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Research: The Fed will huff and puff and blow your house down as it begins quantitative tightening

Quantitative easing (QE) has become synonymous with the COVID-19 pandemic as the blowout from the lockdowns stalled the growth of the global economy and…

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1 year ago

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Quantitative easing (QE) has become synonymous with the COVID-19 pandemic as the blowout from the lockdowns stalled the growth of the global economy and threatened to turn into a financial crisis.

To artificially create economic growth, central banks began buying up government bonds and other securities, while governments began expanding the money supply by printing more money.

This was felt the most in the U.S., where the Federal Reserve increased the rate of dollars in circulation by a record 27% between 2020 and 2021. The Fed’s balance sheet reached around $8.89 trillion at the end of August 2022, an increase of over 106% from its $4.31 trillion size in March 2020.

None of this, however, managed to deter a financial crisis. Fueled by the ongoing war in Ukraine, the current crisis is slowly gearing up to become a full-blown recession.

To mitigate the consequences of its ineffective QE policies, the Federal Reserve has embarked on a quantitative tightening (QT) spree. Also called balance sheet normalization, QT is a monetary policy that reduces the Fed’s monetary reserves by selling government bonds. Removing Treasurys from its cash balances removes liquidity from the financial market and, in theory, curbs inflation.

Graph showing the total assets held by the Federal Reserve from 2005 to 2022 (Source: Board of Governors of the Federal Reserve System)

In May this year, the Fed announced that it would begin QT and raise the federal funds rate. Between June 2022 and June 2023, the Fed plans on letting around $1 trillion worth of securities mature without reinvestment. Jerome Powell, the Chairman of the Federal Reserve, estimated this would equal one 25-basis-point rate hike in how it would affect the economy. At the time, the cap was set at $30 billion per month for Treasurys and $17.5 billion for mortgage-backed securities (MBS) for the first three months.

However, increasingly worrying inflation has pushed the Fed to double its shrinking pace for September, increasing it from $47.5 billion to $95 billion. This means that we can expect $35 billion in mortgage-based securities to be offloaded in a month. And while the market seems more worried about Treasurys, offloading the mortgage-backed securities could be what actually triggers a recession.

The dangers of the Fed unloading mortgage-backed securities

While mortgage-backed securities (MBS) have been a significant part of the financial market in the U.S. for decades, it wasn’t until the 2007 financial crisis that the general public became aware of this financial instrument.

A mortgage-backed security is an asset-backed security that’s backed by a collection of mortgages. They’re created by aggregating a similar group of mortgages from a single bank and then sold to groups that package them together into a security that investors can buy. These securities were considered a sound investment before the 2007 financial crisis, as unlike bonds which paid out quarterly or semi-annual coupons, mortgage-backed securities paid out monthly.

Following the collapse of the housing market in 2007 and the subsequent financial crisis, MBS became too tainted for private sector investors. To keep interest rates stable and prevent further collapse, the Federal Reserve stepped in as a buyer of last resort and added $1 trillion in MBS to its balance sheet. This continued until 2017 when it started letting some of its mortgage bonds expire.

The 2020 pandemic forced the Fed to go on another buying spree, adding billions in MBS to its portfolio to inject cash into an economy struggling with lockdowns. With inflation now soaring, the Fed is embarking on another offloading spree to keep rising prices at bay.

In addition to allowing them to expire, the Fed is also selling the mortgage-backed securities in its portfolio to private investors. When private investors buy these mortgage bonds, it pulls cash out of the overall economy — and should (at least in theory) help the Fed achieve exactly what it set out to do.

However, the chances of the Fed’s plan actually working are decreasing every day.

While offloading $35 billion in MBS every month might look like it’s curbing inflation in the short term, it could have a detrimental effect on the already struggling housing market.

Since the beginning of the year, mortgage rates have increased from 3% to 5.25%. The jump to 3% from a 2.75% fixed interest rate was enough to raise red flags for many. A jump to 5.25% and the potential to increase even higher means that hundreds of thousands of people could be pushed out of the housing market. The gravity of this problem becomes clearer when looking at it as a percentage increase, and not as an absolute number — interest rates have gone up 75% since the beginning of the year.

With mortgage payments 75% higher, the market could see many people defaulting on their payments and their homes in danger of foreclosure. If mass foreclosures like the ones we’ve seen in 2007 do happen, the U.S. housing market could be flooded with a fresh supply of houses.

Data from the National Association of Homebuilders (NAHB) shows that the monthly supply of single-family homes and condos in the U.S. has been on the rise since 2021. The NAHB Housing Market Index, which rates the relative level of single-family home sales, has been decreasing significantly since the beginning of the year, entering its eighth straight month of decline.

fed us home supply
Graph showing the inverted NAHB Housing Market Index compared to the monthly supply of single-family homes and condos in the U.S. (Source: @JeffWeniger)

According to data from the National Association of Realtors, housing affordability in the U.S. has reached its 2005 levels, suggesting that housing prices could peak just as they did in 2006.

fed housing affordability
Graph showing housing affordability from 1981 to 2022 (Source: The National Association of Realtors)

Redfin and Zillow, the two largest real estate brokerages in the U.S., saw their share price drop 79% and 46% since the beginning of the year. The trouble that’s been brewing in the housing market since last summer shows that the “soft landing” the Fed is trying to achieve with QT will be anything but soft. With more and more market conditions lining up almost perfectly with the conditions seen in 2006, a new housing crisis could be waiting around the corner. In its attempt to stabilize the financial market, the Fed could inadvertently destabilize the housing one.

