Author: George Yacik

Are We Returning To Normal?

Posted on by George Yacik

It may be time to start thinking that this recent bout of high inflation won’t really last as long as we thought.

Right now the outlook is starting to look fairly positive: Oil prices are coming down, the chip crisis seems to be over — the shortage has quickly turned into a glut — supply chain problems have eased.

At the same time, technology will continue to make things more efficient, just as it did before the Covid-19 lockdown, thus easing price pressures.

Retailers are overloaded with inventory and are already unloading it at steep discounts. And stores can only raise prices so much before consumers say no. Do I really need that $6 box of cereal? Probably not.

Does this mean the Federal Reserve won't need to be as aggressive in raising rates as we thought? Was the Fed - dare I say it — correct after all in believing that inflation was transitory, and the only thing they got wrong was how long that temporary period would be and how high inflation would rise?

Maybe it won't be as long as most everyone thinks. Like most things lately in the U.S. — climate, Covid, the economy — crises never turn out to be as bad as the panic-mongers would have us believe.

Indeed, consumers don’t appear as worried about inflation as most people think. Consumer confidence numbers have dropped sharply, it’s true, but retail sales have held up, witness the 1.0% rebound in June after falling 0.1% the prior month, according to last Friday’s report.

That’s mainly because we still have a robust job market and incomes continue to rise, maybe not at the same rate as inflation but not far behind. The economy added 372,000 jobs in June, down slightly from May’s gain of 384,000 but 100,000+ more than forecasts.

The unemployment rate remained near the 50-year low of 3.6% and about where it was before the pandemic. Most importantly, perhaps, average hourly earnings rose 5.1% in June from a year earlier, not far below the core inflation rate of 5.9%.

Does this mean we’re out of the inflationary woods that our monetary and fiscal authorities have largely created by flooding the economy with money when it wasn’t totally necessary? I wouldn’t go that far.

While income gains seem to be running only a little behind the rate of inflation, the same can’t be said for interest rates. On Friday the yield on the U.S. Treasury’s benchmark 10-year note had fallen below 3.0%. Can the Fed realistically get inflation down to its target rate of 2% if inflation is double that on long-term bond yields? It doesn’t seem possible.

However, it’s useful to note that other bellwether rates have risen closer to the rate of inflation, thanks to the threat/promise of more Fed rate hikes. Specifically, the average rate on a 30-year fixed-rate mortgage in June hit 5.52%, according to Freddie Mac, more than 200 basis points above where it stood at the beginning of the year.

That’s certainly not good news if you’re planning to finance the purchase of a house soon, but it does stand the possibility of removing some of the froth from the housing market — both purchases and rentals — that is keeping many young people from starting out on their own. Long term, that’s a good thing.

More than any other statistic, perhaps, housing costs were an area where the Fed proved woefully inept in measuring inflation over the past decade or so.

Ever since the global financial crisis of 2008, the Fed banged its collective head against the wall trying to raise the inflation rate to 2%, while all along inflation was running well above that, if only the Fed’s army of Ivy League-trained economists had paid attention to what was going on around them in home prices and rents.

So where does that leave us? Is the Fed going to stop tightening because inflation may appear to be under control? No, nor should it.

For the past 15 years or so, ever since the end of the global financial crisis in 2008, we’ve heard constant pleas (including from yours truly) that monetary policy needs to “normalize,” meaning to some traditional, pre-2008 level of interest rates. Alas, it never came to pass.

The post-crisis economic growth rate was never strong enough to persuade the Fed to ease monetary policy and raise interest rates significantly. Then we had the pandemic, which moved everything back to square one, with Fed policy going well beyond where it had ever gone before.

Now, with the economy still growing fairly strongly despite multiple obstacles — supply chain disruptions, war in Ukraine, inflation — that should give the Fed comfort to continue to raise rates and reduce its balance sheet without overly disrupting consumers, who continue to travel, eat at restaurants, and go to ballgames.

Let’s hope it doesn’t lose its nerve as it has multiple times before. That should be a boon to stocks, which could certainly use a lift.

It’s time to get back to normal.

George Yacik
INO.com Contributor

Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.

