Note from Jeff Brown: I know many readers are following the events in Ukraine and are anxious to know what this means. I want you to know I’m tracking the situation closely. Please tune in to tomorrow’s edition of The Bleeding Edge, where I’ll share my thoughts on the turmoil and what it could mean for the markets in the coming weeks.

Dear Reader,

For all the aggressive talk from the Federal Reserve over the last few months about tapering and reducing the size of its balance sheet, I thought it would be fun for us to check in and see what is really happening.

Aside from printing money to buy U.S. Treasury bonds, the largest asset purchases happen in mortgage-backed securities. So that’s the place for us to look to see what is really happening.

Here’s a chart showing the Fed’s balance sheet holdings of mortgage-backed securities from the beginning of the pandemic to the present. The balance sheet had been in a smooth and healthy decline from 2018 until March of 2020, when all hell broke loose.

From a pre-pandemic level of around $1.366 trillion, the current balance sheet has about doubled to $2.7 trillion.

And despite all the “threatening” talk from the Fed since December, the Fed’s balance sheet for mortgage-backed securities has increased by about $85 billion since the end of December. That has all happened in just the last seven weeks or so.

Not only is the Fed not reducing the size of its balance sheet… but it’s apparently increasing it at a pretty extraordinary rate. And there’s a reason for this…

The Fed – by either implicitly or explicitly guaranteeing that it will continue to purchase mortgages from the U.S. mortgage market at such an extreme level – basically removes the risk from banks and mortgage lenders. This is the same nonsense that took place in the early 2000s, which led to the financial crisis in 2008/2009.

And by doing so, it artificially suppresses interest rates on non-jumbo loans. If the mortgage lenders and banks know that they can package up their mortgages and hand them off to the Fed, they have very little risk.

That means they aren’t too concerned about the quality of the mortgages that they write. Lend at low interest rates to keep the money coming, package the mortgages up quickly, sell them off to the government, rinse & repeat – easy.

Right now, the average 30-year fixed mortgage can be had for just under 3.45%. That’s not as good as the sub-3% loans that we saw in 2021, but that’s still a fantastic rate.

For those of us who might know that we’ll be in one place for an extended period of time, taking advantage of these rates is about one of the smartest financial moves one can make.

And it’s one of the best ways to short the U.S. dollar. This is because the borrower is paying back the mortgage with grossly devalued U.S. dollars, yet the nominal dollar amount of the repayment remains the same.

But if we really want to see what is going on with inflation and interest rates, we have to look at the 30-year fixed mortgage rate for jumbo loans. These are the loans that aren’t eligible to be securitized by Fannie Mae or Freddie Mac.

Ouch! What a different picture… right?!?

This is what’s really happening right now. Since the sub-3% rates as recently as the end of last year, 30-year fixed jumbo loans have skyrocketed to 4% – the average right now is 4.23%.

And this is exactly what would happen to the non-jumbo loans if the Fed stops purchasing mortgage-backed securities. The mortgage rates will snap away from the Fed Funds rates and all chaos will unfold… which is why the Fed won’t take that risk.

If those rates were allowed to rise quickly by more than 100 basis points, a lot of mortgages would become delinquent. It would also remove discretionary spending from a large percentage of households that are already struggling with the pandemic and monetary policy-induced inflation on all of our daily needs.

I spent a lot more time digging deeper on these topics, including my outlook for the rest of 2022 and into 2023 during an event that I held last week. If you’d like to learn more, please go right here.

Air taxis are gearing up to go live…

Joby Aviation just made a major announcement: The air taxi company just partnered with All Nippon Airways (ANA), the largest airline in Japan, to launch an air taxi ride-hailing service by 2025 at the latest.

This is a great development. Clearly, Joby has been making great progress with its test flights that began last summer.

As a reminder, Joby Aviation is developing an electric vertical take-off and landing (eVTOL) air taxi. It’s a four-person craft that can take off and land just like a helicopter – except it’s incredibly quiet.

And the craft can fly straight at a speed of up to 200 miles per hour, with a maximum range of 150 miles on one battery charge.

Here’s a visual:

Joby Aviation Vehicle

Source: Joby Aviation

This eVTOL craft is ideal for population-dense markets like Japan. Think about this – 92% of Japan’s population lives in urban areas. And Tokyo is one of the most congested cities in the world.

As we can imagine, this poses major problems when it comes to ground transportation. Having lived and worked in Japan for most of my adult life, this is something I can speak to personally.

