ECONOMIC UPDATE – MARKET OVERVIEW
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It’s all about the bottom line. And since the Panic of ’08 when the Bankster Gangsters began a scheme called quantitative easing and shrunk interest rates to negative and zero rates…the bottom line was cheap money printed out of thin air and backed by nothing that artificially drove up U.S. and European economies.
Now, the word on The Street is that the cheap money scheme is back and it can be seen in the numbers.
The yield curve has inverted deeper, which means longer-term U.S. Treasury yields have fallen further below those on short-term bonds. The bet is that short-term rates will be lower in the longer-term than they will be in the near-term.
Registering its largest negative gap since 1981, last week the yield on the 10-year U.S. Treasury was 0.78 percentage point below that of the two-year yield. So the bet is that inflation is easing and the Fed will cut back on its interest rate hikes.
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With the current Fed Rate between 3.75 percent and 4 percent, The Street is betting the central banksters will bring their rate up to about 5 percent by early 2023, which the market sees as not too much of a recession threat.
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Yes, the interest rate game of guessing how much it will cost to borrow money is what is driving equities. Indeed, this is what CNBC said today: “Fed Chair Jerome Powell is scheduled to speak at the Hutchins Center on Fiscal and Monetary Policy at Brookings on Wednesday. Investors will be listening for clues into whether the central bank will slow or stop interest rate hikes.”
The Dollar Story
Adding to the confusion of where U.S. interest rates are going is the strength of the dollar. The higher interest rates go, the higher the value of the dollar.
The dollar’s value, assessed against a collection of six other major currencies, fell to $106.06 on 25 November, down from a peak of $114.10 on 28 September, according to the U.S. Federal Reserve’s U.S. Dollar Index.
The dollar has surged 10 percent this year, lifted by the Fed’s aggressive campaign of interest rate hikes.
The Fed’s key rate has moved from about 0.25 percent in March to between 3.75 and 4 percent now, with the central bank lifting the rate by three-quarters of a point three times in a row.
The dollar has ridden the crest of that rising wave: U.S. interest rates have been higher than in other major countries, so dollar-denominated assets have delivered the highest yields. Demand for dollars steadily boosted the buck’s value.
Now the dollar has slid on expectations that the Fed is softening its stance on rate increases.
Several Fed officials have recently signaled that the rate bump in mid-December is likely to be a half-point, not three-quarters.
The euro closed last week at $1.0404, close to its four-month high.
TREND FORECAST: How high will the interest rate rise and what will it do to economies? As noted in this Trends Journal, we have a special SPOTLIGHT: THE STRUGGLE OVER INTEREST RATES that identifies that there is a very mixed interest rate message from central banks around the world regarding how much they should raise or lower interest rates.
While the expectation in the U.S. is that the Fed will bring interest rates to 5 percent by early to mid-2023, we forecast that the rate hike will hit the housing and commercial business real estate sector the hardest. And while there are forecasts among the mainstream economic “experts” that there will be a residential real estate crash, we disagree.
According to the S&P CoreLogic Case-Shiller US National Home Price Index, in 2020, home prices rose 10.4 percent, they were up 18.8 percent in 2021 (which was the biggest increase in 34 years), and as of September, the annual gain is 10.6 percent… which means that home prices are up nearly 40 percent in three years!
Therefore, when and if interest rates reach 5 percent and mortgage rates hit the high 7 percent range, home prices may decline as much as 20 percent. However, that correction will reverse over time as it has since the beginning of time.
On the bad news side of life in what used to be called the Land of Opportunity, with the average price of a home at around $400,000, according to the fintech SoFi, depending where you live, you have to make between $165,000 to $195,000 a year to pay for mortgage, taxes, etc.
However, according to Political Calculations’ initial estimate of median household income in August 2022 is $78,075, a decrease of $457 (or 0.58 percent) from the initial estimate of $78,532 in July 2022. Therefore, on the other side of life, as we have greatly detailed, the apartment rental business will continue to expand and the Bigs will be buying up more homes to rent them out… as we have greatly detailed since they began the house buying scheme following the Panic of ’08. Also see: “HOME SALES UP AS MONEY GANG GOBBLES UP HOUSES.”
Equity Markets
As to where the equity markets are going, again, it’s a gambler’s game. Down nearly 30 percent from its high, over the past 12 months “investors” lost nearly $7.5 trillion betting on the Nasdaq… yet they keep on betting.
And while the benchmark S&P 500 has tumbled 16 percent this year, as we have noted, minus a wild card—and there are plenty of them—following the past 40 U.S. midterm elections, the S&P had an average return of 16.3 percent.