Tag Archive for: FederalReserveInflation

What’s Next for the Fed?

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Estimated Reading Time: 3 minutes

After neglecting to address inflation throughout 2021 and into 2022, the Federal Reserve has now raised its interest rate targets 10 consecutive times, to the highest level since 2007.

At his press conference to announce the change, Fed Chair Jerome Powell emphasized the Fed’s priority of reducing inflation and stressed that the Fed will maintain high interest rates as long as is needed to achieve this goal.

Given the turmoil in the banking system and softening of the labor market, is the Fed likely to fulfill this commitment? What factors might cause the Fed to revise its monetary policy?

Will interest rates remain elevated? Powell has repeatedly stated that the Federal Open Market Committee (FOMC), which determines the stance of monetary policy, has no plans to cut interest rates in the current year. Several FOMC members, however, have expressed views that the committee should pause its rate hikes for now to evaluate the effects of its recent policy changes.

While not committing to a pause, Powell pointed out the FOMC had removed from its new monetary policy statement a note in previous statements that “some additional policy firming may be appropriate.”

One reason for Powell’s emphasis on keeping interest rates high is his fear that if the public believes the Fed will cut rates, then they will expect more inflation, and that change in expectations could actually cause inflation to rise. The FOMC must signal that they are willing to keep rates high since their priority, at least for now, is to stamp out inflation.

What are market participants expecting? Despite Powell’s insistence that the Fed has no plans to reduce its interest rate targets, it appears that financial market participants do not believe him. Financial markets indicate that the Fed is expected to stabilize interest rates through the summer and begin cutting in the fall. This might happen for one of two reasons.

First, the Fed’s ideal scenario is that inflation continues to slow, in which case, they could reduce interest rates slightly to what they consider to be the “normal” range with little negative side effects to the economy. Falling inflation implies an increase in real interest rates, so the FOMC may need to reduce interest rates in order to maintain a neutral policy rather than becoming overly restrictive.

Second, most economists are predicting a recession this year. If it happens soon, the Fed will be stuck with two bad options: either keep interest rates high to prevent inflation or cut interest rates to address the recession. Given the Fed’s history and Powell’s past reluctance to address inflation, the markets may be betting on the latter.

What will determine the Fed’s decisions? Chair Powell said that, going forward, the Fed will be data dependent in its monetary policy decisions. Three important factors they will likely consider are inflation, unemployment, and the prospect of further bank failures.

The Fed is hoping inflation, and especially inflation expectations, will continue to fall. High inflation has been harmful to average Americans, and getting it down has become the Fed’s top priority. Falling inflation would give the Fed more room to cut rates without pushing up expectations.

Employment remains strong but may be slowing slightly, which is fine since the Fed wants it to calm to a sustainable pace. If unemployment rises substantially, indicating a likely recession, it is not clear how the Fed will respond, especially if inflation remains high.

Despite the negative effects of high interest rates on the banking sector, the Fed is reluctant to lower rates for fears of perpetuating inflation. It has sought to address banking problems with emergency lending facilities rather than through monetary policy. That has worked so far. If more bank failures threaten the financial system or put the economy at risk of recession, however, the Fed may choose to reverse course and lower interest rates to address these issues.

The economy is stable for now with low unemployment, falling inflation, and interest rates expected to remain stable, at least for a while. A wide range of outcomes are still possible for 2023, ranging from stagflation to a “soft landing.” The Fed’s response to economic conditions in the coming months may tell us which of those outcomes is most likely.

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This article was published by the AIER, American Institute for Economic Research and is reproduced with permission.

The Next Two FED Meetings Could Be Market Movers

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Estimated Reading Time: 4 minutes

There is little doubt today that what the Federal Reserve decides to do with both interest rates and its massive balance sheet is perhaps the most important variable moving markets.  The next two FED meetings loom as particularly important.  The key dates will be May 3rd-4th and June 14th-15th.

To be sure, corporate earnings, retail sales, real estate activity, industrial production, the world economy, politics, tax policy, and numerous other variables impact markets as well.  But nothing has been moving markets over the past 20 years quite like FED policy.

While economists and historians will no doubt continue to debate the efficacy of the central bank intervention, the fact is those of us with money in markets must deal with it.

Right now, we notice the chart action of many important markets are sitting on major inflection points.  An inflection point is defined as a market at either important overhead resistance or downside support.  Which way the FED goes could well push markets above resistance or below support, creating important signals in a variety of markets.

In the past month or so, the markets have been coming down in volatility into a kind of an eerie holding pattern, suggesting considerable confusion among market participants.

The stock market has been buoyant, recovering rather quickly from some staggeringly large bank failures. The stock market seems to be saying the nirvana of the soft landing is nearby and that the FED is likely done raising interest rates. 

The stock market seems to feel the FED has taken enough inflation out of the system, that the numbers are running in the right direction, and that they will as a result, will stop raising rates (pause), and then soon shift back to lower interest rate policy.

The FED itself has been saying otherwise, but the stock market seems to be saying, you are mostly talk and you will not push the economy to recession to fight inflation…  not with a major political cycle just ahead.

The stock market does also not seem particularly concerned with earnings reports or lofty valuations.  Some of the most expensive companies, many in technology, have taken over market leadership again.

But the bond market has been strong (lower rates) but recently started to reverse trend suggesting that the FED will continue to raise interest rates.  Not only is money again becoming more expensive, evidence suggests banks and other lenders are tightening up credit requirements after the surprise of large bank failures.  Not only is credit getting more expensive, it is getting harder to obtain.  Both developments are negative for the economy and hence indirectly negative for stocks.

One of the deans of technical analysis, the late Richard Russell, used to say that when the stock market and the bond market are discounting different scenarios, Russell advised one should believe the bond market.  His reasoning was that the bond market is by comparison much larger and is mostly a professional market.  The public may dabble in stock speculation, but professionals run the bond market.

If this observation holds, be prepared for the FED to raise rates one or two more times, creating the real risk of recession.  This will wind up being positive for bonds later, but negative for stocks in the near term.

Chart courtesy of stockcharts.com

Here we see the very important 30-year mortgage rate.  It has gone up a lot and is still double what it was just at the beginning of 2022.  This has put downward pressure on housing activity since the down payment is very much a function of both the house price and the cost of interest.  But like the bond market, recently rates have started back upward, suggesting the FED is not yet done raising rates.

Other markets as well are trying to peer into the future and divine what the economy and the FED are going to do. As mentioned, many of these markets are also at important inflection points.

