I Would Take Powell At His Word

 

At the end of last week, markets broke out the pipes and smoked the "hopium".  They are betting that the Fed will back off of the interest rate hikes in the coming months and the indexes posted Friday gains.

I am not convinced that the Fed will stop raising the overnight rate.  I do believe that they will continue to unwind their balance sheet where Treasury and mortgage backed securities are concerned.  The QT strategy is scheduled to kick into overdrive beginning in September.  

Powell's own statement was that on the current inflation problem, "we can not fail on this" when speaking to Congress.  The reality of the situation has settled in at the Federal Reserve (finally).  They have been monkeying around and meddling with the price of credit and the terms of underwriting for decades.  The consequences of actions taken by Greenspan, Bernanke, Yellen and others have manifested themselves and have finally come to a head.  I think Powell is beginning to understand the gravity of the situation.

One talk show host I listened to recently voiced a concern that we could have years of inflationary pressure on items that everyone buys on a regular basis (fuel, groceries, utilities, medicines) but deflationary pressure on asset prices (real estate, stocks) as the Fed increases interest rates to more normal levels and removes stimulus via QT.

Rents continue to skyrocket with many evictions in the pipeline.  The poor who do not own their homes would be crushed if things continue as they are progressing.  There are far more poor people in this country than rich or comfortably middle class people.  Social upheaval could become a real problem in many parts of the country.  Many of these working poor are also heavily in debt.

The cheerleaders on Wall Street make their fees by selling fear and by selling hope.  Last week, they advocated that their clients break out their pipes and buy some "hopium" and light up - the markets responded positively to their brokers' requests.  I would be very surprised if those collecting their fees actually have their own personal money where their mouths are at.  I would guess that a few do - there are always some drug dealers who do make the mistake of getting high on their own supply.  Always remember that during the last credit crisis one Goldman Sachs trader was caught referring to his clients as "Muppets" - that is what they truly think of their clients.  Pushers and junkies.

Savings and Loan Fiasco On Deck

"In the 1980s, the financial sector suffered through a period of distress that was focused on the nation's savings and loan (S&L) industry. Inflation rates and interest rates both rose dramatically in the late 1970s and early 1980s. This produced two problems for S&Ls."

When you make long term loans at very cheap rates (30 year mortgages at very low rates) and hold them on your own books as an asset, you set yourself up for what is known as interest rate risk.

You can't make a long term fixed rate loan (an asset on the institution's balance sheet) at 3.50% when depositors in your institution are expecting a 4% return on their money.  When you "mark to market" your asset and are underwater, the NEV will go down.  That's why so many originators sell their mortgage paper - it's like a hot potato.

"Interest rate risk is the probability of a decline in the value of an asset resulting from unexpected fluctuations in interest rates."

"Credit unions are less likely to sell home loans to other lenders, Gleason says, partly because they want to keep a long-term relationship with the 

borrower" - *my comment, if I want another long-term relationship, I'll get myself another dog*

We have not as yet reached any tipping point but I have to wonder if credit unions have not set themselves up to be the next Savings and Loan industry.  Deposit rates have slowly come off the floor for anyone willing to do some shopping.  Internet banking is no longer considered "exotic".  You are not limited to where you park your money and competition will heat up in the next year or two.

From Jesse's Cafe Americain:  As I have previously noted this feels more like a long, grinding bear market than a 'crash.'

I've read his blog for quite a while going back to the housing market run up and crash - yes, there are a lot of bloggers out there putting up posts about their observations and opinions.

Charles Hugh Smith - Of Two Minds

Daily Reckoning

Zerohedge

They're not going to fill your head with a lot of Happy Talk and cheerleading.

Anyway, what I remember of working in credit unions and the present day interest rate/inflation scenario reminds me a great deal of the Savings and Loan fiasco where an entire industry that lent out long on cheap rates and held the loan on its books got caught with its pants down when rates quickly hiked upward to stem inflation.

