Month: March 2022

30 Year fixed mortgage rates have jumped 160bp this year, reaching the highest since November 2018, with the latest Freddie Mac data showing an acceleration in mortgage rates which jumped a quarter point in just the past week, from 4.42% to 4.67%. This is an even bigger increase than we discussed in our recent Housing comment.

And while the benchmark 10y Treasury yield has also risen, the increase is “only” 94bp. In other words, there has also been a significant widening in mortgage spreads, by 66bp to 243bp. This could be explained by the Fed’s accelerated pivot from QE to QT, the latter of which we expect will be announced at the next FOMC meeting in May.

As discussed one week ago in “Housing Affordability Is About To Crash The Most On Record“, the move higher in rates means that an already record affordability shock will be even worse! As a reminder, we looked at the NAR affordability index and found that the 4.22% on average rate through mid-March, would lead to a record affordability decline of more than -25% yoy. Refreshing the data, Bank of America finds that the decline now looks closer to -30% yoy.

Unfortunately, that’s only the beginning: according to BofA economist Alex Lin, it will probably be even worse than that given the considerable momentum behind home prices, which actually picked up to begin this year with Case-Shiller national home prices accelerating 1.6% mom and 19.2% yoy in January. This move would bring the level of affordability to the lowest since 2007, when the housing bubble was bursting. In other words, not only is housing affordability about to plunge at the fastest rate in history, it will also drop to the lowest rate on record, making housing an asset class which just a select group of US households can afford.

What does this shock mean for actual home prices, sales and – ultimately – the coming recession?

According to Lin, housing affordability tends to lead the trajectory of existing home sales by about half a year. For illustrative purposes, we can draw up a scenario where the existing home sales trajectory matches affordability. This would suggest existing home sales falls below a 4.4mn SAAR pace by September, averaging 5.26mn SAAR over the first 9 months of 2022. That said, the relationship between affordability and existing home sales is imprecise. As a result, this is probably more of a bear case than the base case.

The hit to affordability will likely be only one part of the picture. Another major reason for existing home sales to pullback will be because of the mortgage rate “lock-in” effect. Remember that existing home sales is a measure of housing turnover and will partially reflect owner-occupied households trading up, down, or moving regions. It is likely that the overwhelming majority of these households are paying a much lower mortgage rate than the current market rate, which provides a huge disincentive to move. As a result, demand and supply would head lower.

There are signs of this buyer/seller base already withdrawing: according to the NAR existing home sales data, the share of buyers that were previous homeowners slid to 35% in February from 42% in January. Meanwhile, current existing home inventories are already at record lows with months supply SA at 1.9 and actual levels at 966k units.

That said, there will be positive offsets for the existing home sales trajectory. The move higher in rates could lead to a pull forward in demand, which could underpin near-term sales. The pandemic has also led to a shift towards remote-work, which could help facilitate migration from high-cost areas to low-cost areas where homeownership is more affordable.

In addition, and this is debatable, BofA notes that household balance sheets are the strongest they’ve ever been with net worth surging to 809% of disposable income, and debt service ratios running near historically low levels (we would counter that applies predominantly to the top 5% who have uniquely benefited from the surge in asset prices; the rest of US households – not so much).  Labor markets are booming as well, with job growth averaging nearly 600k over the last 6 months alongside accelerating wage growth. Finally, there are demographic tailwinds with Millennials now in their prime home-buying years.

Authored by James Rickards via DailyReckoning.com,

All wars are full of lies.

Winston Churchill famously said, “In wartime, truth is so precious that she should always be attended by a bodyguard of lies.”

We accept that idea broadly. Secret invasion plans should be closely held. The identities of spies must be kept under wraps. New weapons and defensive tools should not be revealed because enemies will be alerted to their potential and begin offensive workarounds.

Still, just because the government has legitimate reasons to deceive the public in wartime does not mean that citizens don’t have a duty to find the truth to the extent they can.

The Russian-Ukraine kinetic war and the broader U.S.-Russian economic war are full of more lies than any public events I’ve seen in my lifetime including Vietnam, Watergate and the Iraq War.

That’s how big the lies are.

The Bodyguard of Lies

Here’s the official U.S. narrative as echoed by the mainstream media: Russia’s invasion of Ukraine was unprovoked, Putin’s three-day blitzkrieg of Kyiv has failed, Russian forces are bogged down and valiant Ukrainian troops are putting up a powerful defense and regaining lost ground with the help of weapons from NATO.

In this version, President Zelenskyy is the new Churchill rallying patriots against an evil dictator. All of that is either entirely or mostly false.

Here’s the real story: Russia’s invasion is the end result of 14 years of provocation by the West, including repeated declarations that Ukraine will join NATO and a U.S.-backed coup d’état in 2014 that displaced a pro-Russian president.

Russia never planned a blitzkrieg on Kyiv. That’s a Western invention intended to make Putin look like a failure. In fact, Russia is slowly and methodically taking territory in the south and east of Ukraine in order to control the seacoasts, eliminate pro-fascist elements in Mariupol and establish pro-Russian autonomous zones in Donbas.

Churchill? Really?

