Month: June 2022

A day after Fed Chair Powell crowed once again how the US economy was strong enough to cope with his hawkish rate-hike cycle (and President Biden told the world this morning that the US economy is the strongest in the world), the Atlanta Fed just stole the jam out of everyone’s donut by confirming the recession has started.

If you were curious why bond yields are plunging and rate-hike expectations are falling, then here’s your answer, courtesy of the Atlanta Fed, which just confirmed the economy is in technical recession.

I may be the only person besides Jay Powell who believes we are not going to have a recession. At least i hope Jay thinks that way!

— Jim Cramer (@jimcramer) June 3, 2022

The continued erosion in economic data has prompted The Atlanta Fed to slash its forecast for Q2 GDP growth from 0.0% to -1.0%+0.9% to 0.0%, meaning the US is now right on the verge of a technical recession (after Q1’s contraction).

According to the Atlanta Fed’s GDPNow model estimate for real GDP, growth in the second quarter of 2022 has been cut to a contractionary -1.0%, down from 0.0% on June 15, down from +0.9% on June 6, down from 1.3% on June 1, and down from 1.9% on May 27.

As the AtlantaFed notes, “The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2022 is -1.0 percent on June 30, down from 0.3 percent on June 27. After recent releases from the US Bureau of Economic Analysis and the US Census Bureau, the nowcasts of second-quarter real personal consumption expenditures growth and real gross private domestic investment growth decreased from 2.7 percent and -8.1 percent, respectively, to 1.7 percent and -13.2 percent, respectively, while the nowcast of the contribution of the change in real net exports to second-quarter GDP growth increased from -0.11 percentage points to 0.35 percentage points.”

In short: the US consumer is getting tapped out, just as we have been warning repeatedly.

Which also fits with Jamie Dimon’s recent “downgrade” of the economy from “storm clouds” to “hurricane”… and also makes some sense given the recent collapse in macro data relative to expectations…

And longer-term, the trend towards stagflation could not be clearer…

And this is increasingly problematic for The Fed, as the market is now betting Powell and his pals won’t get close to hiking as much as they hope…

And in fact the market is now expecting rate-cuts to start in Q1 2023…

Meaning The Fed is now hiking rates into a recession…

Today https://t.co/MmfB76vWpB

— zerohedge (@zerohedge) June 30, 2022

…and the market is already pricing in more than 3 rate-cuts to address that recession.

Get back to work Mr.Powell.

Shares in German gas and power utility Uniper crashed, plunging as much as a fifth on Thursday after the company slashed its outlook and sought a possible bailout from the German government after Russia reduced natural gas deliveries to Europe, according to Financial Times. 

Uniper said earnings before interest and taxes would be “significantly below” previous years, considering it only received 40% of the NatGas from Russia’s Gazprom PJSC.

The recent decline in NatGas flows to Europe forced Gazprom’s largest customer into covering purchases in spot markets at a massive premium versus its long-term NatGas contracts. At the same time, Berlin has capped the prices it charges households and businesses to control inflation, resulting in the utility losing tens of millions of euros a day (RBC and Citigroup analysts estimate the utility is losing 30 million euros per day) — and the risk of the utility company imploding. 

Bloomberg’s Javier Blas said Uniper’s NatGas losses could be a staggering 11 billion euros on a yearly basis if it has to continue buying on the spot market. He then pointed out that contagion risks could be emerging as other utilities are likely doing the same. 

One number to consider. Uniper probably is paying currently ~€30 million extra for the gas it’s buying in the spot market. Multiply that for 365 days: ~€11 billion. And that’s one single European utility. Now think about other big buyers of Russian gas. And start multiplying. https://t.co/6hKzinI7Pw

— Javier Blas (@JavierBlas) June 30, 2022

“Uniper currently procures substitution volumes at significantly higher prices,” Uniper said Wednesday, adding that since it “cannot yet pass on these additional costs, this results in significant financial burdens.”

