NEWS: HOT TAKES
February New Home Sales Fall 2 percent
According to the U.S. Census Bureau New Home Sales in February fell 2 percent to 772,000 units on an annualized basis, and down 6.2 percent since last year. The median sales price was $400.6K and the average price was $500K. There were just over 400K new homes for sale at the end of February. Rising mortgage rates and home prices near all time highs remain a problem.
MBA Mortgage Applications for the Week Ending March 18th Fall Again
Mortgage applications for the week ending March 18th fell 8.1 percent and the rate for a 30 year mortgage rose to 4.5 percent. In January the 30 year rate was just 3.22 percent. Rising interest rates and home prices near all time highs are hurting demand. The MBA number is composed of both new mortgages and refinanced mortgages (Refi's). Refi's have fallen sharply in the past few weeks and accounted for only 44 percent of the applications in the survey week. First time home buyers, who often rely on government programs from the FHA or VA are most impacted by rising rates and high prices. Repeat home buyers are doing OK as they can depend on home equity increases in their current property to offset rising costs of the next property purchase.
Blowback - The Price We Will Pay for Sanctions on Russia
Blowback, a termed coined by the CIA decades ago refers to the unintended consequences and side-effects of a covert operation. Since, it has been used to describe the same with respect to foreign policy decisions and military actions. As the U.S. leads the effort to punish Russia for their invasion of Ukraine via sanctions rather than direct military engagement you can be sure many outside of Russia will pay the price, including of course Americans right here at home. It is a lower price to pay than the death of our soldiers and the costs of material to be sure, though for many it will be painful and take years to recover.
It is worth noting that most of the sanctions imposed upon Russia, President Putin, and certain Russian citizens are standard stuff and much of which the Russians have been enduring for years now related to their military interventions in Georgia and Crimea. Restrictions on travel, trade, international cash flows, and access to overseas money and assets account for most of the sanctions to date. They have been ratcheted up to a degree we have rarely seen in the past with the sanctions on the hundreds of billions of Central Bank of Russia's overseas assets including foreign exchange reserves and gold balances. In addition, hundreds of non-Russian companies have ceased their operations in Russia, and those that have not continue to be pressured to do so. There is no doubt the Russian economy will be negatively impacted by these actions.
The idea of sanctions is to make the life of the targeted person, persons, or populations unbearable to an extent they will, out of self interest, apply internal pressure on their leadership to change course on a given policy action. In this case, the effort is to make the life of Russian's so difficult that they turn on Putin, remove him from office peacefully or otherwise, and end the invasion of Ukraine.
Sanctions rarely work. Rarely is the intended outcome achieved in a timely manner, if at all. The U.S. has had sanctions on Middle Eastern countries like Iran and Syria for decades, and on Russia for years. You can add to that list Cuba, North Korea, Venezuela, Afghanistan, Libya and a dozen other nations including Ukraine. The citizens of these countries have suffered for years, but it has not caused their leaders to change policy or direction.
However, sanctions do hurt the targeted countries economic outlook and the lives of the citizens of those countries. U.S. sanctions also hurt our own domestic economy and companies and those of our allies. This usually relates to reduced output, lower levels of sales, lower profits, and upward pressure on prices due to rising raw materials prices. That is exactly what Americans can expect from the sanctions on Russia; higher prices for energy and raw materials used on the production process of manufactured goods.
With a domestic price level already pushed higher by President Biden's policies on domestic energy output and deficit spending since January 2021, inflation rates will remain high for sometime as the world grapples with replacing Russian exports of oil and gas and other raw materials; think diesel fuel and agricultural products like fertilizer or wheat.
Russia's "Special Military Operation" is not going well, and certainly not to plan. Military leaders around the world are all now less worried about Russia's conventional military strength and realize now, if not for their nuclear weapons, the U.S., or NATO, or China could successfully engage the Russian military. But, they do have nuclear weapons, and some of them are on submarines likely patrolling off the U.S. Atlantic coast right now. Clearly, the U.S. and Russia are both trying to avoid a direct military conflict for obvious reasons, and this must to some degree embolden President Putin.