The gold market has moved nicely to levels above $2,000 per ounce and will either break out, or once again, fail to move higher.  Has gold stalled out or is it just gathering strength for a push to all time new highs?

Silver has moved up to a long term trendline formed by the peak in prices at near $50 per ounce a number of years ago.  It too could either break out or fail.

The US dollar has formed a large head a shoulder looking pattern with important downside support at 100 on the US dollar index.  It either holds, or it folds.  A weaker dollar suggests lower interest rates, while a stronger dollar suggests the opposite.

Chart courtesy of stockcharts.com

Two of the more interesting charts are copper and lumber, both sensitive to economic growth.

Chart courtesy of stockcharts.com

Copper has been in downtrend for more than a year.  It will either continue to fall, or gain enough strength to reverse its bear trend.  The weakness is somewhat surprising given the widespread belief in the future of electric vehicles and the need to re-tool the entire electrical grid.  Why the weakness?  Maybe copper is telling us the economy is slowing, which would not be good for the stock market. It seems to agree more with the bond market than the stock market.

Chart courtesy of stockcharts.com

Lumber prices are a key indicator of demand for housing construction and it too has been in a bear trend.  But like copper, it would not take much upside action to reverse trend.  But again, right now, lumber seems to be saying demand is soft and so is the economy.

We have real issues with the FED.  Central planning has a terrible track record as bureaucrats, absent real world free markets, can’t really know what the “proper” interest rate should be or the supply of money.

The FED largely controls the demand side of the ledger by creating money, or claims on goods.  But the FED itself can’t produce the goods, the commodities, or the structures they are creating demand for.  Hence, even if they are the best guessers in the world, they only have half the equation.

Despite what the FED likes to say, they are also a highly political organization.  Afterall, most of the governors voting on policy are nominated by the President and hence, have either loyalty to the abstraction of neutrality or reality of politics.  And guess what, we are getting very near to the next political cycle.

Inducing a recession would be highly unpopular.

But letting inflation run longer and hotter would also politically problematical.

The FED now has the markets trained to react to every decision and every rhetorical nuance.

They are now a little like the dog that finally caught the car.  Having been successful, now what does the dog want to do?

Why Gold Is Such an Effective Weapon Against the Government’s Monetary Schemes

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Estimated Reading Time: 4 minutes

Ron Paul: “Because gold is honest money it is disliked by dishonest men.”

Buying physical gold is a time-proven method of securing generational wealth, and a security measure often taken in times of economic turbulence. Gold investing has long been viewed as a hedge against inflation and a store of value against currencies. Throughout history, as coins and currency became debased, those who had more precious metals on-hand had many more options for purchasing what was needed and investing.

Investing in a gold currency, as economist F.A. Hayek suggested, also acts as competition to paper currency and any attempted coercive monopoly of currencies. When currencies are strictly controlled, the power of government is buttressed. Hayek specified, “[Monopoly of currency] has of course become a chief instrument for prevailing governmental policies and profoundly assisted the general growth of governmental power.”

According to Investopedia, currency debasement is intentionally lowering the currency’s value through various monetary and fiscal methods. In the past, debasement was associated with substituting precious metals with base metals such as using less gold or silver in the coins and replacing it with copper or nickel, while keeping the face value the same. Today, debasement primarily occurs by printing more money in the form of fiat currency, a process known as monetary inflation.

The reason governments typically initiate currency debasement is to extend government spending and purchasing power. Still, it comes at the expense of citizens who are eventually stuck with less wealth, higher costs, and lowered purchasing power. Currency debasement, as well as monetary inflation in general, tends toward price inflation. Simply put, currency debasement in the form of monetary inflation is legalized counterfeit.

Since the US began removing itself from the gold standard in 1933—and eventually removing that gold backing altogether in 1971—the value of the dollar has fallen significantly when compared to an ounce of gold. As of 2023, the value of US currency is being challenged as the dollar is slowly debased. The purchasing power of a dollar in 1913 would be worth around $30.22; a dollar in 1933 would be worth around $23; a dollar in 1970 would be worth $7.71; and, a dollar in 2003 would be worth $1.63.

How Does Gold Hedge Against Inflation?
Gold is a commodity valued and traded internationally. Gold is valued for many reasons including its aesthetic appreciation, limited supply, durability, imperishability, popularity, and industrial uses. Due to these reasons and more, gold has maintained its overall value throughout the millennia. When one country’s currency begins to slip or falter, gold is likely the best-shared commodity to transfer wealth between currencies of other countries while maintaining a greater appeal for investment. Especially so when some countries’ currencies are not accepted everywhere due to political conflict or discrepancies.

By measuring the rate of inflation, InflationTool demonstrates that from 1971 to 2023, the average inflation rate for the US dollar has been 3.93%, while the cumulative inflation rate has been a whopping 641.44%. In layperson’s terms, this means $100 in 1971 is now equivalent to$741.44, which represents a significant decrease in purchasing power.

As George Mason University professor of economics Lawrence White, states, “The inflation rate was only 0.1 percent over Britain’s 93 years on the classical gold standard. It was only 0.01 percent in the United States between gold resumption in 1879 and 1913.” Yet, because of failures of monetary policies by the Federal Reserve, and fiscal policies by Congress, the inflation rate today is much higher pushing above 6 percent with an average inflation rate from 1960 to 2023 averaging close to 5 percent.

Is Gold Volatile?
Some economists, especially those with socialist and centralized planning tendencies, will suggest that gold prices are volatile. Their statements misrepresent gold as though the ‘volatility’ means gold is not as price sustainable as the dollar. Contrary to their sentiments, the price of gold is only considered volatile when compared to a currency such as the US dollar in relatively short terms. When gold is looked at through a lens of global values throughout the course of history, beyond a single currency, we see that it has maintained significant value, and when currencies fail it is gold that has helped people regain wealth. Comparing the global value of gold to the dollar, we see that the value of gold has remained intact overall.

In the US, gold in 1913 was $20.67; in 1933, it was around $32.32; in 1970, it was $38.90; in 2003 it was $417.25; and today, it is around $1800. According to Statista, from 1971 to 2022, gold had a return of 7.78 percent per year in USD terms.

Although the US government has continued to artificially fix, change, and influence the price of gold, the value of gold has remained superior to the dollar overall. This further indicates that gold is still a good hedge against inflation. Gold has outpaced inflation in the US in the long term, indicating that gold is not as volatile as the dollar in the long term.