The effects a housing crisis and a recession could have on the crypto market are hard to predict. Previous market downturns have dragged cryptocurrencies down with them, but the digital asset market managed to recover more quickly than its traditional counterparts.

We could see the crypto market taking another hit in the event of a full-blown recession. However, currency devaluation could push more people to look for alternative “hard assets” — and find what they’re looking for in crypto.

The post Research: The Fed will huff and puff and blow your house down as it begins quantitative tightening appeared first on CryptoSlate.

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The metaverse is real: Zuck’s ‘incredible’ photorealistic tech wows crypto twitter

Often roasted for his metaverse tech demos, Zuckerberg appears to have blown away internet users with his latest avatar tech.
While…

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29 mins ago

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September 28, 2023

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Often roasted for his metaverse tech demos, Zuckerberg appears to have blown away internet users with his latest avatar tech.

While critics have been busy writing eulogies for Meta’s metaverse dream over the last few years, Mark Zuckerberg’s latest demonstration of its photorealistic avatars shows it could be pretty far from dead after all.

Appearing on a Sept. 28 episode of the Lex Fridman podcast, Zuckerberg and the popular computer scientist engaged in a one-hour face-to-face conversation. Only, it wasn’t actually in person at all.

Instead, the entirety of Fridman and Zuckerberg’s conversation used photorealistic realistic avatars in the metaverse, facilitated through Meta’s Quest 3 headsets and noise-canceling headphones.

Observers often have fun ridiculing Meta for dumping billions of dollars into metaverse research only to seemingly produce cartoonish avatars and wonky-looking legs.

However, in this case, users on social media, including those from Crypto Twitter, seemed to be genuinely impressed by the sophistication of the technology.

“Ok the metaverse is officially real,” wrote pseudonymous account Gaut, a rare moment of seemingly genuine praise from a user typically known for his satirical and sarcastic takes on current events.

“9 minutes into Lex / Mark metaverse podcast I forgot I was watching avatars,” wrote coder Jelle Prins.

Fridman and Zuckerberg speaking as virtual avatars in the metaverse. Source: Lex Fridman Podcast.

Fridman alsoshared his impressions of the experience in real-time, noting how “close” Zuckerberg felt to him during the interview. Moments later, he explained how difficult it was to recognize that Zuckerberg’s avatar wasn’t his physical body.

“I’m already forgetting that you’re not real.”

The technology on display is the newest version of Codec Avatars. First revealed in 2019, Codec Avatars is one of Meta’s longest-running research projects which aims to create fully photorealistic real-time avatars that work by way of headsets with face tracking sensors.

Related: Meta refutes claims of copyright infringement in AI training

However, users may need to wait a few years before donning their own realistic avatars, said Zuckerberg, explaining that the tech used requires expensive machine learning software and full head scans by specialized equipment featuring more than 100 different cameras.

This would be, at the very least, three years away from being available to everyday consumers, he said.

Still, Zuckerberg noted that the company wants to reduce the barriers as much as possible, explaining that in the future, these scans may be achievable with a regular smartphone.

The most-recent demonstration comes just one day after Meta unveiled its answer to ChatGPT, revealing its newest AI assistant Meta AI, which is integrated across a range of unique chatbots, apps and even smart glasses.

AI Eye: Real uses for AI in crypto, Google’s GPT-4 rival, AI edge for bad employees

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New Tables Show Intermediate-Term Overview is Negative

We have introduced two new tables in the DecisionPoint ALERT to give an overview of trend and BIAS for the major market indexes, sectors, and industry…

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31 mins ago

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September 28, 2023

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We have introduced two new tables in the DecisionPoint ALERT to give an overview of trend and BIAS for the major market indexes, sectors, and industry groups that we track. The first is our Market Scoreboard, which shows the current Intermediate-Term and Long-Term Trend Model (ITTM and LTTM) signal status. To review:

  • The IT Trend Model generates a BUY Signal when the 20-day EMA crosses up through the 50-day EMA (Silver Cross).
  • The IT Trend Model generates a NEUTRAL Signal when the 20-day EMA crosses down through the 50-day EMA (Dark Cross) above the 200-day EMA. This is a soft SELL Signal, going to cash or a hedge. It avoids being short in a bull market.
  • The IT Trend Model generates a SELL Signal when the 20-day EMA crosses down through the 50-day EMA (Dark Cross) below the 200-day EMA.
  • The LT Trend Model generates a BUY Signal when the 50-day EMA crosses up through the 200-day EMA (Golden Cross).
  • The LT Trend Model generates a SELL Signal when the 50-day EMA crosses down through the 200-day EMA (Death Cross).