Sanctions won't solve this problem. Going to war in Ukraine is not in the interests of the United States. Helping Ukraine as best we can is what we can do. The solution to this war is either diplomacy, or as some are considering more as each day passes, a Ukraine victory that sends Russian troops back home on their own. Diplomacy, that should be the focus of all involved. Partitioning Ukraine is the likely outcome with Russia controlling Crimea and southeast Ukraine. Egos, history, and national pride are in the way right now.
The Blowback: restricted supply of energy and raw materials, higher prices, lower output, and the real threat of retaliatory cyber attacks on critical infrastructure. Our food distribution network relies on diesel fuel, and Russia is a big player in that sector. Higher prices and reduced supply is a real risk for America's food supply.
The Week Ahead
Ukraine, many Fed speakers, oil inventories and housing data will keep the attention of market participants this week.
Monday Atlanta Fed President Ralph Bostic speaks, as well as Fed Chair Jerome Powell. Tuesday NY Fed President John Williams speaks. Fed Chair Powell speaks again on Wednesday, and so to does San Fransisco Fed President Mary Daly. Thursday we will hear from Board Of Governors member Chris Waller, Chicago Fed President Charles Evans, and again Atlanta Fed President Bostic. Friday, Richmond Fed President Tom Barkin, and Board of Governors member Waller speak. Markets will be sensitive to any words spoken about inflation, timing of rate hikes or fewer rates hikes, and balance sheet tapering.
For data, Monday afternoon we get a look at crude oil stocks from the American Petroleum Institute (API), on Tuesday we get similar information from the U.S. Energy Information Administration (EIA). Wednesday pay attention to weekly mortgage applications from the Mortgage Bankers Association as well as Feb New Home Sales. Thursday, we get Feb Durable Goods Orders, and Initial Unemployment Claims for the week ending March 19th. Friday, the focus will be on Feb Pending Home Sales (homes in contract waiting to close).
Word of Caution for Policymakers About Solutions for High Rates of Inflation
As the problem of high rates of inflation begins to dawn on our political leaders, democrats and some republicans are increasingly talking publicly about price controls, subsidies, and renewed direct cash payments to households. Don't even think about it. It must not be done.
These solutions will only exacerbate the problem of high rates of inflation and create higher rates of inflation. The inflation rates we abhor today were in part caused by direct payments to households and businesses. Any country that has tried price controls as a policy prescription made things worse, Venezuela, and that was certainly the case for the U.S. in the 1970's. Economists know direct payments to households are always and everywhere inflationary. Too much money chasing too few goods and supply shocks cannot be helped by capping prices and doling out "free" money.
At peaks in a businesses cycle demand exceeds supply. That is where the U.S. economy is right now driven by excessive spending exacerbated by COVID regulations and by the supply shock in the energy sector due to President Biden's actions and Russia's invasion of Ukraine. As prices rise for given products and services households and businesses seek substitutes where possible, or change their consumption behavior; reduce demand. They make hard choices, spend more here, spend less there. Reduced demand results in excess supply, which leads businesses to reduce prices and lower output, which increases unemployment, which results in lower levels of gross domestic product.
Only drops in demand can solve this current inflationary problem. This means lower levels of output and economic activity. So, slower growth, or perhaps even negative growth. The solution is to change fiscal and monetary policy from expansionary to contractionary. For fiscal policy Congress and the President need to end deficit spending, reduce regulations, allow for more oil, natural gas, and coal extraction, and work to reduce our dependence on China. For monetary policy the Federal Reserve must raise the Federal Funds rate (overnight lending and borrowing rate) to a normalized level of between 3-5 percent, and reduce their balance sheet. Ending the war in Ukraine as soon as possible would also be helpful (stop the supply shock).
There is no painless solution for reducing high rates of inflation; consider 1980-82. Keep in mind, even once rates of inflation are back to the 1.5 - 2 percent range on an annualized basis, the new higher general price level across the economy for goods and services that has been established will take a while to move back down; prices are sticky downwards in the short to medium term.