Can Investing in Gold Improve the Dollar?
The fiat dollar of the US is what allows politicians, in conjunction with the Treasury and Federal Reserve, to arbitrarily print more dollars in order to fund nearly-endless wars, inflated welfare programs, and to deliver uncapped foreign aid. More printing of dollars tends to decrease the value of the other dollars in circulation, and this can lead to price inflation. Fiat simultaneously acts as a form of indirect slavery and secondhand theft once those dollars are spent, the same way counterfeiting does. If the dollar does not return to a gold standard to create a natural market-agreed value of the dollar with a more restricted supply, the dollar will likely continue to weaken as the incentives for these government programs and handouts are greater than the immediately perceived costs.

Even if the dollar does not return to a gold standard, having a significantly increasing number of people investing heavily in gold as opposed to treasury bonds, money market accounts, CDs, stocks, and the like, creates shifts in the incentives encouraging and pressuring other people to join in on the more sound investment of gold. The market sees the long-term stability and gains of those that do invest in gold, and people naturally tend to want to have the best return on investment. Gold is not a cure-all for inflation and deflation, rather it is a more stable long-term option than fiat.

Investing in gold and currencies that hold their value creates a challenge for the government’s monopoly over currency and its exploitation of that monopoly. Or, as Hayek said, “Just as the absence of competition has prevented the monopolist supplier of money from being subject to a salutary discipline, the power over money has also relieved governments of the necessity to keep their expenditure within their revenue.”

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This article was published by FEE, Foundation for Economic Education and is reproduced with permission.

What Would Happen if the Fed Caves to 4%-5% Core PCE Inflation, Gives up on 2%, as some Folks are Clamoring For?

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Estimated Reading Time: 3 minutes

The economy would muddle through, but in the markets, all heck would break loose. Here’s why.

The issue is this: Since April 2022, the Fed has hiked its policy interest rates by 450 basis points, but consumer price inflation as measured by the “core” PCE price index – which excludes volatile food and energy products – has been moving up and down in the same high range without much visible improvement.

The core PCE price index, the Fed’s favored inflation index for its 2% inflation target, was at 4.6% in February, according to the latest release, roughly the same as in July 2022. “Core” CPI, which has been running at about 5.5% for months, actually accelerated in March.

So now there are voices – voices with big megaphones – that say that the Fed will and should change its inflation target because this inflation will not go back to 2% without a lot of economic damage, and to get that kind of economic damage, interest rates would have to rise much further, and neither the Fed nor the White House nor Congress is willing to go there.

Americans can live with 4% to 5% core PCE inflation just fine, they say. And once everyone gets used to it, it’ll vanish off the headlines, they say.

Oh really? What does acceptance of 4%-5% inflation mean for yields and asset prices? We probably don’t want to find out.

But let’s play along with it for a moment to see where this will go. Let’s assume that the Fed will actually do this, that it will say, ok, fine with us, we went as far as we’re going to go with interest rates, and 4% to 5% core PCE inflation is acceptable even over the longer term, and we’ll just closely monitor how this develops, etc. etc.

It would completely annihilate the current dream that inflation will revert to 2% by the end of 2023, or at the latest by the end of 2024.

Short-term rates are going to stay high for a long time. At 4% to 5% core PCE inflation, the Fed won’t cut short-term rates by much if at all, even if it accepts this high inflation as the new normal.

Long-term yields will explode. Long-term yields are what really matter for asset prices. They are a bet on long-term inflation. This dream of inflation reverting to 2% in short order is part of what keeps long-term Treasury yields so low. The 10-year Treasury yield is currently at about 3.5%, well below the rate of inflation. Investors buying a 10-year maturity at 3.5% are confidently betting that inflation will revert to 2% shortly.

And if bond markets – including the Treasury market, good grief! – are told by the Fed that core PCE inflation will be 4% to 5% and that core CPI will be at 5% to 6% for years to come, and that everyone will get used to it, and that the Fed will be happy with it, and won’t do anything about it, then the 10-year yield will spike to 6% or 7% to be above this long-tern new normal.

And mortgage rates will blow out. With the 10-year yield spiking to 6% or 7% in response to this much higher-than-expected inflation, the average 30-year fixed mortgage rate will spike to somewhere between 7% and 9%. And stay there.

Higher yields = lower asset prices.

The whole entire logic for low yields in the markets was based on low inflation rates. Core PCE was below the Fed’s 2% target for most of the 13 years between 2008 and 2021. And when it exceeded the Fed’s target for brief periods, it was only by a hair.

The entire QE philosophy since 2008 was based on low inflation, and on the now-crushed theory that QE won’t trigger and fuel inflation…..

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Continue reading this article at Wolf Street.

The Fed Is Bankrupt

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Estimated Reading Time: 3 minutes

Federal Reserve Chair Jerome Powell recently testified before Congress on the current state of the US economy. In addition to monetary policy, Powell was questioned about the Fed’s regulatory proposals regarding cryptocurrencies and climate-related financial risks.

Barely mentioned, however, was the Fed’s balance sheet. The Fed has experienced significant operating losses over the last six months, which have exhausted its existing capital. Those losses represent foregone revenue to the US Treasury.

Operating losses
In the post-pandemic period, the Fed expanded the money supply significantly to support a swift economic recovery. It did so by purchasing vast amounts of US Treasury bonds and mortgage-backed securities. While those assets seemed like good investments at first, they are now a major hole in the Fed’s financial position.

When the bulk of the Fed’s quantitative easing (QE) programs took place in 2020 and 2021, market rates on long-term Treasury bonds fluctuated mostly in the range of 1.5 to 2.0 percent. At the time, the Fed was paying interest on bank reserves and overnight reverse repurchase (ONRRP) agreements of 0.15 or less. The Fed profited on the difference between the higher rate it received from its bond purchases minus the lower rates it paid on reserves and Overnight Reverse Repurchases (ONRRPs).

Now, the Fed has raised the interest it pays to 4.55 percent on ONRRPs and 4.65 percent on bank reserves, but the rates it earns on its QE purchases remain mostly unchanged. Assuming, as a rough approximation, that the bonds it purchased pay an average rate of 1.75 percent, and the average rate paid on bank reserves and ONRRPs is 4.6 percent, then the Fed is paying about 2.85 percent per year more than it receives on its $8 trillion dollar securities portfolio. That’s a loss of $228 billion per year!

The bankrupt central bank
The Fed is bankrupt — and I don’t just mean intellectually.

Like a private bank, the Fed maintains some level of capital as a buffer against losses. When those losses exceed the value of its capital, the Fed becomes insolvent, meaning the liabilities it owes to others are greater than the total value of the assets it holds.

The most recent data show that the Fed owes the Treasury over $41 billion, which exceeds its total capital. The Fed, by common standards, is indeed insolvent.