Wishful Thinking

Posted on by George Yacik

Relax, folks. There isn't going to be a long recession, if there is one at all, and you're probably not going to lose your job, and inflation will be down below 3% by next year. The Fed’s got your back.

That's the story from the Federal Reserve’s incredibly optimistic projections released after the end of Wednesday's interest rate-setting meeting. I use the word “incredibly” deliberately, because these projections seem anything but credible. But we can hope.

Somewhat lost in the release of the Fed's 75 basis-point hike in the federal funds rate last Wednesday is that U.S. GDP growth will remain fairly positive this year, next year, and into 2024, according to the Fed’s latest projections.

The Fed now forecasts U.S. GDP will grow by 1.7% this year as well as in 2023, rising to 1.9% in 2024. Now those are down from the Fed’s March projections, to be sure, but they still remain above recessionary (i.e., negative) levels.

Likewise, the Fed is projecting that the unemployment rate will end this year at 3.7% and 3.9% next year, before rising to 4.1% in 2024. Again, those are worse than the March projections but not overly so, considering all the scare talk about how the Fed’s newly hawkish rate-rising policy will inevitably cause a recession and a jump in unemployment.

Meanwhile the Fed is also projecting that the PCE inflation rate will end 2022 at 5.2% before dropping in half to 2.6% next year and to 2.3% in 2024, again higher than its March projections but dramatically lower than where we are today at more than 8%.

How does the Fed plan to manage all this, you ask? It sees the fed funds rate reaching 3.4% by the end of this year and 3.8% in 2022, again above its March projections but a lot lower than what you would have expected, given that the yield on the two-year Treasury note is already well above 3%.

In other words, the Fed is merely playing catch-up to where the market has already been for a while.

All in all, I would say, a pretty positive story, a lot better than what we had been expecting. But how much of it can be believed? What the Fed is telling us is that it believes it can really engineer a soft landing, meaning only a moderate rise in the unemployment rate and no recession, at the cost of just slightly higher interest rates, at least compared to today’s inflation rate and current bond market rates.

In other words, the Fed says it can tame inflation back down to less than 3% all while leaving interest rates five percentage points below the current 8% inflation rate. Is that possible?

Meanwhile, what is President Biden doing for his part in trying to drive down inflation? Other than not interfering with Fed policy, which he claims is basically all he can do, he is blaming oil executives for the high price of gasoline.

Short of charging them with getting in bed with Vladimir Putin, he's laying the blame for high energy prices on their failure to explore and drill for oil, leaving out his administration's role in basically forbidding them to do just that and putting pressure, through the Fed and other means, not to lend them money in order for them to do so.

You would think Biden would have been happy that they are not drilling for oil, contributing as they are to the blissful carbon-free future he imagines. But he seems to believe he can have it both ways, namely no new oil production and low gas prices. But I guess that’s the same type of logic the Fed is using in trying to convince us it can whip inflation with a few interest rate hikes with little harm to the overall economy.

The market reaction to all this was fairly predictable. Right after the Fed rate announcement was greeted with euphoria on Wednesday, people woke up the next morning and said, “Hey, wait a minute. This can't possibly be true,” and the selling resumed with renewed fervor.

And why not? Can we take any comfort in what the Fed and our government are telling us, which is that after a dozen years of easy money, quantitative easing, artificially low interest rates, and massive fiscal and monetary stimulus, they can undo all that in a year or so without anyone being inconvenienced?

If only it worked that easily. If Powell wanted to be honest, he could have said, “Folks, there will be a lot of pain over the next couple of years to undo all we have done over the past decade, so brace yourselves for it.”

But people don’t want to hear that, especially in an election year. Although the market seems to know better.

Visit back to read my next article!

George Yacik
INO.com Contributor

Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.

Is the Fed Put Kaput?

Posted on by George Yacik

For those new to the game, the "Fed put" is a belief among investors that the Federal Reserve will come to the rescue anytime the stock market drops a certain amount. While much of the belief in the Fed Put is based on wishful thinking, it has proven to be the case enough times over the past 35 years or so that many investors have come to expect it.

