Tag Archives: Higher interest rates

The Housing Bubble Popped, and the Fed Can Let it Rip, by Wolf Richter

Posted on November 5, 2022 | Leave a comment

The market is going to take interest rates higher and the Fed will follow, as it always does. This is not good news for the housing market. From Wolf Richter at wolfstreet.com:

Raging inflation knocked out the “Fed put,” and banks are no longer on the hook for mortgages; taxpayers and investors are.

So we have a weird situation. Not weird actually. Just reality. After mind-boggling ridiculous spikes, home prices in most markets are dropping, and in some markets, they’re plunging at the fastest pace on record. And in some markets, they’re going down faster than they’d spiked on the way up. And it’s just the beginning. There is nothing magic about this.

The average 30-year fixed mortgage rate has more than doubled since last year, from less than 3%, to now over 7%, the highest in 20 years, the highest since 2002. But there’s a difference between 2002 and now: The magnitude of the home prices.

Home prices have shot up to ridiculous highs in the era of interest rate repression and money printing by the Federal Reserve. But that era ended earlier this year. Now we have surging interest rates and the opposite of money printing: quantitative tightening.

So now we’ve got sky-high home prices, and I mean ridiculous home prices, and mortgage rates that were normal when home prices were just a fraction of today’s prices.

Over the past two years, we’ve seen spikes of home prices of 30% to 60%. In the Miami metro and the Tampa metro, for example, home prices spiked by 60% in two years, according to the Case-Shiller index. Which is just nuts. And we know how this is going to end and it already ended:

With 7% mortgage rates after a 60% price spike in two years, sales have plunged, and those sales that are taking place are taking place at lower prices.

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American Exceptionalism: Not Looking Too Exceptional for 2022, by Matthew Piepenburg

Posted on January 4, 2022 | Leave a comment

A nation whose government is officially almost $30 trillion in debt and unofficially much, much more (unfunded liabilities), is not a great nation, it’s not even a mediocre one. From Matthew Piepenurg at goldswitzerland.com:

Below, we look at the converging market forces, policies and math which portend a re-thinking of American Exceptionalism for 2022.

The Fed’s REAL Mandate

As expected, the Fed is an essential starting theme in any conversation of this nature.

Officially, the Fed has two primary mandates: 1) containing inflation and 2) ensuring full employment.

But for those who understand even the most rudimentary (and sordid) history of central bank origins and operations, its real mandate is serving (controlling?) the banking and market masters from whom it was not-so-immaculately conceived on Jekyll Island…

Critical to this rigged-to-fail charade is the Fed’s artificial manipulation of otherwise natural supply and demand forces with regard to Uncle Sam’s increasingly unloved IOU’s—aka: U.S. Treasuries.

Stated simply: There is far more supply than there is demand for America’s exceptional promises.

Filling the Gap with Artificial Zeros & The Taper’s Hard Math

To fill this gap, the Fed desperately adds zeros to its balance sheet (QE) to purchase these increasingly unpopular credits.

Of course, any meaningful taper of this “gap financing” (i.e., Fed accommodation) would create what Powell euphemistically described in December as a “market dysfunction,” the occurrence of which would violate the Fed’s unofficial yet openly obvious (and primary) mandate of propping stocks not citizens.

The mathematical syllogism behind such a potential “market dysfunction” is algebraically quite simple, namely:

Less Fed bond purchases would = lower bond prices.

Lower bond prices = higher bond yields.

Higher bond yields = higher interest rates.

Higher interest rates = higher costs of debt…

…and for nations and corporations hitherto living exclusively off cheap debt, such higher debt costs = a severe “uh-oh” moment in the risk asset bubbles (stocks, bonds and real estate) which the financial world has confused with an “economic recovery.”

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Posted in Banking, Business, Collapse, Currencies, Debt, Economics, Economy, Financial markets, Government, Trade

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