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Authored by Steve Cortes via American Greatness,

The current confluence of economic conundrums elevates risks massively for the prosperity of Americans, especially those of modest means.

These unprecedented, concurring economic contradictions flow directly from the dire mistakes of the 2020 virus panic.

The seismic policy errors of the lockdown era have since been exacerbated by Joe Biden and aligned collaborationist Republicans, to create an economic cauldron into the end of 2023.

What are these conundrums?

1. Interest Rates surging into a slowing economy.

2. Energy prices soaring despite China and other Emerging Markets decelerating.

3. U.S. Housing prices rising in the face of plunging Mortgage demand.

Conundrum #1: Rate Rise as Economy Slows

On that first point, just last week, the Federal Reserve roiled capital markets by warning about the need to keep interest rates higher for longer to fight persistent inflation. But soon, even that volatility will likely seem tame by comparison.

In normal economic cycles, interest rates rise anticipating that fast economic growth triggers a shortage of capital and/or high demand for loans. But in this present quagmire, none of those typical dynamics exist.

Since the lockdowns, the “15 days to slow the spread” announcement from the White House and Fauci in March of 2020, benchmark 10 Year Treasury yields have screamed higher, from 0.80% then to 4.50% last week, the highest level since 2007.

But simultaneously, signs of economic slowdown proliferate. For example, the best gauge for production, the ISM Manufacturing PMI, has now registered 10 straight months in contraction, recessionary mode, which is below 50 on that index. See this 5-year chart:

Source: TradingEconomics.com

Consumers reflect that factory weakness, too. Though consumer confidence has bounced a bit in recent weeks, it still sits below the worst levels of the lockdown depths of the spring of 2020. In fact, the gold-standard consumer confidence survey from the University of Michigan recently hit the lowest levels of all-time, in an index that goes back to the 1970s. Similarly, credit card losses just hit the worst levels since the Great Financial Crisis of 2008, as stressed borrowers cannot make even minimum payments, per a Goldman Sachs report.

Yet, interest rates charge higher anyway. Why?

The answers all flow from the policy disasters that began with the virus panic. The unscientific and largely illegal lockdowns were temporarily “financed” by taking the U.S. to unprecedented post-WWII levels of spending and borrowing. Throwing money at people to stay home and businesses that were forced to shutter resulted in runaway debt, rocket-ship inflation, plus a systemic level of fraud thrown in, to boot.

Those giant mistakes were only amplified once Biden took office. Rather than taming this insane fiscal profligacy, Biden and his willing GOP allies on the Hill, like Mitch McConnell, simply pretend that the crisis-level binge can continue, and even accelerate.

So, instead of policy and inflation normalizing, the deficit doubled this year vs. last year. Even the biased Washington Post took note, with an alarming article and this graphic:

Source: Washington Post

This path is totally unsustainable. In the prior era of low rates and monetary repression from the Fed, large deficits seemed manageable. No longer. The costs now of financing this ballooning debt will quite literally impoverish our children.

Conundrum #2: Oil Soars While China Slides

For years now, China has been the foremost driver of global oil prices. Its smokestack economy is far more petroleum-centered than America’s. In addition, unlike the U.S., China lacks the kind of vast natural energy resources to meet industrial demand from domestic drilling.

But in recent quarters, a notable and new disconnect emerges – Crude Oil explodes higher even as China tanks.

Look at the price trajectory of Crude since the March 2020 “15 days” propaganda. Black Gold more than doubled and now sits just above $90, threatening last year’s painful highs:

Source: CQG

But, conversely, the capital markets outlook for China falls apart, as evidenced by FXI, the primary vehicle for U.S. investors to trade Chinese shares. It is an ETF (exchange traded fund) basket of Chinese stocks:

Source: CQG

So, what gives? Well, the inflation that was sparked by the 2020 fiscal orgy sent Oil and all commodities to the moon, as inflation protection assets. Then, adding to that crisis, Biden’s war on American energy made production here in “Saudi America” more difficult. Simultaneously, rising rates in the U.S. create a massive headache for Chinese government-run industries, which are heavily indebted in U.S. Dollars. Hence…another conundrum.

