We are excited to partner with one of our favorite mortgage minds, Lou Barnes, to bring you his biweekly commentary. Lou is a loan officer in Boulder, CO, but his insight is relevant across the country. Lou's opinions should not be construed as the opinions of CENTURY 21 Redwood Realty or our partner, Day 1 Mortgage.
A funny thing happened on the way to recession. Markets happened.
Chair Powell testified to Congress this week, driving home the Fed’s intent to raise the cost of money as high as necessary until inflation reports show consistent progress toward the Fed’s goal of 2% inflation. If persistence creates a recession, so be it.
Some other Fed officials seemed panicky. Governor Bowman yesterday: "Based on current inflation readings, I expect that an additional rate increase of 75 basis points will be appropriate at our next meeting as well as increases of at least 50 basis points in the next few subsequent meetings, as long as the incoming data support them.” The tightening intentions qualified as data-dependent, but the arithmetic is tricky.
The Fed’s cost of money is now 1.75%. Add .75% at the meeting in the last week of July, to 2.50%. “A few... 50bps....” Few is more than one, at least two, so at the September and November meetings each add .50% to 3.50% -- if anything a hair above the Fed consensus last week for year-end. If “few” is more than two... you get it. The Fed is on the way up to Blood Moon.
But this week a funny thing...
Markets. This week every market sensitive to the Fed and/or inflation reversed from fear of either. As you might suspect, many people have different interpretations of the move. The leading one with which I disagree (so little time, so much with which to disagree...): markets suddenly anticipate recession.
Stick with William of Occam and his Razor, simplicity of hypothesis. Recession is a third-order event, the result of Fed over-tightening, a surprisingly fragile economy, and failure by the Fed quickly to recognize and reverse. Keep it simple: market prices have fallen because they were too high. One at a time...
Energy. Oil before Ukraine was $70-$80/bbl. Ten days later, $123/bbl; then in the one-teens until last week’s double-top at $122/bbl. This week, a stone-drop to $104, settling now at $107. India and China are buying at deep discount from Russia the oil and considerable gas which the West has quit buying. The used-to-be buyers have found new supply -- a global net add -- and cut consumption by both price and policy.
The many-year baseline US price of NGas has been near $4/mcf. Post-Ukraine the US supplied more gas to Europe than Russia, all LNG (no pipeline now or ever), which created a shortage here. In April up to $7.82, May $8.81, and June $9.29. A fire knocked off-line the big Freeport LNG facility; until repaired, there is no use for excess production except to store it. In just three weeks, NGas to $6.19 -- likewise dropping the cost of everything made from NGas, from synthetic fabric to paint to fertilizer.
Gasoline: pre-Ukraine unleaded futures were $2.65/gal. One month later $3.68. Two weeks ago $4.28. Of course all of this the fault of a too-easy Fed. Uh-huh. In the same, magic three weeks, gasoline has crashed to $3.66, which will take a month to show up at the pump.
(Note to Climateers: the cruel rush by creeps to buy Russian energy, funding its war, confirms that the world will not decarbonize until we have affordable alternate technology. Also, press too hard on oil/NGas supply, and we’ll get worse carbon, Germany now firing up coal plants.)
Food. Pre-Ukraine corn traded at $596/cbl. Quickly to $800, in the last week $655. Wheat before invasion $780/cbl. Spikes March and May to $1294 and $1277, then straight down to today’s $937.
Metals Tell Stories... A lot of people believe in gold as a signal of inflation and hedge against it. From the Covid panic in March 2020, gold traded between $1750/oz and $2000, most of the time close to $1800. The last crests near $2000 were in April. Today $1830. Gold has signaled... nothing, has hedged... nothing.
Some argue that gold has been suppressed by Russian sales. So, silver? From $18/oz pre-Covid to tops at $27 in 2020 and again in 2021; post-Ukraine another at $26 and now straight back down to $21.
Copper is one of the best predictors of global economic activity, especially in China. Normal has been near $2.75/lb. Covid has disrupted everything, even copper supply. By the end of 2020, $3.50. In 2021 spikes to $4.50. Copper is indifferent to Ukraine, no copper there and little used there. In April this year the price repeatedly topped near $4.70. Copper is China, China is copper, and China is the world’s last Covid mess, irresolvable in Xi’s stupid-policy. We need China’s supply chain, although less every day. China’s export tangle pushes up global inflation, but its impaired economy pulls down harder. Since April after two big down-swoops, copper today trades at $3.64.
Interest Rates. The Fed proxy is the 2-year T-note. Before Ukraine, trading at 1.50% was a fair forecast for the cost of money at the end of this year. In April, up to 2.50%, and on June 14 a top at 3.42%, driven there by the Fed’s threats. Today... 3.04%.
The 10-year T-note had run ahead of the Fed ever since last fall, when supply chains proved to be persistently clogged. Of course still transient, but a longer wait. The pre-Ukraine 10-year was 1.75%. By April the first trades near 3.00%. Then the Fed jawbone-panicked top at 3.48% -- the same day as 2s, on June 14. Might mark 6/14/22 as the cycle top. 10s traded as low as 3.02% yesterday, settling at 3.13% today.
What’s So Funny? The entire rate and commodity complex has fallen off tops, way off. Bond traders do anticipate the Fed and recession future, but commodity people trade supply/demand/price for right now, not the possibility of future recession.
It will take a month or two for these cost-drops to show up in CPI, energy quicker than others, all the while economic activity continuing to slow, damaged by the Fed and prices themselves. Housing numbers were strong in this week’s reports, but from May when mortgages had just moved into the fives. In a couple of months we’ll know what sixish has done. The inevitable lags in activity and reporting are an oil-soaked invitation to Fed overdoing. They know, but inflation is the greater risk.
Russia. HBO has a new documentary, “Chernobyl -- The Lost Tapes.” HBO’s warning to viewers is inadequate. Do not allow kids in the room, nor any other tender person.
Watch it, please. Not for Chernobyl, but to see Russian culture, unchanged in the 36 years since, nor in the preceding several hundred years. The film is a perfect window to life on the Russian side of the Ukraine war -- soldiers, civilians, and authorities. Extraordinary bravery, brutal mendacity, the lies understood by all but repeated and endured, even with pride.
The 10-year T-note in the last year, the last two days added. 3.00% was the long-term top, going back eleven years. Now it’s the bottom -- until we learn the course of inflation:
The dot-plot from last week’s Fed meeting, for reference. The 2-year T-note, as above is suddenly trading a half-percent below the Fed’s end-of-year forecast:
New homes, the chart from splendid www.calculatedriskblog.com. There is still a lot of housing demand, despite rates, and wealth effect and down payments running in reverse. It will take time to see how far down new sales will go, but the crest has passed:
Thanks for tuning in to our collaboration! Remember that our friends at Day 1 Mortgage are here for you for all of your mortgage needs.