The Economy Ministry confirmed that Berlin and Uniper are discussing “stabilization measures.” Uniper also said talks were underway with the government to secure liquidity which could include “equity investments” and an increase of a 2 billion euro credit facility with state-owned KfW bank. 

News that Uniper is in dire straits sent shares down as much as 23% to five-year lows. 

German Economy Minister Robert Habeck recently warned that declining NatGas from Russia could trigger a Lehman Brothers-like moment. 

Since mid-June, Gazprom reduced NatGas deliveries through Nord Stream to Europe by 40% and blamed the decline on Canadian sanctions over the war in Ukraine, preventing German partner Siemens Energy from delivering critical overhauled equipment for a compressor station on the pipeline. The crunch is also impacting France, Italy, and Austria as NatGas prices have jumped more than 40% in the past two weeks. 

John Musk, an analyst at RBC Europe Ltd., said the focus would be on contagion and if “other utilities with gas supply exposure” will be affected by the supply crunch. 

The situation may worsen when Nord Stream halts Nord Stream flows for ten days in July for planned maintenance. There are mounting concerns Russia might not resume the pipeline to full capacity after the outage. 

Habeck said last week Germany should prepare for further cuts. Europe’s largest economy has declared the second “alarm stage” of its NatGas-emergency plan, allowing utility companies to pass on higher power prices to industry and households to curb demand. 

“Europe should be ready in case Russian gas is completely cut off,” IEA head Fatih Birol told FT News last week. 

Authored by Charles Hugh Smith via OfTwoMinds blog,

Putting this all together, it’s clear that the source of the current housing bubble is the explosion of financial speculation fueled by central bank policies.

Those benefiting from speculative bubbles have powerful incentives to deny the bubble can bust. Rationalizations abound as bubbles inflate, and the continued ascent of speculative bets seems to “prove” the rationalizations are correct.

But bubbles arise from speculative excesses, and once these reach extremes and reverse, bubbles burst and all the self-serving rationalizations are revealed as rationalizations.

Let’s start with some caveats I’ve already covered in Is Housing a Bubble That’s About to Crash? (May 2, 2022):

1. Housing is local, so there may be locales where prices are still rising due to unquenchable demand and low supply and other places where demand is low and supply ample where prices plummet.

2. The wealthiest 1% on a global scale is a very large number, and wealthy buyers seeking a safe haven in North America come with cash and don’t care about mortgage rates. Desirable enclaves could see home prices climb even as the national bubble pops. (World population: 7.8 billion X 1% = 78,000.000 or roughly 30,000,000 households.)

3. Wealthy investors are holding a large number of dwellings off the market as investments. These empty units consequentially reduce the supply in desirable locales, and create an artificial scarcity that would not exist if central banks hadn’t inflated the Everything Bubble.

4. The number of homes bought by corporations has soared. This has driven demand in many markets, but if rents dive due to recession, corporate buyers become corporate sellers.

With those caveats out of the way, let’s look at the foundation of home ownership for the bottom 95%: income and mortgage rates. As mortgage rates rise, more income must be devoted to the monthly payment. If household income lags the increase in housing prices, price eventually exceed what the bottom 95% can afford once mortgage rates rise.

The first chart below is the national Case-Shiller Index. 

Note that housing prices have soared 63.6% since the previous housing bubble peak in 2007, outpacing inflation (up 41%) and median household income (up 34%), the second chart.

The third chart shows mortgage rates have broken out of a 37-year downtrend. It is noteworthy that mortgage rates were in the 7% to 8% range in previous economic booms (late 1960s, the 1990s) but now 6% mortgages are considered the end of the world. That suggests a dependence on cheap money / low rates is the primary support of the current bubble rather than an organic economic expansion such as we enjoyed in the 1990s.