Conundrum #3: Housing Prices High Even as Mortgage Demand Tanks

Given sky-high interest rates and an embattled consumer, naturally mortgage demand falls off a cliff. In fact, mortgage applications have now plunged at the worst clip in almost 30 years.

Here is Joel Kan, chief economist from the Mortgage Bankers Association assessing the present desert of demand: “Mortgage applications decreased for the seventh time in eight weeks, reaching the lowest level since 1996.” He further predicted: “Given how high rates are right now, there continues to be minimal refinance activity and a reduced incentive for homeowners to sell and buy a new home at a higher rate.”

But…despite this collapse in mortgage applications and approvals, home prices remain very elevated. In fact, comparing present prices to levels before the virus panic, St. Louis Fed numbers show a median priced U.S. home rose from $313,000 in the beginning of 2019 to $416,000 today. One would suspect that trouble for potential buyers would compel lower home prices, but no such luck for would-be homeowners.

As a result, housing affordability melts down to the worst levels ever, as I outlined in my previous article on this particular economic enigma.

Conundrum to Cauldron

Taken alone, any one of these three crises listed above can derail an economy.

All three put together, that confluence creates an economic cauldron.

Our country and our movement, therefore, need to get serious immediately about fiscal sanity. Deficits matter again, in spades. We also need to fully unleash American energy, eliminate hurdles to housing construction, and seal the border to raise the wages of American citizens. The economic clock is ticking…time for action.

Authored by Charles Hugh Smith via OfTwoMinds blog,

Does anyone really believe that the renunciation of massive, sustained stimulus of speculation in housing would leave housing valuations unchanged because valuations are solely the result of “shortages”?

Let’s begin by stipulating that speculation (i.e. gambling) is part of human nature. The role of regulations and policy is to limit the damage that gambling inevitably inflicts when “sure things” cliff-dive into losses.

In other words, where the speculative frenzy and money flows matters. When the South Sea Bubble expanded circa 1713-1720, this flood tide of speculative capital did not distort the cost of shelter and bread in England; it was limited to a purely financial marketplace of shares in the company. When the bubble imploded in 1720, the losses fell mostly on wealthy investors like Isaac Newton.

The same can be said of the speculative mania of the dot-com era: the bubble and collapse were limited to the tech sector and those participating in the sector and the speculative frenzy. The cost of rent and bread did not double due to the speculative bubble’s inflation or bursting.

In contrast, when speculation floods into shelter / housing, it fatally distorts the cost of housing non-speculators must pay. I say fatally because shelter, along with food, energy and water (the FEW resources), are essential to life. These are not discretionary things we can decide not to have. When the price of essentials soars due to speculation that only rewards the speculators at the expense of non-speculators, the fuse of social disorder is lit.

Anyone who believes policies that encourage the wealthy to hoard housing to the point that the bottom 80% (or the bottom 95% in some areas) cannot afford to buy a home are just peachy is overdosing Delusionol. The social consequences are severe and uncontainable once the worm turns.

Exhibit #1 in Shelter Becoming a Speculative Asset is a modest house in the San Francisco Bay Area that sold for $135,000 in mid-1996. By modest I mean small, old, and on a small lot in a neighborhood of other small lots and homes. (A screenshot of the Zillow history is below.)

Today the home’s value is estimated to be about ten times higher: $1.35 million. Let’s do some basic math to understand just how distorted this market has become.

The median household income in 1996 was about $39,000. For a house costing $135,000, this represents 3.5 ratio of income to housing, well within the traditional ratio of 4 to 1 (4 X income = cost of the home).

Median household income has almost doubled to $75,000, roughly in line with inflation according to the Bureau of Labor Statistics. According to the BLS, the house that cost $135,000 in July 1996 would now cost $264,000 when adjusted for inflation, and the $39,000 median income would be $76,000.

Let’s say the house appreciated above the rate of inflation to $300,000 today. That’s still within the 4 to 1 ratio of income to house cost (4 X $75,000 = $300,000.) So even though the house rose 2.2X in cost, it would still be affordable to a median household.

At a value of $1.35 million, a household would need to make $337,500 annually–an income that is in the top 5% of households–to buy the house today. In other words, an income that is 4.5 times the median household income is the minimum needed to buy this modest house.

