Rate Hike Pain is Starting to Be Felt

After two consecutive quarters of negative growth, the US economy sprung back to life last week. 

The Bureau of Economic Analysis reported that the US economy — as represented by GDP — had expanded 2.6% in the third quarter. 

This news allows the Fed to exhale, at least momentarily.

Tomorrow the Fed winds up its November FOMC meeting and will tell the world (IMO) that they’re raising the Fed Funds target rate yet another 75 basis points. Which puts their target rate (3.75-4%) mighty close to the theoretical magic median number of 4.4% which the board guesstimated at their September meeting would be restrictive enough for now. 

Restrictive enough for what, they never say. The assumption is to choke off demand and try to rein in prices. The dovish narrative has always been that raising rates would crash the economy into a recession.

But the stronger than expected GDP now suggests that the “soft landing” may be a real possibility. And gives them cover to maintain their hawkish position until at least 2023.

The Less “Rosy” Implications…

But while it seems that the economy as a whole is doing pretty well, there are areas that directly impact individuals that have been taking it on the chin… Namely housing prices. According to the bureau, residential “investment” fell at a 26.4% annual rate. It’s not hard to understand why…

Building permits have been on the slide all year, which means housing starts have been falling in tandem. Rising rates have mortgage applications at near 25 year lows because who wants to pay 7% on a mortgage in a market where the average home price is just off all-time record highs…  So naturally new home sales are down 40% from 2020 and existing home sales are down 30% over roughly the same period. 

(The average price of a house, by the way, is still $521,800 — up 44% from early 2020!)

For most people, their home is their biggest “asset.” If real estate prices continue their trend lower, it’s going to make a lot of people (theoretically) poorer. (Let’s hope they all have fixed mortgages…)

But the Fed’s rate hikes aren’t threatening only middle class homeowners.

Too Big to Fail Tech is… Failing

The other area that’s feeling the pain is the Tech sector. 

I mentioned last week that it’s earnings season. And a lot of big tech was out last week… disappointing the market.

Alphabet (Google) reported revenue of $69.09 billion vs. $70.58 billion expected and actual earnings of $1.06 vs. $1.25. Their YouTube subsidiary reported advertising revenues of $7.07 billion vs $7.42 billion estimated.

Microsoft revenue of $50.12 billion, vs. $49.61 billion and earnings of $2.35 per share vs. $2.30. However their guidance going forward was disappointing, projecting $52.35 billion to $53.35 billion vs. the street’s estimate of $56.05 billion.

Amazon reported revenue of $127.10 billion vs. the market’s expectation of $127.46 billion. Their Amazon Web Services division was disappointing as well coming in at $20.5 billion vs. $21.1 billion. And their forward revenue guidance was no better projecting between $140 billion and $148 billion vs. $155.15 billion expected by the market.

Meta rounded out the field posting revenue of $27.71 billion vs. estimates of $27.38 billion; earnings of $1.64 vs $1.89; and average revenue per user at $9.41 vs. $9.83 expected.

All their stocks were spanked accordingly. 

According to the Tylers at ZeroHedge: 

This historic level of overvaluation was only made possible by massive money printing on the part of the Fed that supported both cash flows and the multiple applied to them.

You can see the correlation in the chart below:

More Than Just Monetary Losses

This underperformance by such an outsized segment of the market carries greater implications than just for your 401(k).

These are companies that employ tens of thousands of people. Continued weak performance on their part could put a lot of jobs, and by extension the economy, at risk.

But there’s still another threat facing the economy, one we actually can’t pin on the Fed. I’ll tell you about it in your next letter.

Make the trend your friend,

Bob Byrne
Editor, Streetlight Daily