Tag Archives: interest rates

Suffering a sea-change, by Alasdair Macleod

When interest rates really start to reflect the ongoing monetary inflation, it will blow the prices of most financial assets out of the water. From Alasdair Macleod at goldmoney.com:

here is an established theoretical relationship between bonds and equities which provides a framework for the future performance of financial assets. It would be a mistake to ignore it, ahead of the forthcoming rise in global interest rates.

Price inflation is roaring, and so far, central banks are in denial. But it is increasingly difficult to see how monetary policy planners can extend the suppression of interest rates for much longer. There can only be one outcome: markets, that is to say prices determined by non-state actors, will force central banks to capitulate on interest rates in the summer.

Hardly noticed, China is deliberately putting the brakes on its economy, which will cause an inflationary dollar to collapse, unless the US defends it by putting up interest rates. Deliberate? Almost certainly, as part of its strategy, China is taking the financial war with the US into the foreign exchanges.

Bond yields will rise, with the US Treasury 10-year bond leaving a 2% yield far behind. Equity markets will sense the danger, and it might turn out that the month of May marks a peak in financial asset values — following cryptocurrencies into substantial bear markets.

Introduction

There is an old stock market adage that you should sell in May and go away. It has already proved its worth in the case of cryptocurrencies, with Bitcoin more than halving at one point, and Ethereum losing 57% between 10—19 May. A sea-change in cryptocurrencies’ market sentiment has taken place.

As for equities, it could also turn out that 10 May, which so far has marked the S&P 500 Index’s high point, will mark the beginning of their decline. But it’s too soon to tell. However, we do know that following the unprecedented dilution of the major currencies’ purchasing power since March 2020 commodity prices have increased substantially, global logistics are fouled up and consumer prices are rapidly rising everywhere, a combination of events which is bound to lead to higher interest rates. But as is usually the case in times like these, central bankers and market bulls are wishing this reality away.

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Pick Your Fed Poison: Tanking Markets or Fatal Inflation? by Matthew Piepenberg

Bet on the Fed choosing fatal inflation. From Matthew Piepenberg at goldswitzerland.com:

Below we look at the dark corner in which the Fed has placed themselves and investors: A one-way path toward tanking markets or crippling inflation.

Alas: Pick your poison.

For us, the antidote is as good as gold.

More Inflation Signs

Stocks continue to gyrate nervously as the Fed continues to behave like a cornered animal trying to downplay inflation risks while paradoxically supporting a mega “everything bubble” with pro-inflationary tools.

April’s “official” CPI inflation number climbed by 4.2%, the fastest climb since 2008 and 2X the Fed’s mandate.

The Fed is claiming that’s because because COVID’s 2020 deflationary trends made such relative inflationary increases “expected,” “temporary,” and soon to be “contained.”

We’ve heard those words before…

Meanwhile, US producer prices surged by 6.2% for the same month, the highest move since 2010, as core inflation, which excludes energy and food, saw its highest move since 1981.

As for energy and food, we’ve already made it painfully clear that prices on everything from ethanol to canola and corn, or from milk, chicken wings and lean pork to beef and coffee are skyrocketing by high double digits.

Thus, in case you think inflation is still up for debate, the facts once again tell us it’s already here.

And as for inflation in the risk asset markets, that’s now as obvious as any bubble narrative.

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Fragile: Handle with Care, by Sven Henrich

The Fed is walking on egg shells trying not to say or do anything that would upset the markets and topple the house of cards. From Sven Henrich at northmantrader.com:

What a circus. I imagine there’s a big sign in every Fed building in America: Don’t drop, fragile, handle with care.

Janet Yellen, while no longer in a Fed building, committed the cardinal sin of pointing out the obvious yesterday: Rates may have to be raised in response to rising inflation.

The response sequence was as predictable as laughable:

Recognizing the market’s reaction of the unthinkable: Selling, the comments had to be caveated to immediately erase the damage of a near 3% drop in the tech sector.

Yes, this is how conditioned investors are, this is how pitifully everything is centered around policy makers where the slightest hint or thought of even just thinking about reducing the free money spigot may cause selling of equities.

