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One Bank Sees A Stagflationary Hellscape For Markets In 2022: Here’s How To Trade It

One Bank Sees A Stagflationary Hellscape For Markets In 2022: Here’s How To Trade It

For the past year BofA Chief Investment Strategist, Michael…



This article was originally published by Zero Hedge

One Bank Sees A Stagflationary Hellscape For Markets In 2022: Here’s How To Trade It

For the past year BofA Chief Investment Strategist, Michael Hartnett, has been one of Wall Street’s gloomiest strategists (perhaps just below Albert Edwards and Michael Wilson on the permabear scale) warning that global markets are on the precipice of a very ugly turn of events, and predicting that 2022 will unleash a “rate shock” that will hammer risk assets, and as 2022 gradually rolls out, doling out major pain for the bulls, his predictions are finally coming true.

But for all the complaints from stock investors, nowhere is the pain more acute than in the White House, because as Hartnett writes in his latest weekly Flow Show note, US inflation is up from 1.4% to 7.0%, while Biden’s approval rating is down from 56% to 42% past 12 months. One can almost imagine what Biden told Powell during that renomination phone call…

As Hartnett explains for the cheap seets, inflation = economic and political problem, writing that Joe needs 50bps from Jerome at Jan FOMC. And while Biden won’t get it, the BofA strategist notes that the Fed will be very hawkish next 9 months, “so short the winners of Fed’s liquidity supernova – tech, IG, private equity.”

The take home from the above is that after a decade of Fed desperation to hike inflation, the central bank finally got what it wanted… and is now trapped because, as Hartnett lists: 

  • inflation is off-the-charts,
  • oil prices strong,
  • supply bottlenecks remain, with China freight prices at all-time highs…

… and the less-acknowledged G7 unemployment rate (@ 4.5%) close to 40-year lows = wage growth..

And while it is like beating a dead horse by now, Hartnett – who has written about this topic extensively – notes that the coming “rates shock” will be global in ’22, while the deflation of long duration bonds (Austrian 100-year bond -34% in price terms) is leading deflation of long duration equities (biotech, software, solar, ARKK…).

Which brings us to the core of Hartnett’s note, which is his explanation of the market’s latest “conundrum” – the drop in the dollar, which as the BofA strategist writes is getting smoked despite 7% inflation, . Why? Because global investors’ belief is US fading fast; dollar debasement = yields up & dollar down = 1970s, when cash/commodities outperformed stocks/bonds. That, in a nutshell, is ’22 thus far).

Yet a dropping dollar doesn’t mean “cash is trash” – just the opposite (curiously, every time Dalio says Cash is trash, the market crashes within 3 months): as Hartnett explains in a section on “asset allocation”, cash outperforming stocks and credit rare, and has happened just twice in past 30 years – 1994  and  2018 – both “Fed-shock” years…  but the stagflation era of 1966 to 1981 saw cash outperform stocks & credit 7 out of 16 years (Table 1).

And like every stagflation, we see a furious response from central banks which Hartnett dubs simply “The Tightening”: as of this moment, EM leads largest global tightening wave since 2011 past 6 months 49 global rate hikes vs 7 cuts (here one can note that the big story is not the coming tightening cycle from the Fed but the biblical easing that will follow).

But before we get the easing, we need to hike…a lot: inflation YoY in US, UK & Europe is currently 7%, 5%, 5%, and if inflation continues to rise 0.4-0.5% MoM (the average pace in ’21) over the next 6 months, then inflation will hit 6% in US, 7% in UK, 6% in Europe “making total mincemeat of Fed/BoE/ECB inflation forecasts 2.6%/3.4%/3.2%.”

So while the tightening is coming, the inflation is already here, and as Hartnett puts it simply, inflation always precedes recessions:

  • late-60s recession preceded by consumer price inflation,
  • 1973/4 by oil/food shocks,
  • recession of 1980 by oil,
  • 1990/91 by CPI,
  • 2001 by tech bubble,
  • 2008 by housing bubble

… and the slower the Fed reacts – here Hartnett again notes that the Fed should hike 50bps on Jan 26th – on fears of upsetting Wall St, the more inflation & recession risks grow, and the more likelihood US dollar debasement scars 2022.. albeit great for EM/commodities.

To be sure, the coming recession won’t be just in the markets, it will hit consumers especially hard.

Why? Because the best consumer news are now behind us – as we noted this morning, retail sales are 22% above pre-COVID levels while payrolls up 18mn from lows but still well below pre-covid levels.

