After dropping four straight days in a row, the stock market is flat on the day. Mortgage pricing continues trading in a flattish pattern but is looking upward, meaning that interest rates are really trying to improve. Because they lock in a bank for 30 years, they tend to go down more slowly than other debt instruments. The 10 Year has fallen to 3.46% from the high of 4.34% a month ago. The Two Year is also down about 1/2% from the high, but since that tracks the Fed Funds Rate, I expect it to turn back northward heading into next week’s FOMC meeting. Today’s Productivity Report showed that Unit Labor Costs rose 2.4% YOY, below the 3.1% expected gain and more lower (that sounds funny) than last month’s 3.5% computation. Labor costs are a big driver of inflation and account for 69% of GDP. Oil & gas account for 8% of our GDP, so you add that to the savings of fuel dropping 30% since July and we’ve a big head start on lowering the cost of everything without increasing borrowing costs.

Geeking Out

I’m going to geek out for a minute this morning, so you can delete this email right now if you’re not in the mood.  This commentary grew much longer than I had anticipated. :).

Yesterday, the Institute of Supply Management (ISM) Non-Manufacturing Index was released showing that orders of parts used in the manufacturing of other goods and services rose 2.1 points from last month and 3.2 points greater than expectations suggested.  With only a handful of reports due prior to next week’s Fed meeting, each will be closely watched as in indicator of what the FOMC will do with the Fed Funds Rate next Wednesday.  The major consensus is for a 1/2% rate hike (50bps) to be announced at the close of the conference. You knew that already.

Now for the interesting part.  The long term rates seem to be caring less and less about headline inflation and what the Fed’s doing and more and more about the likelihood of recession next year. Global financial firm UBS predicts a 70% chance of a U.S. recession in 2023 with the Unemployment Rate rising from 3.7% to 5.5% (which is not horrible at all).  Incidentally, once this happens, the Fed will start the slashing cycle again. Such is the existence of a reactive Central Bank.  This is not a dig on them; their job is to engineer employment and price stability, not micromanage every nuance of the dollar. 

Now for the writing on the wall.  But first let me set the stage.  As an implication of convenience and risk, the longer you commit your money to someone, the higher your return will be.  Conversely, the longer you take to repay debt, the higher will be your imputed interest rate.  Let’s say you give the federal government some of your hard-earned after-tax dollars that you’ve scrimped and saved over a lifetime of diligent efforts.  You would expect that if your money was tied up in the hands of bureaucrats for a decade, they’d reward you greater than if you only gave them free rein with your money for 24 months.  Now let me be clear that it’s the free market and not the government that sets the going rate of treasury bills. The more money that gets thrown at a particular investment, the less that fund needs to pay to keep people interested.  Right now, you get a better return on a 2 year Note than on a 10 year note.  In fact, you get a better return on every t-bill other than the 10 year note, starting with the 1 month bond and heading all the way to a 30 year commitment. 

The 2/10 Spread is currently at a whopping -82bps with the 2 Year paying 4.39% and the 10 Year paying only 3.57%.  The historical recessionary implications of such a large discrepancy are virtually unanimous, and the spread hasn’t been so large since 1981. Each of the gray bars in the chart below indicate a recession and always follow a negative 2/10 spread like we have right now. Those optimists who say we will avert a slowdown are just looking for more airtime, or are blinded by their rose-colored naïveté. 

Having said that, I am an optimist!  Absolutely!  But I am also a realist and seek only to be prepared for what is most certainly coming our way.  Ignorance can be bliss, but only until the cards don’t fall your way.  So yes, I am expecting inflation to fall and with it will slow the velocity of money and business activity.  I don’t know what that will look like nor how ling it will last.  I study trends and see that all numbers eventually reverting to the mean.  The sooner we get into it, the quicker we’ll be out of it. 

Speaking of means, and charts and stuff. That top chart shows the prices of mortgages as they get traded every day. Green days are good and red days are bad if you like low rates.  High prices mean low rates and vice versa.  Rates have trended higher all year long until November 10th when pricing shot up almost 200 bps and drove interest rates down 1/2% in one day.  The course has been relatively flat, but pricing is trending higher since then. 

Now for the technical-geeky part.  If you look at the 20/50 day moving averages which I have also illustrated as green and red lines, you’ll see that there was a crossover on November 23, indicating that there are lower interest rates ahead.  I don’t know for certain how soon mortgage pricing will improve nor for how long it will last.  But, if the macroeconomic trends deteriorate like the FOMC is strategizing to effectuate, we’re in for lower interest rates in the future. For sure. 