A full assault on Kyiv, if it ever comes, is last on the list. Ukraine may reoccupy a village here and there, but they’re losing ground in Kherson, Mykolaiv, Melitopol, Mariupol, Kharkiv, Luhansk, Donetsk and surrounding areas.

Moreover, Zelenskyy is no Churchill.

He’s succeeded in presenting himself as a strong wartime leader, standing up to the big, bad Putin. But in reality, he’s a corrupt oligarch with millions of dollars hidden offshore. His acting skills have enhanced his propaganda efforts, but it doesn’t take much training to see how phony he is.

Innocent civilians, including women and children, are dying under his failed leadership and inability to come to terms with Putin before the invasion began. In a nutshell, Zelenskyy bet on support from Biden and the West and lost.

There is ample evidence from numerous sources to support this analysis. Some of the best sources come from Switzerland, where military experts are infuriated that traditional Swiss neutrality has been cast aside.

Most tellingly, Pentagon leaks say the same thing. The story from inside the Pentagon is that Putin is not acting recklessly but is being patient and methodical. It also says that, despite some civilian casualties, Putin is actually using a restrained approach. Furthermore, there are no signs he is preparing for the use of chemical or biological weapons.

So what about the economic sanctions? Are they working?

The Most Severe Sanctions in History

Payments in and out of Russia have been blocked. The Central Bank of Russia has been banned from the global dollar payments systems. The same is true for the 10 largest Russian banks and a long list of oligarchs and Russian government officials.

Accounts of Russian targets in Western banks have been frozen. Exports of critical technology and high-tech equipment to Russia have been banned. U.S. and European airspace has been closed to Russian airlines.

Secondary sanctions have been imposed so that if another nation like China sells goods to Russia made with U.S. technology or machines, that nation will be punished also. The list goes on.

Economic sanctions of these kinds sound powerful when they’re announced and do have some impact. But in the long run they never work. In the end, the costs are real but the effects of the sanctions are nil. It’s a lose-lose proposition.

Sanctions Against Oligarchs Are Doing Putin a Favor

Some losses are incurred by those whose accounts are frozen or whose businesses are handicapped. A few Russian oligarchs may lose their yachts, but guess what? Putin doesn’t like the oligarchs anyway.

We’re actually doing Putin a favor by clipping the oligarchs’ wings. Putin’s power comes from the military and security services, not the oligarchs.

Tellingly, the strategic goals that justified the sanctions are never achieved. At most, they are slowed down temporarily. It’s just a matter of time before the affected parties devise workarounds to the sanctions.

The bottom line is Russia has not stood still. Russian exports of critical strategic metals such as nickel, titanium, palladium and aluminum have been cut off. Russian (and Ukrainian) wheat and other grains have also been cut off.

This will result in starvation in certain parts of the world and massive food price inflation everywhere. Given the extent of these sanctions and the retaliation, the damage to world trade, supply chains and even the availability of goods will be massive.

But what about the strategic aims of the sanctions?

Sanctions Won’t Stop the Ukrainian War

Here, the sanctions are a complete failure. They have had zero impact on Russian advances on the battlefield and Russian goals in Ukraine. In fact, Putin has proved to be a master chess player as he runs rings around the sanctions.

When the U.S. imposed sanctions on Russian banks, the value of the ruble collapsed. Still, oil and natural gas exports from Russia were allowed because Europe is dependent on them and the world is facing an energy shortage independent of the war in Ukraine.

Oil and natural gas are paid for in dollars. In a masterpiece of judo, Putin is now demanding that Russian oil and natural gas bought by states imposing sanctions be paid for in rubles. This mystified many. If Russia needs dollars (they do), why be paid in rubles?

The answer is that the only way for Europe to get rubles quickly is to buy them from the Central Bank of Russia using dollars. Under Putin’s plan, Russia still gets the dollars, still sells oil and natural gas but he has the added benefit of making rubles stronger because Europe has to buy them to pay for the energy exports.

Cutting off Russian exports of oil and natural gas is pointless because Russia will just sell the same energy to China and India. But the price will go up. It’s a world market, after all.

Putin’s Many Moves Ahead of Biden

This is how judo works. You use your enemy’s power against him by avoiding the main attack and turning the tables. Putin’s a judo expert in real life and he just demonstrated that he can practice it in economic warfare. The West will now be engaged in propping up the ruble after they did so much to destroy it.

Putin thinks many moves ahead on the chessboard while Biden is playing pin the tail on the donkey, blindfolded.

Sanctions ultimately harm everyday citizens and consumers most. Inflation is surging in Russia and the United States because of the sanctions. But the pain on the American people has only begun. It’s about to get much worse.

U.S. consumers and investors will suffer as prices soar, growth lags and stocks collapse.

This is all unpleasant news for Western warmongers. But it’s critical for investors to know what’s actually going on so they don’t lose money in the chaos to come.

The best information is that the war in Ukraine will last longer than most expect, will produce supply chain disruptions and will amplify the inflation that’s already present.

In the end, Putin will prevail in Ukraine, while the Ukrainian people and Western consumers will pay the heaviest price.