Deceptively deferred assets
What does the Fed do when its liabilities exceed its assets? It doesn’t go into legal bankruptcy like a private company would. Instead, it creates fictitious accounts on the assets side of its balance sheet, known as “deferred assets,” to offset its increasing liabilities.

Deferred assets represent cash inflows the Fed expects in the future that will offset funds it owes to the Treasury. As the Fed describes, “the deferred asset is the amount of net earnings the Reserve Banks will need to realize before their remittances to the US Treasury resume.” The Fed had already accrued $41 billion in deferred assets, and the amount is only getting larger.

The advantage to deferred assets is that the Fed can continue its normal operations without disruption, although considering the 40-year-high inflation, its recent performance has been less than ideal.

The disadvantage is that, at a time when the Fed is already worsening the US fiscal position by raising interest rates (and therefore interest payments on the federal debt), it is further robbing the Treasury of revenues by deferring them into the future. Those deferred payments, of course, must be shouldered by American taxpayers until the Fed’s remittances resume.

These losses may be offset by any previous gains on the Fed’s QE portfolio, but assessing the net effects of those actions is even more difficult. QE has created massive distortions in the financial system. The Fed’s interest rate tools of interest on bank reserves and ONRRPs have significantly curtailed short-term lending in the banking and financial systems.

A job for Congress?
In addition to its role in managing the money supply, the Fed is the primary regulator of most US banks. If any private bank behaved this irresponsibly, regulators, such as the Fed or Federal Deposit Insurance Corporation (FDIC), would force it to close. Bank managers would lose their jobs and incomes.

Clearly, Congress is not planning to shut down the Fed, and is unlikely to punish it for its poor performance, but there are changes that could be made. The banks that are members of the Federal Reserve System could be forced to cover the capital shortfall, as described in the Federal Reserve Act. The Fed could return to a corridor system of monetary policy, resulting in lower interest paid on bank reserves and ONRRPs relative to market rates and therefore fewer reserves held at the Fed.

Shrinking the Fed’s balance sheet would make another Fed insolvency less likely, while also reducing the Fed’s footprint and the distortions it creates in the financial system. At very least, Fed officials should better manage its operations so as not to be a drain on American taxpayers again in the future.

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This article was published by The American Institute for Economic Research and is reproduced with permission.

Gold Near All Time Highs

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Estimated Reading Time: 6 minutes

In early January 2021, we authored a brief article on gold.

In that article, we suggested some reasons we thought would be positive for the price of gold.  Since it has now been more than two years, it may be worth revisiting the subject and updating readers of The Prickly Pear on the current status of the gold market.

You can see on the chart provided that at the time we wrote our piece, gold was out of favor and trading around $1,675 per ounce, a level that it retested several times.  It made one final low, slightly below that level in November of 2022, and is now closing in on two previous highs made just above the $2,000 mark.

So far the advance has been orderly.  Since the turn of the year, gold is up about 8%, a slightly better showing than the stock market.  It is up about 21% since the lows last fall. We would be more concerned if gold was “going parabolic” or almost straight up.  Instead, it has avoided excess by backing and filling price action with an upward bias. It continues to climb towards the important old highs and acts like it wants to break them.

Old highs typically provide resistance, since the market previously peaked out at those levels, so getting through the old highs will mark an important milestone for the yellow metals.  If gold is able to do that, investors likely will start to pay closer attention and the market will become more active.

However, as we approach the old highs, gold will either fail again at around $2100 or will break out.  We soon should find out which it will be.

Without rehashing what we said two years ago, the reason gold may be rising is that the investing public is starting to recognize that no progress is being made on the deficit front. On the contrary, politicians of both parties think deficits are of no consequence.  The public has largely been out of gold over the past few years with ounces constantly flowing out of the popularly traded Exchange Traded Funds.  That looks like it is changing.

In terms of speculative positioning among futures traders, again, the public commitment by both traders and hedge funds is quite low.  There is no gold fever at present, and that is good.  There is plenty of room for speculative positioning to grow.

The one big buyer has been central banks, with 11 straight months of adding gold to their reserves.  China has been a particularly active buyer.

Meanwhile, the Biden Administration has introduced another blowout budget, this time without Covid and lockdown serving as an excuse.  And all this came after the Trustees of Social Security announced the insurance fund would be running out of money a year earlier than predicted, in just 10 years.

Rather than shoring up the finances of important “entitlements”, the Democrats are launching huge new initiatives based on global warming theory and even reparations for Blacks.

This is a message most likely that has not been missed by the market.  Either they don’t understand or they just don’t care.  Neither inspires confidence.

But while Biden is spending like mad, the Federal Reserve is trying to reverse years of easy money, fight inflation, and yet must do so in a way that does not break the banking system and/or plunge the economy into recession.  Instead of interest rates “higher and longer”, the FED may have to tolerate inflation “higher and longer.”  The odds of the nirvana of a soft landing seem to be growing more remote.

Clearly fiscal policy is completely out of step with current monetary policy.

Despite multiple increases in interest rates that should be supportive, the US dollar seems to have built a large “head and shoulders” type top, with a significant risk of breaking support around 101 on the dollar index.   Why the dollar weakness?

It could be the markets recognize the FED has finally painted itself into a corner and we can’t get out of the situation without making a terrible mess of things.  Dollar weakness may also portend that emerging powers like China no longer want to play by the Bretton Woods rules imposed after World War II but seek new arrangements not dominated by the US.

The US is now in an extended war with Russia and China is backing up Russia.  Wars are always inflationary and always cost much more than anyone anticipates.

There is increasing talk and actions being taken by other countries to settle trade among themselves without using dollars, pay for oil without using dollars, and hold reserves in a form not in dollars and outside of the Western banking system.  This in our view, is a result of the foolish steps taken by the Biden Administration to seize Russian foreign currency reserves.

Every country from Saudi Arabia to India, to China; saw the example of how the US could seize foreign reserves without any kind of judicial procedure.  Many countries no longer trust the US with their money, fearing exactly this kind of retaliation should they disagree with US policy.

India has been buying Russian oil and not paying for it in dollars and Japan has decided to break the US boycott and buy oil from Russia as well.  Countries generally friendly to the US are breaking out of the US monetary orbit.

Saudi Arabia is thumbing its nose at the US relative to oil production and also signals its intention to follow China’s overtures to restore relations with their arch-rival Iran.  The US is clearly losing influence in key areas of the world.

A weaker dollar historically has been quite positive for gold.  A revamping of the international monetary system may well utilize gold to a greater extent as a reserve and that might explain why central banks are buying gold for their own reserves at the fastest pace in 50 years.

