AIN’T BUDGIN’

Issue 257?????

By Jeffrey Trusheim, Chief Financial Officer, Mortgage Solutions of Colorado, LLC DBA, Mortgage Solutions Financial.

Mortgage Solutions presents Issue 257 of Market Pulse. This commentary will provide Trusheim's perspective of the economic, political, and technical considerations that will have an impact on the global & domestic financial marketplace. The report will provide a recap of the previous week's activity as well as a look at the important market-moving factors in the week ahead.

Inflation in September, as measured by the Consumer Price Index (CPI), came in hotter-than-expected with the headline number at 8.2%, and the core number (ex food and energy) at 6.6%, year-over-year.?Any hopes for a near-term Fed pause or pivot (on interest rate policy) were quickly dashed by this report. The stock markets initially crashed, but quickly reversed course and produced one of the biggest single-day rallies ever. However, bond yields moved to multi-year highs, and the fed fund futures market is now pricing-in a higher terminal rate just below 5% by next April.?More on stocks and bonds later in this report.

Here are some Fed comments given after the CPI report:

Cleveland Fed President Mester - “I have not seen any evidence to warrant slowing the pace of hikes, and doesn’t “see the Fed cutting rates next year.”

Fed Governor Waller - “We have not made meaningful progress yet on inflation.”

Minneapolis Fed President Neel Kashkari - “The bar to shifting our stance on policy is quite high.”

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IMHO, the Fed made a big mistake by keeping interest rates too low for too long, which (combined with a flawed energy policy) helped create the current inflation monster. Now, they run the risk of pushing interest rates too high and keeping them too?high for too long. Something is going to break. Total global public debt is $500 trillion. Maybe a sovereign debt default or another pension blow-up is just around the corner?

The Fed’s actions this year have resulted in record destruction of wealth in dollar terms.?Bonds are having their worst year ever (down 28%), with a record $3 trillion in market value erased from investors’ portfolios. Equities have lost about $13 trillion (about 25%) in market cap so far this year. That’s a combined $16 trillion drawdown in the market value of U.S. stocks and bonds. The so-called “balanced” portfolio of 60% stocks and 40% bonds is down over 21% so far this year, making it the second worst year ever, just below the 27% losses in 1931. Our markets have experienced three consecutive quarters of losses for the first time since the Great Financial Crisis of 2008-2009.?

Of course, the Fed welcomes all this “bad news”, as it creates the “demand destruction” that surrounds their inflation-fighting strategy.?What they want to see next is for our houses to lose value, and at least 1.3 million of us to lose our jobs. Then they can pat themselves on the back for a job well done! Hopefully, when they’re done, there?will still be some of our?economy intact… to pull out of the ashes of the Fed’s recession. Maybe the Biden Administration will find “energy religion”, and give us a workable and acceptable policy? The mid-terms are just three weeks away. Hooray!

THE STOCK MARKET

If you were tuned into the markets last Thursday, you were able to witness one of the most spectacular trading days of all time. Just prior to the CPI report, the markets were quite firm on a QE announcement by the Bank of England. The Dow was up about 400 points, and the S&P 500 was up about 40 points. Then in response to the bearish CPI data, the market crashed, with the Dow plummeting over 900 points and the S&P declining nearly 200 points, all within just a few minutes. The S&P hit a new low at 3491 and before you could say “buy the dip” the market took-off like a rocket. At days end, the Dow had rallied over 1,500 points from the morning low, and the S&P rallied about 190 points, producing what technicians call an outside key reversal.?

The celebration didn’t last too long, as the impressive rally ran into (S&P) resistance just above 3700, and went into full retreat on Friday, closing at 3583, down 86 points on the day, and down 56 points for the week. So, for now, the battle lines are drawn. Initial resistance looks firm at the 20-day moving average near 3708, and Fibonacci resistance at 3715. Initial Fibonacci support is at 3575, followed by Thursday’s reversal low at 3491. As mentioned in recent missives, I view the 3500-3550 area as a place to begin nibbling on starter positions, realizing that lower lows toward the 3200 region are still possible. IF the S&P can get above 3735, there is a high probability that a bottom has been struck, and upside targets in the 4100-4200 region will be targeted.?

Many important corporate earnings reports will be released during the next three weeks and could have a significant bearing on stock market prices and direction. After all, we are dealing with a “market of stocks” more so than a “stock market.” Corporate balance sheets are in excellent shape, with cash flow to GDP ratios near all-time highs, and debt to profit ratios near all-time lows. Recall the better-than-expected Q2 earnings reports back in June…The S&P rallied 14%. How about a repeat?!!

THE BOND MARKET

Government bonds are having one of their worst years ever. In fact, 2022 will go down in history as the 4th worst year after 1721, 1865, and 1920. The Fed is now on track to raise the fed funds rate by nearly 500 basis points…from the zero-bound pandemic low, to the projected April 2023 terminal rate just below 5.0%. Long-term Treasuries have declined 28%, and after adjusting for inflation, the declines have been well over 30%. The 10-year Treasury closed just above 4% for the first time since 2007.

The Fed’s preferred method to measure recession risk is the 3-month/10-year spread. That has narrowed dramatically in recent months, from 113 in July to just 19 basis points currently. However, the 2-year/10-year spread has just increased to -47 basis points, the widest negative spread in 40 years.?

With yields at multi-year highs, and at attractive levels for the first time in many years, I see value at current yield levels and have been layering positions into my income portfolio. The 2-year Treasury is yielding 4.5%, and may possibly reach 5.0% next year. I like the yield, the safety and the liquidity.?

Nobody knows exactly when or where the current Fed tightening cycle will end. However, we do know that it will end at some point, and the Fed will start an easing cycle again. History has also shown us that the markets always bottom before the economic data starts to improve. How will the Fed pull us out of the recession…by lowering interest rates, of course.?

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Make it a great week!

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Jeff Trusheim is the CFO of Mortgage Solutions Financial. Jeff is a 30+ year veteran in the Wall Street arena, with a background in economics, risk assessment and finance (banking and mortgage). He has previously worked in Fortune 500 companies in growing their portfolio and economic footprint.?