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Big changes in inflation and government finances

Today’s data releases brought some real surprises for the market, both good and bad: consumer price inflation in June came in much higher than expected (+0.9% vs. +0.5%) and federal revenues surged. I’ve been predicting higher than expected inflation…

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Today's data releases brought some real surprises for the market, both good and bad: consumer price inflation in June came in much higher than expected (+0.9% vs. +0.5%) and federal revenues surged. 

I've been predicting higher than expected inflation for some time now, so today's numbers were not a surprise to me. The market barely budged, since there appears to be an overwhelming consensus—reinforced by the Fed numerous times—that higher inflation is merely transitory and in fact, welcome, given the Fed's desire to see inflation average well over 2% a year for a few years. I don't see the rationale for these views, however, and I expect to see big changes in market expectations in the next year.

My thesis has been, and continues to be, that the huge increase in M2 that we saw over the past 16 months was initially not worrisome, since the world's demand for M2 money (mostly cash and bank savings deposits) was driven through the roof by the panic and uncertainties generated by the Covid-19 crisis. The peak of the Covid crisis was arguably last November, when successful vaccine trials were announced. Since then new Covid cases have plunged, confidence has soared, and the economy has rebounded sharply, which in turn means that the demand for all that extra money has all but vanished. Unfortunately, the Fed has taken no steps to offset this. This has left the economy with upwards of $3 trillion in unwanted cash (as I have explained in previous posts). Now that prices are surging, the interest rate that the holders of all that cash receive is hugely negative. Who wants to hold $3 trillion in extra cash that is losing purchasing power at the rate of 10% a year? No wonder prices are rising, and they will continue to rise as the public attempts to reduce their money balances in favor of things (e.g., commodities, property, equities) that promise much better returns.

It's simple: The economy is loaded with unwanted cash, and the real (inflation-adjusted) return on that cash (and the real return on almost all fixed-income instruments) is hugely negative. This is an untenable and unsustainable situation which will cause inflation to rise even more. It will only end when the Fed realizes it has made a mistake and starts jacking short-term rates higher, and/or starts draining cash by selling trillions worth of bonds. 

On the bright side, the June Treasury report saw a huge surge in revenues that was largely unexpected. The catastrophic budget deterioration that we saw for the past 16 months now looks to have turned the corner. There is hope for the future! Unless, of course, the Biden administration succeeds in passing another multi-trillion spending lalapaloosa. Fortunately, the likelihood of that is diminishing by the day—in my opinion.

Here's a huge and very under-appreciated fact: an unexpected and significant rise in inflation is a boon to federal finances. Why? Because it creates an "inflation tax." Anyone who owns a Treasury security these days is effectively receiving a negative rate of interest that could be as high as 10% per year. The average yield on Treasuries today is somewhere in the neighborhood of 1 - 1½%. So at the current rate of CPI inflation (almost 10% annualized), Treasury debt is "costing" the government -8 ½ to -9% per year. That is, the real value of the debt is declining by that amount. With debt owed to the public now just over $22 trillion, that's like a gift of roughly $2 trillion per year to the federal government! In the 12 months ending June '21, the federal deficit was $2.6 trillion. This year's inflation tax will pay for about 75% of that. In other words, inflation this year will take about $2 trillion out of the pockets of those owning Treasuries and give it to the federal government. Why bother with raising taxes? (Did I mention that this is the way the Argentine government finances itself?)

So it is with mixed emotions that I detail some of this story with charts:

Chart #1

Chart #1 shows how consumer confidence has surged since late last year. The wild gyrations of confidence in the past year explains why the demand for money rose in the first half of last year and is now falling. The future looks much less scary now, so who needs a ton of money sitting in their bank account earning nothing? 

Chart #2

Chart #2 looks at the ratio of gold to oil prices. This ratio has been remarkably stable—on average—over time, with an ounce of gold buying about 20 barrels of oil. Another thing this chart shows is that the prices of these two very different commodities have tended to rise by about the same amount over time.

Chart #3

As Chart #3 shows, crude oil today costs about $75 a barrel, which is not a lot more than its long-term inflation-adjusted value of $59. Oil arguably is thus a contributing factor to today's rising prices, but not significantly so.

Chart #4

Chart #4 shows the level of the ex-energy version of the Consumer Price Index, plotted on a semi-log scale in order to show that the rate of increase in the prices of goods and services in this basket has been remarkably stable at about 2% per year—until this year, that is. The index so far this year has surged at a 7.4% annualized rate. This cannot be explained away by referring to the fact that prices were soft in the second quarter of last year. We are looking here at an inflation breakout.

Chart #5

Chart #5 shows the 6-mo. annualized change of both the total CPI and the ex-energy version. We haven't seen inflation like this since the period just before the Great Recession. Recall that the Fed tightening needed to rein in that inflation episode was, I would argue, the proximate cause of that recession.