Without requirements to use dollars to settle trade and buy oil, it reduces the demand for dollars, and the dollar then must stand on its own financial foundation, which is shot through with deficits and wild spending schemes.

If gold can break to new highs, what would be the likely upside targets we could expect?

That is very difficult to know, but we do have some history to guide us.  Gold in the 1970s started at $35 per ounce and ran to $200 in 1974 when gold was finally legalized in the US. Gold then fell off and bottomed in 1976 at $100 and moved to $860 by 1980.  Gold floundered for the next 20 years and bottomed out in 1999 just before the beginning of the financial crisis and the 9/11 attack at $250, and ended its move in 2011 at around $1900.

In short, in each previous bull market, gold swung from the cycle low to go up 7 to 8 times off that low.

Since the recent low was just above $1,600 a similar swing could put gold up around $11-12,000 per ounce.  Huh?

Even thinking such a thing makes me feel ridiculous. But that is what has happened in the past, and one has to ask this question:  Is it better or worse today in terms of the background conditions?  In many of those other moves, we didn’t have the money supply soar more the 20% in a year, central banks were not huge buyers of gold, we did not have a banking panic, and dollar hegemony was not being challenged by a rival superpower, and the Democratic Party was not an outright socialist party.  In previous times we were at war for some of the time and no one was imposing additional huge costs on society for “global warming”.

In all the previous cycles, whether you liked Nixon, Ford, Carter, or Bush, there was no doubt that the President of the United States was functionally in charge of his Administration.  That can’t be said about today, can it?

The country was not so nearly divided politically and nobody remotely thought that men could have babies.  We mention the latter, not as an economic condition, but as a statement as to how insane our world has become.

When the insane are in charge of monetary and fiscal policy, and just about everything else, bad things can happen.

It is not irrational to say conditions are worse today.  We lived through all those aforementioned cycles functioning as an investment professional, and we would sadly conclude that conditions today are worse in many regards than those in past cycles.  Debt burdens are much heavier and the character of the people is weaker and more dependent on the government. The rule of law is now seriously impaired and we are close to political tribal warfare.

While trust in government has been dropping, we cannot recall it being this low.  When the value of money is based only on faith and confidence, attitudinal shifts like those we are witnessing are not good for stability.

Therefore, it is hard to see reasons why gold will suddenly depart from previous behavior demonstrated in past market cycles.

But as to what the future holds, whether history is a guide in this circumstance is certainly arguable.  No one really knows or can know. All we can do is tell you what did happen in the past. But in the short term, getting through the old highs does complete a much larger historical formation.

Technical analysts call this a cup and handle formation, and it is an enormous rounded bottom, built over a very long period of time.

The “rules” used in such a formation is the market will generally rise above the rim of the cup line, the distance from the bottom of the cup to the rim of the cup.  Others say you should measure from the bottom of the cup to the breakout point on the “handle”. As you can see, either way of measuring it is around $1,000 dollars.   That would project something around $3,000 per ounce as an interim target using this methodology.

We make no pretense of having the last word on the subject.  None of this is science and history does not always repeat.  But as often noted, history may not always repeat exactly, but it usually rhymes.

The only thing we might offer is this:  if gold can break to new highs, it likely goes quite a bit higher.  How high will depend on how badly monetary affairs are mismanaged.

Is the Fed Trying to Bail Out the World? Sure Looks Like It

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Estimated Reading Time: 6 minutes

The collapse of Swiss banking giant Credit Suisse recently was a catastrophe long in the making. A quick perusal of the bank’s financial statements from recent years shows that we’re dealing with something analogous to a classic bank run. Credit Suisse’s pool of liquid assets declined more than 50 percent from 2021 to 2022, mostly in October 2022, from CHF 229.9 billion to CHF 118.5 billion as depositors withdrew their money. Despite the timing, however, the fall of Credit Suisse had little directly to do with the collapse of Silicon Valley Bank and a lot to do with the contraction of the international monetary system.

The Contractionary Fed

As pointed out last year, the Federal Reserve has long pursued a deflationary policy. This may come as a surprise, since official inflation numbers are still elevated and Federal Reserve officials have continued (until very recently, at least) to pronounce their determination to bring down inflation. However, if we look at changes in the money supply, and especially changes in that part of it the Fed directly controls, it becomes apparent that sizeable deflation has been occurring. The US M2 money supply had been slightly falling since April 2022 and in total declined by about USD 900 billion until February 2023 (figure 1), but the real contraction is significantly larger.

To see this, we only need to look at the Fed’s balance sheet, specifically at reverse repurchase (repo) agreements (which is where the Fed sells an asset and promises to buy it back the following day at a slightly higher price determined by the repo rate). As I pointed out last year, by accumulating reverse repos, the Fed is effectively sterilizing bank reserves. Banks and financial institutions move their cash into repos at the Fed, where they earn a cool, risk-free 4.80 percent. As a result, the reserves in the financial system have fallen, since repos do not serve as reserve balances for the commercial banking system. Reverse repo operations have partly served to soak up reserves added to the system during the corona inflation, but it is important to note which financial institutions have access to the Fed’s reverse repo operations.

Not all banks have access—in addition to the primary dealers, only accepted reverse repo counterparties can conduct business with the New York Fed. A quick look at these lists reveals them to be a veritable who’s who of Wall Street and international investment banks, from old names like J.P. Morgan and Goldman Sachs to more recently famous Blackrock and Vanguard to Swiss banks Credit Suisse and UBS. It is especially the international aspect that is of interest here. It is the markets that these international banks operate in that have been drained of dollars due to Fed deflation—and above all, that means the Eurodollar system.

Eurodollars and the Fed

Eurodollars are simply dollar deposits originating outside the United States and thus not subject to US regulations. Since the 1960s they have played an increasing role in the international financial system. The Eurodollar system is not, however, totally detached from the American banking system; above all, it is not detached from the Federal Reserve. The Eurodollar banks, like all modern banks, operate on a fractional reserve basis.

Thus, if reserves are cheap and plentiful, they expand; and if reserves become expensive and scarce, they contract. The ultimate supplier of reserves is the Federal Reserve—either directly, through related international investment banks or indirectly, through US banks that supply credit to international borrowers. Thus, while the expansion of Fed reverse repos seems to have had only a belated and weak effect on the domestic money supply, the Eurodollar institutions experienced a significant contraction of reserves.