The current table shows that there is considerable stress in the intermediate-term; however, the long-term is still comfortably green for market and sector indexes. But we need to remember that the market indexes are cap-weighted, which means that they can be held aloft by large-cap stocks. The 11 sectors shown are composed solely of S&P 500 components, meaning that they will reflect the strength of that index. Industry groups, however, are not doing as well because they are less protected by the large-cap umbrella.

Next, let's look at how we determine the BIAS of a given index. First, the Silver Cross Index shows the percentage of stocks in an index that have a Silver Cross (20-day EMA above the 50-day EMA), and the Golden Cross Index shows the percentage of stocks in the index that have a Golden Cross (50-day EMA above the 200-day EMA). Next, we determine BIAS based upon the relationship of the Silver Cross Index to its 10-day EMA and the relationship of the Golden Cross Index to its 20-day EMA. When they are above, the BIAS is bullish. When they are below, the BIAS is bearish. See the chart below.

The following table shows the current intermediate-term and long-term BIAS of the market, sector, and industry group indexes we follow. Note that the picture is extremely bearish, but it is a very oversold condition, which will shift toward the positive in the event of a strong rally.

Conclusion: These new tables, available daily in the DecisionPoint ALERT, provide a quick overview of market trend and BIAS. They are intended to help focus attention on areas that may be of interest. They do not give action commands, but provide information flags to prompt assessment of the relevant charts.

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Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional. Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.

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Tesla rival Polestar reveals lineup of its new electric vehicles

The Sweden-based electric vehicle maker completes key testing before launching production of its new SUV.

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31 mins ago

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September 28, 2023

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Tesla's Model Y crossover, the best-selling vehicle globally, is the standard that electric vehicle makers strive to compete with. The Austin, Texas, automaker sold about 267,200 Model Y vehicles in the first three months of the year and continued leading the pack well into the second quarter.

It's no wonder that the Model Y is leading all vehicles in sales as it retails for about $39,390 after tax credits and estimated gas savings. Ford  (F) - Get Free Report hopes to compete with the Model Y about a year from now when it rolls out the new Ford Explorer SUV that is expected to start at $49,150.

Related: Honda unveils surprising electric vehicles to compete with Tesla

Plenty of competition in electric SUV space

Mercedes-Benz (MBG) however, has a Tesla rival model with its EQB all-electric compact sports utility vehicle with an estimated 245 mile range on a charge with 70.5 kWh battery capacity, 0-60 mph acceleration in 8 seconds and the lowest price of its EVs at a $52,750 manufacturers suggested retail price.

Tesla's Model X SUV has a starting price of about $88,490, while the Model X full-size SUV starts at $98,490 with a range of 348 miles. BMW's  (BMWYY) - Get Free Report xDrive50 SUV has a starting price of about $87,000, a range up to 311 miles and accelerates 0-60 miles per hour in 4.4 seconds.

Polestar  (PSNY) - Get Free Report plans to have a lineup of five EVs by 2026. The latest model that will begin production in the first quarter of 2024 is the Polestar 3 electric SUV, which is completing its development. The vehicle just finished two weeks of testing in extreme hot weather of up to 122 degrees in the desert of the United Arab Emirates to fine tune its climate system. The testing was completed in urban cities and the deserts around Dubai and Abu Dhabi.

“The Polestar 3 development and testing program is progressing well, and I expect production to start in Q1 2024. Polestar 3 is at the start of its journey and customers can now visit our retail locations around the world to see its great proportions and sit in its exclusive and innovative interior,” Polestar CEO Thomas Ingenlath said in a statement.

Polestar 3 prototype is set for production in the first quarter of 2024.

Polestar

Polestar plans 4 new electric vehicles

Polestar 3, which will compete with Tesla's Model X, Model Y, BMW's iX xDrive50 and Mercedes-Benz, has a starting manufacturer's suggested retail price of $83,000, a range up to 300 miles and a charging time of 30 minutes. The company has further plans for the Polestar 4, an SUV coupé that will launch in phases in late 2023 and 2024, as well as a Polestar 5 electric four-door GT and a Polestar 6 electric roadster that the company says "are coming soon." 

The Swedish automaker's lone all-electric model on the market today is the Polestar 2 fastback, which has a manufacturer's suggested retail price of $49,900, a range up to 320 miles and a charging time of 28 minutes. The vehicle accelerates from 0-60 miles per hour in 4.1 seconds. Polestar 2 was unveiled in 2019 and delivered in Europe in July 2020 and the U.S. in December 2020.

Polestar 1, the company's first vehicle, was a plug-in hybrid that went into production in 2019 and was discontinued in late 2021, according to the Polestar website.

The Gothenburg, Sweden, company was established in 1996 and was sold to Geely affiliate Volvo in 2015.

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