And it wasn’t just Yellen coming to the rescue of her unforced error course. In the last 24 hours alone a multitude of Fed speakers coming out nearly every hour to assure markets that they either have the tools ideal with inflationary pressures or that inflationary pressures will be transitory or even moving the goalposts outright:

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Nothing Can Get Us Out Of This High Debt, High Intervention, Low Default, Low Productivity Loop, by Tyler Durden

This pithy little article hits the nail on the head. From Tyler Durden at zerohedge.com:

On Tuesday morning, Deutsche Bank’s Jim Reid published his 23rd annual default study, a document he first put out in the 1990s which as he says, “makes me feel very old” and adds that the story of this report over the past decade or so has been the increasing divergence between economic growth and defaults. And while defaults have trended down alongside growth, the last 12 months have been a supersized version of this as defaults have peaked at a lower level than during the previous three big default cycles even as growth across many countries was at the lowest levels for several decades or centuries.

According to Reid, the reason for this is simple: it is because debt has become so large over this period, and of such extreme systemic importance, that when each cycle turns there is an ever larger policy move to ensure that many of the most heavily indebted entities don’t default and risk a severe contagion event for the global economy.

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Why interest rate management fails, by Alasdair Macleod

You can’t control an economy by controlling interest rates. From Alasdair Macleod at goldmoney.com:

This article explains why attempting to achieve economic outcomes by managing interest rates fails. The basis of monetary interventionist theories ignores the discoveries of earlier free-market thinkers, particularly Say, Turgot and Böhm-Bawerk.

It also ignores Gibson’s paradox, which demolishes the theory that managing interest rates controls price inflation. And incredulously, the whole basis of banking regulation assumes that commercial banks are just intermediaries between depositors and borrowers. That model of banking fails to address the simple fact that banks create credit out of thin air and that deposits are the property of the banks, and not their customers.

The process of credit creation is described herein and is markedly different from that commonly assumed. Changes in the level of outstanding bank credit have nothing to do with interest rates, except perhaps in extremis.

It is hardly surprising, therefore, that critical mistakes are being made by policy planners. And we find that the US bank cohort is now reducing outstanding bank credit for the non-financial economy, which will make it impossible for businesses to deliver sufficient product to satisfy expected consumer demand. Far higher consumer prices than currently discounted in financial markets will follow.

Consequently, bond yields are set to rise much further, marking the end of the global financial asset bubble, and the failure of the fiat currency regime.

Introduction

It must be a mystery to central bankers that reducing interest rates to the zero bound hasn’t stimulated their economies as expected. It is also a surprise to the vast majority of economists and financial commentators. Part of the problem is the modern habit of taking government statistics as Gospel, another part is not understanding what individual statistics truly represent, and finally there are the fault lines in neo-Keynesian macroeconomics. And at the root of it is the cost of production theory of prices.

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Billionaire hedge fund manager urges diversification out of the dollar, by Simon Black

Why would you want to stay in a currency its sponsors are hell-bent on debasing? From Simon Black at sovereignman.com:

Ray Dalio is the founder of one of the largest investment firms in the world and has amassed a personal fortune nearing $20 billion from his business and investment acumen.

In short, he understands money and finance in way that most people never will. And it’s for this reason that his latest insights are so noteworthy.

In a recent, self-published article entitled “Why in the World Would You Own Bonds When. . .”, Dalio makes some blunt assertions about the alarming US national debt, the decline of the dollar, and other negative trends in the Land of the Free.

Here’s a summary of the major points:

1) Interest rates are now so low that “investing in bonds (and most financial assets) has become stupid.”

Dalio points out that bond yields are so low today that investors would essentially have to wait more than 500 years to break even on their bond investments after adjusting for inflation.

That’s why sensible people are already ditching the bond market.

JP Morgan’s CEO Jamie Dimon recently said he wouldn’t touch a US government 10-year Treasury Note “with a ten foot pole.” Neither would Dalio, as he told Bloomberg this month.

2) This is a big problem for Uncle Sam. Investors are ditching US government bonds at a time when the US is “overspending and overborrowing”.

They just passed a $1.9 trillion stimulus, and they have another $3 trillion spending package ready to go, plus plenty of momentum for Universal Basic Income, health care, Green New Deal, and just about everything else.

In short, the government is going to have to sell a LOT of bonds (i.e. increase the debt) at a time when investing in bonds has become stupid.

