With the New Year here with the Fed fighting aggressively to battle inflation i know there are a lot of rumors floating around the FED either lowering, maintaining, or increasing the FFR (federal funds rate). none of this matters in my opinion.
why?
price goes up and buyers slow down.
Because, the FED jacked up interest rates so fast that they did not allow the markets to adjust. it seems as is the fed noticed that the inflation was indeed not "Transitory". anyone who believed the idea of transitory inflation is honestly quite foolish. something as absurd as "transitory inflation" is lip service for "give us a second to decide what to do". And "do" they did. As traders we do not care whether its political, all we care about is "the Set-up" there are a few fundamentals that lead me to believe this could potentially be a solid set-up.
1. during 2020 the FED lowered interest rates and here in the states there was a huge surge in demand for housing. So, homeowners bought houses at super low interest rates around the 3's. prior homeowners refinanced their homes at lower interest rates. Around the same percentage. Commercial Real Estate Investors bought RE during this time thinking the good times were going to continue to roll and when the bridge money is complete the inexperienced RE investors probably did not account for the massively higher interest rates on their Exit Caps when they ran their due diligence. So whats going to happen is now that the FED has made money way more expensive it has locked these investors and the sorry souls that invested with the guys in with the property. they will not be able to offload the property, because they will have to take a loss on the property because the cap rate went up and the buyer will not be able to afford the asking price at the 6-7% interest that is currently at in Jan of 2023. Nor will a lending institution lend Grade A money on grade B or C property.
2. Banks are in major trouble. the lending institutions that made riskier loans are about find out where their weak links are located. if borrowers did not lock their interest rates down the borrower and the lender are about to be at odds. This goes for people who took out a home equity line of credit out on their primary residence to buy some thing stupid like an expensive car, boat, girlfriend whatever. typically HELOCs are floating rates (not always) but most of the time. Banks are businesses and make their profit on the spread. Just like your market makers in trading. So the spread is the difference between the interest rate the bank has with the federal reserve and the interest rate you the consumer are willing to pay for the loan. example: if the FFR is 6% then the bank is going to charge you (typically around 2% over the FFR) 8% on a mortgage, car loan, whatever loan product. if you lock your interest rate down at 8 % you're good, but if not you're in trouble.
Why?
3. Going back to the business part and the mortgage part. all the buyers and refi-ers that locked down at 3% are staying where they are at. the mentality is "why pay more for the same amount of house or the same house" So new home loans and refinances (the banks cash cow) are drying up. So how does a business survive the drought? they take their floating loans and shoot the rate sky high. to make up for the loss volume of new loans. Commercial Loans, HELOCs, HEILs, Refinances. The potential problem with this is the borrower accounted for the interest at the stated rate of lets say 3-5 percent. 3 percent everything is good, 5 percent the family is eating butterless toast. Well the contract states the bank can charge you up to (example) 20% on the loan after a seasoning period. on a 30 year 100k$ loan thats $20,000 dollars. so now the loan is 120k$ and the loan payment went from 286$ to 341$ naturally a 20% increase on your payments. Now I know alot of people are excited about mortgage rates coming down, but im not sure this is a good thing. i havent seen the paper on these loan products but im guessing one of two things
A) these are floating ARMs (adjustable rate Mortgages)
B) the banks are getting desperate for business. the FED doesnt control mortgages (YET) its up to the individual banks that borrow from the fed. The fed charges them the borrowing bank the FFR its up to the borrowing bank to decide what to do with cost they can either eat it and absorb the cost or they pass it on to the consumer. so when i hear mortgage rates being 6% or 7% which is near the current FFR its telling me the banks are trying to drum up business. it is by no means a good thing like i keep seeing.
4. Commercial loans are the same way. instead of giving the business the loan based on the borrowers position they are based off the businesses health and business plan. and the terms are a bit different. in commercial loans you have what they call balloon payments and thats when the loan matures. the balloon is typically 5-7 years and again rates can fluctuate. But to make the payments more affordable they lock you in at a payment rate of typically 20 -25 years but could go high as 30 years and even better they're typically interest only loans. So an example of this is on a 100K loan at a 20 year payment rate at 3% with a 5 year balloon youre only paying like 12$ month to month but at the the end of 5 years you have to pay back the entire 100K$. so, that leaves the business a few options to either refinance or liquidate. Now this is not all commercial loans but the ones im familiar with are like this, so if you're holding any businesses in your paper portfolio you need to be paying super close attention to their 10Ks and 10Qs, because a lot of businesses in-cooperated either the influx of cash or lack thereof during this weird COVID time. So if you're seeing their assets drop and their debt rise or maintain or even drop it means the business is selling off its assets to meet these increasing loan demands or even worse their taking new loans to pay off old loans.