Market Update Week Ending March 18
Monday: no data
Tuesday: Feb Producer Price Index (price received by producers for their product) up .8 percent for the month, and up 10 percent from Feb 2021, Mar NY State Empire Manufacturing Index (mthly survey of manufacturers in the NY state) fell to -11.8 from a positive 3.1 in Feb
Wednesday: MBA Mortgage Applications (weekly change in the number of mortgage applications) for the week ending March 11th fell 1.2 percent v up 8.5 percent in the prior week. Feb Retail Sales (mthly sales by retail and food service firms) up .3 percent v up 4.9 percent in Jan, and the Federal Reserve Interest Rate Decision to increase the Federal Funds rate (overnight lending and borrowing rate) 25 basis points to a range of .25-.5 percent from 0.0-.25 percent.
Thursday: Initial Unemployment Claims (weekly change in the number of American initially filing for unemployment benefits) for the week ending March 19th were 214k v 229k in the prior week, March Philadelphia Federal Reserve Business Conditions Index (direction of change in overall business activity) 22.7 v 28.1 in Feb, Feb Housing Starts (foundations in the ground) up 6.8 percent v down 5.5% in Jan, Feb Capacity Utilization (percent of installed productive capacity in use) 77.6 percent v 77.3 percent in Jan, Feb Industrial Production (measure of output in industrial sector) up .5 percent v up 1.4 percent in Jan.
Friday: Feb Existing Home Sales down 7.2 percent v up 6.6 percent in Jan
Stocks: the S&P 500 Index was higher on the week closing at the high for the week of 4,463 up from 4,205 to start the week led by optimism about a peace deal between Russia and Ukraine and a belief that the conflict will slow economic growth and cause the Fed to not raise interest rates as much as expected.
Interest Rates: the benchmark U.S. 10 year treasury bond closed the week at 2.153 percent up from the 2.08 percent to start the week, though off the highs of 2.24 percent set on Wednesday. Inflation concerns and the interest rate hike by the Fed helped push rates higher across the yield curve.
Commodities: oil, West Texas Intermediate, closed the week at the highs of $105.10, up for the week from Monday's $94.72, Gasoline closed the week at the highs of $3.24, up from $2.90 to start the week, Copper closed near the weekly highs of $4.71 off the lows to start the week of $4.48, Wheat was lower on the week closing at the lows of $1,060, down from $1,1114 to start the week, and Lean Hogs closed the week at the lows of $99.50 down from $102.65 to start the week. Energy, metals, and grains have been bid for sometime now due to Russia/Ukraine and supply chain challenges. It is buy the dip across the board for this sector.
Currencies: the U.S. Dollar Index (USD) closed the week at 98.23 off the highs of 99.17 on Tuesday on profit taking and a growing sentiment recession is coming and the Fed will have to keep interest rates relatively low. The dollar finished the week lower against the Euro at 1.1055 dollars per Euro, higher against the Japanese Yen at 119.17 Yen per dollar, and against the Russian Ruble the dollar fell on the week to 99.00 Rubles per dollar (this is up from 80 Rubles per dollar before the invasion of Ukraine, and off the highs of 150 Rubles per dollar on March 7th).
The Fed Raises Interest Rates - Finally
The Federal Open Market Committee (FOMC) completed their two day March meeting deciding to hike the Federal Funds Rate (Fed Funds, overnight lending and borrowing rate) by 25 basis points as expected. They have also indicated their intention to continue rate hikes in the months ahead and reduce their monthly asset (bonds, MBS) purchases. This implies a slowdown in the rate of balance sheet expansion which should lead to a reduction in the balance sheet. The FOMC statement said in part:
"Indicators of economic activity and employment have continued to strengthen. Job gains have been strong in recent months, and the unemployment rate has declined substantially. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures.
The invasion of Ukraine by Russia is causing tremendous human and economic hardship. The implications for the U.S. economy are highly uncertain, but in the near term the invasion and related events are likely to create additional upward pressure on inflation and weigh on economic activity.
The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With appropriate firming in the stance of monetary policy, the Committee expects inflation to return to its 2 percent objective and the labor market to remain strong. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 1/4 to 1/2 percent and anticipates that ongoing increases in the target range will be appropriate. In addition, the Committee expects to begin reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities at a coming meeting."
