Is The Fed REALLY Tightening? The Monetary Shell Game (Hint: M1 Money Growing at 8-10% YoY)

The Federal Reservc Open Market Committee (FOMC) has “tightened” the Fed Funds Target rate twice since December 2015. One in December 2015 and once in December 2016.

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Well, 75 basis points is hardly “tight.” But what about The Fed’s asset purchases? The Fed ended their third round of asset purchases in October 2014.  While QE expansion has stoppped (for the moment), The Fed’s balance sheet is being reduced very slowly. Hardly monetary tightening, but not loosening either.

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But if we look at a third measure of monetary easing, M1 money supply, it is growing at a rapid rate.

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M1 money is growing at around 8-10% YoY. M1 includes funds that are readily accessible for spending. M1 consists of: (1) currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions; (2) traveler’s checks of nonbank issuers; (3) demand deposits; and (4) other checkable deposits (OCDs), which consist primarily of negotiable order of withdrawal (NOW) accounts at depository institutions and credit union share draft accounts. Seasonally adjusted M1 is calculated by summing currency, traveler’s checks, demand deposits, and OCDs, each seasonally adjusted separately.

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So while The Fed Funds Target rate is slowly risening and Fed asset purchases have curtailed, M1 Money Stock continues to grow at an unpredented rate YoY since the end of The Great Recession in June 2009.

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The M1 Money Multiplier remains below 1 thanks to The Fed’s easing efforts. An M1 Money Multiplier of less than 1 means that every dollar created by the FED (an increase in the monetary base M0) will result in a <1 dollar increase of the money supply (M1). So, the credit and deposit creation of commercial banks is limited in this case. The banks are still holding on to a lot of excess reserves.

At least Excess Reserves of Depository Institutions has been falling since August 2014.

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It is a shame that while M1 money grows at 8-10% YoY, average hourly earnings for 84% of the population are growing at only 2.5% YoY.

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So while The Fed signals monetary “tightening,” check the third cup to find the EXPANSION pea!

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Case-Shiller Home Price Index Hits All-time High! (Despite Record Low Wage Recovery After A Recession)

What an incredible “recovery” from The Great Recession!

The Case-Shiller 20 Metro home price index hit an all-time high!

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Despite home price growth YoY of 5.10% being over 2x average hourly earnings growth for production and non-supervisory workers of 2.40%.

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The WORST wage recovery from a recession since 1965.

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The big loser? The Big Apple!!

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Seattle is the biggest winner, followed by Portland.

Foreign investors and super low interest rates make for unaffordable housing for 82% of the population.

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But the cheap money does make a nice gift for current homeowners!!!

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Core CPI At/Above Fed’s 2% Target For 13th Straight Month (Shelter Inflation At 3.5% YoY)

The inflation figures are out for November and they show core inflation has been at or above The Fed’s 2% target for 13 straight months.

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Yes, 13 straight months of 2% or more core inflation.

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While 2.1% core inflation (and declining) seems impressive, the 3.5% inflation rate for shelter (aka, housing) is not welcome. Particularly when hourly earnings growth for 82% of the population is only 2.36% YoY.

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Is this the “affordable housing policy” I have heard of eminating from Washington DC?

For all the criticism of Trump’s pick for HUD Secretary (Neurosurgeon Ben Carson), bear in mind that current HUD Secretary Julian Castro had no relevant experience either.  But Castro does have a nice smile!

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Dollar Climbs to Strongest Since 2003 As Real Earnings Growth Continues To Decline To Lowest Since Jan ’15

The US Dollar continues to strengthen while real earnings growth continues to decline.

(Bloomberg) The dollar climbed to the highest level since 2003 against the euro as the prospect of a steeper path for U.S. interest rates next year filtered through markets. European bank stocks climbed while bonds and gold slumped.