The house is now worth 4.5 times what it would have been worth if it had appreciated well above inflation.

The conventional argument holds that this four-fold increase in housing costs is due solely to a shortage of housing. Let’s consider some data before concluding this is the only dynamic in play.

Chart #1: Case Shiller housing index: this chart shows two massive housing bubbles in the past 20 years.

Chart #2: Federal Reserve’s purchases of mortgage backed securities (MBS) to goose the housing market. The “housing shortage” argument claims the unprecedented Fed purchases of trillions of dollars of MBS is not correlated to the housing bubble, but this claim makes no sense: dropping mortgage rates to unprecedented lows while soaking up trillions of dollars in securitized mortgages was like injecting speculative crack cocaine into the housing market. Gosh, how did we survive without the Fed buying $2.5 trillion in mortgages?

Chart #3: the current housing bubble compared to the 2000-2006 housing bubble: today’s bubble is even more extreme than housing bubble #1.

Chart #4: housing per capita (per person) has reached a new high: if there’s such a severe shortage of housing, how can the housing per capita be at an all-time high? Population rose 4 million in the past 4 years while 5 million housing units were added–plus a pig-in-a-python of housing in the pipeline.

Chart #5: household net worth is $50 trillion above trend, the direct result of massive monetary and fiscal stimulus. Tens of trillions of dollars were borrowed into existence and pumped into so-called risk assets–assets such as housing that the wealthy buy for speculative appreciation.

Chart #6: total debt–private and public–soared from $20 trillion in 1996 to $95 trillion now. Is it merely coincidental that this is $55 trillion above the trendline of inflation, which would have placed total debt at $40 trillion today?

Chart #7: net worth of the top 1% households, which soared from 23% of all net worth to 32%: this 9% gain in the percentage of all household net worth represents a gain of $14 trillion above and beyond the $28.7 trillion in gains registered by the 23% they owned in 1990.

1990 total net worth: $21 trillion, 23% = $4.8 trillion; 2023 total net worth: $146 trillion, 23% = $33.5 trillion; $33.5 trillion – $4.8 trillion = $28.7 trillion.

This unprecedented bubble in housing valuations is due not to shortages but to decades of massive financial stimulus that incentivized speculative capital to flood into housing as a low-risk way to skim stupendous gains for creating zero gains in productivity. If you doubt this, then run this scenario and tell us what happens:

The Fed dumps its entire portfolio of mortgage backed securities and stipulates it will never buy any again. It also renounces all the other stimulus gimmicks that incentivized expansions of debt and speculation.

Does anyone really believe that the renunciation of massive, sustained stimulus of speculation in housing would leave housing valuations unchanged because valuations are solely the result of “shortages”? If so, there’s a little shack under the Brooklyn Bridge I’ll let you have for a couple of million. I’m sure the Airbnb rent will mint you millions.

*  *  *

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Orange juice futures have surged to record highs as stockpiles in the US tumble to a half-century low due to Florida citrus groves battered by years of disease and hurricanes. It’s a perfect storm hitting the OJ market, as supermarket prices have risen this year. Fortunately, suppliers have ramped up imports from Brazil to mitigate sliding US inventories. 

Bloomberg cites new data from the US Department of Agriculture that shows frozen orange juice concentrate fell to 235.5 million pounds by the end of August. This marks the lowest level since December 1968 and comes as Florida’s 2022-23 season is the weakest since the 1936-37 harvest. As a result, OJ futures have tripled in the last several years, nearing $3 per pound. 

“Low stocks and a dim outlook for future output from Florida and Brazil have also driven up futures prices to record highs in September,” Bloomberg said. 

In July, industry group CitrusBR said exports of orange juice from Brazil to the US jumped 55% for the 12 months ended in June. This means more Americans than ever are drinking OJ from Florida Brazil. 

“Even if the next Florida crop shows some slight recovery, production levels are already set to be very low,” said Ibiapaba Netto, executive director at CitrusBR. 

Breakfast lovers can’t catch a break after two years of food inflation. 

