You Made Bankers Rich!

Did You Know You’re Overpaying? [Morning Reckoning] August 03, 2023 [WEBSITE]( | [UNSUBSCRIBE]( You Made Bankers Rich! - By focusing only on monthly payments, Americans overpay their bankers. - That’s because only in America can you get a 30-year fixed mortgage. - Outside the US, mortgage rates are fixed for a shorter time, then become variable. [$32.8 Billion PER DAY!]( [Click here to learn more]( Forget AI, cryptocurrency or anything else – [THIS]( is the biggest profit opportunity of your lifetime. It’s an obscure corner of the market… one which is quietly creating an average of $32.8 BILLION in new wealth PER DAY. [That’s $1.2 trillion per year…]( And if you act fast, you have the chance to get in on the action starting right away. Hurry, though – this video will be removed from the internet on Friday at 4PM. [Click here now for details](. [LEARN MORE]( Asti, Northern Italy August 03, 2023 [Sean Ring] SEAN RING Good morning Reader, Greetings from beautiful Il Piemonte! I had such a good laugh earlier this week. If you’ve been reading the Rude, you know that my in-laws are visiting from the Philippines, and we are doing our best to entertain them. We’re driving them around Italy, trying to introduce them to new food and wine, and generally showing them a great time. To restock the fridge, Pam and I went food shopping the other day. I noticed Pam pick up a jar of Nescafé instant coffee. I said, “Who is that for?” She said, “My parents.” I said, “Isn’t that what they drink at home?” Pam said, “Yes.” I asked, “Why would they want to drink that here when they’ve got all this wonderful Italian coffee around them?” She said, “Well, they don’t like it very much…” Of course, the Italian in me recoiled. But the economist in me thought, “Well, that’s their preference.” Steak a la Trump I have a confession to make. Growing up in New Jersey, my mother made London Broil for the family at least once a week. It was always well done, and I always ate it with ketchup. So when people started making fun of Donald Trump, I never entirely understood why. Don’t get me wrong. There are better ways to prepare a steak. For instance, in London in the early Naughties, my good friend Freddie made fun of me at the Gaucho Grill in Shepherd Market, one of our favorite Argentinian steakhouses. He challenged me to give up my American obsession with “burned” steak and eat a “blue” steak. In British terms, a blue steak is a barely seared and cold (raw) in the middle. Freddie said how much you cook your steak and how smart you are, are inversely proportional. So I took him up on this challenge and ordered a blue steak with béarnaise sauce. The flavor exploded in my mouth. I had never eaten something so delectable, and I quickly understood why Europeans love their steaks practically raw. Now I prefer my steaks blue. But I don’t frown upon people who like their steaks well done or with ketchup instead of béarnaise sauce. And that’s the issue. What are people’s preferences? Some of “their” preferences defy “our” expectations. We think these people are crazy, but they’re ideally within their rights to choose something we may feel is not in their best interests. [DR-MR] Now imagine these preferences comingling with government-sponsored incentives. [Warning: Will “Bidenflation” Destroy Your Retirement?]( [Click here to learn more]( If you’re like most Americans, you’ve worked hard for decades to build your financial legacy. And now, as a result of Biden’s disastrous money printing policies, that’s all at risk. According to one top retirement expert, “Bidenflation” threatens to destroy your retirement and make your hard-earned savings worthless. That’s why you must take action right away to protect yourself… [Click here now to get the simple, step-by-step actions to survive “Bidenflation.”]( [LEARN MORE]( Preferences and Incentives “Show the incentives, and I’ll show you the outcome,” famously said Charlie Munger, ace coffin dodger and bestie of Warren Buffett. Governments incentivize people to stay in one place. That makes it easier to keep tabs and collect taxes. And nothing will keep you in one place better than owning your house. And if you can’t pay cash for your house - and most people can’t - then the government would need to set up a long-term financing scheme to get you your house and keep you there. In his excellent book, Walk Away: The Rise and Fall of the Homeownership Myth, Doug French writes: In his book American Individualism, Herbert Hoover viewed American individualism stripped of “the laissez-faire of the 18th century” as Abraham Lincoln’s “ideal of equality of opportunity” whereby “fair division can only be obtained by certain