Tag Archives: interest rates

Peter Schiff: The Bond Market Is Rigged!

The Federal Reserve has its multi-trillion pound thumb on the scale. From Peter Schiff at SchiffGold.com via zerohedge.com:

You may have noticed that the financial media has started talking about inflation. But by and large, it’s not a warning. It’s reassurance. Many analysts are dismissive of any concerns raised about inflationary pressure. They often claim the bond market isn’t signaling inflation. But as Peter Schiff points out in a clip from a recent podcast, the bond market is rigged.

The narrative is that the bond markets aren’t signaling much concern about inflation. Treasury yields have risen in recent weeks with the 10-year rate now above 1%. As Peter pointed out in a more recent podcast, the upward trend does indicate some investors are starting to get nervous about inflation, and at some point, we could see “an explosive move up in interest rates.” But so far, the broader market hasn’t caught on. Even though the trend is up, yields remain historically low and they don’t exactly scream “inflation problem.”

After all, if investors were concerned about inflation, why would they be willing to loan money to the US government for 10 years at 1%?”

Typically, inflation is a major concern for lenders. If you plan to lend somebody money for 10 years, you have to consider what that amount of money will buy when you get it back. In effect, you’re giving up the opportunity to buy something with your money today in order to lend it to somebody else. You’re willing to do this because the borrower is paying you for the service of loaning him that money. But if inflation is going to eat away your purchasing power over time, you will want to charge a higher rate of interest to compensate for that loss.

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Bond Market Smells a Rat: 10-Year Treasury Yield Hit 1.04%, Highest since March. 30-Year 1.81%, Highest since February. Mortgage Rates Jumped, by Wolf Richter

The bond market may well be the canary in the coal mine for the impending financial collapse. From Wolf Richter at wolfstreet.com:\

Seems, inflation prospects jangled some nerves today.

The 10-year Treasury yield jumped 8 basis points today and settled at 1.04%, the highest since the wild panic days in mid-March 2020. As the yield rises, the price of that bond falls. This yield has now exactly doubled from the historic low of 0.52% on August 4, when folks were still betting that the 10-year Treasury yield drop below zero:

The 30-year yield jumped 11 basis points today to 1.81%, the highest since February 26. On March 3, as all heck was breaking loose, the yield had briefly plunged below 1% for the first time ever, and days later it was back at nearly 1.8%, in some wild and volatile panic trading. But this time, the upward trend started on August 4 and has been systematic:

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Inflation, deflation and other fallacies, by Alasdair Macleod

In history’s most economically productive periods, prices have usually fallen, not risen. From Alasdair Macleod at goldmoney.com:

There can be little doubt that macroeconomic policies are failing around the world. The fallacies being exposed are so entrenched that there are bound to be twists and turns yet to come.

This article explains the fallacies behind inflation, deflation, economic performance and interest rates. They arise from the modern states’ overriding determination to access the wealth of its electorate instead of being driven by a genuine and considered concern for its welfare. Monetary inflation, which has become runaway, transfers wealth to the state from producers and consumers, and is about to accelerate. Everything about macroeconomics is now with that single economically destructive objective in mind.

Falling prices, the outcome of commercial competition and sound money are more aligned with the interests of ordinary people, but that is so derided by neo-Keynesians that today almost without exception everyone believes in inflationism.

And finally, we conclude that the escape from failing fiat will lead to rising nominal interest rates, with all the consequences which that entails. The inevitable outcome is a flight to commodities, including gold and silver, despite rising interest rates for fiat money.

Demand-siders and supply-siders

In a macroeconomics-driven world, economic fallacies abound. They are periodically trashed when disproved, only to arise again as received wisdom for a new generation of macroeconomists determined to justify their statist beliefs. The most egregious of these is that inflation can only occur as the handmaiden of economic growth, while deflation is similarly linked to a recession spinning out of control into the maelstrom of a slump.

This error is the opposite of the facts.

Conventionally, macroeconomists split into two groups. There are the Keynesians who believe in stimulating demand to ensure there will always be markets for goods and services, which they attempt to achieve through additional spending by governments and by discouraging saving, because it is consumption deferred. And there are the supply-siders, who believe in stimulating production through lower corporate taxes and lighter regulation. Both demand and supply-siders advocate monetary inflation in the belief that their methods stimulate an economy so that government spending need not be cut.

