Tomorrow's News Today

Today is one of those days where the thing’s I’ve said are coming are now happening.

Let’s start with the overly secure stock market that plunged over 400 points intraday on the Dow and landed down almost 400 points because the economic news did what readers here knew was coming, though the market delusionally believed otherwise. For perspective on the Dow’s drop, it was the worst day since the March bank failures.

Consumer confidence gave the stock market a surge of confidence not that long ago; and I said to pay it no attention because confidence could and would “turn on a dime.” With one of September’s measures in the bag, we saw consumer confidence fall to a four-month low today over “rising fears of a recession,” which nearly everyone in stocks had breathed a big sigh of relief over when confidence was strong the month before because the consumer being strong supposedly proved there was no recession in sight on the basis that consumers who feel strong keep consuming.

And that was where my “it can turn on a dime” came in, and it just did. It is also where I said consumer confidence was “reactive and not a forward indicator.” Other factors in the drop were continuing rises in interest and the political divide that could shut down government.

If congress doesn’t reach a deal …

Hundreds of thousands of federal workers will be furloughed and a wide range of services, from economic data releases to nutrition benefits, suspended beginning on Sunday.

So many unemployed will, of course, put a big bite on consumer spending; and this is exactly what would have happened if the debt ceiling was not raised. It would NEVER, as I said back then, result in the government not paying its debt. Instead, the government would do even more trimming of this kind on its daily expenses to keep all government spending within its revenue so that it didn’t have to add to the debt.

All of that was a fear-mongering lie put out by both sides of the aisle to up their bartering pressure and fed to the masses by the complicit financial media that should have been able to EASILY see through all of that, but never did. David Stockman was one of the few I read at that time calling the whole thing a bald-faced lie by both parties.

And, of course, so many unemployed can be just what tips things quickly into recession, even in GDP, as government — perversely to the view of some — gets counted as part of GDP, and its reductions in pay feed through the economy. Plus market can start a nasty slide at that point that can be hard to stop when there is plenty waiting to give way.

What was really interesting was how perfectly the housing market’s plunge in today’s news illustrated what I have been warning about the Fed’s tightening and how it could backfire where additional tightening in a misunderstood labor market that is tight due to too few producers could actually raise prices by lowering production even more and creating greater scarcity. We saw EXACTLY that critical dynamic in the housing market today as an illustration of what could come in other industries.

The number of new home sales plunged, but prices soared. Why is this happening? Well, I can tell you that builders will be cutting production in this kind of environment, if they are not doing so already, making already short housing supply even more scarce. They are likely cutting back already based on other data out earlier because very few people are buying due to the Fed’s raised interest rates making houses unaffordable. Soaring mortgage interest has driven the cost of monthly payments higher, but they are also not buying because the shortage of houses has driven the price of homes higher, compounding the payment increases.

Today, we saw those two forces that have been denting the housing market come through in available reports. The number of homes that are available for sale went way down, but the scarcity of the homes that are available is meaning that the few who are still able to pay paid a much higher price to get one.

The Commerce Department showed new home sales plunged 8.7% to a seasonally adjusted annual rate of 675,000 units in August after racing to a 17-month high in July. Economists had forecast new home sales … falling to a rate of 700,000 units.

The rate on the 30-year fixed mortgage vaulted above 7% in August and climbed to an average of 7.19% last week, the highest since July 2001, according to data from mortgage finance agency Freddie Mac. Mortgage rates are rising in tandem with U.S. Treasury yields, which have surged on worries that soaring oil prices could hamper the Fed's fight against inflation.

There you gave a whole lot of what I’ve been forecasting coming in in a single bite: Oil prices are now soaring. That, among other things, is sending Treasury yields surging higher. Those drive mortgage rates. So the rising price of oil is even contributing to the rise in home ownership costs because it is raising interest rates. Rising oil prices, I’ve said, find a way to seep into everything and die up the price of everything. They will also soon be driving up the prices of most components that go into new home construction in production energy costs and shipping costs and, in some cases, as raw material costs that go into components.

So scorching oil prices will turn up the heat on inflation everywhere over time; but the foolish market said only a week or so ago these rising oil prices were “temporary.” Well, sure, if by that you mean everything in this life is temporary, but I claimed they would likely prove to be as “transitory” as inflation, itself, did back in those good ol’ days when the Fed was trying to fool us before inflation ripped their lying faces off.

