Thursday, September 28, 2023


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“There is a great deal of ruin in a nation” - Adam Smith, 1777

 Recently there has been a noticeable uptick of “Roman Empire” scuttlebutt on the socials, which wouldn’t be all that interesting except for the fact that in this instance, it appears as though there is a significant effort being made to somehow associate the act of “thinking” about the “Roman Empire” with manhood and men’s supposed preoccupation with concern for the unwind of the United States.

A comical example was from “Eva Vlaardingerbroek” who wrote:

There is some “Freudian thing” happening here for sure and I, for one, believe that her father was being far more honest… that being said, in a world awash in fanciful narratives, and in particular, narratives concerning impending hyper-inflationary financial doom for the United States, one shouldn't get too carried away.

It's important to remember that hyperinflation is not simply “lots of inflation” coming as a result of the mismanagement of purely monetary factors, but instead a far more fundamental and total loss of confidence in the institutions of the state and the financial system.

While hyperinflation typically arises from a combination of familiar calamities such as severe economic crises, political instability, and loss of confidence in currency as a result of excessive money printing to finance large budget deficits or in response to external shocks like war or other exogenous events, the scale of such numerous ruinations and the credibility of the nation in question make all the difference.

There is no doubt that the United States will ultimately visit such a condition eventually, particularly given the lowly course we have chosen to chart these last many decades, but the real question, as perennially posed, is when?

While our historical understanding of “The Fall of the Roman Empire” provides a lot of information to work with when drawing superficial parallels to today’s seemingly endless political theater and economic dramas, it is noteworthy to consider that this is not a new exercise in our public discourse.

A cursory dive into the newspaper archive yields a couple of interesting articles (reprinted here in their entirety from The Minneapolis Representative on July 12, 1893) detailing the monetary concerns of that time:

Clearly on matters of money and arguments over monetary standards, metal or otherwise, the “Fall of the Roman Empire” serves the purpose of providing a powerful historical account of a dramatic end to a once great civilization and thereby a potent lesson for similar issues in the storyteller’s place and time.

Note also that in the first of the two articles above, the “Fall of the Roman Empire” theme is, ironically, being leveraged to make the radical argument to put an end to metalism in favor of a purely “numerary” unit of account, the precursor argument that ultimately led to the “fiat” world we find ourselves in today.

As it turned out, while much of the latter half of the nineteenth century was spent debating metalism, commodity gold and silver backed standards as well as other supposedly modern “scientific” approaches for a monetary standard, it was not until 1913 that we finally organized an institution, namely the Federal Reserve, that could possibly cultivate enough hubris to actually justify a move in the direction of a “fiat” standard.

Even then though, it took another 58 years, a period containing two epic world wars, several lesser wars and a massive depression, before the state ultimately cut the final cord (just a single thread by then) tethering our financial system to a metal-backed monetary standard with the Nixon administration’s now infamous “temporary” move back in 1971. (including support from Paul “the inflation slayer” Volcker prior to his famous Fed Chairmanship by the way)

Fast forward another 52 years that included nearly two decades of inflationary hardships, numerous recessions, a vast campaign to defeat our major “cold war” rival, multiple significant wars in the Middle East and many lesser elsewhere, a steadily mounting Federal debt built by ever more preposterous budget deficits and a Federal Reserve seemingly continuously paying-out larger and larger portions of its valuable credibility in an effort to underwrite the next and progressively more extensive “stability”-inducing bailout of the economic system, and we are only now just coming to common conclusions of the downsides of our “fiat” system.

Given all that has been recounted above, it could seem as though real “ruin” has finally arrived and that we are on the precipice of the “big one”, the final tipping point into a hyper-inflationary tailspin engulfing our entire financial system and destroying the future for millions.

Yet, even the ancient Roman Empire didn’t fall overnight as its influence spanned roughly 1000 years and required multiple centuries of debasement and devolution to fully erode thereby ushering in the terrible period of the “dark ages”.

By comparison, the United States Empire is orders of magnitude more significant a world (military) and economic power than the Roman Empire ever was and will take far more significant devolution to sully itself into past-empire status than any naive monetary-focused narrative suggests.

The key point is that hyperinflation is (almost) all about credibility… as long as the United States is unquestionably the dominant global military and economic power, hyperinflation is not a likely end-state.

That said, persistent periods of typical and even deeply entrenched and uncomfortably high inflation dotted with bouts of deflation coming as the repercussions of 35 years of the Federal Reserve's monetary mismanagement unwinds against the backdrop of the Federal Government’s hyper-dysfunctional and counterproductive political process, are absolutely to be expected.

This era, that I previously termed The Great Agitation, will continuously feel like “the end is nigh” as our financial and political systems reflect a new degree of volatility coming from the continuous recognition of the cost of the vast liabilities we have allowed to accumulate.

Will this era truly mark the end of the United States Empire as is suggested by the supposedly vast number of “men” who are apparently preoccupied with “thinking” about the Fall of the Roman Empire?… I wouldn’t bet on it.

Monday, February 13, 2023

Not the Right Man for the Job

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 For one brief moment at the 2022 Jackson Hole symposium, we got a glimpse of what a Fed Chair could achieve in the way of “jawboning” if he concluded that to be the right action and, going even further, possessed the leadership quality to get it done.

In that moment, Powell both presented and truly embodied something revolutionary, particularly to a generation of delusional speculators with virtually no conscious or even lived memory of anything other than a permissive Fed doling out endless liquidity through continuous open market operations while always at the ready to jump in with the expected “Fed Put” at the smallest sign of system risk.  

The proverbial “punch bowl” had never been so rife a nostrum of narcotic delights as what had been concocted in the prior fourteen years of Fed quackery.

But now, with one succinct nine minute speech about bringing “some pain to households and businesses”, Powell not only pulled the punch bowl away, he dumped it into the toilet, flushed all the methadone then grabbed the addict by the back of the shoulder and slapped him in his stunned and delirious face.

Needless to say, all markets responded accordingly. 

Bond market yields jumped notably with the 10-year Treasury bond yield climbing over 80 basis points in the following four weeks while the notable summer rally completely gave way with stocks selling off about 15% over the same period. 

This was the right approach at the right time for Fed policy.

After about 35 years of steadily increasing and moral-hazard coddling incursions into the private markets, including the most absurd fourteen year period of never ending “zero interest rate policy” (ZIRP) and “quantitative easing” (QE) boondoggles, the Fed had finally stated the truth... Financial “pain” is a fact of life and it finally was coming to your home and business and the Fed wasn’t intending to stop it.

