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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…



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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Stay Ahead of GDP: 3 Charts to Become a Smarter Trader

When concerns of a recession are front and center, investors tend to pay more attention to the Gross Domestic Product (GDP) report. The Q4 2022 GDP report…



When concerns of a recession are front and center, investors tend to pay more attention to the Gross Domestic Product (GDP) report. The Q4 2022 GDP report showed the U.S. economy grew by 2.9% in the quarter, and Wall Street wasn't disappointed. The day the report was released, the market closed higher, with the Dow Jones Industrial Average ($DJIA) up 0.61%, the S&P 500 index ($SPX) up 1.1%, and the Nasdaq Composite ($COMPQ) up 1.76%. Consumer Discretionary, Technology, and Energy were the top-performing S&P sectors.

Add to the GDP report strong earnings from Tesla, Inc. (TSLA) and a mega announcement from Chevron Corp. (CVX)—raising dividends and a $75 billion buyback round—and you get a strong day in the stock markets.

Why is the GDP Report Important?

If a country's GDP is growing faster than expected, it could be a positive indication of economic strength. It means that consumer spending, business investment, and exports, among other factors, are going strong. But the GDP is just one indicator, and one indicator doesn't necessarily tell the whole story. It's a good idea to look at other indicators, such as the unemployment rate, inflation, and consumer sentiment, before making a conclusion.

Inflation appears to be cooling, but the labor market continues to be strong. The Fed has stated in many of its previous meetings that it'll be closely watching the labor market. So that'll be a sticky point as we get close to the next Fed meeting. Consumer spending is also strong, according to the GDP report. But that could have been because of increased auto sales and spending on services such as health care, personal care, and utilities. Retail sales released earlier in January indicated that holiday sales were lower.

There's a chance we could see retail sales slowing in Q1 2023 as some households run out of savings that were accumulated during the pandemic. This is something to keep an eye on going forward, as a slowdown in retail sales could mean increases in inventories. And this is something that could decrease economic activity.

Overall, the recent GDP report indicates the U.S. economy is strong, although some economists feel we'll probably see some downside in 2023, though not a recession. But the one drawback of the GDP report is that it's lagging. It comes out after the fact. Wouldn't it be great if you had known this ahead of time so you could position your trades to take advantage of the rally? While there's no way to know with 100% accuracy, there are ways to identify probable events.

3 Ways To Stay Ahead of the Curve

Instead of waiting for three months to get next quarter's GDP report, you can gauge the potential strength or weakness of the overall U.S. economy. Steven Sears, in his book The Indomitable Investor, suggested looking at these charts:

  • Copper prices
  • High-yield corporate bonds
  • Small-cap stocks

Copper: An Economic Indicator

You may not hear much about copper, but it's used in the manufacture of several goods and in construction. Given that manufacturing and construction make up a big chunk of economic activity, the red metal is more important than you may have thought. If you look at the chart of copper futures ($COPPER) you'll see that, in October 2022, the price of copper was trading sideways, but, in November, its price rose and trended quite a bit higher. This would have been an indication of a strengthening economy.

CHART 1: COPPER CONTINUOUS FUTURES CONTRACTS. Copper prices have been rising since November 2022. Chart source: For illustrative purposes only.

High-Yield Bonds: Risk On Indicator

The higher the risk, the higher the yield. That's the premise behind high-yield bonds. In short, companies that are leveraged, smaller, or just starting to grow may not have the solid balance sheets that more established companies are likely to have. If the economy slows down, investors are likely to sell the high-yield bonds and pick up the safer U.S. Treasury bonds.

Why the flight to safety? It's because when the economy is sluggish, the companies that issue the high-yield bonds tend to find it difficult to service their debts. When the economy is expanding, the opposite happens—they tend to perform better.

The chart below of the Dow Jones Corporate Bond Index ($DJCB) shows that, since the end of October 2022, the index trended higher. Similar to copper prices, high-yield corporate bond activity was also indicating economic expansion. You'll see similar action in charts of high-yield bond exchange-traded funds (ETFs) such as iShares iBoxx $ High Yield Corporate Bond ETF (HYG) and SPDR Barclays High Yield Bond ETF (JNK).

CHART 2: HIGH-YIELD BONDS TRENDING HIGHER. The Dow Jones Corporate Bond Index ($DJCB) has been trending higher since end of October 2022.Chart source: For illustrative purposes only.

Small-Cap Stocks: They're Sensitive

Pull up a chart of the iShares Russell 2000 ETF (IWM) and you'll see similar price action (see chart 3). Since mid-October, small-cap stocks (the Russell 2000 index is made up of 2000 small companies) have been moving higher.

CHART 3: SMALL-CAP STOCKS TRENDING HIGHER. When the economy is expanding, small-cap stocks trend higher.Chart source: For illustrative purposes only.

Three's Company

If all three of these indicators are showing strength, you can expect the GDP number to be strong. There are times when the GDP number may not impact the markets, but, when inflation is a problem and the Fed is trying to curb it by raising interest rates, the GDP number tends to impact the markets.