Here is more of that kind of nonsense assurance:

"While we expect higher rates to hurt new home sales, we think they will be more resilient than existing home sales as builders seem willing to scale up their use of incentives to motivate sales," said Nancy Vanden Houten, lead U.S. economist at Oxford Economics in New York.

Builders have already gone a long way with this, but those “incentives” cost them money, and they are probably getting close to having offered as much in incentives like “mortgage payment buy downs” as they can. So, that’s a dream.

A third report from the Federal Housing Finance Agency showed annual home price growth quickened for a second straight month in July, largely reflecting the tight supply in the market for previously owned homes. House prices jumped 4.6% on a year-over-year basis in July after rising 3.2% in June. Prices shot up 0.8% month-on-month after advancing 0.4% in June.

Exactly! So, prices bolted upward even as sales and production decline.

The big, BIG risk that it all backfires

And here is, as I said, how you can see this actually causing the Fed to tighten us deeper into a recession (to go even higher for longer), causing more production shortages down the road:

The resurgence in house prices was seen feeding through to higher inflation, likely giving the Fed cover to maintain its hawkish posture for some time.

What one needs to understand that is truly different this time is that the Fed has not in our lifetimes tightened when many things around the world are already in short supply, including especially workers. So, we have not seen a situation where their tightening could cause such scarcity that it drive prices upward. Now, however, many things around the world are scarce, though the US has managed pretty well, but crimping down jobs when too few people are already producing goods and services in the country will decrease production more, and scarcity is already contributing some to the inflation equation of “too much money chasing too few goods.”

That came together in housing in today’s reports. Let’s hope it doesn’t come together in a lot of things in the months ahead, because I am betting the Fed will be so short of understanding that dynamic that it will just make them think they need to be even more “hawkish in posture for some time.”

"The Fed will see the reacceleration of house prices as a reason to keep interest rates higher for longer," said Bill Adams, chief economist at Comerica Bank in Dallas. "Renting households are seeing some relief in new lease prices, but since two thirds of Americans are homeowners, the Fed cannot afford to look past house prices' influence on the cost of living."

But, if their tightening reduces production more, we’ll just see prices rise more due to even worse scarcity. There won’t be many people buying at those prices, but those will be the prices driving the inflation numbers down the road. It is the last price sold that sets what prices have risen to, not the number of buyers still willing to purchase at that price. It’s what you will have to pay if you want to purchase, or you’re out of the game.

Here is a statement from another one of today’s stories about that dynamic in play:

The index measures a period where mortgage rates started to push back up toward 7%. Many owners are reluctant to put their homes on the market at a time of high borrowing costs, leaving buyers to fight over a limited supply of homes listed for sale. The number of homes up for resale in August was down 7.9% from a year earlier, according to Realtor.com.

“Buyer demand continues to outmatch housing supply, creating upward pressure on home prices despite the fact that home purchase costs are taking up an outsized share of household incomes,” Realtor.com’s Chief Economist Danielle Hale said in a statement.

High borrowing costs are also denting sales for new homes, which dropped in August to a five-month low, government data showed Tuesday.

So, prices soared even as sales plunged.

On the production side, tipping us off about likely future production and supply …

Builder sentiment dropped into negative territory in September for the first time in seven months, according to the National Association of Home Builders’ monthly survey.

In September, 32% of builders said they cut prices, compared to 25% in August…. The average price cut was 6%.

That many builders cutting prices that much are likely to also cut production. That’s when you enter the “doom loop” or “death spiral.” Falling production causes more scarcity and even higher prices for what remains, and most are just shut entirely out of the frozen upward market. At some point, that cracks up and gives way to falling prices, but not before huge economic damage is done.

Now you may be confused. Are prices up or prices falling? Well it depends on what sector of the market you are looking at and what gauge. It is the more generalized S&P CoreLogic Case-Shiller report that showed rising prices, and those prices are the ones that are more inline with what will eventually follow through on CPI. It also runs a little behind some reports, but it's including existing homes, a larger part of the market, not just the new homes builders are dropping prices on. The existing homeowner continues to hold out for more.

“High mortgage rates are clearly taking a toll on builder confidence and consumer demand, as a growing number of buyers are electing to defer a home purchase until long-term rates move lower,” Robert Dietz, NAHB’s chief economist, said in a release.

And that CERTAINLY is not happening anytime soon, tough the market has disbelieved me about that all along (mostly because it doesn’t read me anyway, but the point is it believes the opposite of what I have continued to say for well over a year — “higher for longer” and then longer).

