Inflation to spike because of Debt Ceiling Impasse. Housing prices continue to crater.

Here’s what we are getting into today:

1. Two views on the Impact of a Debt Ceiling Impasse on the Federal Reserve's Stealth QE & the Repo Market.

2. Housing Prices Continue to Crash.

3. Automations Effects On The Economy

Let's Dive In!

YouTube Channel: Eurodollar University

Title: Will gridlock in Washington spill over?
Link: https://www.youtube.com/watch?v=qNDuIqkfZ70

Here are the top takeaways:

• The Federal Reserve is being forced into a stealth QE. Congress has reached a debt ceiling impasse which seems to be a fairly regular occurrence and Treasury secretary Janet Yellen has already sent an official letter to Congress saying the debt ceiling isn't being raised. Extraordinary Measures must now be taken which include drawing down the TGA balance.

• The Federal Reserve is trying to Stamp Out inflation through:

  • Quantitative tightening

  • Reducing the size of its balance sheet

  • Reducing the systemic level of Bank Reserves

• Now comes along the debt ceiling drama and what happens? Bank Reserves Go back into the system. The mechanics of stealth QE are at least correct. Every dollar that goes out of the TGA goes into the banking system as a reserve.

• There are some drawbacks to this plan that should be considered.

  • When the government used the TGA in the past, every dollar in tax payments that was made is a dollar that left the banking system. This created disruptions in the economy as money was taken out of circulation when it could be put to better use. The TGA is a relatively new phenomenon, and it's not clear that it will be able to handle the influx of cash that will come with a debt ceiling impasse.

  • The Fed is trying to Stamp Out inflation through quantitative tightening, which will reduce the size of its balance sheet and reduce bank reserves. However, if the debt ceiling isn't raised and tax payments have to go into the TGA, this could offset the Fed's efforts and lead to more inflation.

• The Federal Reserve's focus on the level of bank reserves is misplaced and their efforts to drain reserves in order to raise the Federal Funds rate have been ineffective. The real issue is banks' sensitivity to liquidity, which is determined by a variety of factors including regulations and self-imposed risk management practices.

Website: Wolf Street

Title: Prices of Existing Homes Fall 11% from Peak. Sales Hit Lockdown Low. Cash Buyers and Investors Pull Back Hard
Link: https://wolfstreet.com/2023/01/20/prices-of-existing-homes-fall-11-from-peak-sales-hit-lockdown-low-cash-buyers-and-investors-pull-back-hard/

Here are the top takeaways:

• Sales of previously owned homes, condos, and co-ops fell by 1.5% in December. This is the 11th month straight of month over month declines. 34% year-over-year decline. We are roughly matching the May 2020 lockdown low. Lowest since Housing Bust in 2010.

• The median price of all homes, fell for the sixth month in a row, to $366,900, down 11.3% from the peak in June.

• All cash sales dropped by 22% year-over-year. Buyers that do not have to worry about mortgage rates are not trying to buy these overpriced homes either.

• This historic housing bubble has popped, causing buyers and sellers to re-evaluate their strategies when it comes to pricing and selling their homes

• Active listings jumped up 55% year-over-year, but are still relatively low in aggregate. Potential sellers are determined to wait it out. The individuals that wanted to ride prices up are now sitting on vacant homes.

Newsletter: Exorbitant Privilege

Title: "Let me tell you something. Im from Chicago. I dont break. Barack Obama.
Link: https://exorbitantprivilege.substack.com//p/let-me-tell-you-something-im-from

Here are the top takeaways:

• The repo market reflected the struggling dynamic between those holding short positions, bank balance sheets constraints and the background of ample liquidity in 2022. At the end of Q1 and Q2, all three factors were present, but Q3 quarter-end was different due to the limited rise in RRP, unusually large fall in repo rates and massive rise in settlement fails. Q4 quarter-end saw lower repo rates and an increase in RRP usage, but fewer settlement fails due to lower bearish sentiment in the bond market.

• Treasury General Account (TGA) is expected to increase due to the debt ceiling debate, resulting in a decrease in dollar liquidity and upward pressure on repo levels.

• The TGA is a key factor in determining the liquidity of currency, and is expected to rise if the debt ceiling debate continues. A large rise in the TGA could lead to increased repo levels, a reduction of usage of RRP by money-market funds and further incentivize short bond positions.

Newsletter: Sage Economics

Title: Jan-23 Q&A Part I.
Link: https://basu.substack.com/p/jan-23-q-and-a-part-i

Here are the top takeaways:

• It is clear that automation is a good thing and that it will continue to be used to automate various tasks in order to make our lives easier. However, there are still some who are concerned about the impact that automation may have on jobs.

• Automation is not new. It has been around for centuries and has been used to do everything from cutting hair to manufacturing products.

• Automation has always had a positive impact on the economy. It has helped to reduce costs and increase efficiency.

• While there have been some job losses due to automation, there have also been new jobs created as a result of it. For example, the creation of ATMs led to the creation of new jobs in the banking industry.

• So, should we be worried about automation? Overall, no. Automation is a good thing and it has always had a net positive impact on the economy.

Thanks For Reading!

If you find value in this newsletter and want to make sure you don't miss any important updates, you should definitely consider subscribing. By subscribing, you'll be the first to know about new articles and special offers.

We also offer a paid service which will give a breakdown of every source we cover that will be sent out almost daily.

Our Wednesday newsletter will always be free, but to make sure YOU are not missing anything be sure to sign up for our paid subscription.

So DON'T WAIT - hit the subscribe button now and join our community of informed readers.

If you have any newsletters you wish to see in our lineup, please reach out and let us know. We will continually look to incorporate more sources to our weekly wrap-up