Authored by Leighton Woodhouse via Public Substack,

There is no victory in this war. There are only bad and worse outcomes…

Last February, as Russia’s invasion of Ukraine entered its second year, President Biden visited Poland and pledged the United States’ eternal support for the Ukrainian military. “Our support for Ukraine will not waver,” Biden declared. “NATO will not be divided, and we will not tire.”

A few days before, Vice President Kamala Harris had made the same promise. “The United States will support Ukraine for as long as it takes,” she told an audience in Germany. “We will not waver.”

“If Putin thinks he can wait us out, he is badly mistaken,” the Vice President went on.

“Time is not on his side.”

But that’s not what the United States’ top military officer appears to believe. Two weeks ago, Chairman of the Joint Chiefs of Staff Mark Milley told the BBC that the vaunted Ukrainian counteroffensive has only until the autumn weather turns, and the cold and the rain impede the maneuverability of Ukrainian forces, to achieve its goals. Time is running out for the Ukrainian army’s best and perhaps only chance at driving the Russians out of Crimea and the Donbas region.

For months, analysts and media pundits hyped the Ukrainian counteroffensive as the campaign that could finally turn the momentum of the war against Russia. “This assault could turn the tide of the battle for Ukraine, just as the Allied assault on the Normandy beaches altered the trajectory of World War II,” trumpeted Washington Post columnist David Ignatius. The counteroffensive would “achieve significant breakthroughs and accomplish much more than most analysts are predicting,” former General David Petraeus told Washington Post columnist Max Boot. Russian forces may “collapse over broad areas,” Petraeus further speculated.

Privately, the Biden administration was less optimistic. A top secret intelligence document leaked on Discord anticipated only “modest territorial gains” by the Ukrainian army. That bleak prognostication appears to be materializing. Ukraine has thus far failed to break through Russia’s defenses, and U.S. intelligence agencies do not expect the Ukrainian army to capture Melitopol — a key objective of the counteroffensive, as doing so would put the Ukrainian army in a position to cut off the land bridge to Crimea, severing Russia’s supply lines. 

In his BBC interview, Milley insisted that the counteroffensive is making “very steady progress,” a talking point that Secretary of State Antony Blinken has also recited. And indeed, late last month, the Ukrainian army punctured the first of Russia’s three defensive layers in Southern Ukraine. But even the best-case scenario, described to The Economist by a Defense Intelligence Agency official, doesn’t put Ukrainian soldiers past the third line of defense until the end of the year, deep into the season Milley expects to stymie Ukrainian progress, and with winter around the corner.

Even if, by some extraordinary turn of events, the counteroffensive broke through Russia’s defenses this year, Ukrainian forces would likely be so depleted as to be in no position to push beyond that point and take back Crimea. For months, the Ukrainian government has struggled to conscript troops, as fighting-age men have hidden from recruitment officers, bribed them, or simply ignored summonses. In January, rates of desertion and disobedience among Ukrainian soldiers forced President Zelensky to sign a bill increasing prison sentences to a decade or longer. Though Russia, too, is facing similar problems, it has a larger population to draw on.

If the counteroffensive fails and Russia maintains control of Crimea, the only way Ukraine could prevail over the long term would be with NATO troops directly in combat — a suicidal situation that would invite a global nuclear confrontation. And even then, a victory for Ukraine that comes years rather than weeks from now could come at the price of the total destruction of the entire country.

In interviews, Ukrainians have characterized the counteroffensive as a “disappointment.”

“I want the price they paid to be reasonable,” the wife of a combat veteran told The Washington Post in August.

“Otherwise it’s just useless, what they went through.”

Her husband, who lost a leg to a landmine, told the Post that soldiers on the frontline are unprepared and unmotivated. Another Kyiv resident said that new soldiers last just two to three days on the front.

And yet, the Biden administration is pushing for another $24 billion aid package for Ukraine. “There’s no alternative,” President Biden said about continued financing of the war.

Ukraine is turning into the proxy version of Afghanistan or Iraq: an endless conflict in which victory is always around the corner, in which the Pentagon and the defense industry push for escalation after escalation regardless of the reality on the ground, in which deaths mount and a country is destroyed only to end in defeat or a Pyrrhic victory years later, once enough American voters have had their fill of war.