Courtesy of my colleague CH at Econimica, the next three charts shed light on housing fundamentals. The first Econimica chart shows the rate of growth in population, employment and housing units. The U.S. population increased by a scant 1.5 million since 2019, the number of employed was flat and the number of housing units increased by 2.8 million.

The second Econimica chart shows the Fed Funds Rate (FFR), the staggering increase of mortgage-backed securities purchased by the Federal Reserve to keep mortgage rates low (from zero to $2.7 trillion), declining rate of population growth year-over-year and the remarkable rise in the number of housing units under construction.

The third Econimica chart shows housing units per capita (per person), which has reached the same level as the previous housing bubble peak in 2007-08.

As CH observed: “Housing units (per capita) against US population should suggest not a shortage of housing units but a surplus of dollars with which to buy them.”

Putting this all together, it’s clear that the source of the current housing bubble is the explosion of financial speculation fueled by central bank policies. Housing prices that far exceed the growth of household incomes are not sustainable, and neither are housing prices that rose solely on the basis of unprecedentedly low mortgage rates.

It’s also clear that those with access to the (temporary) wealth created by central banks’ trillions in new credit have poured many of these “free money” trillions into housing globally as a hedge against inflation, a safe-haven investment or for corporations, for rental income. All of these factors exacerbate an artificial demand and equally artificial scarcity.

As I’ve noted in the past, bubbles typically manifest a symmetry in their ascent and decline. All the gains are eventually reversed, and if the system is destabilized by the bubble bust, then prices drop far below previous lows.

Setting aside rationalizations in favor of fundamentals, the housing bubble’s bust is already baked in.

*  *  *

My new book is now available at a 10% discount this month: When You Can’t Go On: Burnout, Reckoning and Renewal. If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com.

At the same time as it give the Biden admin a token victory by overturning Trump’s “remain in Mexico” rule, the US Supreme Court also struck a major blow to Biden’s fight against climate change, when in a landmark ruling, the SCOTUS also curbed the ability of America’s top environmental regulator to limit greenhouse gas emissions.

In a majority opinion authored by chief justice John Roberts, the justices ruled that in the latest example of Democratic overreach, the Environmental Protection Agency was not specifically authorized by Congress to reduce carbon emissions when it was set up in 1970. The ruling leaves the Biden administration dependent on passing legislation if it wants to implement sweeping regulations to curb emissions.

The opinion from the court’s conservative majority said that “a decision of such magnitude and consequence rests with Congress itself, or an agency acting pursuant to a clear delegation from that representative body”. The justices added they doubted Congress intended to delegate the question of “how much coal-based generation there should be over the coming decades, to any administrative agency”.

The dissenting opinion authored by justice Elena Kagan and joined by the court’s other two liberal justices said the EPA had the authority to regulate “stationary sources” of polluting substances that are harmful to the public, adding that curbing the output of greenhouse gas emissions was “a necessary part of any effective approach for addressing climate change”. In other words, the usual green tripe that has sent the country to the edge of a hyperinflationary commodity disaster.

“This Court has obstructed EPA’s effort from the beginning,” Kagan wrote. “The limits the majority now puts on EPA’s authority fly in the face of the statute Congress wrote.”

As the FT reports, at the heart of the case is a disagreement over how broadly the EPA should be allowed to interpret portions of the 1970 Clean Air Act, particularly the sections that direct the EPA to develop emissions limitations for power plants.

Dubbed West Virginia vs EPA, the case was brought by a host of Republican attorneys-general and the coal industry. Their argument centres on a regulation that never took effect: an Obama-era proposal known as the Clean Power Plan, which would have mandated that power plants make 32 per cent reductions in emissions below 2005 levels by 2030. The Supreme Court ordered that rule to be suspended in 2016.

That rule was later torn up by the Trump administration in favor of its Affordable Clean Energy rule, designed to support the coal industry. The Trump administration’s regulation, however, was struck down by the US Court of Appeals for the DC Circuit last year.