restrictions on the strong and dominant.” Hoover associated homeownership with independence and initiative, believing that an American must own a home to be considered a true American. Disturbed that the 1920 census showed a decline in homeownership, “Hoover offered a vigorous, new approach to the housing problem through the application of federal, voluntary, and business cooperative activity,” Janet Hutchinson writes in “Building for Babbitt: The State and the Suburban Home Ideal.” At Hoover’s direction, the federal government threw its weight behind four organizations to promote homeownership: the commercial “Own Your Own Home Campaign” and Home Modernization Bureau, the nonprofit Better Homes in America Movement, and the professional Architects’ Small House Service Bureau. This concentrated effort served to foster, as Hutchison points out, “an idealized vision of American home life rooted in the ownership of a suburban residence replete with modern amenities.” So while it may seem that Americans by their nature have genes that make them aspire to homeownership, this notion is nonsense. “Homeownership was sold to Americans with “carefully calculated governmental policies that proselytized Americans about the virtues of suburban homeownership while opposing outright market intervention,” explains Hutchison. With that in mind, let’s look at the United States mortgage market. You Made Bankers Rich Oh, you didn’t mean to. But what did you expect? As of the end of 2022, the [total mortgage debt outstanding is $11.92 trillion](. Even if all mortgages carried a 1% interest rate, that’s still $119,200,000 billion in revenue for the banks. That’s a lot of pasta! If that were spread evenly across the roughly 5,000 banks and credit unions the FDIC insures, that’s $23 million in revenue each. But we know that’s not how it works. JP Morgan alone had $43 billion in revenue for the second quarter of 2023. But it’s not even the biggest mortgage lender in the US. Here’s a list of the largest US mortgage lenders: [DR-MR] Credit: [ADV Ratings]( Rocket Mortgage, the biggest lender, [earned $5.8 billion in revenue for 2022 on their loan originations of $133 billion](. Do you know who paid these guys? You did. And in America, it makes complete sense. American Homeownership Versus European Homeownership What’s the difference between these two types of homeownership? In a nutshell: the 30-year fixed mortgage. [DR-MR] Credit: [FRED]( Americans have access to these. Most Europeans do not. And it makes an enormous difference. Let’s look at how 30-year fixed mortgages change the game. Mortgage Math Though it’s tough to tell from the above chart, between April 1971 and June 2023, 30-year fixed-rate mortgages averaged 7.74%. The lowest rate ever recorded was 2.65% in January 2021. The current rate is near the average, clocking in at 7.26% as of August 1st. Let’s do the math. In my example, we’ll use the US average house price of $344,000. And I’ll be a bit more generous on the down payment; I’ll use 10%, or $34,400. The current median down payment is $26,000. I’m also going to assume that the homeowner makes no prepayments. I’ll also assume he stays in the house for the entire 30 years, even though the average American only spends ten years in one house. At the current rate of 7.26% on a 30-year mortgage: [DR-MR] The numbers are alarming. While the monthly payment is a mere $2,114.12, the total interest paid on the house is $451,482.52. This brings the total purchase cost to $795,482.52. If you notice the top line of the mortgage amortization table I drew up, the last column is the principal reduction divided by the monthly payment. In this example, it’s only 11.40%. It takes a long time to cut into the principal of the mortgage. But here’s the thing: Americans only have to worry if they can make the $2,114.12 payment. It never changes. That’s the beauty of the fixed rate. My friend and colleague Alan Knuckman asked, “Where was everyone when rates were low?” Let’s do the same example… but with the 2.65% historical low: [DR-MR] The difference is enormous. The total interest paid and, by extension, the total home cost is over $300,000 less. That’s because far more of the monthly payment reduces the principal (45.20%) from the get-go. Now, looking at those examples, how are Rocket Mortgage, JPM, and Bank of America feeling about these higher rates? Pretty damn good! And they’re feeling especially good because the US housing market is still strong, despite Chairman Pow’s steep hiking cycle. [DR-MR] Credit: [The Daily Shot]( As you can see, most US mortgages aren’t linked to market rates. That is, they are fixed and not variable rate mortgages. [DR-MR] Credit: [Charlie