But where did this moment of clarity on the part of Fed Chair Powell come from?

It was well noted that there were last minute changes to the messaging and watching the speech, it seemed plausible that he literally just “ripped up the script” and went with his gut, but, such a magnificent work of bluntness took fortitude and courage the likes of which could only come from one place, namely actual leadership.

It’s important to really reflect on what a “leader” is in order to truly comprehend the role of leadership in human life. 

While the modern Merriam-Webster dictionary defines a leader as superficially as “a person who leads” and “a person who has commanding authority or influence”, an antique dictionary by Samuel Johnson from 1768 only adds “one that leads or conducts” and “one who goes forth”.

Probably the one of the best quotes on leadership was published in the Manchester Weekly Times and Examiner on Saturday March 7th, 1846 within a larger article on legal policy matters:

“In ethics, the law of compromise is unknown.  There is one right and one wrong – one truth and one falsehood – but no intermediate partaking of neither. Compromise is a thing human, physical – a thing born of that necessity which weak men admit, and, admitting create.  Compromise is the game of the mere politician, not that of the truly great leader whose life is the exposition of a sacred truth.”

In a sense, a true leader projects a vision of a future and drives men to want to embark on a mission for that future, not because they want to take the easy way, but because, despite the journey possibly being difficult, risky or even dangerous, they know it is the only true path forward.  

The people we attach the empty moniker of “leader” to today are NOT true leaders.  They are weak, conciliatory political tacticians who present calculated mischief to the populous either for purely political gain, to fulfill some duty to their institutional role or, more selfishly their own legacy, or for even worse and more nefarious reasons.

Whether coming from a “new hope” political deity, a multi-billionaire titan of industry, a highly educated and acclaimed scholar or even a decorated military commander, the problems these charlatans confront often aren’t truly real, the solutions aren’t real or worse, they are “solutions” that literally create or exacerbate actual problems with narratives spun from appeals to authority, emotion or ignorance or just pure fantasy and then socialized and tele/techno-evangelized to the multitudes for maximum impact.

Reality though is unforgiving and always finds a way of breaking through the current hegemonic bamboozle, particularly in economic matters, eventually, flushing out all the ills and deceptions and with them, the cleaver frauds and con artists who perpetrated these malfeasance.

Our economy is on a disastrous track and only true leadership can bring back some semblance of what has been lost over the last 35 years, and not through some “easy money” scheme to kick the can even further down the road, but a true reckoning of the actual circumstances at play.

For a very brief moment, it looked as if that leadership, at least within the confines of the Federal Reserve, had arrived in the form of Jerome Powell.

He spoke the truth, kept the point clear and concise and offered no equivocation.  Like the Orwellian-attributed dictum, “In a time of universal deceit, telling the truth is a revolutionary act”, Powell’s simple nine minute “pain” speech was truly revolutionary.

But alas… the revolution was only a brief mutiny, or maybe even just a random quirk made possible by a hot case of the runs, or some other momentary digestive illness that was troubling Powell.

There was no additional follow through or further momentum, only a retreat back to the prior cowardly “data dependent” posture with a non-stop cavalcade of dovish Fed speakers lead, not by Chair Powell, but by the Queen of the Doves, Vice Chair (and aspiring political hack) Lael Brainard and her close compatriot the San Francisco Fed’s President Mary Daly.

The reminder of 2022 was truly disastrous as Powell, possibly subdued by the UK’s gilt fiasco, the UN’s warning of global recession, the looming mid-terms or even moronic yin and yang hyperventilation by the likes of “Nobel laureate” Paul Krugman and Wharton’s Bull-kook Jeremy Siegle, allowed the Fed’s forward guidance to disintegrate into decidedly dovish heap of muddled and confusing outlooks with Fed speakers attempting to again “look through” the COVID-driven supply-shocks (read… still focused on mystical “transitory” nonsense) drivers of inflation while indicating the intention to not “crash the economy” with too aggressive rate hiking. 

These missteps, in turn, resulted in a strong expectation and an actualization of a step-down in the pace of the Fed’s rate hikes which transmitted to markets throughout January as a notable lift for all risk assets as this generation of cunning speculators easily picked up on the Fed’s weakness and doubled down on everything from gold to stocks to cryptos.

Financial conditions reverted back to a loosening trend with, most notably, the 10-year Treasury yield declining about 80 basis points from the fall of 2022 to the start of 2023 while the 30-year fixed mortgage rate retreated from a national average that topped 7% to about 6% over the same period.

In short, Powell utterly and totally failed. It’s just that simple. 

He is completely incapable of mustering the courage to lead because he is simply NOT a leader.

Monday, November 28, 2022

Time to "Rightsize" the Economy for a Reality-based Future

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For roughly the last 15 years the Fed’s reckless “easy money” zero interest rate policy (ZIRP) has encouraged more than just gratuitous speculation in assets like stocks, cryptos and housing.

In undermining our sense of the value of “money” by encouraging imprudent uses of artificially cheap debt and discouraging thoughtful uses of real earned productive capital, the Fed has warped and distorted our entire economic system thereby creating the “Everything Bubble”.

But this “Everything Bubble” is NOT constrained to just obviously absurd examples of strictly financial anomalies like high flying speculative assets or the seriously distorted and sorry state of public finance; “Everything” truly refers to EVERYTHING.

Over this historically anomalous period, the Fed’s “easy money” worked to “zombify” firms, households and institutions alike creating a massive mis-allocation of resources across the entire spectrum of decisions rendered by all free market actors including those decision related to business investment, household formation, higher education, career planning, campaign finance and ultimately our culture.

It should come as no surprise that while we are witnessing the most historic crescendo in financial markets, we are simultaneously experiencing some of the most outlandish human excesses in our social, political and cultural spheres as over a decade of massive mal-investments in people’s time, attention and resources has materialized as a truly distorted society with ideals aligned with fantasy and delusion.

Fortunately, as goes this financial crescendo so will go all of these excesses too as our economic trends revert to the mean and a harsh reality bears down on humanity forcing a “rightsizing” of sorts on everyone and everything.

For example, the recent “rightsizing” of Twitter by Elon Musk’s aggressive management actions, while still a work in progress, may be a real harbinger of things to come for software tech and technology industry employment in general.

To say that the technology space is bloated is a serious understatement as many years of mal-investment have manifested in epic excesses not the least of which are employment levels that are well over what is truly required for the fundamental viability of individual projects, services, firms and the industry as a whole.

An over-emphasis on the value of STEM disciplines was made possible by loose financing of higher education coupled with the simplistic notion that all students should be funneled into highly technical fields where prosperity was virtually guaranteed.