5. the fed is in charge of the employment rate as well. kind of odd or counterintuitive to be frank on the matter. but it does kind of make sense. when you look at #4 you can see where the problems start to arise. once the businesses start to liquidate their physical plants they begin to square off the excess fat to bridge the gap. so all unnecessary employees and departments begin to get cut. So when you look at the unemployment rate i think every percent is a million people. So, when you hear things like 4% or 5% unemployment its basically saying 4,000,000 or 5,000,000 people are unemployed. the FED has stuck hard and fast on keeping inflation at 2% its in Powell's speeches on the FEDs website the writing is on the wall in essence. He has also been quoted to be unhappy with the employment rate and wanting higher unemployment.
6. Student loan bubble. I dont know how this is not being discussed in major outlets. But we have a major student loan bubble on our hands here in the states. the problem arises with the issue of the recession we are currently in at the moment. I whole heartedly believe that the US is in a period of Stagflation. productivity has leveled off or dropped off and prices are increasing. The problem arises (as i have said in prior posts before) is the last recession of 2008 businesses never really increased wages after that period i believe out of fear. they learned they can suppress wages and increase productivity so there is no need to increase wages if we can get more for less right? SO, we have kids leaving university with degrees and student loans with the promises of better paying jobs than their vocational trained counter parts, and the plan back fired. students are graduating university and taking jobs that are paying the same amount that a high school drop out is getting payed. (with the exception of STEM based degrees) Why? Because of wage suppression and the older work force staying in the work force longer locking up those higher paying positions due to inflation. So, these kids are forced to take lower paying jobs, live with their parents, and then 6 months later the bill is due for the loans.
Im no conspiracy theorist im just a trader that uses a highly debated technique of trading, but if you just remove yourself and look at the bigger picture its clear to see that the world is moving toward a centralized economy. it will probably be a digital one that the central planners can control so they can limit the funds available to their opposition. AKA the FEDcoin. a digital dollar is a terrible idea. but thats a post for another time.
long story short the pattern is a bearish butterfly. with all the fundamentals listed above with the rising interest rates i see the dollar gaining strength and in essence following this pattern and coming down over the long haul.
thanks for reading my conspiracy! if youre a homeowner lock your mortage rate if you can or pay to lock the rate. even if its 1% or 2% higher than it is currently i dont see the FED slowing down until we get under 5% inflation (if the US government doesnt change the items listed in the CPI)
why?
price goes up and buyers slow down.
Because, the FED jacked up interest rates so fast that they did not allow the markets to adjust. it seems as is the fed noticed that the inflation was indeed not "Transitory". anyone who believed the idea of transitory inflation is honestly quite foolish. something as absurd as "transitory inflation" is lip service for "give us a second to decide what to do". And "do" they did. As traders we do not care whether its political, all we care about is "the Set-up" there are a few fundamentals that lead me to believe this could potentially be a solid set-up.
1. during 2020 the FED lowered interest rates and here in the states there was a huge surge in demand for housing. So, homeowners bought houses at super low interest rates around the 3's. prior homeowners refinanced their homes at lower interest rates. Around the same percentage. Commercial Real Estate Investors bought RE during this time thinking the good times were going to continue to roll and when the bridge money is complete the inexperienced RE investors probably did not account for the massively higher interest rates on their Exit Caps when they ran their due diligence. So whats going to happen is now that the FED has made money way more expensive it has locked these investors and the sorry souls that invested with the guys in with the property. they will not be able to offload the property, because they will have to take a loss on the property because the cap rate went up and the buyer will not be able to afford the asking price at the 6-7% interest that is currently at in Jan of 2023. Nor will a lending institution lend Grade A money on grade B or C property.
2. Banks are in major trouble. the lending institutions that made riskier loans are about find out where their weak links are located. if borrowers did not lock their interest rates down the borrower and the lender are about to be at odds. This goes for people who took out a home equity line of credit out on their primary residence to buy some thing stupid like an expensive car, boat, girlfriend whatever. typically HELOCs are floating rates (not always) but most of the time. Banks are businesses and make their profit on the spread. Just like your market makers in trading. So the spread is the difference between the interest rate the bank has with the federal reserve and the interest rate you the consumer are willing to pay for the loan. example: if the FFR is 6% then the bank is going to charge you (typically around 2% over the FFR) 8% on a mortgage, car loan, whatever loan product. if you lock your interest rate down at 8 % you're good, but if not you're in trouble.
Why?