Power of Gratitude

In case you find yourself in a bad mood this weekend when you’re stuck in holiday traffic, find yourself eating dry turkey, your family gets on your nerves, it’s too cold outside, you miss the black Friday deal you were holding out for, not all of the lights on your tree turn on, etc, etc, etc.

Remember: practicing gratitude leads to an improved mood, better physical health, lower stress, an increased level of hope, and assurance of personal well-being. So take a sec and think of something that you ARE grateful for.  Take a deep breath.  Smile.  Get back to it and be your best self!  Repeat as many times as necessary.

I am grateful for you.  Yesterday’s pie giveaway was one of the best; thank you to everyone who participated.  I wish you a wonderful Thanksgiving and a festive long weekend kicking off the Christmas season.

Country Living?

In 1960, 1.5X more people lived in the city than in the country. That factor has risen to 5X.  More people moving into the cities means higher density housing and competition for resources. Studies show that living in rural areas is 30% cheaper than in urban developments.  Interestingly, there is 20% higher homeownership rate among country folks, and they are 14% more likely to own their property free and clear. So why doesn’t everyone live in the sticks?

Well, there are fewer opportunities and limited access to things like viable employment, healthcare, legitimate entertainment, and modern infrastructure.  There are spiders, snakes, and racoons, among other invasive species. Plus it’s more work taming the wilderness than it is to feign politeness to the neighbor you don’t like. 

On the other hand, it’s easier to find a parking spot outside city limits.  Crime rates are lower, insurance costs are lower, noise levels are lower, stress levels are lower, less pollution, there’s more room to spread out, and housing is cheaper in the country.     

Although Friday the 13th has a bad rap for being unlucky, scientists have statistically proven that the day is no unluckier than any other day that a masked murderer hides in your basement, your barn, and the backseat of your broken-down car.  So quit worrying so much about what might happen to you tonight in the dark when you’re scared, alone, and the power goes out. 

As a point of fact, these scientists (the real researcher kind, not the crazy mad kind that inevitably wind up as the antagonists suffering a gruesome defeat at the end of the film) have also hypothesized and successfully concluded that the people who suffer from “bad luck” on any given Friday the 13th are those who ahead of time thought that something untimely was waiting for them.  These self-fulfilling-prophets are also apt to endure catastrophic karma on any other day as well.  So cheer up, buttercup, it’s going to be an amazing weekend!

About the Fed…

They announced today that they taking actions to keep more water in Lake Powell to preserve the Dam’s ability to generate power. Currently, the reservoir is only 33 feet above the “no power zone”. Part of the plan calls for more water to be released from Flaming Gorge, which flows the length of Utah into Lake Powell. This historic action will keep the lights on in the homes of 5.8 million Americans who are the beneficiaries of the electricity produced by the Glen Canyon Dam. Slowing water out of the dam is the second half of the equation. Lake Mead was heard to say, “wait, what”?

You can’t please everyone, ever.  The Bureau of Reclamation deals with it today over the Colorado River; the Open Market Committee gets to deal with it tomorrow over their interest rate decision.  It’s most likely that Feds’ll raise 1/2%, tomorrow at noon our time, but it may be a 3/4% hike.  Like utilizing dams to capture water, harness its power, and release it without wiping out downstream civilizations, the Fed manages a Lake Mead sized balance sheet and controls borrowing costs in attempts regulate the economic greater good of the entire U.S. population. 

It’s tricky.  I wouldn’t want that job.  It’s impossible to be all things to all people.  The Fed has spent the last 14 years damming up their portfolio and amassing 10X the assets they had in 2008, which currently stands at $8.95 trillion.  They have been buying funds of all shapes and sizes to keep the velocity of money moving in a controlled manner down through the remainder of the canyon.  Just releasing the plans to open up the floodgates has caused long term interest rates to rise 75% in the last four months.  The deluge of payment shock is crushing the have-nots.  But the current direction taken by Chair Powell et al. seems to be a prudent step if only to have the ability to relax the policy again in a few months should the move be too drastic.

Maybe the Feds should pool their resources and buy $8,000,000,000,000 worth of water.  Ok, hear me out.  The above plan will keep 1,000,000 acre feet of water in Lake Powell in 2022.  A pallet of water bottles at Costco has 253.5 gallons and costs $439.99.  It would take 1,285.4 pallets to amass one acre foot of water at a cost of $565,566.  So just do that a million times and you’ve filled up Lake Powell for the year and reduced the balance sheet by $5.6 trillion.  Geez, this running the country stuff is easy. maybe I should be in the public sector. The ONLY logistical problem I see (because there can’t be any others) is now you’d have 2.5 trillion empty water bottles to try to recycle.  Dang, this is hard indeed.  Well, good luck tomorrow Jerome. 