The problem, of course, is that while many young people may superficially display the capacity for STEM education, there is no guarantee that these fields will be correct for these people’s long-term career viability.

Stated simply, no matter how you encourage education and training in technical fields, probably no more than a few percent of the workforce will ever truly be able to make an entire 40 year career out of highly technical disciplines like physics, scientific research and electrical and software engineering.

That’s not to say that it is wrong to encourage technical and scientific education but only that ultimately all of our educational goals should be aligned with the fundamental workforce demands brought about by a reality-based highly competitive modern economy and NOT the grossly speculative “easy money” debt-fueled period we have all just lived through.

Further still, more recent innovations in technical project management techniques (namely, “agile development”, a full description of the pros/cons of this technology management process would be far too lengthy for this discussion) have allowed significant staff and process bloat where there is an over-emphasize human “storytelling” foibles, a lack of scrutiny of actual hours worked (particularly for remote staff) and ultimately and under achievement of true reality-based accomplished work.

To “rightsize” the technology industry, executives will have to follow Musk’s lead and drastically reform their operations with major layoffs, the implementation of management techniques that verify commitment and real work performed, and a significant curtailing of many of the superfluous luxuries tech workers have grown to expect over the last decade.

As we leave the delusional “Everything Bubble” years far behind, getting “back to basics” will be difficult but ultimately a healthy trend towards a reality-based future.

Monday, October 17, 2022

The Fed's Overreaction and Inaction

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They say that the Federal Reserve’s policy action works with a lag but what simple maxim would be best suited to describe the result of their initial massive over-reaction and then subsequent hapless inaction? 

What the market is still not fully appreciating is the notable downside risks inherent in both the Fed’s reckless “extraordinary” policy action implemented after the crescendo of the 2008 financial crisis and further hysterical response to the COVID-19 panic, as well the lack of action once the consequences of these policy blunders resulted in an obvious and not-in-any-way “transitory” bout of textbook monetary inflation.

Make no mistake, the Fed’s era of QE and ZIRP has drawn to a close and, as we move further away from the Great Moderation into the Great Agitation, history will judge these actions harshly with great and powerful Nobel-winning Keynesian wizards fully revealed as panic stricken academic weaklings that debased our monetary system thereby totally distorting all markets, public finance and a generation of now delusional “investors”.

Similar to Fed Chair Bernanke's March of 2007 testament that the tumult in the subprime market was "contained", Powell's 2021 "transitory" narrative was an overt charade attempting to frame an emergent, highly problematic economic trend in a light that simply wasn't even remotely true thereby seriously damaging the credibility of the Fed and allowing matters to get far worse before any actual policy action response was be mounted.

But unlike back in 2008 where the Fed first exhausted all normal policy tools before then overreacting and intervening in markets with unconventional methods, today, Fed Chair Powell has all the tools he needs to respond to the current economic conditions but is simply too timid to fully use them.

Today’s inflation is not temporary or supply chain related or coming from China lockdowns or the war in Ukraine or any other recent “con” whipped up by statist policy junkies.  

Our current bout of inflation is simply plain old monetary inflation coming as a long delayed effect of the Fed’s own reckless “easy money” policy action. 

Adding insult to injury, the Fed’s hesitance to own up to this fact allowed inflation to continue to run wild becoming an ingrained intractable factor in the minds and actions of all market participants.

The Fed funds rate hikes to date have come nowhere near the level required to arrest ongoing inflationary pressures with interest rates still far below even the most optimistic read of rising prices (PCE, core-CPI).

As Powell stated himself during his September 21 press conference; "... you want to be at a place where real rates are positive across the entire yield curve.” But the Fed continues to delay making this tight money yield curve a reality.

After the horror that was the September CPI report (as well as PPI), it is quite clear that inflation has moved well beyond the point that the Fed’s typical forward guidance and regular schedule Fed meetings can contain. 

The Fed needs to go big, once and for all. 

The only option for the Fed and Powell now is to implement emergency inter-meeting rate hikes.

Unscheduled, unexpected large Fed policy action will provide the shock the markets need to put a final and lasting end to all forms of speculative delusion bringing participants back to their senses as they abruptly realize that the era of “easy money” is gone for good.

Tuesday, August 30, 2022

FHFA Purchase Only House Price Index – What Goes Up, Must Come Down

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Today’s release of the Federal Housing Finance Administration (FHFA) House Price Index indicated that the Purchase Only repeat sale index of single family properties (similar to the Case-Shiller but with Fannie Mae and Freddie Mac home sale transactions) has begun to decelerate notably in recent months with the index falling to a still bubbly 16% annual percent change.

While prices are still rising notably, the trend appears to be abruptly changing as mortgage rates continue to climb bringing higher costs, tighter lending standards and more economic uncertainty.

Given the truly anomalous surge in home prices seen since the start to the pandemic, it appears pretty clear that we are now seeing an equal but opposite deceleration in prices that will more than likely end in a spectacular home price bust as inventories continue to mount and housing finance continues to tighten. 

The following data visualization (click for dynamic version) shows the Annual Percent Change of the Single Family Purchase Only Index (in blue).

Thursday, July 14, 2022

The Inflation Conflagration

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Once I lived the life of a millionaire 
Spending my money'n I did not care 
Carrying my friends out for a good time
Buyin’ bootleg liquor, champagne and wine

Lord but I got busted and I fell so low
Didn't have no money and nowhere to go
This is the truth, Lord, without a doubt
Nobody wants you when you're down and out

Lord, if I could get my hands on a dollar again
I would hold it till that eagle grins
I would try just for one little house
Nobody knows me when I'm down and out

- excerpt from Scrapper Blackwell’s “Nobody knows you when you are down and out”

The inflation that we are seeing today was not caused solely by recent exogenous shocks like China’s COVID lock-downs or the war in Ukraine or any other temporary event, but instead it has come as the result 15+ years of reckless monetary policy and 30+ years of moral hazard induced mal-investment. 

Like the misguided mindset of pre-1970s forest management, suppressing every fire in an effort to “protect” the forest, a process that Mother Nature was perfectly capable of performing for many millions of years without the “benefit” any human intervention, the “stewards” of our financial eco-system have consistently prevented the natural cleansing effect of major market downturns and financial crisis.

Worse yet, the Fed and their global central banker counterparts through their extraordinary “easy money” policies (i.e. ZIRP/NIRP, QE) literally spread combustible debris all over the global financial system in an foolish effort to manage a macro-economic “controlled burn” that only worked to warp our sense of value while simultaneously encouraging immense amounts of reckless speculative activity.