Many Economists are Idiots

"I write to you from a disgraced profession. Economic theory, as widely taught since the 1980s, failed miserably to understand the forces behind the financial crisis. Concepts including rational expectations, market discipline, and the efficient markets hypothesis led economists to argue that speculation would stabilize prices, that sellers would act to protect their reputations, that caveat emptor could be relied on, and that widespread fraud therefore could not occur.  Not all economists believed this, but most did."

James K. Galbraith

Are you kidding me???

It Would Appear That the Stock Market Experienced a Reality Check Overnight

“It hasn’t taken long for the post-Fed bounce in stocks to fade, and given the gloomier outlook for growth, that is hardly surprising," said Chris Beauchamp, the chief market analyst at IG Group in London. “We are still living in the same world we were 24 hours ago, one where growth is slowing, earnings are still falling and prices keep on rising. This is not a great environment for stocks.”

Both Political Parties Are To Blame

 And for that matter, anyone who mindlessly supports or defends the actions of his or her political party without a thought as to the right or wrong of the situation.  

We were warned by Washington himself that having long lasting entanglements in foreign lands should be avoided.  Did we listen?  *cough, NATO, cough*  *cough, Korean peninsula, cough*  He also warned against blind loyalty to political parties.  Did we listen?

Establishing a Federal Reserve may have seemed like a good idea at the time but it has also provided a gateway to politicians to try to influence monetary policies in order to sway elections for themselves.  

Presidents, including Donald Trump, have done it over and over again.   LBJ did it.  Trump was needlessly hammering Powell to lower rates into net negative territory just before his re-election campaign in order to solidify his position against a backdrop of "pedal to the metal" growth.  I still remember his tweets calling his pick of Powell to head the Fed "a big mistake and a regret".  I thought to myself, "Fuck you Trump".

Politicians on both sides (R or D - makes no difference) of the aisle love having the Central Bank to buy up Treasuries with newly minted money at nosebleed prices.  This way they can fund the government's many bullshit artists and their bullshit projects behind a lot of smoke and mirrors.  Think of it as the nation's secret credit card.  The taxes that you pay to the government don't actually pay for purchases.  The taxes you pay every year represent the interest due on Uncle Sam's Mastercard bill and maybe a tiny amount is paid on the principle balance in a good year.  The government (both parties) like seeing you tread water and keep paying.  

What is happening today is like this:  It's like coming home from work one day unexpectedly because the office or shop or factory you work in closed up early.  Your free spending spouse has not as yet arrived home to collect the mail and so you go to the mail box and get the mail inside.  Whereupon you find a Mastercard statement that you have no previous knowledge about but it bears your name and that of your spouse.  The account has a very large balance due that has been accruing interest for quite a while.  Payments (from your salary) have been made in the past but have never touched the principle due in any meaningful way.  You have never been the beneficiary of any of the items purchased with this "secret Mastercard".  You're blindsided by the balance and somewhat hurt by your spouse's financial betrayal.  

The Fed and Treasury are your Mastercard issuer, Congress is your free spending spouse and you have been played like a violin.  It doesn't matter if your "spouse" has a D or an R in front of his or her name.  Congress is the root of the problem.  Like a bad spouse, the best you can do is give them the boot.

The Only Buyer of Mortgage Backed Securities Stupid Enough To Buy At Nose Bleed Prices

The only chump stupid enough to buy MBS paper at 2020 - 2021 prices has been the Federal Reserve.  They ceased their purchases in March (finally).  They were a full "day late and a dollar short".  These chumps bought bullshit paper at nearly full price.  Selling them at any point in the future is not an option unless they want to take a loss because no one in their right mind would buy them at the prices they would need to ask in order to cover their asses.  It is "hold until maturity" for the Fed.

They are "screwed, blued and tattooed" to use an old Mississippi term should they need to unload them quickly.  But, the Fed won't dump them anytime soon.  My thought is that, at some point in the future after the spotlight is no longer upon them, they will sell them at a deep discount to a group of their cronies but that is a "horse of a different color".  

You just have to remind yourself of how fucking corrupt and manipulative this country truly is and thoughts like this will pop into your head as if by magic.

