The Economy

The 30-year fixed rate mortgage pushing is 6 percent now. This time last year, rates were below 3.1 percent. People are really strained, and all they think in terms of is their monthly payment. For the same monthly payment, you can afford to buy a home that costs half as much today. But you still aren't even getting half the home, because the branaics who base their operations out of the Eccles Building were buying mortgage-backed securities hand over fist to suppress rates, and they fueled a housing bubble sending the cost of homes, um, through the roof. Some really high percentage of people with a mortgage have a 30-year fixed locked in at a rate below 5 percent. Those people are now effectively trapped in their current home (unless the Fed reverses course and digs the hole deeper by choosing inflation over taking the mess that they are responsible for, which has to be a good possibility given their behavior over and over again) because of the favorable rates they locked in. That means the housing shortage is likely to persist, because homes aren't coming on the market. This is exactly the kind of shitshow chain reaction we all have to deal with when people given broad power to price fix the cost of money think they can design things they don't even understand.

Aside from the fact that homes aren't turning over, the big reason you are seeing a slowdown in demand (what that story about goods from China is really saying) is that when Congress dumped money in people's pockets during the pandemic (and the Fed monetized it unleashing the inflation monster), it pulled demand forward from the future. Another way to look at it would be to look at the earnings Home Depot, Lowes, etc. posted in 2020 and 2021. They were raking it in as people did home improvement projects. There are a ton of people like this -- trapped in their homes, but. ... their fixed up home. They are not going to be putting money into their homes again for a while.

I agree with the premise of that story -- inflation is not going to fall because of the Fed, but it's certainly not because of that nonsense from Tom Lee. It's because the Fed is doing too little, too late, and is likely to pivot and choose inflation over a nasty recession. The real rate is still deeply negative. A fed funds rate at 1.5 to 1.75 percent when they are telling us that the CPI is pushing 9 percent, is like using a water pistol to try to fight a 5-star fire. Assume another 75 basis point hike in July, and they are still diddling themselves rather than really addressing it. The problem is that they know that the world can't afford rates that are any higher without a cascade of credit defaults starting. It's wild how delusional people are. At the government level, they are talking about all kinds of new spending, on top of the massive amount of debt we have run up over the last 25 years and the deficit they are still currently running. With higher rates, they not only can't continue to live that fantasy without starting to sell a ton of treasuries (which will send rates even higher!), we begin to drown in interest expenses. A problem made worse by the fact that tax receipts are already falling because markets have gotten cracked in the face this year (the federal government has feasted on cap gains the last few years on the back of the bubble. There have been none this year).

At the corporate level? There has been trillions upon trillions of borrowing, still sitting on balance sheets. They used the money to buy back stock, pay dividends, light on fire. There was very little investment (a major reason we couldn't supply all the demand from the U.S. when they send demand through the roof by stuffing money in people's pockets). At the kind of rates it would take to seriously try to fight inflation, you'd see a lot of company's drowning in their debt and going out of business. It was going to happen in 2020 when the pandemic hit. ... and the Fed answered the debt problem by creating money and using it to buy up everything with no regard for the price they were paying.

Regarding that story, keep in mind that as inflation was taking off, and the Fed was still expanding its balance sheet and saying "no worries, it's transitory," Tom Lee was banging a drum to their beat. Why is he worth listening to today? The only guy out of the three in that story with much credibility is Ian Shepherdson, who I am pretty sure was calling BS on the Fed during the whole "transitory" period. He's right that whatever we see in the coming months is already built in -- this is like a cruise ship, and any attempts to try to steer it happen with a lag. The thing he was not addressing was 1) whether what they are doing is enough (not even close), and 2) whether he thinks they are going to get much farther before they break something, panic and reverse course to try to avoid the blame.

 

Timing is everything. I sold my condo in February 2021 and moved in April. And was able to lock in on a 30-year fixed at 2.95 percent.

 

This is the problem the central bank created. ... They blew a housing bubble in the 1990s into the mid 2000s by killing all price discovery in the rates market, and it sent home values up, up, up. They patted themselves on the back. ... look at the prosperity we've created!

It started to come crashing down in 2007, 2008 -- it was malinvestment and it just took one trigger -- but rather than allowing all of the necessary defaults to take place (the necessary pain), they stepped back in to prop up the mountain of debt they enabled with MORE monetized debt. And kept their thumb on the scale for the last 14 year or so. As part of their QE, they intervened in the MBS market so aggressively, that it artificially blew housing prices right back up. ... and then during the pandemic, when they upped their bond buying, they sent prices on a rocket shot.

So there you are, just living your life. People have watched housing prices being blown up by them for decades, and they don't want to sit on their hands waiting to see if the idiots screwing up the housing market are going to stop artificially pushing rates to zero (what sends prices higher and higher) or if they are going to lose control and another bubble is going to pop. You want a home to live in, and you can't wait while your whole life races by.

You did the right thing by buying if you will be able to afford it if the value drops / rates go up (if you borrowed and it's not at a fixed rate). It's a home. ... you are buying it to live in, not to play speculator. Unfortunately, though, if / when prices do drop a lot (and it will be in a disorderly way if rates come even close to normalizing), there will be people who end up underwater. ... with mortgage payments they can't afford and homes that are worth a fraction of what they paid. It's easy to say that thoe people should have anticipated what would happen. ... but they were just living their lives and wanted a home to live in and were responding to the distortions they were being forced to deal with.

 

The risk of a flip-flopping Fed

 

Second Q1 GDP number. ... negative 1.6 percent (revised down from 1.5). Personal consumption cratered from +3.1 percent to just 1.8 percent. And the GDP price index, the measure of inflation built into their growth (or contraction in this case). ... 8.2 percent (revised up from 8.1 percent).

This is stagflation. The U.S. economy is not in good shape.