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Doug Casey on the Coming Bond and Real Estate Collapse and Where the Next Bubble Will Be

The bond market isn’t an accident waiting to happen, it’s a cataclysmic disaster waiting to happen. From Doug Casey at internationalman.com:

International Man: The bond super bubble continues to get bigger. Interest rates seem to be headed even lower from here. Is this the blow-off top in the bond market?

What do you think will cause central banks to lose control and for interest rates to head higher?

Doug Casey: Even with the Fed bailing out major institutions—which it will continue to do, just like back in 2008–2009—the fundamentals underlying many businesses are so bad that a lot of them are going to collapse. I’m not just talking about the obvious candidates—retail, restaurants, airlines—but across the board.

As that starts happening, people will realize that the cat’s really out of the bag, that this isn’t just another cyclical downturn—it’s genuine depression. And almost everything the government is doing is not only the wrong thing but the exact opposite of the right thing.

The worst possible place for money today may not even be the stock market, as dangerous as it is. It’s the bond market. Bonds aren’t just in a bubble. They’re in a hyper-bubble.

The bond hyper-bubble is serious because there’s so much debt in the world at such low interest rates. When reality reasserts itself, interest rates start heading up—not just to levels that show a real yield after inflation but levels from the early ’80s, which ranged from 10% to 20%. The bond market is heading toward its long-overdue collapse.

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Here Is The Stunning Chart That Blows Up All Of Modern Central Banking, by Tyler Durden

Zero Hedge may be on to something: savings go up when interest rates go down, and inflating the money supply can be deflationary. From Tyler Durden at zerohedge.com:

Several years ago, when conventional wisdom dictated that to push inflation higher and jumpstart lethargic economies, central banks have to push rates so low as to make saving punitive and force consumers to go out and spend their hard earned savings, several central banks including the ECB, SNB and BOJ crossed into the monetary twilight zone by lowering overnight rates negative.

Then, year after year, we would hear from the likes of Kuroda and Draghi how the BOJ and ECB will continue and even extend their insane monetary policy, which now includes the purchase of 80% of all Japanese ETFs…

… until the central banks hit their inflation targets of 2%.

And yet, year after year, the BOJ would not only not hit its inflation target but appeared to drift ever lower, as did the ECB, SNB and any other bank that had gone NIRP, confounding all economists and central bankers: why was this happened if rates were negative? Why were consumers not taking their money out of the bank and spending it, pushing inflation higher?

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Leveraged Loans Blow Out. Distressed Corporate Debt Spikes, by Wolf Richter

James Grant once said something to the effect that reaching for yield is more dangerous than reaching for razor blades in the dark. He was right, as the last few weeks have amply demonstrated. From Wolf Richter at wolfstreet.com:

This is the moment when yield-chasing turns into a massacre.

Leveraged loans – they’re issued by junk-rated overleveraged companies with insufficient cash flows – are part of the gigantic pile of risky corporate debt that is now being brutally repriced as concerns over credit risk (the risk of default) are finally bubbling to the surface. Since February 22, the S&P/LSTA US Leveraged Loan 100 Index, which tracks the prices of the largest leveraged loans, has plunged 20%:

The index is another example of how in these crazy times, when the most splendid Everything Bubble collided with the coronavirus, ever more financial metrics are violating the WOLF STREET beer mug dictumthat “Nothing Goes to Heck in a Straight Line.”

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Has Anyone Told the ECB Yet it’s Bankrupt? by Tom Luongo

European bonds were not a “safe haven” asset last week while equity markets were cratering, which suggests that the world’s creditors are finally rediscovering sovereign risk.  From Tom Luongo at tomluongo.me:

“The problem with socialism is eventually you run out of other people’s money.”

— Margaret Thatcher

For months myself and very few others have been warning about the problems in Europe. That the real problem isn’t in the U.S., though it’s certainly a mess, it is in Europe.

It’s why I focused so hard on Brexit. Would the U.K. actually get out of the EU before it all came crashing down around the deaf and now stunned Brussels technocrats?

A U.K. outside of the EU meant localizing a major problem on the backs of those that 1) engineered it and 2) cheered it as they literally stole hundreds of billions of pounds from them.

But while everyone has been focused on the melting equity markets and what the high priests of monetary wizardry at the central banks were going to do, did anyone notice the complete collapse of European bonds last week?