Mortgage rates are rising because private investors who buy mortgage backed securities demand higher compensation for the risks associated with providing a long term loan to some loser to buy his or her shack.  The only chump at the card table has finally, mercifully, left the room.

Private investment can not compete with the Federal Reserve.  Why?  Because we don't have a fucking printing press (metaphorically speaking - they don't have an actual printing printing press but they can create digital credit, etc. - it's complicated, but they control the monetary supply of the country among other things).

Higher interest rates and higher underwriting standards will be headed toward the housing industry.  That will translate into fewer borrowers.  That will translate into job losses in many industries.  When the last housing bubble burst, the unemployment showed up in a lot of areas that were not part of the mortgage industry.  Builders of homes, people who make and sell home furnishings, appliance makers, etc. felt the pinch.  A lot of people make a living when some schmuck goes into the local bank with hat in hand to borrow for the purchase of his or her American Dream.  Increased inventory and lower prices on housing will be headed to many markets.  Who knows where this will lead.

It's The End of the World As We Know It and I Feel Fine

I'm sure that a lot of individuals and entities have not had a solid night of sleep (or, for that matter, taken a solid shit) over the past week in anticipation of the upcoming Federal Reserve's June meeting.  On the other hand, your old Uncle Kenny sleeps like a baby dreaming of slowly but surely increasing treasury yields and interest income.  

There's an old banking phrase that many will become intimately acquainted with:  Those who do not understand compounding interest PAY it while those who do understand compounding interest COLLECT it.  

It is high time that you bunch of coddled, cuddled and over indebted losers cough it up.

No more hiding behind the skirt (or in the case of Janet Yellen, pantsuit because she has probably NEVER looked good in a skirt and looks only SLIGHTLY LESS UN-FUCKABLE in a pantsuit) of your fucking Mommy who masquerades as an impartial Central Bank.  Will it hurt?  Abso-fucking-lutely.  Too fucking bad.

"Federal Reserve Note"

Bloomberg June 10, 2022: The stock market: buckling under the hottest inflation since 1981, battered by a historically aggressive bid to break it. Making matters worse is that bonds are beckoning as well.

And everyone is shocked...  I love watching the U.S. Treasury markets this year.

My reply - really?  Really?  Can you really be that fucking stupid to think that the Federal Reserve induced Everything Bubble was real and permanent.  This bubble came out of Jay Powell's ass just as the Covid-19 virus came from Charlie Chan's Basement Laboratory in Wuhan.

Every shred of historical data was screaming for years that this shit show was coming IF the Federal Reserve kept fucking around with the price of credit.  This whole fucking country runs on poorly planned and poorly underwritten credit and when you start jacking around with the market price of credit or skewing acceptable risk factors just so that you can juice some numbers or influence elections or front run your customers' investments this is the inevitable shit show that you can expect to follow. 

The ONLY reason that the Federal Reserve is back peddling now is for one reason...SAVE THE DOLLAR'S SPECIAL AND MOST PREVALENT RESERVE CURRENCY STATUS.  That's it.  Why?  So they can run the same scam again at some point in the future.  

In the meantime, enjoy $6 per gallon gas and $10 per pound bacon even as your 401k becomes a 201k and your home's "value" slowly reverts to a more historical average price.  And by the way, the pain ain't over at the grocery store just yet.  Farmers across the country are bemoaning the cost increases they will face to put the 2022 / 2023 crop into the ground and harvest.  Where do you suppose those increased costs are going to show up?

What you had better be praying to the good Lord above for is that the country doesn't go "full Argentina" or "full Brazil" 1980's style.  What do I mean by that?  When the unwashed masses make a bee-line for the grocery store or gas station to unload their paychecks denominated in Argentine pesos or Brazilian reals to buy goods because the price of those goods are expected to increase weekly (sometimes daily or even hourly).  It can happen.