3. Going back to the business part and the mortgage part. all the buyers and refi-ers that locked down at 3% are staying where they are at. the mentality is "why pay more for the same amount of house or the same house" So new home loans and refinances (the banks cash cow) are drying up. So how does a business survive the drought? they take their floating loans and shoot the rate sky high. to make up for the loss volume of new loans. Commercial Loans, HELOCs, HEILs, Refinances. The potential problem with this is the borrower accounted for the interest at the stated rate of lets say 3-5 percent. 3 percent everything is good, 5 percent the family is eating butterless toast. Well the contract states the bank can charge you up to (example) 20% on the loan after a seasoning period. on a 30 year 100k$ loan thats $20,000 dollars. so now the loan is 120k$ and the loan payment went from 286$ to 341$ naturally a 20% increase on your payments. Now I know alot of people are excited about mortgage rates coming down, but im not sure this is a good thing. i havent seen the paper on these loan products but im guessing one of two things
A) these are floating ARMs (adjustable rate Mortgages)
B) the banks are getting desperate for business. the FED doesnt control mortgages (YET) its up to the individual banks that borrow from the fed. The fed charges them the borrowing bank the FFR its up to the borrowing bank to decide what to do with cost they can either eat it and absorb the cost or they pass it on to the consumer. so when i hear mortgage rates being 6% or 7% which is near the current FFR its telling me the banks are trying to drum up business. it is by no means a good thing like i keep seeing.
4. Commercial loans are the same way. instead of giving the business the loan based on the borrowers position they are based off the businesses health and business plan. and the terms are a bit different. in commercial loans you have what they call balloon payments and thats when the loan matures. the balloon is typically 5-7 years and again rates can fluctuate. But to make the payments more affordable they lock you in at a payment rate of typically 20 -25 years but could go high as 30 years and even better they're typically interest only loans. So an example of this is on a 100K loan at a 20 year payment rate at 3% with a 5 year balloon youre only paying like 12$ month to month but at the the end of 5 years you have to pay back the entire 100K$. so, that leaves the business a few options to either refinance or liquidate. Now this is not all commercial loans but the ones im familiar with are like this, so if you're holding any businesses in your paper portfolio you need to be paying super close attention to their 10Ks and 10Qs, because a lot of businesses in-cooperated either the influx of cash or lack thereof during this weird COVID time. So if you're seeing their assets drop and their debt rise or maintain or even drop it means the business is selling off its assets to meet these increasing loan demands or even worse their taking new loans to pay off old loans.
5. the fed is in charge of the employment rate as well. kind of odd or counterintuitive to be frank on the matter. but it does kind of make sense. when you look at #4 you can see where the problems start to arise. once the businesses start to liquidate their physical plants they begin to square off the excess fat to bridge the gap. so all unnecessary employees and departments begin to get cut. So when you look at the unemployment rate i think every percent is a million people. So, when you hear things like 4% or 5% unemployment its basically saying 4,000,000 or 5,000,000 people are unemployed. the FED has stuck hard and fast on keeping inflation at 2% its in Powell's speeches on the FEDs website the writing is on the wall in essence. He has also been quoted to be unhappy with the employment rate and wanting higher unemployment.
6. Student loan bubble. I dont know how this is not being discussed in major outlets. But we have a major student loan bubble on our hands here in the states. the problem arises with the issue of the recession we are currently in at the moment. I whole heartedly believe that the US is in a period of Stagflation. productivity has leveled off or dropped off and prices are increasing. The problem arises (as i have said in prior posts before) is the last recession of 2008 businesses never really increased wages after that period i believe out of fear. they learned they can suppress wages and increase productivity so there is no need to increase wages if we can get more for less right? SO, we have kids leaving university with degrees and student loans with the promises of better paying jobs than their vocational trained counter parts, and the plan back fired. students are graduating university and taking jobs that are paying the same amount that a high school drop out is getting payed. (with the exception of STEM based degrees) Why? Because of wage suppression and the older work force staying in the work force longer locking up those higher paying positions due to inflation. So, these kids are forced to take lower paying jobs, live with their parents, and then 6 months later the bill is due for the loans.
Im no conspiracy theorist im just a trader that uses a highly debated technique of trading, but if you just remove yourself and look at the bigger picture its clear to see that the world is moving toward a centralized economy. it will probably be a digital one that the central planners can control so they can limit the funds available to their opposition. AKA the FEDcoin. a digital dollar is a terrible idea. but thats a post for another time.
long story short the pattern is a bearish butterfly. with all the fundamentals listed above with the rising interest rates i see the dollar gaining strength and in essence following this pattern and coming down over the long haul.
thanks for reading my conspiracy! if youre a homeowner lock your mortage rate if you can or pay to lock the rate. even if its 1% or 2% higher than it is currently i dont see the FED slowing down until we get under 5% inflation (if the US government doesnt change the items listed in the CPI)