I was constantly traveling throughout Asia during my time as a corporate executive in Japan. Most of my international flights were out of Narita airport, located about an hour’s drive from Tokyo, assuming no traffic. Except there was almost always traffic.

And the trips back from Narita to downtown could be especially brutal, depending on when I arrived. The worst windows could take 2.5 hours.

Even the trains, while efficient, would take at least an hour and a half door to door with all the waiting times, walking, and taxis after arriving at Tokyo station.

I don’t think any of us get excited about an hour-plus commute. And it’s even more painful after you have just gotten off a 12-hour international flight.

This is where Joby Aviation comes in.

Joby’s eVTOL could make this same commute in about 15 minutes. Travelers could land, enter the air taxi line, and be in downtown Tokyo 15 minutes later. There would be an incredible demand for this service.

Joby and ANA plan to have at least one air taxi flight path in service in time for the World Expo in 2025. Japan will host the Expo for six months on an artificial island in Osaka Bay.

For this reason, the first flight path will be from Kansai Airport to Osaka Station by the bay. Similar to my example above, this is a 55-minute commute by car. Yet Joby can make the trip in 14 minutes.

So I’m very excited to follow Joby’s progress in Japan going forward. And I should note that the company is also partnering with South Korean conglomerate SK for a similar service in South Korea.

Given the tech rivalry between Japan and South Korea, I think it’s smart for Joby to service both markets simultaneously. And I expect we’ll see rapid adoption once the air taxis are live.

Better yet, I can’t wait to take advantage of the service on a future return to Japan…

The wrong way to approach augmented reality…

Verizon and Motorola just announced a new partnership focused on augmented reality (AR). The two certainly have a unique take on what consumer-grade AR should look like. And I must say, I got a chuckle out of this.

AR Neckband Prototype

Source: Motorola

Here we can see somebody wearing Verizon and Motorola’s prototype eyewear. And it doesn’t look too bad. It’s not quite the sleek form factor of a normal pair of glasses. But at the same time, these are better than big bulky goggles.

But look at what’s hanging from the thick cable around this guy’s neck, something roughly the size of a smartphone: That’s the core power center.

It houses the battery, the gyroscope, accelerometer, barometer, GPS sensors, and all the other tech that goes into smartphones.

Now think about this – the battery is roughly four times larger than a normal smartphone battery. And a smartphone’s battery is the heaviest part of the device.

And since we are talking about AR here, this battery will need to provide a lot of energy when it’s in use. And we know what happens to batteries when they are working hard – they heat up.

So here we have something that is four times heavier than a smartphone and likely to get hot when in use… And Verizon and Motorola think we should have this thing hanging from our necks? Ha.

This is not the path to widespread consumer adoption. This is simply the wrong approach to AR.

And it’s especially foolish considering everybody has a smartphone anyway. The eyewear can easily tether to the phone to take advantage of its processing power and connectivity to a wireless network. That’s the approach that will first gain consumer adoption.

Then in a few years, power efficiency will improve to the point where all the components get small enough to go right into the glasses. This is the way…

If you’d like to learn more about actual ways to profit from the AR trend, you can check out my recent presentation here.

Flippy 2 is getting popular…

We’ll wrap up today with a big development on the robotics and automation front.

Fast-food chain White Castle just announced that it is rolling out the Flippy 2 robotic arm to 100 more locations. At that point, Flippy will be in about 30% of all White Castle restaurants. How’s that for rapid adoption?

If we remember, Flippy 2 is the second-generation robot developed by Miso Robotics. It is loaded with artificial intelligence (AI) and computer vision (CV) so that it is fully automated. The robot can position itself correctly with no human intervention necessary.

And Flippy 2 can work the grill and the fry station simultaneously without any oversight. Once the food is ready, Flippy 2 will transfer it to a preparation station where humans can dress it up and get it out to customers.

Here’s a look at Flippy in action:

Flippy in Action

Source: YouTube

As we can see, Flippy is fully autonomous. It doesn’t require any human intervention to operate.

So we are seeing the mass adoption of robotics and automation in real time. The Great Resignation and the resulting labor shortages are largely driving this.

In fact, businesses like White Castle have to adopt this kind of automation technology. They can’t get enough employees to operate full hours without the help of robotics.

We are at the start of a huge trend here. We can expect many more developments like this one in the coming months.


Jeff Brown
Editor, The Bleeding Edge

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