Don't believe your old Uncle Kenny?  Well, back in the day I used to date a good looking little Brazilian number from the South of Brazil.  She told me that she could remember grocery stores there announcing price increases over the intercom while people were shopping.  She's not much to look at these days but back in the day she was a cute little thing with a nice rack and she could suck a golf ball through a 10 foot section of garden hose.

Right About Now, I'd Love to Own a Gas Station

 

R.I.P. Warmonger.  Oh, and while we're on the subject of corruption in government and taking a trip down Memory Lane, let's get a quote from the Phoenix New Times in November, 1989:

"You're John McCain, a fallen hero who wanted to become president so desperately that you sold yourself to Charlie Keating, the wealthy con man who bears such an incredible resemblance to The Joker.

Obviously, Keating thought you could make it to the White House, too.
He poured $112,000 into your political campaigns. He became your friend. He threw fund raisers in your honor. He even made a sweet shopping-center investment deal for your wife, Cindy. Your father-in-law, Jim Hensley, was cut in on the deal, too.

Nothing was too good for you. Why not? Keating saw you as a prime investment that would pay off in the future."

Just a Reminder

 Later today, the CPI report will hit the news.  Yesterday, I took one of the motorcycles for a ride to the Washington, MO riverfront for a ride.  While there, I enjoyed two scoops of the local creamery's product.  $7.12 for a cup with one scoop of cherry and one scoop of chocolate.  

Don't get me wrong - it's good ice cream but, IT'S NOT $7.12 FUCKING GOOD.

So, how did this come to pass.  Well, let me cut and paste the immortal words of the Fed's point man in March of 2020  - I give to you the pearls of wisdom from none other than Neel "Crazy Eyes Cash - n - Carry" Kashkari:

"Last October, Ikigai Asset Management’s Travis Kling predicted central banks would have to “juice QE to infinity” in order to save markets from recession. Yesterday on “60 Minutes,” Fed President Neel Kashkari said that “there is an infinite amount of cash at the Federal Reserve. We will do whatever we need to do to make sure there is enough cash in the financial system.”

My reply - Neel, nothing except the Good Lord above is infinite.  You flew too close to the sun.  There IS a limit to the amount of cash that the Fed can inject into the markets without causing a shitstorm.  Closing down the economy due to Covid 19 *cough - politically driven bullshit - cough - meant to sway a national election - cough - meant to dislodge a political enemy of the left - cough, cough* was a colossal mistake and everyone knows it.  If the Fed had any balls at all, it wouldn't have participated in the idiocy.  But it did, and now we have $5 per gallon gas and $7 ice cream cones.  Congratulations, Boy Wonder.

If Your Local Newspaper Poses the Question, Then Yes, You Live in a Bubble Market Part II

 I love it when the dumbasses running news outlets post a headline that is in the form of a question.  My reaction is always the same - it is a news outlet not a forum for posing stupid questions.  I blame the dumbass generation that always speaks with that stupid inflection at the end of each sentence that comes out of their pie holes.  Everything ends with a question.  Then again, this is the same generation with several members who can't even define what the fuck a man or a woman is - confused about everything but demanding that they run the shit show.

From The Indy Star, Indianapolis, IN - 'Worrisome' Indy housing market is overvalued, study finds.  Is a housing crash coming?

Allow your old Uncle Kenny to answer.  Yes, Virginia.  There really is a housing market crash coming to Indiana.  It's pretty fucked up when housing bubbles can occur in shithole towns like Indianapolis, IN but that's the miracle of Federal Reserve.  All zip codes can participate in the bubbles that they create with their reckless policies.  If you bought a home during this clusterfuck or refinanced with a cash out deal then enjoy the snorkel mortgage America.  You'll be underwater on your home loan for quite a while to come.

Demand Destruction Begins in the Housing Market

From Market Watch - "If you think now is the right time to purchase a home, you’re in the minority.