As a result, in 2022 consumers face inflation annualizing 9% (food 23% YoY, heating 50%, rents 13%, house prices 18%), real earnings falling 2.4%, synonymous with recession – see 1974, 1980, 1990, 2008, 2020…

…  while stimulus payments to US households evaporating from $2.8TN in ’21 to just $660bn in 2022, meaning there is no more buffer from excess US savings (savings rate = 6.9%, lower than 7.7% in ’19…and as we repeated all the time, the “rich” hoard the savings), and as we said this morning, a record $40bn MoM jump in US consumer borrowing in Nov’21 sign to us that consumer starting to feel the pinch.

But while consumers patiently await for purgatory, Small Business are already in recessionary hell: the number of small businesses saying inflation/labor costs/poor sales the #1 problem is highest since 2010; this has historically coincides with recession.

Finally, there is the Profit Recession, where things get funny, because while all predict multiple contraction, few predict EPS contraction, and yet…the BofA global EPS model predicts marked deceleration from 40% last summer to 5% next summer (model driven by China FCI, Asia exports, global PMI, US yield curve), and could turn negative in the second half! 

Hartnett is certainly right that nobody is prepared for what’s coming: the latest weekly fund flows showed a massive $30.5bn inflow to stocks (“nobody is short the equity market”), $0.1bn from gold, $2.9bn from bonds, and the largest outflow from cash since Sept 21, at $43.5BN.

Rounding out his apocalyptic views, Hartnett continues to think the S&P will test 4000 before 5000, delivered by

Finally, this is how Hartnett is trading the coming apocalypse: bearish, negative credit & stocks returns in ’22 driven by “rates shock” H1 & likely “recession panic” in H2.

  • Longs:
    • 1. volatility, high quality, defensives on tighter financial condition;
    • 2. oil, energy, real assets on inflation (Chart 6);
    • 3. EAFE/EM banks on reopening;
    • 4. Asia credit on (very) distressed yield (Chart 8).

  • Shorts:
    • 1. IG & HY bonds on Quantitative Tightening;
    • 2. short private equity & broker dealers on wider credit spreads;
    • 3. short tech/Nasdaq on higher rates/less capital flow from Europe/Asia.

There is more in the full report, available to professional subs.

Tyler Durden
Sat, 01/15/2022 – 06:44

Author: Tyler Durden


Stop Pretending Price Inflation Is a Result of “Too Much” Profit

Some commentators attribute the latest sharp increase in the Consumer Price Index to businesses pushing prices of goods higher in order to secure higher…

Some commentators attribute the latest sharp increase in the Consumer Price Index to businesses pushing prices of goods higher in order to secure higher profits. (See the New York Times article “Democrats Blast Corporate Profits as Inflation Surges,” January 3, 2022). Note that the yearly growth rate of the Consumer Price Index jumped to 6.8 percent in November 2021 from 1.2 percent the year before. However, is it true that businesses are determining the prices of goods and services?


How Prices Are Established

As a rule, a supplier sets the price. After all it is the supplier who offers the goods to the buyers. So it is the supplier who must set the price of a good before he presents the good to the buyers.

In order to secure the price that will improve his lot, the price that the supplier sets must cover his direct and indirect costs and provide a margin for profit. By setting the price, the supplier must make as good an estimate as possible regarding whether he will be able to sell his entire supply at the price set.

The process of making the estimate involves the assessment of the possible responses of the buyers and the possible responses of his competitors—other suppliers. If his estimates are accurate, then he makes a profit. By making a profit, the supplier expands his pool of resources, which in turn enables him to attain more ends. His standard of living improves.

Observe that while the cost of production in some cases would appear to be the main factor in price determination, this is not so. Ultimately, it is the evaluation of the buyer that dictates whether the price set by the supplier is going to be realized. Every buyer decides in his own context whether the price paid for a good betters his life and well-being.

If the cost of production were the driving factor behind setting market prices, then how can we explain the prices of goods that have no cost because they are not produced—goods that are simply there, like undeveloped land?

Likewise, the cost-of-production theory cannot explain the reason for the high prices of famous paintings.

According to Rothbard, “Similarly, immaterial consumer services such as the prices of entertainment, concerts, physicians, domestic servants, etc., can scarcely be accounted for by costs embodied in a product.”1

It follows then that businesses striving to make profits cannot cause increases in the prices of goods and services without the consent of consumers.

Defining Price

The price of a thing is the amount of money paid for the thing; for example, the number of dollars per loaf of bread or the number of dollars per shirt. The key driving factors here are the amount of dollars and the quantity of goods.

Now, with all other things being equal, an increase in the amount of money paid for goods and services implies that the price of these goods and services is going to be higher. More money is now paid for these goods and services.

