According to the Federal Reserve, it exists to “stabilize” the economy. Does it though?
Despite inflation coming in hotter than expected month after month this year, Federal Reserve Chairman Jerome Powell assures us we need not worry. This surge of inflation is “transitory.” But even if it isn’t we still don’t need to worry. He assures us that if inflation does prove to be significant and “materially” above its 2% goal, the Fed will use its tools to guide inflation back down.
Peter Schiff says this is nothing but a bluff. The Fed won’t fight inflation, because it can’t.
The Fed is really not as clueless as people think when it comes to inflation. They’re not missing the inflation problem. I think they understand that there’s an inflation problem. They also understand that they would create an even bigger problem, from their perspective, if they tried to do anything about it, which is why they’re not, which is why they are pretending that the situation is transitory.”
Loyola University Chicago finance professor and Truth in Accounting director of research Bill Bergman isn’t buying Powell’s assurances either. He points out that the Fed claims to “stabilize the economy. And he’s skeptical
The factors undermining confidence in the Fed’s credibility for inflation-fighting are related to its claims to serve as a source of financial system stability.”
The following article by Bill Bergman was originally published at the Mises Wire. The opinions expressed do not necessarily reflect those of Peter Schiff or SchiffGold.
Before, during, and after the 2007–09 financial crisis, the masthead of the Federal Reserve Board’s main webpage included the following assertion right below its name at the top of the page:
The Federal Reserve, the central bank of the United States, provides the nation with a safe, flexible and stable monetary and financial system.
This statement is still there today. Can we all breathe easier now? Maybe not, if we endured one of the worst financial crises ever while the Fed was championing itself as a source of stability.
Rebranding to Inspire Confidence
Curiously, the board changed the wording of the statement at the top of the main page of its website during 2007, amid the onset of the 2007–09 disaster. Back in January 2007, the internet archive Wayback Machine shows the following saying to the right of the board’s name at the top:
The Federal Reserve, the central bank of the United States, was founded by Congress in 1913 to provide the nation with a safer, more flexible, and more stable monetary and financial system.
In other words, at the beginning of the year, the assertion was an opinion of what Congress intended, not what the Federal Reserve said that it provided in reality. By the end of 2007, however, the statement had taken on the more assertive, confidence-inspiring tone it has today. The Fed has advertised itself as a sufficient condition for financial stability, period—not simply as a means by which Congress tried to promote that difficult goal.
This helps to explain why the Fed’s forecasting failed so dismally before 2008–09. When advertising itself as a source of stability, it may have been hard to predict what ended up being one of the worst financial crises in our nation’s history.
We should try to learn lessons from history, including this one. Can we take for granted the Fed’s continuing claims to be a guarantor of stability, today? Not just in terms of the Fed’s role in stabilizing and/or bailing out large financial institutions, but for a stable price level?
In this light, the Fed’s more recent claims that inflation threats are “transitory,” and that it has the tools to manage higher inflation if it arises may not be so comforting. And the factors undermining confidence in the Fed’s credibility for inflation-fighting are related to its claims to serve as a source of financial system stability.
The Financial Stability Report: Avoiding Liability for Crises
Back in 2010, reeling from the political effects of the 2007–09 financial crisis, Congress passed the 849-page “Dodd-Frank” legislation. It was signed by President Barack Obama with a statement that the law was intended “to make sure that a crisis like this never happens again.”
The first section of Dodd-Frank created a new Financial Stability Oversight Council (FSOC). The first listed member of the FSOC was the secretary of the Treasury and the second was the chairman of the Federal Reserve Board of Governors. The law made the Treasury secretary, not the chair of the Federal Reserve, the chair of the FSOC. And the law created ten voting members, with the chair of the Fed holding only one of those votes.
The law directed the FSOC to annually report on financial market developments with “potential emerging threats to the financial stability of the United States,” including developments relating to “accounting regulations and standards.”
In 2011, the FSOC issued its first annual report. That report listed a financial system that was “less vulnerable to crisis” first among three elements of the “stronger, more resilient financial system” the FSOC said the law was trying to promote. In turn, the first of six elements of policies to achieve those ends was “tougher constraints on excessive risk-taking and leverage across the financial system.”