Unfortunately, we have no direct knowledge of the number of Eurodollars in existence, but the rapid appreciation of the dollar throughout 2021 and 2022 suggests that there was a substantial contraction of the Eurodollar supply (figure 2). This contraction also compares well with changes in reverse repos: the dollar appreciated continuously to almost 96 cents per euro in late September 2022, only to depreciate rapidly thereafter, while reverse repos reached a peak of USD 2.4 trillion on Friday, September 30, 2022, and have fallen significantly since (figure 3; it should be noted that there is a seasonal spike in reverse repos at quarter end, but the trend is clear). The Fed’s contraction therefore really ended back in October 2022—after that, no talk of tightening was connected to the reality in the international dollar market.

Back to Bern

It is surely significant that the change in Fed policy came about at exactly the time that Credit Suisse felt the squeeze, in October 2022. Now, this change in policy was not necessarily entirely driven by the Fed, since credit contraction would drive up interest rates in the market and thereby make it attractive to move from reverse repurchases to expansionary private lending anyway. As credit tightened for Credit Suisse, the Swiss bankers would be willing to pay dearly for short-term loans to fund the outflow of deposits and avoid illiquidity and bankruptcy. However, that can only explain a short-run change in the flow of liquidity. The turn to loose money in October, then, was a deliberate policy change, aimed at propping up the Eurodollar market.

One can speculate about what prompted the Feds to first drain the Eurodollar system and then reverse the decision when the first bank threatened to collapse. It is always a live option that these people did not, in fact, know what they were doing—but it strains credulity that the Cantillionaires, those bankers and financiers close to the central bank, whose wealth and power depend on access to the Fed and the privileges supporting the broader fiat money system, did not realize the implications of the policy changes.

According to the central bank’s own explainer, raising the repo rate (and thus attracting more reverse repos) is simply a necessary part of raising the interest rate on domestic reserves and thereby preventing a domestic overexpansion of the money supply. Since the Fed risked losing all credibility if it did nothing in the face of the high inflation and monetary overhang from the corona policies, Chairman Jerome Powell and his fellow rate setters may simply have felt forced. Once their primary clients, the Cantillionaires, really felt the heat, however, the Fed quickly changed gears.

Central Bank to the World?

In the aftermath of the collapse of Credit Suisse, still in the process of being taken over by UBS, on March 19 the Federal Reserve and the main central banks of the Western world reactivated their liquidity swap lines. These swaps lines were a key tool in “saving” the international system after the great financial crisis and will play a similar role today: non-US central banks will borrow dollars from the Fed using their own currencies as collateral.

Say the Swiss National Bank (SNB) wants to supply Swiss banks with dollar liquidity. In a swap with the Fed, it first buys a dollar deposit at the Fed in exchange for a Swiss franc–denominated deposit at the SNB. The SNB can then use the dollars to supply liquidity to the Swiss financial system. To close the swap, the SNB sells the dollar deposit back to the Federal Reserve against the Swiss franc deposit. The exchange rate in this transaction is frozen; the Swiss National Bank only has to pay a small amount of interest on the loan. However, the swap is also an inflationary instrument: money is newly created to be used in these swaps—after all, that’s all a central bank can do.

A second important inflationary policy that the Fed has reactivated is the Foreign and International Monetary Authorities (FIMA) Repo Facility. Here central banks can borrow from the Fed using US Treasurys as collateral. While the focus in the press has been on the liquidity swap lines, the real action so far has been here: the supply of repos to foreign official institutions has expanded from zero to USD 60 billion in the week ended Wednesday, March 22. This looks so far to be a limited, one-off liquidity support—the coming weeks will show how many dollars the Fed will inject into the global dollar system.

It may sound like the Federal Reserve is now engaged in an altruistic quest to save the global financial system, and that is the stated intention. But it is far from altruistic. The Eurodollar system and the rest of the central bank–sponsored global financial system benefit the Fed’s real patrons among the Cantillionaires, who are placed in a position of privilege as bankers to the world. If the Eurodollar system collapsed, the Fed would have the most to lose. After all, any currency could serve as the global trade currency; the global use of the dollar and the Eurodollar system supported by the Fed and Western central banks are not necessary. However, he seigniorage the US earns on the global use of the dollar funds the US’s permanent balance-of-payments deficit: dollars and debt are exported in exchange for real goods and services, while Americans buy up foreign assets at a discount. Barry Eichengreen estimated that the US pays 2–3 percentage points less on its foreign liabilities than it earns on its foreign investments.

In fact, the global financial system resembles the old Bretton Woods system. Bretton Woods led to a great wealth transfer from Europe to the US—to the spoliation of Europe, as Jacques Rueff called it. The modern, dollar-based financial system leads to similar benefits for the US economy and for US-based financiers. Americans can consume more and the US government can spend more because foreigners are forced or induced to use the US dollar. The Federal Reserve, now and always, is simply acting in the narrow interests of its sponsors. These interests dictate policy. Fed tightening was probably seen as necessary to maintain the legitimacy of the system, but once serious problems emerged back in October, the Fed quickly changed gears to easing. That Credit Suisse fell despite this change, and that we now see much more drastic interventions in the financial system, only shows the limitations of central bank power. Inflation can only distort reality for a while, benefiting some and hurting others, it cannot permanently lead to general prosperity—a crisis must come.

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This article was published by Mises Institute and is reproduced with permission.

Is The Banking System Safe?

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Estimated Reading Time: 7 minutes

Over the past few weeks, we have had the second and third-largest bank failures in our history. As this crisis unfolds, we are repeatedly told by officials that it is localized to these particular banks, that the banking system is sound, and there is not a systemic risk to those with money on deposit in banks.

One interesting commentary is from the journalist Kim Iverson, who suggests the failures are basically a raid to take down cryptocurrencies as if they needed any help in their demise.  See the video archives.

We have long felt government cannot tolerate crypto or anything else that threatens its monopoly on money.  However, we are skeptical of Iverson’s thesis because other explanations appear compelling and not so esoteric.  The Biden inflation, followed by the sharpest rise in rates in history, is damaging banks everywhere.  This includes the Federal Reserve itself, which may soon have negative equity.  This seems to us to satisfy the notion of “systemic.”

Others point to the systemic build-up of government debt at an unprecedented and unsustainable rate.

To be sure, inflation, high-interest rates, are all connected to excessive government spending and borrowing.  It is a wonder to us that we could go years with this kind of fiscal abuse without serious consequences.  Globalization, shrinking demographics, and other factors might simply have delayed the problem.  Whatever.  Now we must deal with the consequences.

For the investor, if one believes the problem is localized, there is no particular action to be taken. Odds are, your bank is safe. Or if it is not, it will be rescued.