In the absence of an increase in the amount of money there cannot be a general increase in prices. If a business raises the price of its goods and consumers have agreed to this increase then consumers are going to have less money to spend on other goods, all other things being equal. Hence, we will have here a specific price increase but not a general increase in prices.

Inflation Is All about Increases in Money Supply

By popular thinking, it is the role of the central bank to guide the economy onto the path of economic and price stability.

If central bank officials anticipate that the economy will fall below the path of economic and price stability, then officials are expected to prevent this decline through monetary pumping. Conversely, if officials are of the view that the economy is likely to shoot above the stable path, then they are likely to prevent this by reducing the monetary pumping.

In response to covid-19 and in particular the lockdowns and other restrictions, central bank officials expected severe damage to the economy. The economy was expected to fall strongly below the path of stability. In this case, strong monetary pumping was considered as a welcome move. The strong monetary pumping is believed to have brought the economy onto the stable path.

But monetary pumping cannot generate economic stability. The pumping sets in motion an exchange of nothing for something, or the diversion of wealth from wealth generators to the early recipients of the newly pumped money. This undermines the process of wealth generation and weakens the prospects for economic growth.

As a rule, because of the monetary pumping, individuals are going to have more money in their pockets, which they are likely to dispose of by buying goods and services. This means a greater amount of money is going to be spent on various goods and services. This means that the prices of goods and services are going to increase, all other things being equal.

Given the massive increase in the monetary pumping, the yearly growth rate of the US money supply jumped to 79 percent in February 2021 from 6.5 percent in February 2020, according to the True Money Supply metric—an average increase of 43 percent. Allowing for the time lag between changes in money supply and changes in prices, it is not surprising that the momentum of the Consumer Price Index displays massive increase.


Hence, the culprit here is the alleged defender of the economy—the central bank itself. Curiously, very few commentators are mentioning the role of the central bank in fueling general increases in the prices of goods and services. Note that the massive increase in the growth rate of money supply, coupled with lockdowns and various other restrictions, has intensified the upward pressure on the prices of goods and services. The combination of not enough savings allocated toward the expansion and the enhancement of the production structure and a strong demand for various goods and services due to the massive increase in money supply has resulted in shortages. After a time lag, prices are therefore likely to increase further to eliminate the shortages that have emerged.

Could Price Controls Resolve the Issue of General Price Increases?

Some commentators are of the view that the government should introduce price controls in order to prevent further increases in the prices of some key consumer goods. A policy of restricting price adjustments due to the monetary pumping is going to weaken various marginal producers. Consequently, these producers are likely to move to activities which are not subject to government price controls.

As a result, the supply of some key consumer goods will come further under pressure. So rather than benefiting consumers, such a government policy would hurt consumers’ well-being. Hence, a policy of price controls is likely to increase shortages and stifle the production of goods and services. In fact, this could ultimately lead to the imposition of the price controls on a large variety of economic activities, which in turn is likely to result in the economic system that resembles the former Soviet Union.2

  • 1. Murray N. Rothbard, “The Celebrated Adam Smith,” in Economic Thought before Adam Smith, vol. 1 of An Austrian Perspective on the History of Economic Thought (Auburn, AL: Ludwig von Mises Institute, 2006), pp. 433–74, esp. p. 452.
  • 2. Ludwig von Mises, “How Price Controls Lead to Socialism,” Mises Wire, Jan. 14, 2016.

Author: Frank Shostak

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The One Chart That Suggests the Crypto Comeback Is Around the Corner

Crypto investors are on edge right now. And reasonably so. Ever since peaking in early November, Bitcoin prices have dropped nearly 40% – marking the…

Crypto investors are on edge right now. And reasonably so. Ever since peaking in early November, Bitcoin prices have dropped nearly 40% – marking the token’s biggest correction since July 2021, when Bitcoin dropped 50%.

Although some altcoins have soared over this stretch – like a few altcoins we’ve recommended over the past few months – most altcoins have followed Bitcoin lower. The total cryptocurrency market cap has dropped 33% from $3 trillion to $2 trillion in just about three months.

That’s a steep drop. Time to call it quits on the Bitcoin bull market?

Hardly. The long-term potential in cryptos remains enormous, considering the entire market is worth just $2 trillion – versus a $50 trillion market cap for the U.S. stock market. Even if just 10% of the money in the U.S. stock market migrates into cryptos, then the whole crypto market could rise 3.5X from current levels.

The multi-year investment thesis on cryptos remains compelling. Don’t quit on that because of a little near-term weakness.

