Is The Fed’s Heavy Lifting Almost Over?

Don’t bank it.  Avoiding a recession is not part of the Fed’s explicit dual mandate

The Federal Reserve System has been given a dual mandate—pursuing the economic goals of maximum employment and price stability. – St Louis Fed

Even after today’s 75 bps hike, the real Fed Funds rate (see chart below) remains at about -5 percent.  Note from the chart the economy has never kicked into a recession with a negative real Fed Funds rate.  It’s amusing to watch the market watchers muse over how big a recession the Fed will create. 

Yes, a recession is highly probable, and the timing is difficult, but markets have a yuuuge “failure of imagination.”  There can be, simultaneously, a recession in economic activity, relatively high and sticky inflation, and relatively low unemployment.  

Chairman Powell stated in his presser today about moving real rates to positive levels across the yield curve.

You wanna be at a place where real rates are positive across the entire yield curve – Chairman Powell, 18:50 into the video

This time could be different, it is pretty weird out there, making monetary policy very difficult,  but we run when we hear those four words

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Radar Watch: The Copper/Gold Ratio

We don’t think copper has a Ph.D. in economics but possibly is an ABD

If you are not buying copper hand-over-fist here, at $3.54 per lbs., you should be. We doubt there is enough copper in the world to electrify the transport sector alone.  

According to Jim Paulsen, chief investment strategist at the Leuthold Group:

“The copper/gold ratio is nearing a new high! Undeterred by yet another stock market decline, confidence nonetheless appears to be gaining ground over fear. Is Dr. Copper picking up on something positive coming soon?”

Copper, an ubiquitous metal with wide-ranging uses from construction involving wiring and plumbing to being a key ingredient in the transition to green energy, is typically purchased when investors feel good about the economy. This is why Paulsen calls the reddish-brown metal “Dr. Copper” for its purported Ph.D in economics due to an “uncanny ability to predict global-economic turning points.”  – Bloomberg

Thew sharp increase in electric-vehicle registrations at the start of 2022 meant that the EV share of the overall market in the U.S. hit a historic 4.6 percent. While places like Norway—where over 86 percent of all new vehicle sales were electric in March—may laugh at that number, EV advocates know that change happens slowly, then all at once, or something like that.

Currently, it’s estimated that around 1 percent of the 250 million cars, SUVs, and light-duty trucks on American roads are electric. However, while it’s difficult to estimate future sales, an analysis by IHS Markit projects that 25–30 percent of new car sales could be electric by 2030 and then 40–45 percent by 2035. Using the rates for those projections, Reuters estimates that by 2050 more than half of the vehicles on U.S. roads could be EVs. – Car & Driver

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Breakout!

Don’t be fooled; the 10-year yield is the chart and market indicator to monitor. 

The Fed is no longer around to support notes and bonds, the ex-post real yield on the 10-year is still below -3.0 percent, and the spike in yields acts as a double hammer to stocks. 

First, through the economic effect of higher borrowing costs, and second, through the valuation effect as a higher interest rate to discount profits lowers stock valuations. 

The U.S. 10-year yield is the most important price in the world and has been highly distorted for many years.  It has been stunning to watch the markets focus on nominal yields rather than real yields, as they fail to realize how the coupon and TIPs market has been managed for many years.  A classic case of recency and confirmation bias. 

Stay tuned. 

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Are Stock Valuations There Yet?

You decide. 

The ratio of total US stock market valuation to GDP has been named “The Buffett Indicator” because Warren Buffett – the legendary CEO of Berkshire Hathaway (BRK.A)(BRK.B) – once called it “the best single measure of where valuations stand at any given moment.”

Essentially what it represents is the value of expected future economic activity discounted back to the present compared to the total value of current economic activity. In this sense, it is strikingly similar to the price to earnings ratio that is commonly used to value individual stocks. – Seeking Alpha

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Investors Bet On Ketamine Treatment 

Break out the Tie Dy.