Before 2011, and indeed before 2008, the Federal Reserve had assumed the lead role on such matters. That may help explain why, beginning in 2018, the Fed began publishing its own Financial Stability Report. The Fed doesn’t have a specific directive from Congress for this report, and it has justified enlightening the rest of us on financial stability developments as a means for promoting increased “transparency and accountability for the Federal Reserve’s views,” given that “promoting financial stability is a key element in meeting the Federal Reserve’s dual mandate for monetary policy regarding full employment and stable prices.”
But the Fed has already long reported semiannually on its performance in meeting Congress’s dual mandate in the Humphrey-Hawkins testimony, raising the question of whether this report is necessary or merely a means by which the Fed is trying to defend and promote its leadership role.
The latest version of the Fed’s Financial Stability Report arrived in May 2021. The Fed distinguishes “shocks” from “vulnerabilities,” with a view to promoting a financial system capable of performing intermediation services during and after the arrival of difficult-to-predict or control “shocks.” In making this distinction, the Fed risks a perception that is trying to wash its hands of responsibility for creating the conditions under which shocks arise.
In all of its financial stability reports issued since 2018, the Fed has reviewed developments in four categories established for its “vulnerabilities,” including asset valuations, funding risk, borrowing by businesses and households, and “leverage in the financial sector.” For the last category, the Fed has been tracking leverage among banks, broker-dealers, insurance companies, and hedge funds—but it has refused to look at itself in the mirror. The financial stability framework does not include leverage for the Federal Reserve Banks in monitoring vulnerabilities.
Doing More Harm Than Good
In its latest weekly consolidated balance sheet for the twelve reserve banks, the Fed reported $8.1 trillion in total assets, funded by $8.0 trillion in liabilities and $36.9 billion in capital. That’s a massive amount of leverage for an $8 trillion dollar “company,” one whose assets and liabilities quadrupled from 2007 to 2019, and have since doubled with the arrival of the pandemic and the impact of government lockdowns on the economy.
Assume a widely unforeseen but significant increase in inflationary expectations arrives in the coming months. That might qualify as a shock—under the Fed’s framework for financial stability, anyway—especially given the implications for the prices of trillions of dollars of “risk-free” Treasury bonds, as well as longer-term securities issued in the private sector. In turn, widespread losses in bond prices would have immediate consequences for the finances of the Federal Reserve Banks and the independent exercise of monetary policy.
In “normal” times, the Fed could try to manage rising inflationary expectations with contractionary monetary policy, selling bonds in open market operations with a view to drawing down reserves in the financial system. Given its high leverage, however, selling bonds could generate significant losses for the Reserve Banks. These would wipe out its reported capital were it not for an accounting change the Fed made to its own accounting standards a few years ago.
In 2014, Marvin Goodfriend identified Federal Reserve quantitative easing as a “bond market carry trade,” one that accumulated risk on the Fed’s balance sheet and threatened the independent exercise of monetary policy given the Fed’s implied reliance on the US Treasury and future fiscal policy. Goodfriend argued that the Fed should retain more of its earnings and build up its capital to reduce its leverage risk and bolster the credibility of its monetary policy.
In this light, the Fed’s ongoing efforts to monitor and advertise its ability to manage financial market stability bring to mind a prophetic article written by George Kaufman and Kenneth Scott in 2003, titled “What Is Systemic Risk, and Do Bank Regulators Retard or Contribute to It?” Kaufman and Scott decried the moral hazard implications of government safety net policies, concluding that “many bank regulatory actions have been double-edged, if not counterproductive,” and called for significantly reducing the government’s backup role in the financial sector.
Congress should explore a fundamental reexamination of that backup role today.
US Hog Herd Hit By Largest Monthly Drop Since 1999
US Hog Herd Hit By Largest Monthly Drop Since 1999
US hog herds experienced the most significant monthly drop in two decades, according to…
US hog herds experienced the most significant monthly drop in two decades, according to new data from the USDA. The reason behind the drop is because farmers decreased hog-herd development over the last year due to labor disruptions at slaughterhouses plus high animal feed.
USDA data showed the US hog herd was 3.9% lower in August than a year ago. It was the largest monthly drop since 1999 after analysts only expected a decline of about 1.7%, according to Bloomberg.