The greenback extended its advance against major and emerging-market peers after the Federal Reserve’s first and only interest-rate hike of 2016 was accompanied with a signal of three increases next year. European banks rallied to near an 11-month high on bets that higher rates will make lending more profitable, while a measure of stock volatility in the region fell to a two-year low. U.S. 10-year yields reached the highest level in more than two years, while 30-year bunds led a decline in German securities. China’s 10-year benchmark headed for its biggest one-day increase and gold fell to a 10-month low.

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The Fed’s move has added to speculation of a shift away from global central-bank policy and toward fiscal stimulus that has helped fuel a rally in stocks and rout in global bonds since the election of Donald Trump in November. Still, the U.S. central bank stands largely alone in actively tightening policy, boosting the dollar against its peers. The Bank of England kept its key rate at a record low Thursday, mirroring moves by policy makers in Norway, South Korea and Switzerland. The European Central Bank last week extended quantitative easing through 2017, depressing the euro.

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Real earnings growth? Falling like a paralyzed eagle.

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I wonder if the “animal spirits” will be trapped by The Fed’s continued rate increases?

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Remember, The Fed and Janet Yellen are likely to do their dance and continue raising rates during 2017.

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US Treasury 10Y Term Premium Turns Positive For First Time Since Sept ’15

At last, the US Treasury 10 year TERM PREMIUM has turned positive!

(Bloomberg) The term premium for 10-year Treasuries, which shows the extra compensation investors demand to hold the notes instead of a series of shorter-maturity obligations, climbed to 0.24 percent as of Dec. 12, the highest since September 2015. The measure has increased along with all other U.S. yields since Donald Trump’s election as president. After being positive for most of the past five decades, it had turned negative this year as traders wagered that the world would be stuck with slow economic growth and stubbornly low inflation.

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According to The Adrian Crump & Moench 10 Year Treasury Term Premium, it skyrocketed and turned positive when Trump was elected President on November 8th.

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Does it mean the the “low interest” party bus is ending?

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Now waiting for The Fed’s annoucement at 2pm EST, the least surprising financial news release of the century.

 

 

US Treasury 10Y-2Y Yield Curve Surges To Highest Level Since December 7, 2015 (Break-even Rate Rises Above 2%)

The US Treasury 10 year- 2 year yield curve slope surged to its highest level since December 7, 2015.

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The yield spread between 10-year U.S. Treasury bonds and similar-maturity Treasury Inflation Protected Securities, or TIPS, climbed above 2 percentage points Thursday for the first time since 2014. Known as the break-even rate, the measure reflects investor expectations for average annual consumer-price gains over the next decade. Inflation expectations have soared on bets that Donald Trump’s policies will fast-track economic growth, while the Federal Reserve’s preferred gauge of price pressures — at about 1.7 percent — is closing in on the bank’s 2 percent target.

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Now that we have at least one measure that the US has 2% inflation, should The Fed “team” be celebrating?

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I don’t think the worst wage/earnings recovery from a recession since LBJ is any reason to celebrate.

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“Duke” Mnuchin Strikes Again! Suggests 50-100 Year US Treasuries (Drops A Duration Bomb)

The US has a staggering amount of Treasury debt outstanding that has doubled in size (actually up 105% since October 2008).

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And as interest rates rise, the US Treasury will have to figure out how to refinance the debt as it matures.

In an interview on CNBC Wednesday, Steven Mnuchin said about the current mix of U.S. debt issuance: “we’ll look at potentially extending the maturity of the debt because eventually we are going to have higher interest rates and that is something this country is going to need to deal with.”

Prodded further, he indicated that he may look at issuing debt that doesn’t come due for as long at 50 or 100 years, among other options, a much more distant maturity than the longest-term 30-year bond that’s currently outstanding.

So, Treasury Secretary in waiting, Steven “Duke” Mnuchin is following the UK and France’s model of 50 year sovereign debt.

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His suggestion was brought on my rising Treasury rates that could literally break the back (and fiscal budget) of the Federal government.

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So, longer duration bond issuance from Treasury? Duke Mnuchin just dropped a bomb on Treasury investors.

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