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The Great Global Inflation Of 2022

In the past six months, inflation has far exceeded December 2021 expectations. In many countries, actual rates have doubled projections. European countries are particularly affected. For example, inflation in Lithuania is running at 15.5 percent annually, nearly five times the rate expected. Poland is at 11 percent and the United Kingdom at 9 percent, both well above projections. At 3 percent, Switzerland is an outlier. Asia is seeing a less severe change: Indian inflation is about 7 percent, only a bit above projections; and South Korea is at 5 percent. In China and Japan, inflation remains muted. – McKinsey & Company

 

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Global Stock & Interest Rate Monitor – Sept 16

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Friday CK Chart Fest

Don’t Bank Peak Inflation

Korean Chip Exports

Cry For Argentina

Japan Running Trade Deficits, WTF?

China Growth Turning Up

Sterling Getting Pounded

Working Age Men Lag Return To Labor Market

World Economy Back To Pre-COVID Levels

Is There Enough Copper To Electrify The Transport Sector?

Drought In Treasury Market Liquidity 

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Nonlinear Thinking: Vertical Farms Of The Future

A bankable technology of the future.  All things must change in the coming hard reset.

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Shelter Rocks CPI Report

The economy is still in a Gimme Shelter feedback loop, which we warned about last May in the following repost of that post.  

The monthly payment increases as mortgage rates rise faster than housing prices fall, which, in our opinion, has an increasingly more significant impact on the psychology of homeowners and landlords. And don’t underestimate the Airbnb impact on the survey that the BLS conducts with homeowners to calculate Owners Equivalent Rents,

“If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities?” – BLS

What a horrendous way to measure 25 percent of the CPI inflation. 

Housing contributes 42 percent of the CPI basket, of which Owners’ equivalent rent (OER) makes up about 24 percent of the CPI basket and rents 0.8 percent of the basket. Both measures rose 0.7 percent in August, rocking this morning’s CPI release.  

Give it a few days until we hear market analysts’ cries about how OER is a distorted measure of housing inflation.  We have been beating that dead horse for years, if you haven’t noticied

Here’s a whimsical piece we posted in 2019 on core inflation, a chart that we were buying.

Political Impact

Ironically, today’s inflation report is likely a net positive for the Administration as gas prices were way down, -10.4 percent. Gas prices impact 100 percent of the population, and OER inflation, a phantom price, affects none.  The rise in food prices of 0.8 percent, 11.4 percent year-on-year?  Not so good.

Finally, see our piece, Gimme Shelter, to illustrate how moves in housing prices impact CPI with a long lag.  

CPI Inflation’s Big Problem: Housing

Originally Posted on  by macromon

Updated:  Post-CPI release @ 9:12 pm PT,  May 11, 2022 

But the Fed seems to be learning lessons from its 2021 experience. – NY Times

The Fed is under a lot of heat for letting inflation get out of control, which is now generating super hawkishness even among the most gentle of monetary doves.  The scorching is illustrated in the above NY Times headline.  

We are reposting our piece from last April 2021, Just In Case, You Think The Fed Has A Clue, in which we questioned the Fed’s economic sanity to keep buying mortgages while the housing market was in a massive bubble. 

Bond yields are now spiking, and the stock market suffers because of the monetary authorities’ ineptitude as the economy contemplates a bond and stock market without central banks. The major buyers of Treasury securities since the beginning of the century have now morphed into net sellers in aggregate.

Nevertheless, making monetary policy is difficult, especially in the last few years, so we grant policymakers considerable grace. 

Valuations and multiples have to come down as interest rates rise. 

Given the FOMC’s latest statement on balance sheet reduction, we estimate the Fed will be extracting almost $1.5 trillion from the economy throughout 2023, approximately $972 billion from the Treasury market, and a maximum of just over $500 billion in mortgages. 

Inflation As The End Game

However, we doubt the Fed and the American body politic have that high of a pain threshold for the subsequent economic and financial pain such a monetary tightening will bring.  We, therefore, expect inflation will be the end game but only after, at the very least,  a few deflation scares.  When the going gets tough, the Fed will default to the mantra of most central banks and monetary authorities throughout history, 

Print [debase], baby, print [debase]! 

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Housing Is Now The Problem, And Its Measurement Is Fatally Flawed

We estimate the Fed bought over $525 billion in mortgages between March 2021 and March 2022.  During this period, the housing market was in Fuego with FOMO panic buying, driving up the National Price Index by 18 percent during the same period. 