Bilello]( To put this further into perspective, household debt service is a small part of disposable income: [DR-MR] Credit: [Charlie Bilello]( The cost of all this is that starter homes are more expensive than ever. [pub] Credit: [Charlie Bilello]( This just puts more pressure on our poor demographics. After all, it’s much harder to start big families in little apartments. All in all, the US housing market looks pretty good. But how is it different in Europe? European Blues In Europe, usually, you can’t get a 30-year fixed mortgage. In the UK, prospective homeowners can get a 2- to 10-year fixed mortgage, and then after the fixed term, it becomes a monthly floating rate mortgage. Anecdotally, most people I know either get a 2-year fixed rate and keep rolling it or get an interest-only mortgage. On the continent, most mortgages are floating rate mortgages. The rate is Euribor, the "Euro Interbank Offered Rate." It’s the benchmark interest rate at which a panel of European banks offers to lend unsecured funds to one another in the euro wholesale money market. Euribor is published daily by the European Money Markets Institute (EMMI) and serves as a reference rate for various financial instruments, including loans, mortgages, and derivatives, denominated in euros. The floating rate mortgage is usually priced at Euribor plus a spread. The mortgage I’m looking at right now is Euribor + 190 bps (1.90%). So Europeans have far less certainty about their monthly payments and, therefore, can’t plan as well as Americans can. It may also explain why Europeans don’t mind renting for long periods. Wrap Up Since Americans have 30 years of home security, they can plan out their lives well in advance. But the cost can be the exorbitant interest they pay on their houses. It’s their prerogative, but we shouldn’t wonder why bankers make so much money… especially when the American public pays them. When preferences meet government-sponsored incentives, strange outcomes result. Have a lovely day! All the best, [Sean Ring] Sean Ring Contributing Editor, The Morning Reckoning feedback@dailyreckoning.com Twitter: [@seaniechaos]( [Shocking Backdoor Crypto Play – LIVE on Camera!]( Crypto millionaire James Altucher just received a strange box that could COMPLETELY change how you look at cryptos: [Click here to learn more]( [CLICK HERE to See What’s In the Box]( He opens it live on camera, and shares details on the strange device that’s delivered everyday Americans over $1,170 per month in passive crypto income. [Click here to discover it for yourself now](. [LEARN MORE]( In Case You Missed It… Investors Think They’re Bulletproof Greg Guenthner, Editor [Greg Guenthner] GREG GUENTHNER Good Morning Reader, The bulls are running wild. Remember when we discussed the possibility that the red-hot tech leaders were finally running out of gas? Well, we just witnessed a dramatic mid-air refueling on the heels of last week’s tame Fed meeting, positive earnings reactions, and strong economic data. Just when it looked as if the highest-flying names would finally take a break, frantic buyers stepped in to blast these stocks back into the stratosphere. Mega-cap tech continued to push higher. Semiconductors roared back to life as the VanEck Vectors Semiconductor ETF (SMH) posted fresh all-time highs. Even the tech-growth trade found its footing to finish the week with respectable gains as the ARK Innovation ETF (ARKK) pushed back toward recent highs — despite flashing an ugly reversal candle on Thursday. The bulls were nowhere to be found in December. Now, they’re buying up just about everything and memory-holing the big fears from 2022, including steady rate hikes and sticky inflation data. But here’s the thing… No one is contemplating a pullback — or what might happen if stocks actually go down for a week or two. Confident? Or Just Plain Cocky? Just how cocky are investors right now? For starters, virtually no one is hedging their bets. Snagging puts has never been cheaper than it is now, according to Bloomberg, with the cost of buying protection against a 5% dip over the next year falling to historically low levels. When hedging is dirt cheap, you’ll have trouble finding anyone who isn’t setting up their portfolio with higher prices in mind. Even a routine 5% pullback isn’t top of mind right now. I say “routine” here because a 5% dip is downright guaranteed to come knocking sooner rather than later. The major averages will typically post a 5% drop an average of about four times per year. To think a perfectly normal pullback isn’t lurking around the corner is nothing short of delusional. Yet we’re cruising into August without a care in the world — and stocks aren’t the only assets