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.