Challenging the lower court’s reversal of Trump’s rule at the Supreme Court, West Virginia has argued that the Obama-era Clean Power Plan relied on an overly broad interpretation of the Clean Air Act and gave the EPA excessive and “industry transforming” power.

West Virginia argued that the lower court’s interpretation of the law granted the EPA “unbridled power” to issue significant rules that would reshape the US electricity grid and decarbonise sectors of the economy. It said the EPA should only have very limited authority to regulate emissions inside “the fence line” of power plants, and cannot apply broader industry-wide measures like carbon credit trading or biomass co-firing.

Defending the case, Biden’s EPA has said that nothing in the Clean Air Act makes a distinction between inside the fence line measures and broader, industry-wide regulatory measures. It added that West Virginia’s “real concern” was that the agency might introduce some elements of Obama’s Clean Power Plan into a future rule. But the EPA said that the Supreme Court is not authorised to issue an advisory opinion on the types of measures a future rule could contain.

Dick Durbin, the Democratic whip in the Senate, predictably said the decision was “a dangerous step backwards and threatens our air and our planet”, adding it “sets a troubling precedent both for what it means to protect public health and the authority regulatory agencies have to protect public health”.

What he means is that the US may once again be on the path to becoming self-sufficient in energy, and not peddling money to corrupt “green” lobbies and interests.

The ruling by the court’s conservative majority is the latest in a string of dramatic decisions that have challenged established legal precedents, including the recent reversal of Roe vs Wade. Last week, it also struck down a century-old New York state law requiring an individual to show “proper cause” to carry a concealed gun in public, deeming the statute unconstitutional. The court on Monday also ruled in favour of a former high school coach dismissed for praying at football games, fuelling the fraught debate on the separation of church and state.

Authored by Tom Ozimek via The Epoch Times (emphasis ours),

The Biden administration said it has signed a new agreement with Pfizer and partner BioNTech for 105 million doses of their COVID-19 vaccine for a fall vaccination campaign, with the deal worth $3.2 billion.

The contract includes doses for both adults and children, as well as supplies of a retooled Omicron-adapted vaccine that is currently pending approval by federal health authorities, the Department of Health and Human Services (HHS) said in a statement.

“We look forward to taking delivery of these new variant-specific vaccines and working with state and local health departments, pharmacies, health care providers, federally qualified health centers, and other partners to make them available in communities around the country this fall,” said HHS Assistant Secretary for Preparedness and Response Dawn O’Connell.

Pharmaceutical firms have been developing vaccines for the Omicron variant that the Centers for Disease Control and Prevention (CDC) says is the dominant strain in the United States.

“This agreement will provide additional doses for U.S. residents and help cope with the next COVID-19 wave. Pending regulatory authorization, it will also include an Omicron-adapted vaccine, which we believe is important to address the rapidly spreading Omicron variant,” Sean Marett, Chief Business and Chief Commercial Officer of BioNTech, said in a statement.

The Food and Drug Administration (FDA) is expected to issue a decision in the coming days following a Tuesday meeting in which external advisers recommended modifying the vaccines to better target Omicron.

Under the new Pfizer contract, the U.S. government has the option to buy an additional 195 million doses, bringing the total up to 300 million, HHS said.

“Over the past 18 months, we have procured and delivered more than 750 million doses of COVID-19 vaccine nationwide, contributing to two-thirds of American adults being fully vaccinated,” O’Connell said.

Read more here…

Just when investors were hoping for a month- and quarter-end rebalancing uptick in stocks after the carnage of the last few months, US equity markets are ending the first half of the year on an ugly note with Nasdaq leading the charge lower…

And recession fears have sent the 10Y Yield back below 3.00% for the first time since June 10th’s CPI print…

Interestingly, rate-hike expectations are fading and subsequent rate-cut expectations are rising…

But for now it appears stocks are more worried about The Fed driving us into recession than the post-recession easing and QE rebound.