The share of American consumers who reported it was a bad time to buy reached a new high of 79% in May, according to Fannie Mae’s monthly housing survey. Fannie Mae’s FNMA, -0.56% Home Purchase Sentiment Index, which “remained relatively flat,” also managed to slide 0.3 points to reach 68.2 last month — moving toward its pandemic low of 63 from April 2020. "

This number EXCEEDS the percentage of Americans who believed 2007 and 2008 were bad years to buy a new home.  79% - even with 30 year mortgage rates below 6% for most borrowers.  Why?  Because the PRICE IS TOO FUCKING MUCH.  All but the most dull (or desperate) among the population believe it is A-OK to buy a house right now.  

I could be wrong but my guess is that a good chunk of the 21% who believe now is a good time to buy a home are generally employed in the house building and mortgage lending business - and/or just generally retarded.

My Own Private "Juneteenth" Celebration

 "Juneteenth".  Only in these modern day Great United States of America could such a stupid name be given to a national holiday.  Dumb.  Just fucking dumb.  Right up there with "Kwanza".  But then again, we have some voting "citizens" who believe that Wakanda is a real place in Africa.

My own private Juneteenth celebration is coming up.  That is the Federal Reserve's meeting that begins on June 14 and concludes on June 15.  The long anticipated quantitative tightening (QT) will then begin.  Oh how I have waited for and anticipated this meeting.  

Now that inflation has kicked into high gear, the Fed finally has run out of road to kick the can down.  It's put up or shut up.  Shit or get off of the pot.  Some youngsters in the markets are betting that the Fed will back off when the stock market tanks because heretofore, that's exactly what the Fed has done.  The Fed has always ridden to the rescue to a crying and whining Wall Street whenever rising interest rates have interfered with their party.  That was then.  This is now.  

Not in recent memory has the Fed faced the inflationary pressure it faces today.  Even dumbass Janet Yellen is doing a half assed mea culpa these days.  She is a fat, stupid bitch with a bad haircut.  It is either ride to the rescue and go "full Zimbabwe" or protect the currency.  You can't have both.  My thought is that the Fed is going to protect the last shreds of credibility that it has and protect the currency.  In the process, more than a few people who should have been thrown under the bus decades ago are going to finally be thrown under the bus.  Not because the Fed wants to - it will do it only because it has to.

Timber!!!! Prices Down 51% Since February

 Mortgage rates - UP!  Timber prices - DOWN!  There is still a lot of room to fall as today's timber prices are still twice as high as historical averages.  P.S. - timber prices are a leading indicator of where home prices are headed.  

I recently learned that an "odd couple" that I know in Waterloo, IL have their rather substantial home listed for sale.  5,100 square feet of living space for a formerly attractive, 50 'ish Jefferson County, MO cow patty who parlayed her pussy into riches that she would have no way in hell of affording on her own and her Viagra popping Senior Citizen husband who is now pushing 80.  I guess the 5 acres of grass mowing and weekly cleaning of the McMansion is getting old.  In 2007 and 2008, they were heavily invested in real estate.  When that bubble burst, they and their business partners went bankrupt.  They have reduced the listing price on their large shack by $25,000 even though the listing date was in May.  I guess they did not attract any potential buyers.  Anything priced over one half million that relies upon a borrowing buyer to sell is going to move at a slower pace.  Banks are probably getting scared, as they should be since the Fed ain't going to be the dumping ground of overpriced mortgage backed securities going forward.

Down go the prices.

The Fed's Moment of Truth

The very small increases to the overnight rate have thrown markets into a tizzy.  The rubber starts meeting the road this month as the Fed's previously stated schedule for unwinding its very large balance sheet ($8.9 TRILLION dollars) begins this month.  This will have far more impact on markets than the tiny rate increases that it has approved during the past six months.  The pace that is being proposed for rate increases and quantitative tightening will not bring much relief from the present rate of inflation.  Some price increases in food are already "baked into the cake" as farmers contract for fuel, seed and fertilizer a year in advance and have seen very large increases in the costs to produce a crop.  Those increases generally show up on the consumer's end bill a year to eighteen months later.  One Texas farmer estimated that by 2023, Americans might see their grocery bill double from current levels.

A large number of voters have Democrats, the Federal Reserve and their own greed to thank for the clusterfuck that they find themselves in today.  Embrace the suck.