain high compared to last year. Coupled with mortgage rates that are edging closer to 7%, many would-be buyers have been shut out, while some sellers have retreated.
While 13% growth sounds good, it is not good for renters looking to buy a home.
According to S&P/CoreLogic/Case-Shiller, Southern (red) cities Atlanta, Charlotte, Dallas, Miami and Tampa all still grew at over 20% YoY. Other cities like blue cities Detroit, Minneapolis, Portland, San Francisco, Seattle and Washington DC are grew at UNDER 10% YoY.
It looks like some people have taken three steps and left blue states for red states.
On related news, I always said in my classes that +/- 10 basis point in the US Treasury yield is a big deal. This morning, the US Treasury 10-year yield is DOWN -16.1 bps. In fact, the 10-year yields are down across the board globally.
Its that smell of impending recession.
Well, they certainly aren’t calling Biden “The Breeze.” Except for the recession that is going to clobber the US.
Everything is NOT beautiful with the US economy.
Another crack in the dam (US economy) is buyer traffic for new homes. They are now down -64% since last year (YoY).
Of course, The Federal Reserve is removing its massive monetary stimulus. BUT commercial bank deposits have declined the most since 1973.
The US Empire State Manufacturing Survey General Business Conditions SA index fell to -9.1 in October, continuing a downward trend along with the downward trend in Fed M2 Money stock growth.
And the global sovereign debt market is showing fear as 10-year sovereign yields drop -10 basis points. The UK 10-year is down -36.8 bps! The US is down only -6.6 bps this morning.
The Empire (State) strikes out.
It’s beginning to look a lot like winter. Perhaps we should call Biden “Frosty The Snow Man” because it is going to be a miserable winter for the middle class and low wages workers as Biden’s green energy policies sink in.
The US CPI for electricity is up 24% under Nuclear Joe as The Fed continues to leave their balance sheet relatively untouched.
You might have to bail on the stock market to stay warm this winter, but it is a shame that the S&P 500 index is down -25.3% in 2022 as The Fed counterattacks Bidenflation.
When will The Federal Reserve pivot? That is, when can we sing “Here comes Santa Claus”?
According to the Fed Funds Futures data, Santa Claus is expected to return in May 2023 (rate reversal).
Bidenflation is just killing us. Now rising prices and The Fed’s counterattack are killing retail sales for American consumers.
US retail sales were sluggish last month, suggesting shoppers are becoming more guarded about discretionary purchases in the worst inflationary environment in decades.
The value of overall retail purchases were little changed in September after an upwardly revised 0.4% gain in August, Commerce Department data showed Friday. Excluding gasoline, retail sales were up 0.1%. The figures aren’t adjusted for inflation.
The median estimate in a Bloomberg survey of economists called for a 0.2% advance in retail sales.
Seven of 13 retail categories declined last month, according to the report, including a drop in receipts at auto dealers, furniture outlets, sporting goods stores and electronics merchants. The value of sales at gas stations fell 1.4%, reflecting cheaper fuel prices, but they’re now climbing.
At least Export Prices YoY are down below 10%! I hope exporting inflation to the world isn’t Secretary of State Antony Blinken’s idea of good foreign policy.
My favorite headline of the day is “Macron Reminds Biden to Think Before Speaking: “Biden’s Reckless Rhetoric puts World at Risk”“
How about a little Torquay from The Leftovers.
Confounded Interest - Anthony B. Sanders 
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