But Biden is wrong: there is an alternative. It’s time to stop backing Ukraine and force an end to the war.

…

There is no happy ending to this conflict.

A combination of Russian aggression and Western recklessness has destroyed Ukraine’s brief experiment in independence.

If the current counteroffensive fails, as it seems likely to, there will be no good options for the country. Either Ukraine will be partitioned now under one peace treaty, or it will be partitioned in the future under another, and only after many more people have died and a great deal more destruction has been wrought on Ukraine’s infrastructure and economy. In either case, the country will revert back to its centuries-long struggle for national unification, with Russia playing its old historical role as the enemy of that project. This is the price Ukrainians will pay for peace, a price that both Russia and the United States have imposed on them. But the cost of further war will be much greater.

No fair-minded person is happy about these grim prospects for Ukraine. But as one of the two countries capable of ending the conflict, it’s time for the United States to take stock of reality and accept that there is no winning this war. Our generals, our diplomats, and the American elite will be the last to accept this. Left to their own devices, they will allow the fighting to go on forever. It’s time we force them to make a different choice.

Subscribers can read the full substack here…

Only five days ago, the Mayor of Eagle Pass, Texas issued an emergency order due to a huge influx of illegal immigrants crossing into the US from Mexico, and only a few days after that the latest border numbers revealed record migrant crossings in 2023 (over 2.2 million so far).  Despite the multitude of warnings since Joe Biden entered the White House, there has been no discernible effort on the part of the federal government to stop the tide. 

In fact, more and more evidence suggests the Biden Administration is deliberately thwarting all efforts to secure the southern border while consistently lying about their intentions. 

Case in point, Biden fought to end Title 42, which was the only legal recourse keeping abuse of the asylum option in check.  Biden has filed a lawsuit asking courts to stop Texas efforts to fence off the Rio Grande with bright orange razor wire buoys, which have proven very effective.  Biden and Democrats have tried to stop Texas Governor Greg Abbott from relocating migrants to blue leaning “sanctuary cities” (they’ve been given a taste of their own medicine and they don’t like it).  Biden has ordered border patrol agents to “process” illegal immigrants for asylum status, instead of using their energies to send them packing back across the border.  And, Biden has ordered those same agents to open border fences against the wishes of state governments so that migrants can easily pass through.

Now, it appears the White House is taking things a step further, ordering border patrol to cut barbed wire fences put in place by Texas DPS as the only effective means for preventing mass migrations. They are actively welcoming in large groups of illegals and opening a path for them.

Eagle Pass, Texas just moments ago:

Under Biden’s direction, Customs and Border Protection cuts Texas DPS barbwire barrier keeping out the hordes of illegals.

Invasion by design. pic.twitter.com/XDBWSRFEsE

— Charlie Kirk (@charliekirk11) September 25, 2023

There has been a clear dereliction of duty when it comes to Biden and his actions on the border.  It is also obvious that his relocation of more border agents and national guard to the region is meant to keep migrants moving into the US while preventing state governments from establishing any form of protection.  What happens next is predictable – A massive surge in third world population, even beyond what the US has witnessed so far, followed by rising crime, rising economic instability, rising poverty and a rising homeless population.  

Unless state governments and the public step in, the crisis will only expand. 

With US debt issuance now in openly exponential mode, as the Trasury just added $100 billion in debt in just the past 5 business days after the US federal debt surpassed $33 trillion for the first time ever…

One week later: total US Debt surpasses $33.1 trillion for the first time. That’s $100 billion in 5 business days. https://t.co/tOrhqmkFXL pic.twitter.com/YqtJ522a0H

— zerohedge (@zerohedge) September 25, 2023

… moments ago the US did what it does so well and it issued another $48 billion in 2Y paper (the largest such offering since April 2022), in what was a well-received auction.

The first coupon auction of the week priced at a high yield of 5.085%, higher than last month’s 5.028% and the highest since the 5.09% yield of the July 2006 auction. Also, notably, the offering priced on the screws with the When Issued which also traded at 5.085% ahead of the pricing.

The bid to cover of 2.728 was less impressive, dropping from 2.942 in August and the lowest since April.