On Monday, hog futures soared in Chicago after the news of tightening supply. Since contracts hit a seven-year high in June, they have plunged from $120 to $80 but have since recovered in recent days to $90.
Supply chain woes at slaughterhouses, and declining cold pork storage in US warehouses, have pushed up pork consumer prices to record highs.
Farmers are experiencing a challenging environment of skyrocketing feed prices and other commodity prices used to maintain and growing pig herds, along with the labor disruptions at slaughterhouses that sometimes force them to cull herds.
Soaring supermarket meat prices have been devastating for working-poor families who allocate a high percentage of their incomes to basic and essential items. The Biden administration spent most of the year ignoring the dramatic increase in food prices and only addressed the issue earlier this month by blaming meatpackers. The administration even had the nerve to say that if meat prices are taken out of the equation, troubling grocery inflation would be lower.
To sum up, shrinking hog herds means pork prices will stay high.
Volatility Roars Back
The surging 10-Year Treasury yield spooks tech investors … watch out for Evergrande default volatility… another debt ceiling showdown
The surging 10-Year Treasury yield spooks tech investors … watch out for Evergrande default volatility… another debt ceiling showdown
It’s like when you’re flying, feel a few jolts of turbulence, then see the “seatbelt” sign flash on.
Investors are experiencing some market turbulence – and buckling up is probably a good idea.
There are three things troubling markets right now. Let’s look at them to get a sense for how significant they might be.
As I write Tuesday morning, the markets are deep in the red thanks to the soaring 10-Year Treasury yield.
After falling under 1.2% in early August, the yield on the 10-Year Treasury has been pushing higher over the last two months.
That “push” turned into a full-blown “leap” last week, as the yield jumped from roughly 1.3% to over 1.5% as I write.
I’ve circled this one-week spike of about 18% on the chart below.Source: MarketWatch.com
This is significant because the yield on the 10-Year Treasury is a major barometer for how traders are feeling about the market and inflation-risk.
A rising yield also serves as a major headwind for technology stocks. Given this, it’s no wonder that our hypergrowth tech expert, Luke Lango, has been monitoring this surge.
From Luke’s Early Stage Investor update yesterday:
The 10-year Treasury yield broke above 1.5% today, continuing its sharpest ascent since February.
Yields have now risen about 20 basis points since the Fed’s meeting last week, as investors are bracing for the Treasury market’s biggest buyer to become a seller before year-end.
This move makes sense, and more importantly, it’s nothing to worry about.
***Why Luke is urging a levelheaded response
Luke points out that while yields might have further to climb, they should return to lower levels due to a handful of reasons.
Back to Luke with those details:
The fact of the matter is that yields were too low, so now they’re correcting higher, but they won’t go much higher from here because there are structural forces in place that will keep them lower for longer.
For one, you have secular deflationary pressures via the expansion and improvement of productivity-boosting and cost-reducing technologies, like automation, artificial intelligence, and virtualization platforms.
For another, you have persistently strong demand for risk-free assets from risk-adverse funds like pension funds – in a market where “cash is trash” and valuations are a bit too stretched to attract major allocations from these risk-adverse funds.
You also have the fact that the labor market will face long-term headwinds from automation technology threatening to disrupt large swaths of the labor market. That will put a floor on how low the unemployment rate can go, which will keep the Fed on the sidelines.
Not to mention, the Fed serves the U.S. government, and the U.S. government has accumulated a lot of debt over the past few years (especially the past 24 months) … so, in order to keep interest payments low for its “boss,” the Fed is incentivized to keep rates lower for longer. Same with every other central bank in the world, for that matter.
Long story short, there are simply too many secular forces at play here for yields to rise much higher. Make no mistake. They will move higher. But at a very slow and gradual pace
The second reason why Luke isn’t alarmed by the yield spike is because he’s focusing on what matters – the long-term growth story, along with earnings.
Back to Luke:
Near-term movements in the yield curve will dictate near-term price action.
But the long-term value of our stocks will be driven by the long-term earnings growth trajectories of our companies.
So long as our companies produce lots of earnings over the next few years, our stocks will move higher – regardless of where yields end up.