Chart #6

Chart #6 shows the 3-mo. annualized rate of inflation according to the Core CPI (ex-food and energy). This measure of inflation now stands at 10.6%, a level not seen since the early 1980s. 

Chart #7

No matter which sub-index of inflation you look at, prices are surging. Chart #7 shows that 47% of small business owners report seeing a meaningful rise in prices. That's a level we haven't seen since March of 1981, when the U.S. economy was still suffering from double-digit inflation. 

Chart #8

Chart #8 shows the level of real and nominal yields on 5-yr Treasury securities, and the difference between the two (green line) which is the market's expected average rate of inflation over the next 5 years. It's amazing to me that inflation expectations still appear to be relatively tame, despite today's blowout inflation report. 

Chart #9

Chart #9 compares the real yield on 5-yr TIPS to the current real yield on the overnight federal funds rate, which is now much more negative than it has ever been. The real yield on TIPS is equivalent to what the market expects the real fed funds rate to average over the next 5 years. It's nothing less than astonishing that the market calmly expects the real fed funds rate to average -1.8% per year over the next 5 years! Does it make sense for anyone to hold overnight and short-term Treasuries if they are going to generate a significant loss of purchasing power for the next 5 years? This is unsustainable and illogical in my book.  

Chart #10

Chart #10 should warm the cockles of many politicians' hearts. All of these lines represent the rolling 12-month total of Treasury revenues from different sources. Note the spectacular increase in individual income tax receipts and corporate income tax receipts in recent months!

Chart #11

Chart #11 shows the trend of federal spending and revenues. The gap between the two (the deficit) has narrowed in the past few months.

Chart #12

Chart #12 puts federal finances into a proper perspective by measuring each as a % of GDP. Revenues are now coming in at a higher level than the post-war average! Spending is still absurdly high, but declining.

Chart #13

Finally, Chart #13 shows the federal budget deficit as a % of GDP. The deficit soared to an unheard-of level of more than 18% of GDP thanks to trillions of dollars of checks sent out all over the place. The deficit currently is back down to 12% of GDP, which is still absurdly high, but at the rate things are going we should see a further dramatic improvement in the budget outlook in the months to come. 

And don't forget the inflation tax, which doesn't show on any of these charts. It could contribute about $2 trillion—effectively—towards paying down the debt this year alone. 

It's going to be a wild ride for the foreseeable future, but it's difficult to quantify and it's difficult to recommend a course of action. Despite the potentially huge amount of uncertainty we are likely to be facing in the coming months or years, one thing does not recommend itself, and that is holding cash. Cash has traditionally been the best port in a storm, but that is most definitely not the case today, and neither is holding any short- or medium-term Treasury security.

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Homes listed for sale in early June sell for $7,700 more

New Zillow research suggests the spring home shopping season may see a second wave this summer if mortgage rates fall
The post Homes listed for sale in…

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  • A Zillow analysis of 2023 home sales finds homes listed in the first two weeks of June sold for 2.3% more. 
  • The best time to list a home for sale is a month later than it was in 2019, likely driven by mortgage rates.
  • The best time to list can be as early as the second half of February in San Francisco, and as late as the first half of July in New York and Philadelphia. 

Spring home sellers looking to maximize their sale price may want to wait it out and list their home for sale in the first half of June. A new Zillow® analysis of 2023 sales found that homes listed in the first two weeks of June sold for 2.3% more, a $7,700 boost on a typical U.S. home.  

The best time to list consistently had been early May in the years leading up to the pandemic. The shift to June suggests mortgage rates are strongly influencing demand on top of the usual seasonality that brings buyers to the market in the spring. This home-shopping season is poised to follow a similar pattern as that in 2023, with the potential for a second wave if the Federal Reserve lowers interest rates midyear or later. 

The 2.3% sale price premium registered last June followed the first spring in more than 15 years with mortgage rates over 6% on a 30-year fixed-rate loan. The high rates put home buyers on the back foot, and as rates continued upward through May, they were still reassessing and less likely to bid boldly. In June, however, rates pulled back a little from 6.79% to 6.67%, which likely presented an opportunity for determined buyers heading into summer. More buyers understood their market position and could afford to transact, boosting competition and sale prices.

The old logic was that sellers could earn a premium by listing in late spring, when search activity hit its peak. Now, with persistently low inventory, mortgage rate fluctuations make their own seasonality. First-time home buyers who are on the edge of qualifying for a home loan may dip in and out of the market, depending on what’s happening with rates. It is almost certain the Federal Reserve will push back any interest-rate cuts to mid-2024 at the earliest. If mortgage rates follow, that could bring another surge of buyers later this year.