It is a start, but more hikes are needed sooner rather than later. More importantly, the Fed must start balance sheet reduction very soon. This means the end to their quantitative easing (QE) policy. The Fed must be ready to risk growth to push down inflation rates and to manage consumer and business expectations about future prices. It may be time to begin the debate on changing the Fed's dual mandate of stable prices and max employment to just one; stable prices - yearly rates of inflation below 2 percent.
Political pressure to keep interest rates low and support growth will be increasing as we approach November using the Russian invasion of Ukraine and the resulting global sanctions as the primary reason. The Fed must be ready to ignore this pressure and return the Fed Funds rate to a level of normalcy.
From the end of the 1981/1982 recession thru March 2001 the Fed Funds rate averaged 6.41 percent. From March 2001 thru March 2022 the Fed Funds rate averaged 1.38 percent. Since October 2008 it has averaged just .51 percent. We have a housing and stock market bubble, and crushed savers and retirees to prove it. Modern monetary theory is failing.
The Federal Reserve: Destroyer of Markets, Corporate Competition, Retirees, And Savings; Savior Of The Wealthy And Government Pension Plans
Zero interest rates (ZIRP), printing money to buy bonds and monetize U.S federal deficit spending - known as quantitative easing (QE), stock market bubble, housing bubble, commodity bubble, speculation bubble, IPO & SPAC bubble; the result of 12 years of failed monetary policy. What hasn't been mentioned yet is their dual mandate as imposed by the U.S. Congress in the 1970's. The Fed is supposed to maintain price stability (defined as yearly inflation rates below 2 percent), and maintain full employment (defined as maintaining a full employment unemployment rate between 3.5-5.5 percent. Inflation is running above 5 percent today, and the unemployment rate is around 5 percent. They have achieved their mandate and then some with the spike in the rate of inflation.
The federal funds rate, the overnight lending and borrowing rate the Fed controls, should be hiked from 0 - .25 percent range today to 3 percent in the next 4-5 policy meetings. The Fed must stop monetizing U.S. federal debt, and the Fed must reduce their balance sheet. Fed Chair Jerome Powell indicated the Fed will start "tapering" their bond purchases in the coming months beginning hiking the federal funds rate at the March 2022 meeting. Too late.
Savers and retirees have been devastated since the Fed began their unusual monetary policy after the great recession. In 2008 savers and retirees could earn 6 percent on their saving, since 2009 that rate fell to basically zero. Only by taking more risk (think stock market) would they have possibly been able to fund their retirement. For banks the traditional way of making money, net interest earnings (the rate at which they lend minus the rate at which they borrow), narrowed sharply forcing banks to take more risk putting the whole system in a liquidity trap.
When it comes to accelerating the problems of wealth transfer and the growing income gap in America the Fed takes the 1st Place prize. They have to admit their mistake and reverse policy returning to normalcy that was achieved between 1981 and 2008.
In 2007 the Fed's balance sheet, already inflated by managing the impacts of the terror attacks on 9/11, was $850 billion, today it is $8.8 TRILLION. Monetary policy is way off base and represents a severe risk element for the U.S. economy in the near term.
Elected Officials And Appointed Bureaucrats Don't Like To Retire
The average age of the leading policymakers in the U.S. is 71.5 years:
President Joe Biden - 78, first elected 1970
Vice President Kamala Harris - 56, first elected 2002
Speaker of the House Nancy Pelosi - 81, first elected 1987
House Minority Leader Kevin McCarthy - 56, first elected 2000
Senate Majority Leader Chuck Schumer - 70, first elected1974
Senate Minority Leader Mitch McConnell - 79, first elected 1977
Federal Reserve Bank Chairman Jerome Powell - 68, first government job 1990
Secretary of the Treasury Janet Yellen - 75, first government job 1977
Director National Institute of Allergy and Infectious Diseases Anthony Fauci - 80, first government job 1968
Power, status, fame, luxury, and fortune are powerful incentives to keep working into your 70's and 80's. Take out Harris and McCarthy and the average age jumps to 75.2 years. Seniority, network, and name recognition rule in DC. It is reasonable to ask, does the system bring forth the best leaders?