If on the other hand, this is a systemic issue in the banking system, then there are some protective steps investors and depositors should consider. There is not enough money in the FDIC insurance fund to cover systemic risk in the banking system.

At the risk of cynicism, just because the same people making you comfortable with the banks are the same that told you that WMD existed in Iraq, that Covid came from a wet market, that Donald Trump was a Russian pawn, that Hunter’s laptop was Russian “disinformation”, that Covid vaccines work, that inflation was transitory and that men can have babies,(we could go on like this)…is not necessarily a reason they are wrong about the banks.

Then again, they could be lying again. Our government seems to do that rather frequently and thus has poor credibility and has not earned our trust. Besides, how could we know if they are lying before the fact? Moreover, the government as the ultimate guarantor of FDIC, has a vested interest in keeping us calm and our deposits in the banks, right?

Here are some reasons besides their past lying why you just might want to be suspicious.

The financial system is much like a chain. One bank has a claim on another. One financial institution has a claim on another. One institution’s asset is another institution’s liability. If you fail on the liability, you destroy someone else’s asset. In short, the system is only as strong as the weakest link in the chain. It is clear some of the links are breaking, because of this interlocking relationship, there is simply no way of knowing how far the rot has spread.

Localized stress should be just that…local. But we learn for example that the Swedish national pension system was a depositor in Silicon Valley Bank. Sweden? That does not sound very local, does it?

Nor does the failure of Credit Suisse and now the rumors swirling around Deutsche Bank sound localized. Why would giant Swiss and German banks be in trouble if a bank in California is having difficulty? Does that sound local to you?

It would appear that most banks, and many other types of financial institutions, have been victims of government policy in several ways. As such, everyone is affected.

Years of ultra-low interest rates created a “zeal for yield.” This zeal encouraged many to take excessive risks and use excessive financial leverage to try to get decent rates of return. Thus, ultra-low interest rates spread this desperation for return likely far and wide. Not just banks, but many businesses, grew used to almost zero cost for capital and zero costs to borrow. But now they must roll their debt forward to much higher rates and their business models may no longer be profitable.

The government supervises these institutions and once again, we find their supervision did not stop banks from failing. Sleeping at the switch seems to be a trite understatement. Didn’t we just have a financial crisis and they fixed things?

Excessive government spending and the Covid lockdown came after a long string of large deficits and have destabilized the economy. This was not a local issue either. Rather, it is systemic. It caused system-wide inflation, which in turn triggered system-wide sharp increases in interest rates to fight that inflation, which drove down the value of bank assets.

Moreover, the recent blowout budget proposed by the Biden Administration indicates they have no clue how excessive their spending has been, or they do understand and are proceeding anyway. Either way, you slice it they seem to have no plan to dampen excessive spending.

When government acts, it is by nature systemic. The government orders banks to invest in long-dated bonds and mortgages, and then by raising rates very quickly, it has caused the banks to lose a lot of money on what the government forced them to buy. Who escaped this conundrum? We suspect few did and most did not, hence it looks more like systemic risk.

While there is a modest amount of money in the FDIC, it is intended to support isolated banking failure. But the insurance fund is spread even thinner when the government extends deposit insurance beyond the $250,000 account size. Right now, the government is expanding the deposits to be covered without expanding the number of reserves to insure them.

Treasury Secretary Janet Yellen has purportedly insured more deposits in a gambit to calm depositors, but at the same time, by spreading a limited base of capital over far more deposits, she actually has weakened the system. Will her attempts at calming the situation work or did her haste to extend coverage signal there is a greater problem than what we currently appreciate? There is ambiguity about what is insured and what is not. As the Wall Street Journal recently pointed out, “the Administration’s mixed signals are becoming another threat to the financial system.”

It is a confidence game we would rather not play.

Because of all the unknowns and the lack of credibility in government officials, we suggest you treat the current crisis as a systemic risk, not a risk isolated to just a few banks. Assume more pain is to come and act proactively.  There is no risk to yield, credit quality, liquidity, or safety.  There might be some inconvenience but that seems like a small price to pay.

What steps can you take to protect yourself?

If you have money in a bank beyond the $250,000 limit, move the money around between banks and stay under the limit in any given institution.

Get extra cash out of the bank and store it safely at home. Yes, we mean physical bills. Even if FDIC can weather the storm, sometimes audits have to be conducted and other procedures might delay your access to cash. It is good to have some physical currency outside of the banking system.

Since FDIC can only be “saved” up by the government, you might as well own direct obligations of the US government, not indirect ones. Besides, the yields on US Treasury bills can be higher in yield than bank deposits. Move excess cash directly to treasuries.

If the Federal Reserve is forced to reverse on Quantitative Tightening (and there is evidence they are) or reverts to overt money printing to inject “liquidity “into the system, that will aggravate an already difficult inflation problem and possibly create an upward spiral in interest rates. Bank borrowing from the FED already exceeds that of the 2008 Financial Crisis. Where did all the money come from to lend to the banks? How is this substantially different than Quantitative Easing?

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Historically, if forced to choose between inflation and deflation, the government opts for inflation. Why?  Mostly because debtors are really punished by deflation. They have to pay back their debt with more valuable dollars than they borrowed.

Since the government itself is the biggest of all debtors, they would prefer inflation because they get to pay off their debt with dollars worth a lot less than the dollars they borrowed.

Sometimes, however, deflation gets out of control regardless of government desires and during that condition, there is a widespread failure among borrowers of all kinds, including sovereign government default.

We suggest that investors own at least a modest hedge position in gold bullion coins.  Check out our long-term advertiser American Precious Metals which specializes in the physical delivery of gold coins.  For security purposes, not for speculation, these coins should be in your possession. A home safe or private depository is likely better than a safety deposit box.

While there are many flavors of “paper gold” from Exchange Traded Funds that hold bullion to gold mining shares, the entire reason for owning gold and having it in your possession is not to take further “promises” from the banking system or the government. Paper gold might be fine for speculation but not for basic safety against bank runs.

Others suggest you own some cryptocurrencies as well. We have been critics of cryptocurrencies from the beginning and remain unconvinced. Candidly, we don’t understand them and thus prefer not to invest in things we don’t thoroughly understand. Moreover, we have long felt government will not give up its monopoly to issue money to private parties and hence will come after cryptocurrencies.

As for the stock market, as we have mentioned before, we don’t think the bear market in equities is yet over. While we have been impressed by the way the market shook off the last rate hike and the news of banking problems, the trend still remains downward. Remember whatever you buy and presently own, will likely feel the gravitational pull downward of the bear market in stocks and if we go into recession later this year. Our view still is that if our fate is a recession, the first beneficiary will be the bond market, not the stock market.