Mortgage rates have been impacting affordability and sale prices since they began rising rapidly two years ago. In 2022, sellers nationwide saw the highest sale premium when they listed their home in late March, right before rates barreled past 5% and continued climbing. 

Zillow’s research finds the best time to list can vary widely by metropolitan area. In 2023, it was as early as the second half of February in San Francisco, and as late as the first half of July in New York. Thirty of the top 35 largest metro areas saw for-sale listings command the highest sale prices between May and early July last year. 

Zillow also found a wide range in the sale price premiums associated with homes listed during those peak periods. At the hottest time of the year in San Jose, homes sold for 5.5% more, a $88,000 boost on a typical home. Meanwhile, homes in San Antonio sold for 1.9% more during that same time period.  

 

Metropolitan Area Best Time to List Price Premium Dollar Boost
United States First half of June 2.3% $7,700
New York, NY First half of July 2.4% $15,500
Los Angeles, CA First half of May 4.1% $39,300
Chicago, IL First half of June 2.8% $8,800
Dallas, TX First half of June 2.5% $9,200
Houston, TX Second half of April 2.0% $6,200
Washington, DC Second half of June 2.2% $12,700
Philadelphia, PA First half of July 2.4% $8,200
Miami, FL First half of June 2.3% $12,900
Atlanta, GA Second half of June 2.3% $8,700
Boston, MA Second half of May 3.5% $23,600
Phoenix, AZ First half of June 3.2% $14,700
San Francisco, CA Second half of February 4.2% $50,300
Riverside, CA First half of May 2.7% $15,600
Detroit, MI First half of July 3.3% $7,900
Seattle, WA First half of June 4.3% $31,500
Minneapolis, MN Second half of May 3.7% $13,400
San Diego, CA Second half of April 3.1% $29,600
Tampa, FL Second half of June 2.1% $8,000
Denver, CO Second half of May 2.9% $16,900
Baltimore, MD First half of July 2.2% $8,200
St. Louis, MO First half of June 2.9% $7,000
Orlando, FL First half of June 2.2% $8,700
Charlotte, NC Second half of May 3.0% $11,000
San Antonio, TX First half of June 1.9% $5,400
Portland, OR Second half of April 2.6% $14,300
Sacramento, CA First half of June 3.2% $17,900
Pittsburgh, PA Second half of June 2.3% $4,700
Cincinnati, OH Second half of April 2.7% $7,500
Austin, TX Second half of May 2.8% $12,600
Las Vegas, NV First half of June 3.4% $14,600
Kansas City, MO Second half of May 2.5% $7,300
Columbus, OH Second half of June 3.3% $10,400
Indianapolis, IN First half of July 3.0% $8,100
Cleveland, OH First half of July  3.4% $7,400
San Jose, CA First half of June 5.5% $88,400

 

The post Homes listed for sale in early June sell for $7,700 more appeared first on Zillow Research.

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Survey Shows Declining Concerns Among Americans About COVID-19

Survey Shows Declining Concerns Among Americans About COVID-19

A new survey reveals that only 20% of Americans view covid-19 as "a major threat"…

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Survey Shows Declining Concerns Among Americans About COVID-19

A new survey reveals that only 20% of Americans view covid-19 as "a major threat" to the health of the US population - a sharp decline from a high of 67% in July 2020.

(SARMDY/Shutterstock)

What's more, the Pew Research Center survey conducted from Feb. 7 to Feb. 11 showed that just 10% of Americans are concerned that they will  catch the disease and require hospitalization.

"This data represents a low ebb of public concern about the virus that reached its height in the summer and fall of 2020, when as many as two-thirds of Americans viewed COVID-19 as a major threat to public health," reads the report, which was published March 7.

According to the survey, half of the participants understand the significance of researchers and healthcare providers in understanding and treating long COVID - however 27% of participants consider this issue less important, while 22% of Americans are unaware of long COVID.

What's more, while Democrats were far more worried than Republicans in the past, that gap has narrowed significantly.

"In the pandemic’s first year, Democrats were routinely about 40 points more likely than Republicans to view the coronavirus as a major threat to the health of the U.S. population. This gap has waned as overall levels of concern have fallen," reads the report.

More via the Epoch Times;

The survey found that three in ten Democrats under 50 have received an updated COVID-19 vaccine, compared with 66 percent of Democrats ages 65 and older.

Moreover, 66 percent of Democrats ages 65 and older have received the updated COVID-19 vaccine, while only 24 percent of Republicans ages 65 and older have done so.

“This 42-point partisan gap is much wider now than at other points since the start of the outbreak. For instance, in August 2021, 93 percent of older Democrats and 78 percent of older Republicans said they had received all the shots needed to be fully vaccinated (a 15-point gap),” it noted.