Even though the long-term is what matters, for now, the short-term is volatile – and painful. But Luke stresses this is a temporary problem that’s actually an opportunity:
All in all, things look great.
Let the yield volatility resolve itself in the coming weeks. Let tech stocks chop around. Buy the dip when the volatility settles.
Let’s move on to the second source of today’s volatility.
***The threat of a broader fallout from Evergrande is also worrying investors
Let’s begin with yesterday’s update from our Strategic Trader team of John Jagerson and Wade Hansen:
The Evergrande situation in China is continuing to put traders on edge.
A default seems very likely, and most of the world’s major financial institutions have material direct or indirect exposure to that risk.
To make sure we’re all on the same page, Evergrande is an enormous Chinese real estate company that is failing to meet its debt payments.
Last Thursday, the troubled company missed an $84 million payment. It owes another $47.5 million tomorrow.
The broader fear is that this could be a “Lehman Brothers” meltdown for China. Real estate makes up roughly 30% of the Chinese GDP, so a collapse would have a very real impact on their broader economy. It’s reported that Evergrande alone helps sustain more than 3.8 million jobs each year (directly employing about 200,000).
Yesterday, legendary investor, Louis Navellier, also updated his Accelerated Profits subscribers on this situation. Here he is speaking to this broader fear:
A housing bust would have a pretty big impact on the Chinese economy.
Some economists are even predicting that if Evergrande fails, it could cause China to slip into a recession — and, of course, these fears are part of the reason why the stock market sold off hard last Monday.
The good news is neither Louis nor our Strategic Trader team believe significant economic contagion from a default will reach the U.S. However, we could be in for market volatility. Given this, it’s impacting where John and Wade will be looking for trade set-ups.
Back to their update on this note:
We should be cleareyed about the risks and potential for volatility as we get closer to 3rd quarter earnings season in October.
We expect volatility to rise, and we don’t plan on targeting any trades in energy or basic materials, but we also don’t see much risk of a major drawdown yet.
As I write Tuesday, the latest news is that Beijing is urging government-owned property developers to buy up some of Evergrande’s assets. So, it’s not a direct bailout, though it’s a bailout.
Authorities are hoping, however, that asset purchases will ward off or at least mitigate any social unrest that could occur if Evergrande were to suffer a messy collapse, they said, declining to be identified due to the sensitivity of the matter.
We’ll update you as events unfold here, but don’t be surprised if markets suffer another mini-panic if we get bad news from China.
***Finally, partisan politics could upset markets
The debt ceiling deadline is this Friday.
Last night, Senate Republicans voted against a House-backed bill that would have suspended the debt limit. They objected to how the bill was attached to a broader spending bill pushed by Democrats.
Without a shift in position by one of the two parties, the decision to combine the temporary funding measure and the debt ceiling leaves the U.S. on course for a government shutdown and defaults on federal payments as soon as next month.
According to the Bipartisan Policy Center, without a suspension or raising of the ceiling, there will be a risk of default between Oct. 15 and Nov. 4.
Moody’s Analytics suggests that a prolonged shutdown, were it to happen, would cause another recession, destroying approximately $15 trillion in household wealth and 6 million jobs.
Our politicians are aware of this and don’t want to be responsible, so what we’re seeing is partisan brinksmanship. However, the closer we get to Friday without that solution, the greater the risk of more market volatility.
But remember, we saw this in 2011, when the debt ceiling showdown led to a downgrade in U.S. AAA sovereign credit, and again in 2018 as U.S./China trade tensions were growing. Both times brought plenty of anxious hand-wringing, yet both times we moved past it.
Bottom-line, fasten your seatbelt as these three issues work themselves out. It could get worse before it gets better – but it will get better.
Have a good evening,
Jeff Remsburginflation markets policy fed central bank deflationary
Owner-Equivalent Rent Shock On Deck As Actual Rents Surge By Most On Record
Owner-Equivalent Rent Shock On Deck As Actual Rents Surge By Most On Record
Another month, another record surge in US rents to a new all time…
Another month, another record surge in US rents to a new all time high.