driving the bulls wild. Real estate projections are also getting crazy, higher prices and higher rates be damned! Zillow (Z) is, of course, fanning the flames. These real estate perma-bulls just announced that U.S. home prices will likely rise more than 6% by June 2024, with almost 50 of the 200 biggest markets seeing a jump of more than 7%. Is this just the way it is? Are we destined to live in a world of never-ending stock market gains and bidding wars for shoddy real estate flips? I doubt it! In fact, I’d wager we are much closer to at least a minor market correction (or even an abrupt reset/gut-check move) than most investors believe. As the great technician Walter Deemer says, “We have nothing to fear but the lack of fear itself.” Hibernating Bears Investors think they’re bulletproof. They’ve erased 2022 from their minds and now believe stocks have nowhere to go but up. If you’re tuned into the animal spirits, you understand these are the times we should be thinking about fear — when everyone else has the rosiest possible outlook on the market. For the record, these little tidbits don’t mean I’m itching to short the market into oblivion. I’m not attempting to call a top or bet on a serious market crash at the moment. Quite the opposite! Over at The Trading Desk, we’ve enjoyed a red-hot July where we were able to go 5-for-5 in our options trading, with the worst gain being an 82% winner on Palantir Inc. (PLTR) calls. When the calendar flipped to July, I wasn’t expecting this wild rally. I had a suspicion that the market would flatline for the dog days of summer — or even correct through a broad consolidation following the big push higher in June. The Nasdaq — specifically mega-cap tech — was hitting overbought territory. A pause or move lower felt like a sensible prediction. Obviously, this isn’t what happened. Not even close! But I did not allow my expectations for a move lower to affect the outcome of my trading. Trading the Disconnect As the rally continued to broaden and breakouts extended into July, I had no trouble following the trading signals and hopping on board some strong momentum plays. I call it trading the disconnect. Instead of driving myself crazy by trading what I think should be happening in the markets, I open my eyes and trade what I’m seeing on my screen. This is one of the most important skills any ambitious trader needs to learn. It’s also one of the most difficult concepts for most novices to grasp. I can’t tell you how many times I’ve heard a newer trader tell me they’re going to ignore an obvious buy or sell signal because of some preconceived notion about which direction the market is supposed to be moving. The stock market is not the economy. I’m sure you’ve heard this old saw a million times. An extended take on this adage is that the market will go through extended periods where it appears to be disconnected from reality. Sometimes that’s true. Other times, it’s simply a case of the financial media remaining stuck on an old narrative. That’s usually the case in and around market turning points. The investing public’s core feelings about the stock market take time to reverse and move in the opposite direction. If we apply this idea to the market’s performance so far this year, we can assume the herd was extremely bearish in January, and the narrative was slow to flip bullish until the end of the second quarter. Now, we find ourselves in a situation where investors are chasing stocks following a historic first-half run. I’m more than willing to ride this rally until it starts to sputter. But I’m also aggressively taking gains where I can — and carefully watching for signs of weakness. Just like it surprised everyone by exploding off its lows in January, the market will blindside the unlucky baby bulls during its next 5% drop. Best, [Greg Guenthner] Greg Guenthner Contributing Editor, Morning Reckoning feedback@dailyreckoning.com Thank you for reading The Morning Reckoning! We greatly value your questions and comments. Please send all feedback to [feedback@dailyreckoning.com.](mailto:dr@dailyreckoning.com) [Sean Ring] [Sean Ring, CAIA, FRM and CMT]( is a former banker and financial educator and is the editor of the Rude Awakening. Sean has trained interns and graduates from Goldman Sachs, Morgan Stanley, Citi, Bank of America, Standard Chartered Bank, DBS (Singapore), the Abu Dhabi Investment Authority (ADIA), Bank Indonesia (the central bank), HSBC, Barclays, RBS, and BlackRock. He knows the global economy is being corrupted by forces that most people can't understand and has used his unique and worldly experiences to help people navigate the markets. 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