Moreover, the 30-year fixed-rate mortgage rate was up 150 bps, or 47.3 percent, driving up the cost of the monthly mortgage payment on the average house price in the United States by almost 75 percent.  Let’s repeat that, folks,  our best approximation of the cost of a monthly 30-year fixed-rate mortgage payment is up 75-100 percent in the past year. 

The official measure for owners’ residential home inflation in the CPI basket is up a relatively measly 4.5 percent year-on-year as measured by Owners Equivalent Rent (OER), 24 percent of the CPI basket.  What a complete joke. 

Watch this space in tomorrow’s CPI release. [OER came in today up 4.8 percent y/y, which kept the overall number hotter than expected.]

The spike in mortgage payments has priced out most first-time buyers, forcing them into the rental market (7.4 percent of the CPI), raising rents by over 4 percent in the past year. 

Different Housing Market Than The GFC 

Of course, the housing market is in a much different condition than it was at the onslaught of the Great Financial Crisis (GFC), as all cash payments — an acute reflection of too much “money” in the system — have replaced the funky, highly levered subprime mortgages. 

The result should be the reverse of the GFC, where housing prices collapsed almost overnight.   This time, we expect a slow and chronic leak in housing prices with fewer forced bankruptcies, and less sensitivity to mortgage rates as they continue to climb until the Fed gets rolling in draining the excess money from the economy.  

OER Starting To Track Real Housing Costs

Let us beat this dead horse one more time. 

The above chart also illustrates that  OER is starting to track the monthly mortgage payment for the first time, which is not a positive for the Fed or inflation. 

The reason for this apparent disconnect is that most homeowners and renters did not move in 2021. They thus did not have to pay the spot price for shelter as it rose rapidly. Instead, many had to pay the rate that they signed for earlier in the year or the rate they signed for years earlier that had been modified slightly by their landlord or bank. These prices should tend to converge to the market price, but the lag time may be significant and the convergence incomplete. – VOX.eu

If homeowners have changed their perfunctory answer to the BLS survey question used to calculate 24 percent of the CPI

“If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities?” – BLS

to one where homeowners perceive themselves as real renters that track real mortgage costs, or if they get the Airbnb bug, the measured inflation rate for shelter will continue to rise.  This may or may not be happening but keep it on the radar. 

If it does, expect the Washington bureaucrats to start tinkering with the cost of shelter in the CPI as they did in 1983.  See our post, Today’s Inflation Rate And Nolan Ryan’s Fastball.

Best & Worst Time To Purchase A House

We feel for first-time homebuyers caught up in the FOMO bubble of the past year. We concede they may have some inside knowledge of a potential spooky inflation to come, but stretching to buy a starter home on a limited budget when interest rates are at artificial and historic lows, and prices at record highs can, and most likely, will be a toxic cocktail. Of course, we are not talking about the properties or “LifeStyles Of The Rich And Famous.”

Just In Case You Think The Fed Has A Clue

Originally Posted on April 29, 2021 by macromon

This should dispel the notion.

Can’t wait to hear the Chairman justify zero rate policy and deficit monetization with inflation roaring at > 5 percent. It would be entertaining if it weren’t so damaging.

Where To Inflation?

Here’s a pretty good theoretical model (follow the entire thread) estimating that U.S. inflation may reach double digits by Q1 2022. One of the premises is that monetary authorities have no way out of this rabbit hole and are constrained by the risk of severely disrupting financial markets in an asset dependent economy.

Recall our view that deflation/inflation is a corner solution and Wall Street’s “Goldilocks” scenario is still just a marketing gimmick. Deflation as markets try to move back to mean valuations – a lot lower – or inflation, and lots of it.

h/t CG

Anyone with a better model, lay it on the table. Stop with the “fake news” or “don’t worry” nonsense. CPI prints > 4 percent in May and you heard it here first.

GMM’s Health Wars

CK and I are battling some serious health issues. Mine, an acute skirmish, which I am now recovering.

CK’s, a three-front protracted war. Her courage to get up and fight everyday has been such an inspiration during my little battle. She also saved my life by forcing me to “ignore my primary doctor’s diagnosis of “all is well” and aggressively pursue my symptoms.” If not for that, the Grim Reaper would have liquidated my position and GMM would be no more. Thanks, CK.

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