Mortgage Resets Explain Fed’s Temporary Rate Hike
Many believe in an exit from printing, and rightfully so, as the Fed has exited twice already, moving to periods during which there was no printing policy in place. We know what happens after these two good examples: under the thick weight of redistribution of wealth, the economy collapses further, and yields fall further.
This time (fool me three times), we only get talk of an exit. But talk can be powerful, and the Fed knows it.
Now, we all want for the best, even hopeful academics, but if one understands the roughly annual, cyclical nature of printing, followed by international baton passing, washing, rinsing and repeating…
Then it is curious to consider the timing of the Federal Reserve-prompted rise in interest rates, if it is any indication of the desires of the Fed’s majority owners:
The banks, starved for net interest margin in a world of flat yield curves, have a significant amount of mortgages (as shown above) with interest rates resetting; why not ensure the rate banks receive isn’t at least 1% higher over the course of the rest of the contract while the opportunity exists?
In addition, the coming action this fall (detail here, and here) will reinforce the persistent, high Treasury prices (and low yields) that appeared in 2012, after European Union worries ginned up more coordinated printing. The chart below shows the end of the best period to sell a home post-crisis, as simultaneously prices are high, and rates low. The next time yields fall, it will take recent real estate price gains with it.
Surely trouble in the European Union couldn’t again re-surface in the media, post-German elections… Nah, that could never happen.
Of course, with dollars being printed at an amazing clip, many would think dollars and Treasuries would have sunk to the bottom of the ocean by now. But a look back a few decades reminds us that it is not the Irving Fisherine quantity theory of money that won out in the Great Depression, but rather the subjective price formation of the classical-thought economics some 200 years earlier. In other words, it’s not an explicit quantity of cash printed that matters in some ratio, it’s the details individuals use to form prices on their personal value scales.
Two current examples:
Japan’s publicly listed central bank prints 3x the amount the Fed has printed (relative to GDP), and the yen round trips (expected to plummet against the dollar, the yen fell only at first, then regained all of its losses).
The Fed prints $3 trillion, yet global investors have not yet run from the dollar full-force. To explain this, we paraphrased hedge fund manager, Hugh Hendry in What Silver & Gold Price Tell Us About Depression To Come:
In Hendry’s own words:
So since there’s “the absence of a sustained [global] recovery,” the question arises, when will the Fed Chairwoman or Chairman become “despondent” in her/his attempts to jump-start the economy, with seemingly little inflationary side effect, considering the Fed Open Market Committee’s efforts to date.
The President of the New York branch of the Federal Reserve Bank admits printing would be extended (more) should economic indicators not meet targets. Bernanke has also said printing speed could decrease, or increase.
Observe the pattern so far over this “recovery”:
Stop, increase, stop, increase, slow, _____
Mortgage resets explain the timing that the Fed chose to trigger temporarily higher interest rates, as it (again) supports the idea of recovery, and the Fed can tread lightly over the months ahead (with fewer bond and MBS issues to monetize).
The Federal Reserve knew they would only have to speak to accomplish what used to be done with a hike in the price the Fed charges to lend—via the Federal funds rate.
One can see where we stand today quite clearly—a temporary stop topping up bank income on the path of contraction in legacy economies and global trade. Hendry’s opinion of the economic position matches our own data, and he is right: there is an "absence of a sustained recovery." Alongside this we have fresh warnings for the first time in years from Goldman, JP Morgan, The Bank of International Settlements on turmoil ahead.
Treasuries will again reach record high prices, as every asset is sold with the exception of only the largest pools of money-good bonds (U.S., U.K., Swiss), where large investors (think pensions, funds) can get return of capital while planners attempt to save it all… all over again.
The dynamic only changes when printing is viewed as the cause of the malady, the cause of zombification (economic fascism), when no one believes in the promises of “recovery” any longer (on the back of more redistribution from the poor to the government planners).
For the broader public, decades of multiple massive market crashes timed with an end to (now a slowing of) printing have reinforced the fact that printing isn’t good medicine.
As the public’s view of printing changes, planners have begun work to convince the public that ongoing expansion of the currency supply MUST be permanent policy—debates coming this fall over loaning even more will further this cause. Either government dependents accept this, or their exponential system collapses—working on that, planners have turned up recruiting efforts in an attempt to ensure the tyranny of the masses:
The number of Americans on food stamps has grown from 32 million to 47 million during the current administration, now exceeding the entire population of the nation of Spain– Michael Snyder
The banks, starved for net interest margin in a world of flat yield curves, have a significant amount of mortgages with interest rates resetting; why not ensure the rate banks receive isn’t at least 1% higher over the course of the rest of the contract while the opportunity exists?