But, more than that, our technical analysis suggests that this recent Bitcoin sell-off may actually be over…

Specifically, there’s one chart that came across our desks this week that very simply and powerfully illustrates why the crypto market could be ready to rebound in a big way.

This is the chart in question:

Basically, over the past year, the total market cap of the crypto market has consistently shown strong support at previous resistance levels.

Total market cap peaked around $1.1 trillion in January 2021. Around that same level, the total market cap bottomed during the July sell-off.

Additionally, total market cap peaked around $1.8 trillion in March 2021. Around that same level, the total market cap bottomed during the September sell-off – and it just bottomed around that same level again.

In other words, the above-chart shows why the current crypto market slide may actually be over…

Fundamentally, we mostly agree with this chart. We do believe that cryptos will remain volatile over the next few months amid Federal Reserve policy uncertainty and sky-high inflation; however, we also believe that once the Fed starts hiking interest rates and inflation cools off, cryptos will stage an enormous comeback.

Thus, it feels like today we’re in this “bottoming out” process – and the best time to buy cryptos is during these “bottoming out” processes.

That’s why, just yesterday, we issued two new urgent buys in our flagship cryptocurrency investment research product, Crypto Investor Network.

One of the coins is a unique Layer-1 blockchain project. The other is a compelling social content play. Both have enormous upside potential.

Remember: Those coins are joining a portfolio where the average gain is about 100%.

We think it’s very likely that both of these tokens will rally 100% or more over the next six to 12 months.

So, what’re you waiting for? Click here to find out all about these two new cryptos to buy right now.

On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.

The post The One Chart That Suggests the Crypto Comeback Is Around the Corner appeared first on InvestorPlace.

Author: Luke Lango

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Daily Mortgage Rates End Week Higher | January 15 & 16, 2022

The interest rate on a 30-year fixed-rate mortgage ended the week on the upswing, averaging 3.898%.

The interest rate on a 30-year fixed-rate mortgage ended the week on the upswing, averaging 3.898%. Refinance loans also saw an increase with the 30-year rate at 4.037%.

Mortgage rates have been steadily climbing since the beginning of the year. While higher rates may be discouraging, they are still relatively low and afford well-qualified borrowers the chance to lock in low rates and monthly payments on a new mortgage or refinance loan.

  • The latest rate on a 30-year fixed-rate mortgage is 3.898%.
  • The latest rate on a 15-year fixed-rate mortgage is 2.91%. ⇑
  • The latest rate on a 5/1 ARM is 2.442%. ⇔
  • The latest rate on a 7/1 ARM is 3.781% ⇓
  • The latest rate on a 10/1 ARM is 4.017%. ⇓

Money’s daily mortgage rates reflect what a borrower with a 20% down payment and a 700 credit score — roughly the national average score — might pay if he or she applied for a home loan right now. Each day’s rates are based on the average rate 8,000 lenders offered to applicants the previous business day. Freddie Mac’s weekly rates will generally be lower, since they measure rates offered to borrowers with higher credit scores.

Today’s 30-year fixed-rate mortgage rates

  • The 30-year rate is 3.898%.
  • That’s a one-day increase of 0.026 percentage points.
  • That’s a one-month increase of 0.299 percentage points.

The 30-year fixed-rate mortgage is preferred by most borrowers because of its long payback time, which results in relatively low and steady monthly payment. People also like the predictable interest rate, which won’t change unless you refinance. The potential downside is that the interest rate will be higher compared to a shorter-term loan, which means you’ll actually pay more for this type of loan over time.

Today’s 15-year fixed-rate mortgage rates

  • The 15-year rate is 2.91%.
  • That’s a one-day increase of 0.047 percentage points.
  • That’s a one-month increase of 0.341 percentage points.

A 15-year fixed-rate mortgage will have a lower interest rate than a longer-term loan, which means you’ll pay less money over the life of the mortgage. The drawback is that the shorter term means the monthly payments will be higher and may not be as affordable.

The latest rates on adjustable-rate mortgages

  • The latest rate on a 5/1 ARM is 2.442%. ⇔
  • The latest rate on a 7/1 ARM is 3.781%. ⇓
  • The latest rate on a 10/1 ARM is 4.017%. ⇓

Adjustable-rate mortgages are a different option. The interest rate will be fixed at first, then change at predictable intervals. The rate on a 5/1 ARM, for example, will be fixed for five years, then change annually. The advantage of an ARM is that the initial interest rate is very low. The potential disadvantage is that, once the loan becomes adjustable, the rate can increase substantially causing the monthly payments to increase as well.