“So you’re telling me there’s a chance…

Reasons why home loan rates should come down: New Home Sales slipped 8.6% in March. China shutting down. Oil prices have dropped 14.5% in the last few weeks. The Dow is down another 600 this morning and the S&P has lost 4.5% of its value since last Friday. The 10 Year Note has fallen 0.189% over the last three trading days. The above chart shows that mortgage pricing is once again trying to break the downward spiral its been in for the last six weeks. We tested the five year lows (or five year highs if you’re talking about the going rate) late last week and haven’t seemed to have the stamina to move lower (higher). 

Sitting on the fence: Durable Goods Orders rose 0.8% last month, which is up from the -1.7% decline the month before, but less than the 1.0% expected increase.

Reasons why rates will move higher: Case Shiller home price index shows a year-over-year rise of 20.2%, which is a new record YOY gain for Mr. Shiller and his 20 cities he tracks.  The FOMC meets next week and just about every Fed board member has commented that they are considering a 1/2 to 3/4% hike on May 4th (that’s a week from tomorrow)

Building permits are up 9.1% and Housing Starts are up 1.4% from last month, while the NAHB’s own Housing Market Index dropped one point.  The HMI is a reflection of new home sales, new homes under contract, and foot traffic through model homes.  HMI is an abstract collection of sentiment from builders across the country, and carries rippling effects through all aspects of the economy from new appliances purchased (durable goods orders) to real time and future potential labor demands not only in the new communities, but in the surrounding regions.  

Interest rates today take a hiatus from their race to achieving two-year highs.  Still unsure whether they’re just taking a breather from the exhaustive 0.75% climb since New Year’s, or whether they’ve still got another 0.5% to go before hitting the pause button.  The mere mention of four Fed rate hikes this year has already cost the average home buyer $166 per month on a $400,000 loan payment, without the Fed actually raising interest rates.

Upward pressure on interest rates this morning is being mitigated by falling stock prices–just like in simpler times when stock and bond prices would move inverse to one another. The NASDAQ is retreating off of Friday’s all-time-high and other indices are falling suit.  The last FOMC meeting of the year kicks off tomorrow.  There is a 0% chance of a rate hike being announced tomorrow, but I believe they will announce three rate hikes in 2022.

Historically, when the Fed hikes the overnight rate, longer-term rates rise as well.  However, with many corporations and individuals being overleveraged as a result of virtually interest free money being lent these last few years, the prospect of higher carrying costs may actually repress stock prices and send mortgage rates lower. 

The Fed has a lot of stimulus to unwind and must do so without unraveling the entire economic system.  Thank goodness these folks are smart 🙂 

The data on the today’s monthly Jobs report showed that only about 1/3 of the anticipated positions posted to be filled actually came to fruition. Analysts expected 750,000 job listings and we saw 235,000. This data comes from the Bureau of Labor Statistics, the main fact finding agency of the U.S. government. Though not as dramatically, the privately held ADP report released earlier this week corroborates(ish) the drop in freshly minted “Now Hiring” signs with 660K projected and 374K materializing.  On a side note, ADP has been a more accurate indicator of reality than the Feds’ initial number.  The BLS will issue several revisions of their initial reports over the next few weeks, which will fall more in line with what ADP broadcast initially.  

The second major point out of the Jobs Report was the increase in wages, up 0.6% this month versus the 0.3% expected.  Companies are handing out twice the raises and hiring half the people. So a betting man or woman (or a savvy gender neutral employee) would ask for a raise rather than just go out looking for a new job. This “wage based inflation” will be the main driver of interest rate hikes, and, I believe, is an enormous consideration for an Administration considering bumping up the Minimum Wage whilst keeping rates low to balance(ish) their own budget…er, deficit…er, money printing operations.

One more statistic before announcing the winner of a free mortgage payment.  The number of homes that sold in Salt Lake and Utah Counties dropped 26.1% and 22.3% respectively from July 2020 to July 2021.  Over the same period of time, the median sales price on those fewer homes that did sell rose 24.5% and 25.7% in the same order.  Go ahead and pat yourself on the back for being a homeowner.  With home prices rising more than 3X the average wage, finding affordable housing is an increasingly daunting challenge–unless of course you get your payment made by your favorite loan officer.