As Wolf Richter’s summarized the new-home builder market v. the existing-home market tug-o-war:

Cut the price, and they will not come? Homebuilders, in a tough market, compete with homeowners who are still delusional.

It’s somewhat a tale of two markets.

New houses now compete with used houses on price. Homebuilders have to build and sell houses no matter what the market is. And they responded by offering deals, though parts of their deals are not reflected in prices – such as mortgage-rate buydowns and incentives – while homeowners who are trying to sell are still delusional, hence the plunge in sales of existing homes.

However, it is not just that existing-home owners are delusional about the value of their homes, though some may be; many don’t want to even think about entering this market because most existing homes out there are carrying mortgages with far lower interest, and people who already have that locked in are more than reluctant to jump into much higher rates with both feet. So, the market is seizing up because owners of existing homes know they will have to pay the same outlandish price for their next home as the outlandish price they get on their existing home, but they’ll have to do that at double the interest rate or worse.

Thus, the market has locked up, but the Fed is going to raise interest even higher, which will likely just lock it up even more until something gives and the whole Jinga puzzle crashes to the floor.

A Dimon getting rough

At last, one of world’s biggest banksters, Jamie Dimon, agrees with me about where the Fed is going to take interest and so does a voting Fed member who used to be one of the biggest Fed doves. The Fed is likely going MUCH higher for MUCH longer. (“Much” being not a lot more in number, but huge compared to previous interest rates we have long grown used to and compared to the neutral rate this economy can actually survive and compared to the number that wannabe home buyers already cannot afford.) Dimon said he can easily see the Fed lifting its foundational interest rate to 7%. The Fed’s Neel Kashkari joined him with a similar prediction.

Now, these are not quite the fulfillment of what I called “giving you tomorrow’s news today” in that the Fed hasn’t actually followed through on my prediction yet; but these voices tell you — as people very much in the know about how the Fed is likely to adjust its plans — what the Fed is likely to do soon. The Fed and Dimon talk plenty, as he is their buyer of first choice when they team up with the FDIC to sell crashed banks at firesafe prices. And Dimon agrees with the causes I said would be driving this — inflation turning back to rising — and the environment I’ve said it will happen in — slow growth (or recession in my case).

JPMorgan Chase CEO Jamie Dimon is warning that interest rates could go up quite a bit further as policymakers face the prospects of elevated inflation and slow growth.

Though Federal Reserve officials have indicated that they are near the end of their rate-hiking cycle, the head of the largest U.S. bank by assets said that may not necessarily be the case….

“I am not sure if the world is prepared for 7%,” he said, according to a transcript of the interview. “I ask people in business, ‘Are you prepared for something like 7%?’ The worst case is 7% with stagflation. If they are going to have lower volumes and higher rates, there will be stress in the system. We urge our clients to be prepared for that kind of stress.”

“Prepare for it,” he tells his clients. Expect that it is coming.

“That will be the tide going out,” he said about the rate surge. “These 200 [basis points] will be more painful than the 3% to 5%” move.

That, too, accords, at last, with what I’ve been saying, which is that the final part of this inflation battle, as inflation now appears to be resuming, will be the worst. The first picked off the low-hanging fruit. Now we have to battle much longer to tear down the sticky stuff.

At the same time, Fed researchers, in a white paper released Monday, noted the high level of inflation uncertainty, which they said “may be acting as a headwind to U.S. growth and pose challenges for monetary policy.” The paper said that such uncertainty can have an impact on industrial production, consumption and investment.

The Fed’s Neel Kashkari agrees:

Minneapolis Federal Reserve President Neel Kashkari thinks there’s nearly a 50-50 chance that interest rates will need to move significantly higher to bring down inflation….

“The case supporting this scenario is that most of the disinflationary gains we have observed to date have been due to supply-side factors, such as workers reentering the labor force and supply chains resolving, rather than monetary policy restraining demand….”

But the Fed’s answer may be to make those supply chains all worse again, backfiring on the ways improved supply lines brought down inflation more than the Fed’s rates curbed consumption (demand) to bring down prices. That’s where the engine backfires and knocks itself into running in reverse — a very bad situation that can happen with some diesel engines and with some economies.

Finally, the UAW is managing something that I said really needs to happen, but never thought it would. Today’s news says they have specifically targeted buybacks and told shareholders to swallow their buybacks as a way of paying for wage gains, rather than drive prices further up; and cornered shareholders are actually listening and saying it may be time to capitulate to that demand!

Big news.