Belief in the Fed put dates back to former Fed chair Alan Greenspan, who lowered interest rates and eased monetary policy numerous times during market turmoil, starting with the 1987 stock market crash. Since then, all his successors have followed the same basic policy, from Ben Bernanke to Janet Yellen to Jerome Powell, from the 2001 terrorist attacks to the 2008 global financial crisis to the 2020 coronavirus outbreak.

Of course, nearly all of those examples of the Fed put occurred during periods of benign inflation, when the Fed felt safe lowering interest rates to zero and injecting enormous amounts of money into the economy without fear of igniting price increases. Now, however, we live in a world of 8% inflation, and the Powell Fed has stated quite clearly that battling inflation is Priority No. 1, practically its only mission at the moment.

Indeed, when the S&P 500 fell 18% between reaching its all-time high of 4766 on December 27 through the recent low of 3901 on May 16 (the plunge in NASDAQ was even worse), the Fed sat on its hands, indicating the put is no longer suitable in this environment.

But since then (as of June 8) the S&P has rallied more than 6%. Is that a sign that some market watchers believe the Fed is once again going to exercise its put, or was it merely a dead cat bounce or buying the dip (or whatever you want to call it) on the road to even lower stock prices? Continue reading "Is the Fed Put Kaput?" →

The Fed Giveth, The Fed Taketh Away

Posted on by George Yacik

With the stock market tanking and the Federal Reserve finally starting to raise interest rates and reduce its $9 trillion balance sheet, it's probably a good time to look back and determine how much of the stock market's gains in the past 12 years or so have been built on extremely accommodative Fed monetary policy. That could provide some idea of how much we can expect the market to drop once the Fed has finally stopped the tightening process, and when stocks might start rising again.

Since reaching its all-time high of 16,057 back on November 15, the NASDAQ had dropped nearly 29% as of May 18, when it closed at 11,418. Likewise, the S&P 500 is down nearly 18% since it hit its all-time high on December 27, while the Dow is off more than 13% after reaching its peak on that same day.

Those declines followed several indications from Fed Chair Jerome Powell and other Fed officials that the central bank had finally conceded that inflation wasn't "transitory" after all and that it had to act aggressively before inflation got totally out of control.

The Fed raised its benchmark interest rate by 25 basis points on March 16, its first rate increase since December 2018, and another 50 bps on May 4, its largest increase since May 2000. The Fed's next meeting is scheduled for the middle of next month, at which it is expected to vote for another 50-bp hike, followed by several more by the end of the year. If the Fed raises rates by 50 bps at each of its next five meetings, including the one right before Election Day, that will push its benchmark rate to Continue reading "The Fed Giveth, The Fed Taketh Away" →

Is The Housing Bubble The Next To Burst?

Posted on by George Yacik

With stock prices cratering and bond yields soaring, it’s a fair question to ask if the housing bubble is about to burst, too. After all, home prices have skyrocketed in recent years thanks to artificially low-interest rates engineered by the Federal Reserve, which has kept mortgage rates well below historic levels ever since the 2008 global financial crisis, even well under 4% for most of the past three years. But with the average rate on a 30-year fixed-rate mortgage now at more than 5% and climbing, is the home price boom still sustainable?

According to the National Association of Realtors, the median price of a single-family home has jumped by over $100,000, or more than 39%, to $382,000 in March from $274,000 in 2019. The median principal and interest payment has increased by nearly 50%, to $1,502 from $1,054 three years ago, while the percentage of monthly income the typical mortgage payment eats up has risen to more than 20% from less than 16% in 2019. Likewise, the group’s affordability index, which measures whether a typical family earns enough to qualify for a mortgage, has dropped to 124.0 from nearly 160. While the NAR says the median family income has increased more than 10% to $89,321 from $80,808 during that time, the amount of income needed to qualify for a mortgage to buy a median-priced home has jumped by more than 40%, to more than $72,000.

Now, these NAR figures are as of March, when the average rate on a 30-year mortgage was 4.24%. Since then, that figure has risen by more than 100 basis points, to more than 5.25%.
So, is this a bubble ripe for the popping? Continue reading "Is The Housing Bubble The Next To Burst?" →