According to the Apartment List national index, US rents increased by 2.1% from August to September, and although month-over-month growth has slowed slightly from its July peak when the sequential growth rate was 2.6%, rents are still growing much faster than the pre-pandemic trend. Since January of this year, the national median rent has increased by a staggering 16.4%. To put that in context, rent growth from January to September averaged just 3.4% in the pre-pandemic years from 2017-2019.
While even the smallest cooldown in rent growth is a welcome change for renters, Apartment List's Chris Salviati notes that it’s important to bear in mind that prior to this year, the national index never increased by more than 0.9 percent in a single month, going back to 2017. "Furthermore, we have now entered the time of year when rents are normally declining due to seasonality in the market. In September of 2018 and 2019, for example, rents fell by 0.1 percent and 0.3 percent, respectively."
That said, we have a ways to go before US rent - where the median just rose above $1,300 for the first time ever - decline; and with rents rising virtually everywhere, only a few cities still remain cheaper than they were pre-pandemic, and even these remaining discounts are unlikely to persist much longer. At the other end of the spectrum, Apartment List finds 22 cities among the 100 largest where rents have increased by more than 25 percent since the start of the pandemic. That said, there are some early signals that tightness in the market may be beginning to ease: the vacancy index ticked up this month for the first time since last April. And in Boise, ID, which has seen the nation’s biggest price increase since the start of the pandemic, rents finally dipped slightly this month.
The chart below visualizes monthly rent changes in each of the nation’s 100 largest cities from January 2018 to September 2021. The color in each cell represents the extent to which prices went up (red) or down (blue) in a given city in a given month. Bands of dark blue in 2020 represent the large urban centers where rent prices cratered (e.g., New York, San Francisco, Boston), but those bands have quickly turned red as ubiquitous rent growth sweeps the nation in 2021. In 2020, 60 of these cities saw rent prices rise from August to September, but this year, 97 cities got more expensive in September.
In a glimmer of hope for Americans locked out of not only the housing but the rental market, one of the few markets where rents did not increase this month was Boise, ID. Since last March, rents in Boise are up by a staggering 39%, making the city the archetype for rental market disruption amid the pandemic. This month, however, the median rent in Boise fell by 0.1%. While such a small dip certainly doesn’t offer much relief to Boise renters, it may at least signal that the market is finally starting to stabilize. Spokane, WA, another city that has experienced skyrocketing rent growth this year, saw an even more notable decline this month, with rents down 1.8 percent.
Unfortunately, Boise and Spokane represent the exception rather than the rule -- in most of the cities where rents had been growing quickly, that growth is continuing. Tampa, for example, saw rents jump by another 3.9% this month, and the city now ranks 2nd for cumulative rent growth since the start of the pandemic at 36%. Excluding Boise and Spokane, the other eight cities in the chart above experienced rent growth of 3.5%, on average, from August to September, as affordable Sunbelt markets continue to boom. Of particular note, four of the ten cities with the fastest rent growth since last March are suburbs of Phoenix.
A more tangible indicator that demand destruction may be setting in, is that vacancy rates have posted their first increase since March. Indeed, as Apartment List notes, much of this year’s boom in rent prices can be attributed to a tight market in which more and more households are competing for fewer and fewer vacant units. The vacancy index spiked from 6.2% to 7.1% last April, as many Americans moved in with family or friends amid the uncertainty and economic disruption of the pandemic’s onset. Since then, however, vacancies have been steadily declining. For the past several months, the vacancy index has been hovering just below 4%, significantly lower than the 6% rate that was typical pre-pandemic.
This month, however, the vacancy index ticked up slightly, from 3.8 percent to 3.9 percent. Although this is a very minor increase, it represents the first increase of any magnitude since last April. While a few more months of data would be needed to confirm an inflection point, if vacancies are back on the rise again, it would signal that tightness in the rental market is finally beginning to ease and that rent growth will also continue to cool.
Finally, where there may be light at the end of the tunnel in real-time data, we have yet to see the pig even enter the python when it comes to the CPI's Owner Equivalent Rent data series. As shown below, the Apartment List data normally has a 4 month lead to the OER series, which means that as actual rents soar by over 15% Y/Y, OER is either going to skyrocket in the coming quarters or the BLS will have to come up with some very fancy hedonic adjustments why rental inflation should exclude, well, rental inflation.
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