COVID-19 No Longer an Emergency

The U.S. Centers for Disease Control and Prevention (CDC) recently issued its updated recommendations for the virus, which no longer require people to stay home for five days after testing positive for COVID-19.

The updated guidance recommends that people who contracted a respiratory virus stay home, and they can resume normal activities when their symptoms improve overall and their fever subsides for 24 hours without medication.

“We still must use the commonsense solutions we know work to protect ourselves and others from serious illness from respiratory viruses, this includes vaccination, treatment, and staying home when we get sick,” CDC director Dr. Mandy Cohen said in a statement.

The CDC said that while the virus remains a threat, it is now less likely to cause severe illness because of widespread immunity and improved tools to prevent and treat the disease.

Importantly, states and countries that have already adjusted recommended isolation times have not seen increased hospitalizations or deaths related to COVID-19,” it stated.

The federal government suspended its free at-home COVID-19 test program on March 8, according to a website set up by the government, following a decrease in COVID-19-related hospitalizations.

According to the CDC, hospitalization rates for COVID-19 and influenza diseases remain “elevated” but are decreasing in some parts of the United States.

Tyler Durden Sun, 03/10/2024 - 22:45

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Rand Paul Teases Senate GOP Leader Run – Musk Says “I Would Support”

Rand Paul Teases Senate GOP Leader Run – Musk Says "I Would Support"

Republican Kentucky Senator Rand Paul on Friday hinted that he may jump…

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Rand Paul Teases Senate GOP Leader Run - Musk Says "I Would Support"

Republican Kentucky Senator Rand Paul on Friday hinted that he may jump into the race to become the next Senate GOP leader, and Elon Musk was quick to support the idea. Republicans must find a successor for periodically malfunctioning Mitch McConnell, who recently announced he'll step down in November, though intending to keep his Senate seat until his term ends in January 2027, when he'd be within weeks of turning 86. 

So far, the announced field consists of two quintessential establishment types: John Cornyn of Texas and John Thune of South Dakota. While John Barrasso's name had been thrown around as one of "The Three Johns" considered top contenders, the Wyoming senator on Tuesday said he'll instead seek the number two slot as party whip. 

Paul used X to tease his potential bid for the position which -- if the GOP takes back the upper chamber in November -- could graduate from Minority Leader to Majority Leader. He started by telling his 5.1 million followers he'd had lots of people asking him about his interest in running...

...then followed up with a poll in which he predictably annihilated Cornyn and Thune, taking a 96% share as of Friday night, with the other two below 2% each. 

Elon Musk was quick to back the idea of Paul as GOP leader, while daring Cornyn and Thune to follow Paul's lead by throwing their names out for consideration by the Twitter-verse X-verse. 

Paul has been a stalwart opponent of security-state mass surveillance, foreign interventionism -- to include shoveling billions of dollars into the proxy war in Ukraine -- and out-of-control spending in general. He demonstrated the latter passion on the Senate floor this week as he ridiculed the latest kick-the-can spending package:   

In February, Paul used Senate rules to force his colleagues into a grueling Super Bowl weekend of votes, as he worked to derail a $95 billion foreign aid bill. "I think we should stay here as long as it takes,” said Paul. “If it takes a week or a month, I’ll force them to stay here to discuss why they think the border of Ukraine is more important than the US border.”

Don't expect a Majority Leader Paul to ditch the filibuster -- he's been a hardy user of the legislative delay tactic. In 2013, he spoke for 13 hours to fight the nomination of John Brennan as CIA director. In 2015, he orated for 10-and-a-half-hours to oppose extension of the Patriot Act

Rand Paul amid his 10 1/2 hour filibuster in 2015

Among the general public, Paul is probably best known as Capitol Hill's chief tormentor of Dr. Anthony Fauci, who was director of the National Institute of Allergy and Infectious Disease during the Covid-19 pandemic. Paul says the evidence indicates the virus emerged from China's Wuhan Institute of Virology. He's accused Fauci and other members of the US government public health apparatus of evading questions about their funding of the Chinese lab's "gain of function" research, which takes natural viruses and morphs them into something more dangerous. Paul has pointedly said that Fauci committed perjury in congressional hearings and that he belongs in jail "without question."   

Musk is neither the only nor the first noteworthy figure to back Paul for party leader. Just hours after McConnell announced his upcoming step-down from leadership, independent 2024 presidential candidate Robert F. Kennedy, Jr voiced his support: 

In a testament to the extent to which the establishment recoils at the libertarian-minded Paul, mainstream media outlets -- which have been quick to report on other developments in the majority leader race -- pretended not to notice that Paul had signaled his interest in the job. More than 24 hours after Paul's test-the-waters tweet-fest began, not a single major outlet had brought it to the attention of their audience. 

That may be his strongest endorsement yet. 

Tyler Durden Sun, 03/10/2024 - 20:25

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