The New CS Board

[jumanji0881]

David Stockman On The Coming Bond Bear Market... And What Comes Next : https://www.zerohedge.com/markets/david-stockman-coming-bond-bear-market-and-what-comes-next

My Comment: The problem for the Fed is that after 35 years of coddling the stock market, no one believes they will really harm the markets by raising rates dramatically enough to kill inflation and that they will relent at the first signs of a recession. So, in order to have any credibility, the Fed is going to have to raise rates a lot which will crash the stock market and the housing market. Otherwise, inflation will only get worse. The Fed can only control demand, not supply. And supply constraints are driving inflation : Covid, China lockdowns, labor shortages, climate change, sanctions and the war in Ukraine, supply chain bottlenecks.

Excerpts:
Needless to say, an economy staggering under the weight of $87 trillion in debt, representing a record 365% of GDP, can’t take much interest rate increase in any case. But when the Fed is drastically behind the curve and will be forced to hit the brakes hard (and unexpectedly) in coming months, you are talking about a recipe for financial carnage.

Looked at differently, recall when there were $18 trillion of negative yielding debt trading in world bond markets?

That number is already down to $3 trillion and heading vertically toward positive territory—-the only rational place for bond yields to stand. And as it corrects, there will be a world of hurt among corporate, household and government borrowers who had foolishly assumed that free money was a permanent condition.

The benchmark yield, of course, does not exist in a vacuum—just the opposite. The Fed’s post-March 2020 printathon caused a radical plunge of mortgage rates, triggering a speculative run-up in housing prices. Now its reversing violently, and housing prices can’t be too far behind.

In fact, the whole beneficent housing cycle of the last 42 years is likely reversing. As shown in the chart, between 1980 and the first peak in 2006, housing prices rose by 295% as the 30-year mortgage rate plunged from 15% to 6%.

But the Fed was not nearly done. During the era of ZIRP and QE after the 2008 crisis, it drove the 30-year rate (red line) to a low of 2.67% in Q3 2021, thereby fueling a new housing price (blue line) surge of another 60% from the 2006 high.

But here’s the thing. In just the last two quarters, the 30-year rate has rebounded by 175 basis points to 4.42% from the 2021 low, thereby already cancelling 50% of the 350 basis point drop from the Q1 2007 level. So tumbling housing prices are surely next in line.