This scenario is likely to play out in 2023, so it would be worth your while to set up a GDP Tracker ChartList. Want a live link to the charts used in this article? They're all right here.

Jayanthi Gopalakrishnan

Director, Site Content


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.

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Hotels: Occupancy Rate Down 6.2% Compared to Same Week in 2019

From CoStar: STR: MLK Day Leads to Slightly Lower US Weekly Hotel PerformanceWith the Martin Luther King Jr. holiday, U.S. hotel performance came in slightly lower than the previous week, according to STR‘s latest data through Jan. 21.Jan. 15-21, 2023 …



With the Martin Luther King Jr. holiday, U.S. hotel performance came in slightly lower than the previous week, according to STR‘s latest data through Jan. 21.

Jan. 15-21, 2023 (percentage change from comparable week in 2019*):

Occupancy: 54.2% (-6.2%)
• Average daily rate (ADR): $140.16 (+11.3%)
• evenue per available room (RevPAR): $75.97 (+4.4%)

*Due to the pandemic impact, STR is measuring recovery against comparable time periods from 2019. Year-over-year comparisons will once again become standard after Q1.
emphasis added
The following graph shows the seasonal pattern for the hotel occupancy rate using the four-week average.

Click on graph for larger image.

The red line is for 2023, black is 2020, blue is the median, and dashed light blue is for 2022.  Dashed purple is 2019 (STR is comparing to a strong year for hotels).

The 4-week average of the occupancy rate is below the median rate for the previous 20 years (Blue), but this is the slow season - and some of the early year weakness might be related to the timing of the report.

Note: Y-axis doesn't start at zero to better show the seasonal change.

The 4-week average of the occupancy rate will increase seasonally over the next few months.

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American Express Numbers Show What Still Gets People to Spend Money

American Express stock jumped nearly 12% since earnings dropped.



American Express stock jumped nearly 12% since earnings dropped.

Even though American Express  (AXP) - Get Free Report earnings announced Friday afternoon fell somewhat short of expectations for the quarter, shares still soared to highs unseen for many months due to a number of strong metrics -- quarterly revenue growth of 17%, plans to raise its dividend by 15% from 52 to 60 cents and an annual revenue that surpassed $50 billion for the first time ever.

At $52.9 billion, the latter is driven primarily by an increase in quarterly member spending. Last year, that number was at $42.4 billion. 

According to American Express Chairman and CEO Stephen J. Squeri, the increase can be attributed to higher numbers of millennials gaining in earning power and using their AmEx above other cards to tap into rewards as many approach milestones like marriage, career advancement, and homeownership.

"Millennial and Gen Z customers continue to be the largest drivers of our growth, representing over 60% of proprietary consumer card acquisitions in the quarter and for the full year," Squeri said in an earnings call discussing the results.

People Are Using Their AmEx Cards a Lot

The $52.9 billion number is up 25% from what was seen last quarter and reflects a number of different factors also having to do with post-pandemic spending.

"We ended 2022 with record revenues, which grew 25% from a year earlier, and earnings per share of $9.85, both well above the guidance that we provided when we introduced our long-term growth plan at the start of last year, despite a mixed economic environment," Squeri said.

AmEx further reported that 12.5 million new members signed up for cards in 2022 while existing members used their cards frequently. Fourth-quarter sales at AmEx's U.S. consumer services and commercial segments rose by a respective 23% and 15%.

But higher expenses also led to falling below analyst expectations. The fourth-quarter income of $1.57 billion, or $2.07 a share, is down from $1.72 billion ($2.18 a share) in the fourth quarter of 2021. FactSet analysts had predicted $2.23 a share.

"I'm not sure what that's really a function of right now -- whether it's a function of the economy or of confusion on where to advertise right now," Squeri told Yahoo Finance in reference to lower spending on the part of small business and digital advertisers. "We're going to watch that, but the consumer is really strong, travel bookings are up over 50% vs pre-pandemic."


It's a Good Time to Be Tracking Credit Card Companies

Immediately after the earnings dropped, AmEx stock started soaring and was up nearly 12% at $175.24 on Friday afternoon. This is a high unseen in months -- the last peak occurred when, on September 12, shares were at $162.45. 

Whether due to or despite analyst threats of a looming recession, people have been using their credit cards very actively throughout the end of 2022.

When it posted its earnings earlier this week, Mastercard  (MA) - Get Free Report surpassed Wall Street expectations of $5.8 billion and $2.65 per share in fourth-quarter earnings. Visa  (V) - Get Free Report also saw revenue rise 11.8% to $7.94 billion in the same quarter. The numbers also reflect higher numbers of people traveling and using their credit cards in different countries.

"Visa's performance in the first quarter of 2023 reflects stable domestic volumes and transactions and a continued recovery of cross-border travel," outgoing CEO Al Kelly said of the results during a call with financial analysts.

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