The latest VA, FHA and jumbo loan rates

The average rates for FHA, VA and jumbo loans are:

  • The rate on a 30-year FHA mortgage is 3.667%. ⇔
  • The rate on a 30-year VA mortgage is 3.688%. ⇓
  • The rate on a 30-year jumbo mortgage is 3.555%. ⇔

The latest mortgage refinance rates

The average refinance rates for 30-year loans, 15-year loans and ARMs are:

  • The refinance rate on a 30-year fixed-rate refinance is 4.037%. ⇑
  • The refinance rate on a 15-year fixed-rate refinance is 3.045%. ⇑
  • The refinance rate on a 5/1 ARM is 2.737%. ⇔
  • The refinance rate on a 7/1 ARM is 3.922%. ⇓
  • The refinance rate on a 10/1 ARM is 4.165%. ⇓

Where are mortgage rates heading this year?

Mortgage rates sank through 2020. Millions of homeowners responded to low mortgage rates by refinancing existing loans and taking out new ones. Many people bought homes they may not have been able to afford if rates were higher. In January 2021, rates briefly dropped to the lowest levels on record, but trended slightly higher through the rest of the year.

Looking ahead, experts believe interest rates will rise more in 2022, but also modestly. Factors that could influence rates include continued economic improvement and more gains in the labor market. The Federal Reserve has also begun tapering its purchase of mortgage-backed securities and announced it anticipates raising the federal funds rate three times in 2022 to combat rising inflation.

While mortgage rates are likely to rise, experts say the increase won’t happen overnight and it won’t be a dramatic jump. Rates should stay near historically low levels through the first half of the year, rising slightly later in the year. Even with rising rates, it will still be a favorable time to finance a new home or refinance a mortgage.

Factors that influence mortgage rates include:

  • The Federal Reserve. The Fed took swift action when the pandemic hit the United States in March of 2020. The Fed announced plans to keep money moving through the economy by dropping the short-term Federal Fund interest rate to between 0% and 0.25%, which is as low as they go. The central bank also pledged to buy mortgage-backed securities and treasuries, propping up the housing finance market but began cutting back those purchases in November.
  • The 10-year Treasury note. Mortgage rates move in lockstep with the yields on the government’s 10-year Treasury note. Yields dropped below 1% for the first time in March 2020 and have been rising since then. On average, there is typically a 1.8 point “spread” between Treasury yields and benchmark mortgage rates.
  • The broader economy. Unemployment rates and changes in gross domestic product are important indicators of the overall health of the economy. When employment and GDP growth are low, it means the economy is weak, which can push interest rates down. Thanks to the pandemic, unemployment levels reached all-time highs early last year and have not yet recovered. GDP also took a hit, and while it has bounced back somewhat, there is still a lot of room for improvement.

Tips for getting the lowest mortgage rate possible

There is no universal mortgage rate that all borrowers receive. Qualifying for the lowest mortgage rates takes a little bit of work and will depend on both personal financial factors and market conditions.

Check your credit score and credit report. Errors or other red flags may be dragging your credit score down. Borrowers with the highest credit scores are the ones who will get the best rates, so checking your credit report before you start the house-hunting process is key. Taking steps to fix errors will help you raise your score. If you have high credit card balances, paying them down can also provide a quick boost.

Save up money for a sizeable down payment. This will lower your loan-to-value ratio, which means how much of the home’s price the lender has to finance. A lower LTV usually translates to a lower mortgage rate. Lenders also like to see money that has been saved in an account for at least 60 days. It tells the lender you have the money to finance the home purchase.

Shop around for the best rate. Don’t settle for the first interest rate that a lender offers you. Check with at least three different lenders to see who offers the lowest interest. Also consider different types of lenders, such as credit unions and online lenders in addition to traditional banks.

Also. take time to find out about different loan types. While the 30-year fixed-rate mortgage is the most common type of mortgage, consider a shorter-term loan like a 15-year loan or an adjustable-rate mortgage. These types of loans often come with a lower rate than a conventional 30-year mortgage. Compare the costs of all to see which one best fits your needs and financial situation. Government loans — such as those backed by the Federal Housing Authority, the Department of Veterans Affairs and the Department of Agriculture — can be more affordable options for those who qualify.

Finally, lock in your rate. Locking your rate once you’ve found the right rate, loan product and lender will help guarantee your mortgage rate won’t increase before you close on the loan.

Our mortgage rate methodology

Money’s daily mortgage rates show the average rate offered by over 8,000 lenders across the United States the most recent business day rates are available for. Today, we are showing rates for Thursday, January 13, 2022. Our rates reflect what a typical borrower with a 700 credit score might expect to pay for a home loan right now. These rates were offered to people putting 20% down and include discount points.

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