I could go on with this but I think you get the point.

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Anyone with courage and clear thinking will do extremely well, by Simon Black

“If you can keep your head when all about you Are losing theirs and blaming it on you” (Rudyard Kipling, If) then you stand a good chance of coming out ahead over the long haul. From Simon Black at sovereignman.com:

The year 1348, in the words of historian A.L. Maycock, was the closest that humanity ever came to going extinct.

That was the year the Black Death descended on the European continent. And many historians today estimate that it killed as much as 60% of Europe’s population.

Italy was hit especially hard by the plague. Port cities like Venice were accustomed to receiving ships from all over the world, and many of them carried the Yersina pestis bacteria which caused the plague.

And it was out of this pandemic that the first modern public health measures emerged.

Venice created a special council to reduce the outbreak… and one of their first decrees was to ban infected (or suspected) ships from docking.

Plus, any traveler who arrived from a plague-infested area was required to isolate themselves for a period for 40 days, or quaranta journi in Italian. This is the origin of the word quarantine—it’s a reference to the 40-day isolation period during Bubonic Plague.

Even when the worst was over, though, the effects of the plague were disastrous.

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Hey, Jay, Enough of Your Stinkin’ Easy Money! By David Stockman

Whatever you may think the Federal Reserve’s function is—preserve the value of the dollar, promote low inflation and low unemployment, regulate the banking system—it’s real function is to keep stock and bond prices high and rising. From David Stockman at lewrockwell.com:

It doesn’t get any more pathetic than this. The Fed cuts the absurdly
low money market rate by another 50 basis points at 10AM and before noon the
Donald is banging the podium for more.

So if you ever needed a final warning to get out of the casino, today’s
back-to-back eruption of financial insanity from the two most powerful economic actors on the planet should be it.

Even then, we might be inclined to give the Donald a tad bit of slack. After
all, he’s an absolute dunderhead on economics and spent a lifetime as a
leveraged real estate speculator, where, in fact, lower rates are always, but
always, to be welcomed when you’re rolling the dice with other people’s
money.

Still, it doesn’t get any more primitive or dangerous than the Donald’s
current conviction that the price of money should be graduated lower based on
the current year international league tables of GDP growth or the level of presidential braggadocio, as the case may be.

Effectively, however, the tiny posse of fools who run the ECB and the BOJ are
burning down the financial foundations of their own economies. So the Donald
insists we burn down ours, too.

Folks, that’s the sum, substance and full extent of his “thinking”:

“As usual, Jay Powell and the Federal Reserve are slow to act. Germany
and others are pumping money into their economies. Other Central Banks are much more aggressive,” Trump said, referring to the Fed chairman.

“The Federal Reserve is cutting but must further ease and, most importantly,
come into line with other countries/competitors. We are not playing on a level field. Not fair to USA. It is finally time for the Federal Reserve
to LEAD. More easing and cutting!”

By contrast, the empty suite and sniveling coward who announced today’s
emergency 50 basis point cut deserves no quarter whatsoever. The man is so petrified of a hissy fit by the boys, girls and robo-machines in the trading pits that he has just plain abandoned any pretense of rational financial thought.

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Stocks Sag as Fed Cures Coronavirus by Cutting Rates ½ Percentage Point, by Wolf Richter

The main reason this article got posted is for the great headline. From Wolf Richter at wolfstreet.com:

Because “the coronavirus poses evolving risks to economic activity,” despite the “strong” fundamentals of the US economy, and despite stocks being off just 7.8% from all-time highs, the Fed’s FOMC announced during trading hours this morning, following the G-7 conference call, that it had voted unanimously to cut the target for the federal funds rate by half a percentage point to a range between 1% and 1.25%:

The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity. In light of these risks and in support of achieving its maximum employment and price stability goals, the Federal Open Market Committee decided today to lower the target range for the federal funds rate by 1/2 percentage point, to 1 to 1‑1/4 percent. The Committee is closely monitoring developments and their implications for the economic outlook and will use its tools and act as appropriate to support the economy.

But at the moment as I’m writing this, the impact of the biggest rate cut since the Financial Crisis is not propitious, with the Dow and the S&P 500 down between 1.5% and 2.0%. Note yesterday’s spike, about half of which has been undone at the moment:

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