Five Things to Know About Investments for the Week of October 13th, 2023

Chutzpah is a Yiddish word that loosely translates to a combination of gall, obnoxious assumptions, and courage. There’s an old saying that the definition of chutzpah is killing your parents and begging the judge for leniency because you’re an orphan. I also like the way Futurama “explained” it.

In this week’s 5 Things, we’ll highlight a few people and groups with an excess of chutzpah, gall, and a lack of understanding regarding how their public comments would be received. We’ll address the following topics:

• Banks are already asking for another government bailout. Do any of you want to pay for another TARP?
• Realtors and mortgage bankers want lower interest rates and higher commissions. Are they honest about their intentions?
• CPI not coming down. Paul Krugman declares victory against inflation. Is this marketing, or does he believe it?
• The Bond Vigilantes fire a warning shot at the Treasury. Does this mean higher rates even without the next Fed rate hike?
• Current events and energy prices. Is there anything likely to happen in the near future outside of a global recession that will lower the price of oil?

Ready for a week of things you’re likely to find annoying? Let’s dive in:

1) Banks Already Asking for Another Government Bailout:

Outstanding finance reporter, Jack Farley, pointed out that some bankers are starting to warn that they’ll be requesting another trillion-dollar bailout. As everyone including DKI expected, the few banks that failed last spring were not the only banks with unrealized losses. Many banks didn’t shorten the duration of their bond portfolios two years ago, and now have massive losses in those portfolios. Not recognizing them keeps the banks “solvent”.

DKI Takeaway:  US banks have taken massive risk in their bond portfolios. They should have shortened their bond duration when the Fed started raising rates. Unwilling to give up the extra yield or to recognize losses, the banks kept the risk on the balance sheet. Just like 2008, they figure that if they make money, bank execs. will get paid. If they lose money, they can try for another bailout. Like the rest of our “emergency” spending, you’ll see the bill not in your taxes; but rather, in more inflation.

2) Housing and Realtor Associations Want to Control Interest Rates:

Hilarious FinTwit housing expert, Darth Powell, points out that associations of realtors and mortgage bankers have publicly asked the Federal Reserve to lower rates or at least announce they’re done raising them. The stated intention was to make housing more affordable.

DKI Takeaway:  The huge housing price increases we’ve seen in recent years were caused by near-zero interest rates, quantitative easing, and illegal Federal Reserve purchases of trillions of dollars of mortgage-backed securities. Sound money and reasonable interest rates are exactly the thing that will lower prices and make housing more affordable. Lower interest rates mean a continuing asset bubble and higher housing prices leading to higher realtor commissions. I’m calling “chutzpah” on this effort to raise commissions and pretend it's to help others. What do you think?

3) The CPI Isn’t Coming Down:

The September CPI came in above expectations at 3.7% and the Core CPI which excludes food and fuel remains above 4%. Fuel prices are up and about to face easier comparisons with last year. The CPI shows food inflation for food at home under 3%. I’m skeptical about that number and wonder if anyone at the US Bureau of Labor Statistics been inside a supermarket in the last two years.

DKI Takeaway:  With energy prices rising, housing prices staying high, and the end of a year-long ridiculous downward adjustment to health insurance prices, do not expect the CPI to hit that 2% target anytime soon. Fiat “economist”, Paul Krugman wins the chutzpah award by tweeting that we’ve beaten inflation at very little cost. DKI readers:  Would you please check your household budgets and let me know if we’ve beaten inflation? Has the cost been “very little”?

4) The Bond Vigilantes Are Taking Control from the Fed:

During normal times, the Federal Reserve sets the fed funds rate and the rest of the yield curve gets priced based off of a small duration premium to this one ultra-short-term interest rate. The risk to our current practice of unlimited currency creation and quantitative easing was always that the bond market would reject a Treasury auction and demand much lower prices and much higher yields in order to buy the next round of government debt.

DKI Takeaway:  Last Thursday, we saw the stock market drop when the government auction of 30-year Treasuries priced above 4.8% on weak demand. This was a half percentage point increase from the prior month. The market is expressing a lack of trust in the Federal Reserve, Congress, and any data that the government reports. These higher yields are doing the Fed’s work for them. However, before we all celebrate a less-likely next Fed rate hike, please realize that we’ll still end up with higher interest expense on government debt leading to more spending, and in turn, more inflation. To understand this better, check out The Bond Vigilantes Have Arrived.

5) War, Sabotage, and Reduced Supply Leading to Higher Oil Prices:

Hamas attacks Israel leading to war in the Middle East. A Finnish pipeline is sabotaged. Russia is having difficulty getting the catalysts needed to refine their own crude oil leading to more crude exports and less exports of distillates. The one thing each of these events has in common is they all lead to higher energy prices.

DKI Takeaway:  The recent price movements have all been tied to terrible current events. Long-term, increasing worldwide demand for energy and restrictions on exploration and production of the cheapest sources of energy will lead to much higher prices. US inflation will also lead to higher nominal oil prices in dollars. If you want to understand the impact on how these issues will affect the price of oil, we have a brief Clarification on Oil Prices on the DKI blog.

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