Duration Extension on All Home Equity

Plus tracker updates

We commented last week as to the excellent job the Federal Reserve has done in regards to locking up and extending duration on trillions of dollars in home equity that exists. We believe this will lead toward a continued destruction of overall inflation as credit remains tight and main street balance sheets constrained, because they have virtually trillions in untappable cash in the form of Home Owner Equity. What this next Goldman chart demonstrates is that nearly 90% of all outstanding mortgages have a rate that is below 5.50% and 60% have a rate that is below 3.5%:

When we compare this to the valuation of total real estate equity in the United States using 2022s figures and adjusting for a max withdrawal of 80% we can see that there is potentially $23 Trillion dollars in equity that exists that may have been extractable but now because of the higher rates, is seemingly sterilized. It is by default of the current interest rate regime a balance sheet unrealized gain mark to market line item. We believe the FRB higher for longer will extend mortgage duration and sterilize a lot of this excess equity, meaning it will not be used to improve leverage, or as a down payment source for some other asset, not at least until some innovative derivative product comes to market:

Not only are the general consumers shackled here, our own US government and their never ending thirst for spending now pays $910 Billion in interest. This is an 80% increase in a little over 2 years. Many say it doesn’t matter, but it does, it matters to overall inflation and it definitely matters in regards to the utility function our government has in order to facilitate and manager the needs of our country and our economy. Think of it this way, we are spending $900 Billion that cannot go to education, infrastructure and on and on down the line. That number is truly an insane number to even fathom, but to put it contextually, the US Govt is paying on average in interest $2.5 Billion dollars a day:

It doesn’t take a genius to understand that this level of spending, $33.5T in debt and counting and higher interest rates signal the impending doom to the United States ability to export dollars in return for cheaper goods and services, even if we do continue this advantage for a little longer, we will inevitably be crushed under the weight of all this interest, or be sent down the path of eventual default.

This is also why they want to collect as many Bitcoin as they can via confiscation and also why I do not trust holding BTC on any exchanges. I can envision the likes of Fidelity warehousing for their ETF to only say that some hack occurred, the same goes for Coinbase. I am not saying they will do it willingly but rather pointing out the fact that Bitcoin is the Antithesis of fiat currency and with the US Govts propensity to inflate, well only guarantees Bitcoins eventual and perpetual rise.

Here is the latest Bitcoin chart with buyers stepping in here once again:

$36000 is major resistance and obvious initial target here, we believe a move here and close back below would see some sellers, but overall this is a major bullish pattern.

We saw short covering continue in the US bond market today as the 5% yield area in the longer end has proven to be resistance for now. Plus Ackman has come out with a few tweets saying he has now covered his long bond short…how convenient. So today saw the long end outperform and the curve give up some of their steepening:

As far as the settlements, we show the two day look here, we see some stabilization in FX land here as the US dollar has slowed its advance as has the energy sector:

As far as our positions sentiment for the futures markets we follow, we have a few changes to note. We swapped out of the bond short for the ultra bond sale and added a few other changes shown below:

As far as the MEGA8s the did bounce today and the overall market cap has a clear support level around $11.3T, once that goes…should be the end of this bull run:

Here is the MEGA8 portfolio tracker:

We will cover the 365C on a move toward .20 and put on a position closer to the market strikes for next week. The hedge seems to do the heavy lifting as the MEGA8s bounce then fall back, so we are capturing the time decay as the strike is far out of the money now.

Alright that is it, we know the blackout period for buybacks is up so there will be some support there. The market has come down overall to the point where there will be some fresh bottom pickers for support as well, but overall the tone is obvious…WEAK. So with the war unresolved at this point, we suspect that volatility to keep a lid on any equities advance with continued outperformance on the upside by the big cap names.

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