The “cause” of today’s inflation is the over-expansion of the monetary base and all associated money aggregates, the “effect” of inflation is rising prices, but between this basic relationship lies probably the most important stimulating factor, namely human psychology.

What makes a person pay an additional 9% for a consumer good this year than they did last year? Why would a prospective home buyer willingly compete in a bidding war that sends the final purchase price 30% over the original asking price and obviously out of line with the property’s historic valuation? Why would youth with nearly zero real wealth be pumping whatever meager “money” they do have into a stock trading app in the hopes of a quick payoff on shares of any company much less aging firms clearly in their twilight years? Why would an otherwise financially astute investor be duped into believing that he could purchase a tweet and further that it was worth nearly $5 million? How could an obviously strange deep-talking 19 year old Elizabeth Holmes con the venture capital community out of $700 million for a prospective innovation that could easily, with minimum due diligence, be shown to defy the limits of physical reality?

Delusions truly abound!

We are in an era where fantasy has replaced cold hard facts and market participants prefer to LARP their way through their life’s trajectory entertaining one outlandish concept or another rather than simply cultivating the real earned product of toil and time.

This outcome was not by accident either, but by the Fed (and their global central banking counterparts) and the Federal government’s choices. When the value of money is undermined, particularly as fundamentally as it has been over the last many decades, it distorts the human psyche and unleashes irrational wants, desires and perceptions leading to actions that would never be possible with harder earned real wealth in a more grounded real world.

In a high energy and highly preposterous environment like this, it only took the inevitable spark, the COVID-19 pandemic panic, to provide the final stimulus to light-up things and start an epic inflationary conflagration going and ultimately the greatest, most fundamental challenge of our time.

We need face up to this challenge and get back to the world of sound money and prudent behavior.

This coming economic reckoning holds the hope for a post-crisis reality that goes “back to basics” on many fronts albeit at the cost of massive asset price declines, a federal finance and budget catastrophe, a sharp increase in long term unemployment and a never ending list of financial (and real) suffering as the dreamy wild times of the bubble decades of the “Great Moderation” become distant memories.

The task at hand for the Fed at this critical moment, provided that they truly want to tackle inflation and right the wrongs of their prior policy, is to fully embrace a new era, the “Great Agitation”, and a shift of the macro-economy back in the direction of sound money.

This is no small task and is not accomplished with a rate hike here or there but rather a commitment to contract the monetary base, no matter how painful the process may be, stamping out speculative fevers while fully disabusing all market participants of the notion that “easy money” will ever been seen again in their lifetimes.

Painful as this process may be, it is the only true path forward to a world that retains the integrity of our traditional political and economic the systems.

If the Fed again panics in the face of the economic turmoil and pivots back to desperate money creation and inflation just to buy a measure more of “stability”, then we will be truly be repeating history as this latest empire simply degenerates into a modern Dark Age of meaningless chaos.

Monday, July 11, 2022

Forecasting the Coming Housing Collapse

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As the Fed’s rate tightening policy regime continues to put upward pressure on mortgage interest rates and the steadily worsening recessionary trends (and other notable economic headwinds) mount for the macro-economy, it’s becoming pretty obvious that the nation’s residential housing markets are in for a serious pullback.

The most important questions for the housing market now are when will we see the peak firmly established for home prices this cycle and what will be the pace and scale of the downturn?

I’ve developed a model to attempt to answer those questions using past trends as a general guide as well as a healthy dose of pure conjecture based on my first-hand experiences with our most recent past two housing downturns.

First, I want to note that while my outlook would probably be considered by many to be highly pessimistic, I had an equally pessimistic outlook for housing back in 2006 and, looking back on my posts from those years preceding the Great Recession, I think my take back then was actually spot inline or even a tad too optimistic for the times that were headed our way.

In general, my key principles for the dynamics of highly speculative and delusional markets and asset classes could be stated simply as “What goes up, must come down” as the bubble inflates and then, once the delusion has broken, the sentiment shifts to “The bigger they come, the harder they fall.”

In other words, speculative trends tend to overshoot, first on the up-side and then on the down but over long term, the primary function is ultimately a reversion to the mean.  In some cases, the “mean” might just be the zero-bound but in a fundamental asset class like housing; over the long haul, the trend should be a slow and steady (and far from exciting) random walk up and to the right, keeping up with inflation but no more and no less.  

As for the current moment, we are sitting at the nexus of a number of Fed induced “easy money” speculative delusions in the era of the “Everything Bubble”; Stocks, housing and alternative investments (cryptos, NFTs, SPACs, etc.) had all been (until recently) running white hot for at least the last two years while stocks and housing have been propped up and pumped full by ZIRP and QE policy for over the last thirteen years.

This makes comparing the current period for the housing market (or any other asset class for that matter) to past periods very difficult given that so much of the general economic activity that has surrounded us since 2008/09 is but a Fed induced fiction and we will never truly know what the fundamental trends would have looked like without all the market manipulation.

But, be that as it may, I have modeled out the trends using a simple quantitative approach that mirrors my “key principles” whereby I relate the size and scale of the boom to the extent of the bust and also, relate our current cycle to the past two cycles.

First, take a look at Robert Shiller’s long running nominal home price index (blue left axis) plotted with the year-over-year percent change (red right axis) monthly since 1953.  Note that this index is synthesized from several source indices as the S&P CoreLogic Case-Shiller only runs back to the 1980s.   

Notice that the scope and scale of each housing bubble since 1980s has been growing with each successive cycle.  Below is a table summarizing the 1980s, 2000s and the current 2022s cycle details:

Notice that the year-over-year (YOY) percent change for each cycle has been increasing by about a factor of 1.5 for each subsequent cycle.  While I don’t believe that this is some sort of magic factor, I’m going to take this as a general indicator that the current boom has just about reached is maximum upward thrust while also giving a sense of the scale of the minimum YOY when the downturn eventually kicks into gear.

Next, look at the chart below displaying the S&P CoreLogic Case-Shiller Home Price Index of the late 1980s era “Savings & Loan Crisis” boom bust cycle (a subset and not the full cycle) and notice that I have highlighted both the strongest monthly of year-over-year percent change (bright red bar at 2/1987) and the strongest monthly month-to-month percent change (bright green bar at 6/1987) as well as the weakest of both (most negative YOY percent change at 4/1991 and MTM at 11/1990).  

Let’s recall that while the Savings & Loan Crisis was a major event, the boom and bust primarily affected key cities of the east and west coast and their associated suburban property markets and did NOT generally express itself across the whole of the U.S. like the following “Great Housing Bubble” cycle ultimately did a decade later.