Banking problems may make banks both reluctant or unable to extend credit.  Tighter credit conditions on top or rising rates simply raise the odds of a recession in our opinion.  That remains a substantial negative for the stock market.

Certainly, you may own stocks but we would keep the risk down by limiting exposure of the portfolio to below-normal levels for your age and risk tolerance. Hold extra cash in the form of T-bills or short-term Treasury bonds.  See the video on the subject of how to buy them or talk to your broker/financial advisor if you have one.

You may also wish to revisit our “barbell strategy.”

Notice we have stayed away from mentioning amounts or percentages. More specific advice requires much greater detail into a reader’s financial condition, something we simply can’t do.

Consult a qualified financial advisor and be sure you do your own due diligence.

What we are suggesting is that you take a few concrete moves to protect yourself in the event things get uglier than they already are.

As stated before, there simply is no way to know for sure, but given the excesses of the recent era, we would er on the side of safety. Now is one of those times when the return OF your money is more important than the return ON your money.

 

 

Powell Explains the Fed’s New Regime: Rate Hikes & QT to Fight Inflation while Offering Liquidity to Banks to Keep them from Toppling

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Estimated Reading Time: 2 minutes

An enormously important new regime gets engraved into central-bank handbooks. The ECB and Bank of England are also on board.

 

It makes sense in this era of high inflation, QT, rising policy interest rates, and high financial fragility in the banking system, after years of money printing and interest rate repression.

The new regime was already tested successfully by the Bank of England last fall: Tightening through rate hikes and QT while simultaneously providing liquidity to the financial sector for a brief period to douse a crisis.

Today, the Fed confirmed the new regime: It hiked by 25 basis points, bringing the top of the range to 5.0%, and QT continues as before, while it is also providing liquidity support to the banks.

Some people call this principle stepping on the brake with one foot (QT and rate hikes) while stepping on the gas with the other foot (“QE”).

But liquidity support of this type is not QE, and doesn’t have the effect of QE, Fed Chair Powell explained today at the post-meeting press conference.

It’s more like stepping on the brake with one foot while putting an arm around the baby to keep her from hitting the dashboard – that’s how I’ve been explaining it, to stick with the foot-on-the-brake analogy.

Powell on the new regime:

“Recent liquidity provision increased the size of our balance sheet. The intent and effects of it are very different from when we expand our balance sheet through purchases of longer-term securities,” he said.

“Large-scale purchases of long-term securities [QT] is really meant to alter the stance of policy by pushing up the price and down longer-term rates, which supports demand through channels we understand fairly well,” he said.

“The [current] balance sheet expansion is really temporary lending to banks to meet those special liquidity demands created by the recent tensions. It’s not intended to directly alter the stance of monetary policy,” he said.

“We do believe it’s working. It’s having its intended effect of bolstering confidence in the banking system and thereby forestalling what might otherwise have been an abrupt and outsized tightening in financial conditions. So that’s working,” he said.

“We think that our program of allowing our balance sheet to run off predictably and passively is [also] working,” he said.

Fighting inflation while keeping banks from toppling.

Powell split the fight against inflation and the liquidity turmoil at the banks into two separate issues, to be dealt with by using two different sets of tools.

  • Tools to fight inflation: Interest rate policy and QT.
  • Tools to provide liquidity to the banks: The “Discount Window” (short-term loans against collateral at 5% from now on) and the new Bank Term Funding Program (loans for up to one year against collateral at a fixed rate near to 5%)

But banking sector turmoil may help the fight against inflation.

As a result of the turmoil in the banking sector, “financial conditions” have tightened and may tighten further. Tightening of financial conditions is precisely what the Fed wants to accomplish, how monetary policy is transmitted to the economy and ultimately inflation, by making loans harder to get and more expensive, and by making businesses and consumers more reluctant to borrow, and therefore putting downward pressure on credit-financed demand from businesses and consumers, which would theoretically take off pressure from inflation…..

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Housing Bust #2 Has Begun

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Some markets are already deep into it, and others just started. A sobering trip from the free-money decade in la-la-land, back to normal.

The housing market in the United States has turned down, and in some big markets very dramatically so. Other markets lag a little behind.

That’s how it went during the last Housing Bust, which I now call Housing Bust #1. During Housing Bust #1, Miami, Phoenix, San Diego, Las Vegas, etc. were a little ahead; other places, like San Francisco, were a little behind. In 2007, people in San Francisco thought they would be spared the housing bust they saw unfolding across the country. And then it came to San Francisco with a vengeance.

This time around, San Francisco and Silicon Valley, and the entire San Francisco Bay Area, are at the forefront, along with Boise, Seattle, and some others. In the San Francisco Bay Area, during the first 10 months of this housing bust, Housing Bust #2, the median house price plunged faster than it did during the first 10 months of Housing Bust #1. That’s what we’re looking at. I’ll get into the details in a moment.

Across the US, home sales have plunged month after month ever since mortgage rates started to rise a year ago. In January, across the US, total home sales plunged by 37% from January last year. Sales plunged in all regions, but they plunged worst in the West, by 42% year-over-year, and the least bad, if I may, in the Midwest, by 33%. This is happening everywhere.

The median price of all types of homes across the US in January fell for the seventh month in a row, down over 13% from the peak in June. Some of the declines are seasonal, and some are not.

This drop whittled down the year-over-year gain to just 1.3%. At this pace, we will see a year-over-year price decline in February or March, which would be the first year-over-year price decline across the US since Housing Bust 1.

Active listings were up by nearly 70% from a year ago, though by historical standards they’re still low. Lots of sellers are sitting on their vacant properties and are holding them off the market, and are putting them on the rental market or trying to make a go of it as vacation rentals. And they’re all hoping that “this too shall pass.”

“This too shall pass” – that’s the mortgage rates. The average 30-year fixed mortgage rate went over 7% late last year, then in January, it dropped, went as low as 6%, and the entire industry was breathing a sigh of relief. This was based on fervent hopes that inflation would just vanish, and that the Federal Reserve would cut interest rates soon, and be done with this whole nightmare.

But in early February came the realization that inflation wasn’t just going away. Friday’s inflation data confirmed that inflation is reaccelerating and that it already started the process of reacceleration in December. Some goods prices are down, but inflation in services spiked to a four-decade high. Services are nearly two-thirds of what consumers spend their money on. Inflation is very difficult to dislodge from services. The Federal Reserve is going to have its hands full dealing with this – meaning higher rates for longer…..

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