The internals were in line with last month, with Indirects awarded 65.02%, unchanged from the 65.01% in August, and with Directs taking down 20.99%, or just above last month’s 20.01%, Dealers were left holding 13.99%, below the 14.98% in August and also below the 16.7% six-auction average.

Overall, this was a solid, if not stellar 2Y auction, which in light of another concession day (2Y yields pushed higher along with the entire curve all day), was not surprising. After all, in a year or so, when the US is in a deep recession, many will be wishing they had another opportunity to lock in 2Y interest above 5%.

Authored by Michael Maharrey via SchiffGold.com,

Americans are worried about a looming credit crunch. That’s a big problem for an economy that runs on credit cards.

One of the reasons for economic optimism you’ll hear bandied about out there in the mainstream is “the American consumer is strong” and consumer spending is “holding up” despite price inflation. But nobody seems to ask an important question: how have Americans been able to continue spending?

The answer is credit cards.

So, what’s going to happen when consumers finally max out the plastic?

We may be getting close to that point, and many people are worried that they aren’t going to be able to borrow the money they need to keep spending.

As prices skyrocketed last year, Americans blew through their savings to make ends meet. Aggregate savings peaked at $2.1 trillion in August 2021. As of June, the San Francisco Fed estimated that aggregate savings had dropped to $190 billion.

In other words, Americans ate away $1.9 trillion in savings in just two years.

Then they turned to credit cards.

Americans used stimulus money to pay down credit card debt during the pandemic. Americans owed a little over $1 trillion in revolving debt when the pandemic began. It fell below that level in 2020 thanks to an 11.2% drop. We saw small upticks in credit card balances in February and March of 2021 as the recovery began, with a sharp drop in April when another round of stimulus checks rolled out. But Americans started borrowing in earnest again in May 2021. Since then, we’ve seen a relatively steady increase in revolving debt.

As of the end of July, Americans owed $1.27 trillion in revolving credit.

The bigger problem is the double whammy of rising debt and rising interest rates. Average credit card interest rates eclipsed the previous record high of 17.87% months ago. The average annual percentage rate (APR) currently stands at 20.71%.

As a result, more and more Americans are struggling to pay their credit card balances.

Now there is another looming problem. It’s getting harder for Americans to borrow money.

And that has them worried.

Nearly 60% of the respondents in a New York Fed consumer expectations survey said it’s harder to get credit cards, mortgages and other loans than it was a year ago. It was the highest level since the New York Fed started the data series back in 2013.

Another Fed survey of loan officers reveals their fears aren’t unfounded. Banks reported that lending standards tightened across all consumer loan categories and all categories of residential real estate (RRE) loans. Meanwhile, the number of banks reporting tighter standards for credit cards rose by 36%.

Banks have also significantly tightened standards for business loans.

This is a recipe for disaster.

We have an economy that runs on debt and borrowing. Debt has become much more expensive with rising interest rates and it’s getting harder to get loans. Meanwhile, more and more Americans are maxing out their credit cards, and they are starting to have trouble paying the bills.

It seems likely that at some point in the near future, the tidal wave of debt is going to drown the “resilient American consumer” and the American economy is going to plunge over a cliff.

The mainstream narrative is that the economy is fine because consumers are still spending despite high price inflation and rising interest rates. But nothing about this is fine.

The underlying assumption is that Americans wouldn’t keep spending if they were really in trouble. But I think a lot of people are spending on credit cards precisely because they are in trouble. They don’t have a choice.

A JD Power analyst made this very point.

The pandemic-era savings cushions are gone, the economy is shaky and consumers are leaning more heavily than ever on their credit cards to cover day-to-day expenses. Consumers are using their cards for a lot of everyday purchases. Grocery shopping is the lead purchase type that consumers say they are making.”

Even the mainstream is starting to recognize this isn’t a sustainable trajectory. Bloomberg reported, “Despite persistent inflation and high interest rates, consumer spending has remained resilient and helped power the economy. Some have resorted to credit cards and savings to do so, but with savings shrinking and delinquencies on the rise, some economists doubt the current spending momentum is sustainable.”

It’s not.

Americans have managed to kick the can down the road using credit cards and accumulated savings. The question is how much road is left?