Since my plot is displaying the “National” S&P CoreLogic Case-Shiller Home Price Index and given that this home price boom and bust was largely regional, the cycle appears subdued by comparison to more recent cycles.

Next, look at the chart below displaying the S&P CoreLogic Case-Shiller Home Price Index of “Great Housing Bubble” boom bust cycle (a subset and not the full cycle) and notice again that I have highlighted both the strongest and weakest monthly YOY and MTM gains and losses.

Clearly, the “Great Housing Bubble” ran much longer, reached a much higher level and ultimately collapsed much harder than past cycles.  Remarkably, it took about 174 months to reach the peak and another 67 months to trough with a whopping 143% peak increase which was eventually reduced to a net 77% increase after a 27% decline during the bust.

Finally, look at the chart below which displaying the S&P CoreLogic Case-Shiller Home Price Index of “Everything Bubble” boom bust cycle (a subset and not the full cycle) with a projected price trend (all data within the yellow band) running all the way to 2030.

My forecast for the price trend going forward is pretty simple and involves the following key assumptions:

1. The Month-to-Month (MTM) percent change of 2.58% seen in March of 2022 will be the largest monthly increase we will see for this cycle given that the S&P CoreLogic Case-Shiller is a three month moving average and will now (going forward) start to capture price dynamics reflecting the increasing mortgage interest rates that began to surge in earnest during March.

2. We are very near the maximum Year-on-Year (YOY) percent change which I estimate will reach about 1.5x the maximum YOY percent change seen in the last cycle (14.5%) at 21-23% and will come later this year at which point all subsequent monthly YOY reads will trend continuously lower till they ultimately turn negative into the depth of the decline.

3. The general downtrend in prices will play out similarly to the “Great Housing Bubble” cycle with the exception that the monthly declines will be a bit more intense given the more aggressive price run-up and the abrupt reversal in mortgage rates.

I will continue to update this projection as new S&P CoreLogic Case-Shiller data settles as well as revise my overall thesis and key assumptions but at the moment it appears to me that the strongest monthly MTM change was seen in March, we are closing in on the largest annual YOY change coming likely this November and that the peak in prices will probably be some time next year based primarily on the effects that increasing mortgage rates have on market activity.

Wednesday, July 06, 2022

The Real Great Recession

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It’s time to face the facts, recession is here, not “officially” of course since it takes the NBER with a boat load of highly revised and settled macro-economic data to officiate that fact, but “technically” and in a fashion that is widely felt.

Q1 2022 registered a first negative real GDP print for this cycle (i.e. the cycle that started after the COVID pandemic induced mini-recession) and only the third (but most significant) time a quarter turned negative (if you leave off the COVID debacle) since the end of 2008’s Great Recession.

Add to that the fact that the Fed itself is now forecasting a second negative print for Q2 2022 and its becoming pretty evident that the economy is in the middle of a significant down shift that is only going to get worse with the full realization of the impact of each major headwind. 

The data visualization below (click for larger dynamic version) is displaying the Real GDP percent change from the preceding period (in blue on the left axis), the Atlanta Fed’s GDPNow Real GDP estimate annualized rate (in red on the left axis) and the Chicago Fed’s Brave-Butters-Kelly (BBKI) leading sub-component of GDP (green on the right axis).  In summary, Q1 saw an actual 1.6% contraction in real GDP from the preceding period, the Fed is currently estimating -2.0% annualized contraction in GDP while one of the Fed’s high frequency models is forecasting nearly a -3.0% going forward. 

The economy is currently contending with rising consumer prices primarily coming from general monetary inflation stimulated by the Fed’s own “easy money” policies over the last 13+ years, exploding food and energy costs with notable product shortages, an evolving stock market rout with an ever looming crash-out end-game, a quickly souring national housing market fragilized by speculation and loose lending and now traumatized by the abrupt reversal of interest rates, global uncertainty coming from the now obvious quagmire that is the war in Ukraine and a stymied supply chain from a China unwilling or unable to return to a post-COVID normal order.

That would be a sufficient array of challenging issues for even the most competent government and economic order to face up to but one gets the sense that our current “leadership” is woefully out-classed and simply incapable of even waging the most modest of effective responses to even just one of those many issues.

With all of that stated “gloom”, where do we go from here? The answer is pretty simple “doom” or in other words, “down”.  And not just a little down mind you, way back down to 2008 and beyond as genuine “fact” finally catches up with the Fed’s economic “fiction” and yields the compounded negative real return on the massively appalling mal-investment that was the mop-up of the Great Financial Crisis.

The “Real Great Recession” is now looming as the reckless policy response on the part of the Fed and the Federal government in the wake of the 2008 Great Recession, endlessly pumping, priming and backstopping in an effort to simply “kick the can down the road” thereby softening the blow for that era’s legion of weak hands is now realized to have come at an enormous expense of today’s totally FUBAR-ed bag-holders.

But this “doom” does not have to represent only misery and depression.

An epic economic reckoning will bring enormous opportunities as fundamental bouts of “creative destruction” run roughshod over a cornered economic system with no escape and the only path forward leading through the pain.

Business will go crash-out, households will go bust and paper wealth will vaporize and fade from memory taking with it the rampant fever for “easy money” fueled speculation while local, state and the federal governments, severely constrained, will be unable to do much more than simply attempting to manage keeping the peace.

Bleak outlook indeed, but as that famous Stoic philosopher, Seneca the Younger put it “Nothing lasts forever, few things even last for long, all are susceptible of decay in one way or another; moreover all that begins also ends.” Or as Semisonic more optimistically put it a little more recently, “Every new beginning comes from some other beginning's end.”

Tuesday, July 05, 2022

A Real Mean Reversion

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 One of the major differences between our current housing boom and the epic housing run-up and associated crash that ultimately led to the “Great Recession” is in the supposed quality of buyers, or more precisely, the underwriting standards lenders use when making home loans as well as the soundness of the loan products and features they offer.

Without a doubt, lending standards by 2005/06/07 had become completely detached from reality with 100% loan-to-value, no-interest, reverse amortization, no-income verification, sub-prime being some of the various means by which the housing finance system kept the party going (loan volume) even after prices had risen well out of reach for many prospective home buyers.

In the aftermath of the epic financial meltdown that ensued, there was a notable effort by Federal regulators to understand what went wrong, and further, to take measures to prevent such egregious activities in the future.

