The 30-year fixed mortgage rate continues to climb.
Its knocking on the 5% marker according to Zillow data.
Longer term, this looks like a non-event.
As rates climb, the cost of monthly payments increase for new home buyers. It is hard for me to believe rates won’t continue to climb, especially with the US government running massive deficits.
Category: Economy
600K in San Fransisco
San Fransisco’s housing bubble has become epic.
For just under $600K, you get a 1 bedroom 1 bathroom house with a grand total of 488 sqft. Making the price per square foot an amazing $1230.
According to Zillow the house was last sold in 1996 for $82.5K.
Market Update
US market remains my favorite market at the moment. Emerging markets are taking a beating primarily due to a strong US dollar. Emerging markets (EM’s) have gotten cheap but I expect more down side. A time will come to buy EM but I will wait for sideways action in the US dollar.
September is usually a weak month for stocks. In October, we will see the market push up again. Earning are behind us. The market will probably react to negative news out of EM’s, Europe, and trade war talk for the month of September.
I don’t believe US stocks are overvalued. Corporate profit growth is 25% year-over-year. This will push US stocks to all time highs once again.
US stocks are testing support at their previous all time highs. If this support level breaks, I expect some follow through on the down side and we will see our usually correction for this time of year. This will be a buying opportunity.
Net Interest- Inside the Doomsday Mechanism for the US Government
From the 2017 Financial Report of the United States Government:
“Eventually, however, spending on net interest is projected to become the largest category of spending in both the Statement of Long-Term Fiscal Projections and GAO’s simulations.”
First, a snapshot of where the US government is with regard to spending and revenues is given below.
The projected chart below shows the future as a percentage of GDP.
I am not a fan of these projections. I think comparisons related to the GDP are dubious. Linear projections into the future are mostly always wrong. No one knows what interest rates will be in 2 years let alone in 2050. Additionally, there will be plenty of recessions between now and 2090 that will impact government revenue. Having said all of that, the chart above will give you a sense of the trouble ahead.
The debt will continue to grow. The interest expense on the debt will become unsustainable. Net interest will consume a large portion of the government revenue. As long as interest rates remain low, the game will go on.
The side show happening in D.C. is just that- a side show. As the crisis unfolds, the rhetoric in D.C. will reach critical mass. You should not pay attention to any of it. It might last another 10 years. The chances of it lasting another 30 years seem unlikely. I am optimistic about the future. When a governments goes bust it is an opportunity. An opportunity to explain to people what happened.
Italy- The Canary in the Coal Mine
Italy’s 10 year has had a significant move year to date.
A 140 basis point move in less than 3 months.
What is debt sustainability? When more than 10% of central government revenue goes to interest payments trouble is ahead. Italy’s revenue is $800 billion euros. Its interest payments are $93 billion euros. 11.6% of Italy’s revenue goes to interest payments. As interest rates rise more revenue is consumed by interest. This is the problem that all western world nations face.
The die has been cast. There is no way out besides a default. There is nothing holding back the flood gates except the psychological component. It is the qualitative perception of the market participants.
Lehman senior secured bonds traded 400 basis points over treasuries a week before they went bust. Investors did not think Lehman was going to go bankrupt. The psychological changed rapidly.
We do not know the degree the ECB will intervene to postpone Italy’s crisis. They may be able to kick the can a few years. Again, it is the qualitative perception. The bill will come due one day. It is wise to have lots of cash on hand and avoid government bonds at all cost.
Fed Balance Sheet Update
Below is the Feds balance sheet.
Below are the total assets which they are slowly reducing.
I find it interesting that the fed bought treasury bills the past two weeks. They have not bought any since August 2007 and had zero bills since august 2012.
For the first time in over a decade, the federal reserve bought treasury bills. The number is minuscule and I will be watching what happens over the next few weeks. Since I can not find a single person online making a comment on this development I thought I would add my two cents.
Ten years ago, there were probably 100 people on the planet that watched the yield curve and understand its power to predict recessions. Now, at least once a week, I see an article on the yield curve. Everyone is talking about it. Everyone is watching it.
In fact, it hit the top of the “popular series” at the FRED.
This business about the yield curve has definitely bubbled up to the fed board members. Hack economist at the Fed have written papers about it. Most of the papers revolve around, “This time is different”.
So the million dollar questions is this:
Is the fed trying to control the yield curve? If so, how far are they willing to go to keep it positive?
I don’t see any other reason why they started to buy the short end of the yield curve. The next few weeks will be interesting.
Currency Crisis Unfolds
The Turkish Lira and Argentine Peso have gone into free fall. The Argentine Peso dropped over 25% in just two days.
Last year Argentina sold $2.75 billion dollars worth of 100-year bonds at a yield of 7.9%. This is the same country that defaults or hyper inflates its currency about once every 15 years. Investors thought it was a good idea to lend the Argentina government their money for 100 years. So much for the school of rational expectations.
Europe never recapitalized its banking system. There banking system just limps along. The bureaucrats in Brussels put band aids on the ship whenever they see a leak. This is causing a capital flight to the USA. I expect this will continue to put upward pressure on the US dollar, US stocks and US bonds.
Yield Curve Update
The yield curve continues its downward trajectory. From the below graph, recessions are shaded grey. Once the yield curve inverts, there will be plenty of time to exit the market. In some instances, it can take up to 18 months before the recession occurs.
Powell’s Speech at Jackson Hole
Powell gave a speech today at Jackson Hole. He had this to say:
“As the economy has strengthened, the FOMC has gradually raised the federal funds rate from its crisis-era low near zero toward more normal levels. We are also allowing our securities holdings–assets acquired to support the economy during the deep recession and the long recovery–to decline gradually as these securities are paid off. I will explain today why the Committee’s consensus view is that this gradual process of normalization remains appropriate. As always, there are risk factors abroad and at home that, in time, could demand a different policy response, but today I will step back from these.”
The Fed will continue to raise rates and reduce their balance sheet. They will be very slow and cautious in doing this. The moment any crisis occurs they will quickly reverse course.
Long Live the Bull
The bull market that started in March of 2009 has become the longest in US history. Earnings, credit conditions, inflation, interest rates, the yield curve are all looking positive. Markets are poised to break their all time high. I expect this bull market to go longer. With the dollar still strengthening I am staying clear of emerging markets. The US markets are the only game in town.