We’re guessing inflation isn’t going to be as much of an issue for JP Morgan CEO Jamie Dimon as it has been for much of the American middle class. That’s what a cool $56 million payday can do for you, we guess…

The JPM boss just took home about $56 million of JPMorgan Chase & Co.’s stock, before taxes, as part of an incentive program that the bank had put into place just three years ago, according to a new report from Bloomberg.

JPM’s stock was valued at about half of what it is now, at the time the plan was set up. 

Dimon took home 398,708 shares last week, the report says, as a result of an award he was given in January 2019. When it was put into place, the award was made up of 243,697 shares, but at the time the company said it could rise by as much as 50% if the company hit performance milestones. 

For Dimon, it was a more than 10% increase from his prior year’s award, which was worth about $51 million last March. It was the biggest part of his compensation package for his work in 2018. Again, there’s nothing quite like being able to outpace record inflation…

Joe Evangelisti, a JPMorgan spokesman, told Bloomberg: “This is highly restricted performance-based compensation granted and reported three years ago.”

The package will do well to help support Dimon’s $2 billion net worth. And hey, if you’re struggling at home with inflation yourself, here’s a feather in your cap: Dimon didn’t get to keep all of the $56 million; more than half of the shares were withheld last week for taxes, Bloomberg wrote. 

Nothing like sticking it to the man!

By Mark Solomon of Freight Waves

Effective this Sunday, the U.S. Postal Service will implement two parcel-delivery surcharges that will make it costlier for high-volume shippers to move their bigger packages.

A “dimensional noncompliance” fee of $1.50 per piece will be levied on parcels that are tendered without any dimensions appearing on the shipper manifest. A similar fee will apply for parcels that are tendered with dimensional information and either exceed 22 inches in length on the parcel’s longest side or are 1 cubic foot in volume. 

The fees are designed to compensate the Postal Service for the time and resources spent measuring a package, as well as for the expense of handling an outsized shipment that can’t be run through a conveyor.

Under a separate “nonstandard” fee, the Postal Service will impose a $4 per-piece surcharge on parcels with lengths that exceed 22 inches but are capped at 30 inches. That fee would be replaced by a $15 per-piece levy should a parcel exceed 30 inches. An additional $15 per-piece surcharge would then be tacked on for parcels that are denser than 2 cubic feet.

The two $15 per-piece fees would be added to the $1.50 per-piece noncompliance fee, meaning that shippers of parcels of certain lengths and densities could pay $31.50 in combined surcharges for each package, in addition to the base shipping rate.

The dimensional noncompliance fee will apply to all commercial shipments tendered to the Postal Service. The nonstandard fee will apply to the quasi-governmental agency’s Postal Parcel Select, Priority Mail and Express Priority Mail products. High-volume postal shippers are major users of the three products. Surcharges would not apply to a Priority Mail Express shipment if the shipper is being charged a flat rate for the product.

The Postal Service will be measuring the exterior of the box to determine dimensions. Like other parcel-delivery providers, the Postal Service uses sophisticated dimensioning technology to properly calculate length and density. It is nearly impossible for shippers to submit inaccurate dimension specifications without the carriers catching them. 

Approximately 1% to 2% of all parcels tendered to the Postal Service have characteristics that expose them to the surcharges, according to estimates from consultancy Shippo.

Most large shippers have preset dimension rules in their technical processes that ensure that box sizes and weights conform with carrier requirements.The surcharges were originally set to take effect Jan. 9. However, the Postal Regulatory Commission, an independent agency that must approve changes in postal rates and surcharges, delayed the implementation by nearly three months to give the marketplace time to adjust.

Private sector companies like FedEx Corp., and DHL eCommerce the e-commerce unit of German transport and logistics giant Deutsche Post DHL, have imposed similar surcharges for years. Surcharges on outsized shipments are designed to offset the costs of processing packages that can’t be conveyed and must be manually handled. It is also seen as an effort by carriers to discourage the tender of such shipments, which compromise the efficiency of their operations. 

A US Navy surveillance plane crashed Wednesday evening off the Virginia coast. Two people were rescued, and one person died. 

Lt. Cmdr. Rob Myers, a public affairs officer with Naval Air Force Atlantic, told local news WAVY the E-2D Advanced Hawkeye was on a routine exercise when it crashed around 1930 ET. 

Myers said three people were on board during the time of the incident. Two were seriously injured and were rescued, while a third was found dead inside the plane. 

The Coast Guard told Fox News that the surveillance plane, used for battle management command and control, went down in the Chincoteague Bay near Wildcat Marsh, about 29 miles south of Ocean City, Maryland. 

Civilian military plane observers published the erratic flight path of the plane before crashing.

The Navy told WAVY the incident is under investigation. There are no details on why the plane crashed. 

Rep. Elaine Luria, D-Va., tweeted she is “continuing to monitor the Navy plane crash in Accomack County. I’m keeping our naval aviators, their families, and our first responders in my thoughts and prayers tonight as rescue and recovery efforts continue.”

Another US military plane crashed in an exercise just weeks ago in Norway, killing four Marines. The MV-22B Osprey participated in a NATO drill (unrelated to the conflict in Ukraine) when it went down.