The Dodd-Frank “Wall Street Reform and Consumer Protection” Act had as a provision the “Mortgage Reform and Anti-Predatory Lending Act” which sought in part to tighten up the process of mortgage origination in order to:

It is the purpose of this section and section 129C to assure that consumers are offered and receive residential mortgage loans on terms that reasonably reflect their ability to repay the loans and that are understandable and not unfair, deceptive or abusive.

To that end there are the following two important sub-sections (NOTE: Dodd-Frank is an enormous act with many provisions; these are just two small samples of items focused specifically on mortgage origination standards):

Subtitle B: Minimum Standards for Mortgages

IN GENERAL.—In accordance with regulations prescribed by the Board, no creditor may make a residential mortgage loan unless the creditor makes a reasonable and good faith determination based on verified and documented information that, at the time the loan is consummated, the consumer has a reasonable ability to repay the loan, according to its terms, and all applicable taxes, insurance (including mortgage guarantee insurance), and assessments.

This section goes on to detail tighter rules for regulating, multiple loans (borrowers has subordinate loans on same property), income verification, no-interest options, negative amortization options and other lending phenomena that contributed to the mortgage mania of that era.

Subtitle F: Appraisal Activities

IN GENERAL.—A creditor may not extend credit in the form of a subprime mortgage to any consumer without first obtaining a written appraisal of the property to be mortgaged prepared in accordance with the requirements of this section. 

This section goes on to detail tighter rules for regulating the appraisal process of a property that will be financed using a “high-risk” subprime loan. 

Taken together, these two sub-sections point to one major flaw in the legislative financial regulatory process in that it is at best always backward looking, specifically addressing practices that occurred in the past that had led to financial crisis.

Whether there is any sense to even trying to regulate future financial activities, is not the topic of this post, but suffice to say, the Dodd-Frank mortgage origination related provisions focused heavily on the activities that led to the Great Recession and didn’t attempt to regulate other novel methods that might be employed in future speculative episodes.

One area that I have taken an interest in is in the non-conforming “jumbo” loan market and particularly in my own market of Boston where throughout 2020, 2021 and on into 2022, I have witnessed some truly reckless behavior on the part of borrowers and lenders.

Following up on my prior post on the subject, I dug a little deeper into the homes that I have highlighted previously to better understand the nature of the debt that financed these reckless purchases.

From a traditional mortgage lending perspective, these purchases appear pretty sound given that the average loan-to-value (LTV) was about 70% (i.e. 70% loan, 30% deposit), all mortgages were simple 30-year fixed rate loans (no risky options or even a single ARM) and I assume that all incomes were verified.

But considering that each of these buyers over-bid the listing price by on average a whopping 30%, one might draw a different conclusion.

First, below is a simple average model for pricing the Boston housing market that I developed using the S&P CoreLogic Case Shiller Home Price Index (CSI) for Boston.  This model, superimposed on a Zillow price history, simply uses the CSI to calculate the price trend line with 2016-2019 based on actual annual price changes and 2020-2022 based on an average annual price change from the trailing eight (8) years.

My general premise with this model is that 2020 through 2022 represented an absurdly anomalous period where lending rates were exceptionally low and buyers (as a result of COVID-19 hysteria) were simply not acting prudently.

As you can see from the model, there is a significant risk of “mean reversion” for the nation’s severely overheated housing markets as interest rates rise and prices fall meeting a more fundamental balance that, once materialized, will call into question the financial soundness of the loans backing up these properties.

If, given the emerging headwinds for the macro economy and housing specifically, we see a 25% pullback in home prices in Boston (not inconceivable given the ferocity of the price appreciation in just the last two years as well as the scale of prior pullbacks of about 16% after the late-80s S&L crisis and 18% after the Great Recession), then these homes would all have an average LTV of about 92%, a much less sound financial footing for these buyers and lenders.

Further, many of the homes could fall even more sharply given how far off the simple average price trend (the model) the buyers pushed the purchase with their manic bidding.  

The following is a selection of three homes from my original post, annotated with the simple average price model as well as the mortgage details to illustrate the point:

Note that I calculated the LTV as they stood on the day of settlement as well as what the LTVs would be after both a 25% pullback in prices as well as with respect to the simple average price model forecast of the more fundamentals-based value. 

The loophole in the lending standards for this cycle appears to have been that home appraisals were either unable to accurately account for the outlandish price appreciation occurring in the market or were simply roundly ignored given the fact that borrowers came to the table with 20%-30% down-payments and had good credit histories.

Prudent lenders would have evaluated the appraisal to determine a more fundamental valuation and either demanded more down-payment from the bid-happy borrowers to account for the additional risk or simply rejected the transactions outright.

For example, for the first property above, the fundamental value of the home at the time of purchase was probably closer to about $1,300,000 but it was bid up to $1,720,000 or about $420,000 over its fundamental price.

If the lender had been more prudent, they would have either walked away from the transaction or demanded that the borrower come up with about $800,000 for the deposit instead of the meager $400,000 that the borrower actually paid.

This would have resulted in a loan of about $920,000 against an $800,000 deposit for a very healthy 53% LTV which would have been well fortified against any oncoming economic crisis-driven home price decline.

Obviously, the lender didn’t perform this level of due-diligence because the borrow could not afford the additional deposit and all parties involved (lender, broker, lawyers, buyer and seller) simply wanted to stack up another closed transaction.

I suspect that my small sample is clearly demonstrating something important about the housing market dynamics this cycle, namely that there is real, yet to be fully realized, systemic risk coming from the prime lending market particularly for the performance of privately funded “jumbo” loans.

Wednesday, June 29, 2022

Reflecting on Rates

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For the last few months now, I have been suggesting that the Fed needs to move the Fed Funds rate up much faster than they have been, arguing that they are not only “behind the curve” given their failed “transitory” position, but that they have totally lost the narrative as far as taking a “hawkish” stance is concerned.  

My suggested approach to rate hikes has been for the Fed to move in the range of +100 to +125 basis points at each scheduled meeting (of 2022) as well as implementing random “emergency” intra-meeting rate hikes and setting an overall target of at least 8.5% by as soon as conceivably possible.

Obviously, this may seem a bit extreme from the standpoint of the “recency bias” of our current distorted economic times as well as the current level of debt carried widely by households, firms and the Federal government, but historically, this approach is actually very modest.

The following chart displays the annual rate of change of the consumer price index (i.e. the inflation rate) (in blue), the 30-year fixed mortgage rate (in red) and the effective Federal Funds rate (green) as well as the upper-range target of the Fed funds rate (in light green) in order to present the Fed’s actual current target.

Traditionally, the Federal Funds rate (the green line on the chart above… click for larger interactive version) , particularly during periods where inflation was clearly “unmoored”, has always matched or been well above the rate of inflation as measured by the year-over-year change in the consumer price index (the blue line on the chart above… NOTE: you could also use the annual change of the PCE index, the Fed’s preferred inflation measure but CPI is historically the measure that is reported for inflation as well as the measure feeding into COLA calculations and the like, so I’ll stick with this comparison for now).  

Of course, there are notable exceptions, for example, during the two post-recessionary periods following both the “DotCom Recession” and the “Great Recession”, the Fed’s policy rate remained below the rate of inflation for extended periods in an attempt to breathe life back into the respective lackluster economic expansions.

But when it comes to periods where the immediate concern is NOT “deflation” but instead “inflation”, the Fed has either targeted or allowed the Fed Funds rate to float well above the rate of inflation in an effort to contract the money supply and thereby stamp out inflationary pressures.

Shifting our focus to the long-end of the yield curve, another important inflationary relationship is found in comparing the 30-year fixed mortgage rate (the red line on the chart above) to both the consumer price index (rate of annual change) and the Fed Funds rate.

Notice that since the mid-1970s, the 30-year fixed mortgage rate has ALWAYS been well-above the rate of inflation (as well as the Fed Funds rate), which is to be expected, when considering the lengthy maturity of these bonds and the fact that lenders are primarily concerned with the risk associated to the high probability of inflation when pricing this type of debt.

I say “always” but actually since March 2022, the inflation rate (i.e. annual CPI again) has been running above the 30-year fixed mortgage rate and WELL above the Fed Funds rate, a truly anomalous situation that is begging for a resolution.

Either the 30-year fixed mortgage rate has to go up considerably (minimally about 300-400 basis points to 8-9%) or the rate of inflation needs to come down considerably or a bit of both.

One thing is for certain though; the current 1.50% Fed Funds rate is way to low to make a notable difference in either bringing down the rate of inflation or influencing the yield curve enough to instigate the 30-year fixed mortgage rate to guide up.

Remember, I’m certainly not suggesting that raising rates this aggressively is convenient for either debtors (particularly massive ones like the Federal government) or the central bankers at the Fed and their global counterparts.

I’m only pointing out the very simple and sensible historic relationship of these rates and suggesting that since, as Chair Powell noted today, “[Central Bankers] now understand better how little we understand about inflation”, they should have now learned that their recent efforts are simply not enough.

They either want to stamp out inflation, or they don’t.

Tuesday, June 28, 2022

Jumbo Loans, Jumbo Problems

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Something stinks in jumbo mortgage-ville.

For all of my adult life, the interest rate for jumbo loans has been at least a quarter percent (or more) above the rate for conforming loans, but recently, this relationship has flipped.

Recall that the primary goal of the massive “Government Sponsored Enterprises” (GSEs) Fannie Mae, Freddie Mac and Ginnie Mae, is to provide more affordable housing financing to the American population.

The GSE mortgage backed securities (MBS) come with an implicit guarantee (that was shown to be actually “explicit” when Fannie and Freddie were taken into conservatorship during the worst years of the Great Recession) of the “full faith and credit” of the United States government, thereby allowing this market in mortgage securities to exhibit the preferential pricing of near-riskless investment grade securities to the benefit of borrowers seeking lower rates of interest.

By contrast, the private, “non-conforming” lending market (i.e. loans that do not conform to GSE limits/standards …the market in “Jumbo” loans) would logically demand higher rates of interest given that private lenders financing this market are shouldering the full credit risk and not gaining the benefit of an implicit or explicit government guarantee.

This generally meant that the private lenders would perform more due-diligence when originating loans, demanding more down-payment (i.e. more skin in the game), and were more critical of home appraisals, and, further, made the loans at higher interest rates as compared to GSE lending.

Since early 2022 though, this relationship appears to have flipped with jumbo loan rates falling below conforming rates in the range of 25bps – 100bps! In my market, a local bank lender is advertising jumbo loans at a full percentage less than conforming loan rates.

The following is the Fed FRED visualization (click for larger dynamic version) showing the relationship of the 30-year fixed rate conforming versus Jumbo loan rates since 2017.

Clearly there is a different risk-return calculus being performed in the current private lending market that appears to have significantly influenced the pricing of potential risk coming from the performance of these loans.

One explanation could be that the underwriting is very strict allowing private lenders to provide highly preferential interest rates but I have my doubts given some of the dynamics that I have observed in my local market (Boston… a real bellwether housing market) during this cycle.

First, while there is no comparison between now and 2006 (the height of insanity that was the Great Housing Bubble) in terms of “creative lending”, there appears to be another gremlin afoot.  

In 2006, there were a plethora of creative loan products allowing borrowers to stretch to reach ever higher home prices (i.e. affordability loans); the negative/reverse amortization loans, interest only options, low documentation or no documentation (liar loans) together were all complicit in pushing home prices to their maximum in an effort to keep the party going for borrowers/buyers and the loan volume for originators/lenders.

Today, you don’t see these types of loan products advertised widely though I’m sure there are some examples that can be cited. What you do see though, are completed sales like the following (I have calculated the over-list sale amount for convenience as well as obscured the exact addresses):

Notice that these homes, generally speaking, are fairly typical 3 and 4 bedroom homes (one 5) in the suburban Boston housing market.  From my perspective, these are NOT exceptional homes. They are the types of homes most middle to upper middle-class families should expect to be able to afford at some point in their financial life.

But look at the prices and, more importantly, the outstanding over-list bidding wars!

This is nothing short of insanity and there is NO WAY prudent due-diligence was properly exercised by the lenders during the appraisal and underwriting process of these transactions.

I believe that this anecdote is revealing the most important Achilles' heel of the latest cycle of booming real estate, namely, that private lenders fell back into the same trap as the Great Recession housing boom, over-lending with the assumption that residential real estate is immune from market downturn.

Buyers, for their part, clearly went hog-wild throwing nonsensical sums at bidding wars in an effort to win a property at any cost.  This is to be expected with inventories so low and mortgage rates so favorable over the last two years, but the gatekeeper to the sound financing of these transactions is the banking system which should have prevented such madness but appears to have, again, failed that systemically important function.

I have no doubt that we are about to witness a severe housing downturn as prices within property markets across the country briskly reset downward as the ongoing surge in interest rates continues.

It will take some time, of course, given the snails-paced speed with which transactions settle in the residential housing markets, but the lesson we will learn from this new Housing Bubble 2.0 is no different from what we learned the last go around, namely, what goes up, must come down!

Monday, June 27, 2022

Durable Goods Orders – Consumer Demand Destruction Imminent

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 Today’s release of the Durable Goods Manufacturers’ Shipments, Inventories and Orders Report (M3) showed that new orders for manufactured durable goods increased in May by $1.9 billion (adjusted for seasonality, but not for inflation) or 0.7 percent to $267.2 billion while new orders for durable consumer goods declined by 0.62% to $42.9 billion.

The relationship between consumer sentiment and manufacturers’ new orders for consumer durable goods is pretty obvious as a pullback in consumer sentiment generally precedes the destruction of demand for consumer durable goods.

Given the historic pullback in the University of Michigan’s Consumer Sentiment Survey, it appears clear that we are about to see a significant pullback in consumer durable goods spending.

While this is the precise demand destruction that the Fed is looking to achieve with their new “inflation fighting” interest rate policy, to date, the decline in consumer sentiment consumer durable goods spending is likely primarily coming as the result of higher consumer spending on non-durable goods as rising prices for food and energy are forcing consumers to make hard spending choices. 

The following data visualization (click for dynamic version) shows New Orders for Consumer Durable Goods (in blue) on the left axis and the University of Michigan Consumer Sentiment (in red) on the right.

Notice the significant gap that needs to close in order for the current level of new orders for consumer durable goods to match the current level of consumer sentiment.  

Obviously, we should look for a significant decline in new orders for consumer durable goods in the months ahead.

Wednesday, June 22, 2022

Reflation Gave Way to Inflation

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It is surprising how many macroeconomic commentators propagate the false notion that “quantitative easing doesn’t cause inflation” typically offering up some esoteric accounting of the Fed’s balance sheet or the difference between bank reserves and currency in circulation or the highly structured means by which the Fed implements QE or some other means of obfuscating, through needless complexity, the obvious goal of this unusual monetary policy tactic.

Let’s recount for a moment the reason the Fed began “quantitatively easing” in the first place.

Back in the fall of 2008, in the face of the almost continuous flow of horrific economic trends for housing and the wider economy and in the wake of the collapse of Bear Stearns and Lehman Brothers, the Fed finally “blinked” and went beyond their normal policy tools to engage the crisis head-on with an approach that was new to the American economic landscape, namely, Quantitative Easing (QE).

The following two articles (click for larger versions), published at the start of the Fed’s QE1, paint the picture well:

Note the air of crisis and desperation as American’s and those worldwide with economic interests tied to the American real estate markets were truly panicked over fate and fidelity of the American economy.

QE1 was a one-two punch of zero percent interest rate policy (ZIRP) on the short end of the yield curve (the Fed’s traditional Fed Funds rate policy) coupled with an ad-hoc targeted yield control tactic on the long-end by the Fed participating directly in the mortgage market through mortgage backed security (MBS) purchases from Fannie and Freddie, the large government sponsored entities (GSEs) that essentially make the conforming mortgage lending market.

It’s important to note that the Fed’s purchase of GSE MBS was NOT simply an effort to force mortgage rates lower but, by the fall of 2008, the mortgage market was essentially completely impaired leaving the Fed to literally step-in to replace the collapse in demand for these securities with their own artificial demand.

Losses coming from imploding sub-prime mortgages as well as near-prime and even prime were mounting steadily as vast swaths of new or recent home buyers (the top of the market buyers) decided to mail the keys back to the lender (jingle mail) rather than suffer the further downside coming from steadily falling home prices, thereby grinding the mortgage market to a halt.

This was a catastrophic outcome for the highly financialized and highly complex mortgage finance system and without the Fed’s artificial purchase of MBS re-liquefying the market in mortgage lending, home prices would have likely fallen on the order of 40%-50% nationally rather than the roughly 25% that the Fed successfully held it to.

So, put more directly, the Fed’s QE MBS policy not only work to depress rates for mortgages, it also LITTERALLY MADE THE MARKET for home loans from 2008-on as the Fed transformed from a lender-of-last-resort to, ultimately, a permanent fixture in mortgage finance.

By 2010 and on into 2011, it was becoming clear (at least to me here, here, here, and here) that QE was here to stay, a fact that would leave an indelible and fundamental mark on our economic landscape as our highly financialized debt markets would simply adapt to accommodate the Fed’s participation on an on-going basis, thereby allowing this falsehood to permeate deeply into the dynamics of the system.

In fact, it has been recently estimated that even today, roughly 30% of the overall U.S. mortgage market is directly financed by the Federal Reserve, a startling fact made even more alarming by the realization that the Fed’s QE was not just limited to the purchase of MBS but also Treasury securities thereby working to artificially finance Federal debt just like it worked to finance mortgage debt.

This level of support was not just done in an effort to simply fend off “deflation” (a specifically expressed goal of the policy) but also to evoke a “reflation” of the markets and bubbly conditions that existed prior to the crisis in an effort to blunt the trauma felt widely by firms and households thereby working to sure-up systemic confidence.

The result of all of this Fed action is pretty clear as the crisis steadily abated and confidence and sentiment gradually improved throughout the 2010s leading to a notable and lengthy bull market in stocks, a steady reflation of the housing markets and a major improvement in outlook for the economy more generally.

But this “reflation” was, in fact, a form of inflation as it is quite clear that price levels of most asset classes (and probably even consumer prices) would be much lower today had the Fed not stepped up to “rescue” our economy from this notable bout with deflation.

Further complicating matters, by early 2020, the COVID-19 panic circumvented the Fed’s initial attempt to walk back some of this extraordinary support again putting the it directly in the position of “savior” of the economic system, for which again it leveraged ZIRP and QE to do battle with a major economic crisis.

But unlike in 2008, the post-COVID economy was already replete with hot money having benefited from over a decade of historically accommodative easy monetary policy and almost euphoric attitudes coming as a result of ongoing stock market and housing market “wealth effects” on firms and households.

The Fed’s COVID-era ZIRP and QE and the Federal government’s massive fiscal actions (PPP and various stimmies also funded by Fed Treasury QE) thereby worked to transform the prior economic “reflation” into literal, unadulterated “inflation” as economic participants caught in the volatility of the pandemic began to thrash wildly about throwing hot money at speculative absurdities like high-flying frothy stocks, endless cryptos, meme-stonks, NFTs, SPACs and a new wave of totally insane real estate speculation.

Now, with inflation clearly “unmoored” and with literally no easy pathway out of this maelstrom of economic insanity, the Fed and the economy more generally, will finally have to square off with the inescapable reality of this challenging period.