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Willful Blindness, Societal Rift & Death of the Dollar, by Michael Lebowitz

History is replete with governments who borrowed themselves to ruin, but not one that borrowed its way to prosperity. From Michael Lebowitz at realinvestmentadvice.com:

“It was assumed, even only a decade ago, that the Fed could not just print money with abandon. It was assumed that the government could not rack up huge debt without spurring inflation and crippling debt payment costs. Both of these concerns have been thrown out the window by large numbers of thinkers. We’ve seen years of high debt and loose monetary policy, but inflation has not come.

So the restraints have been cast aside.”

– David Brooks- New York Times-  Joe Biden Is A Transformational President

Regardless of whether you agree or disagree with David’s politics, he makes an incredibly bold statement above. In no uncertain terms, he argues, massive amounts of monetary and fiscal stimulus can be employed with no consequences, no restraints.

We fear this naïve mindset is not just David Brook’s, but a rapidly growing school of thought among economists, politicians, and central bankers.  We all want unicorn-like solutions to what ails us, but the truth, grounded in history, is there is no such thing as a free lunch.

Since David shrugs off any consequences of aggressive monetary and fiscal policy, we bring them to the forefront.

Who Is Funding Stimulus?

Someone must pay for rampant Federal spending.

Ask your spouse, neighbor, or friend who that might be, and they are likely to tell you the taxpayer is on the hook. To some degree, they are correct but increasingly less so.

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Rigged to Fail—From Musk to Powell, by Matthew Piepenburg

Living on lies is like living on junk food and TV, sooner or later it will kill you. From Matthew Piepenburg at goldswitzerland.com:

For quite some time we have been warning about the rising shark fin of rising yields and rates.

As of this writing, one can almost hear John Williams’ orchestral theme song to Jaws ringing in the ears.

The Slow Creep

Mortgage rates in the U.S. have hit 3%, dramatically curtailing mortgage re-fi’s.

Meanwhile, oil prices are now at levels not seen since 2018 (as broader commodities in general are on the rise) while the tech stocks of the NASDAQ (most of which thrive on cheap rates) recently, and predictably, saw volatile swings, at one point down past 10% from their February 12th peak.

Rates are up, the dollar is up and as Barron’s reporter, Janet H. Cho, observed: “Things are getting interesting.”

Unfortunately for Barron’s readers, however, these “interesting” developments have little if nothing to do with what she described as “economic growth picking up.”

Economic growth? Huh? Really? C’mon…

Spinning the “economic growth” meme for rising yields is akin to attributing Lance Armstrong’s cycling success to an apple-a-day rather than a steroid per week.

What Barron’s feature articleis conveniently overlooking is the far more obvious fact that investors, here and around the world, are calling the Fed’s bluff, not swooning over “economic growth.”

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The Fed’s Most Convenient Lie: A CPI Charade, by Matthew Piepenburg

If the Fed allowed the true inflation rate to be publicized, and consequently bond buyers demanded interest rates that offered a “real,” inflation adjusted rate of return, it would be virtually impossible for the government to finance its deficits. From Matthew Piepenburg at goldswitzerland.com:

Despite a penchant for double-speak that would make a politician blush, the Fed tells us that its primary focus is unemployment not inflation.

Let me remind readers, however, that an openly nervous Mr. Powell came out in the summer of 2020 with a specific, as well as headline-making, agenda to “allow” higher inflation above the 2% rate.

This “new inflation direction” ignored the larger irony that the Fed had been unsuccessfully “targeting” 2% inflation for years before changing verbs from “targeting” to “allowing.”

Such magical word choices reveal a critical skunk in the Fed’s semantic wood pile.

If, for example, the Fed was honestly “targeting” inflation to no success for years, how could Powell suddenly have the public ability to then “allow” more of what he failed to achieve before, as if inflation was as simple to dial up and down as a thermostat in one’s home?

Dishonest Inflation Reporting

The blunt answer is that the Fed, in sync with the fiction writers at the Bureau of Labor Statistics (BLS), reports consumer inflation as honestly as Al Capone reported taxable income.

In short: The Fed has been lying about (i.e. downplaying) inflation for years.

As we’ve shown in many prior reports, the Consumer Price Index (CPI) scale used by the BLS to measure U.S. consumer price inflation is an open charade, allowing the BLS, and hence the Fed, to basically “report” inflation however they see fit—at least for now.

If, for example, the weighting methodologies hitherto used by the Fed to measure CPI inflation in the 1980’s were used today, then US, CPI-measured inflation would be closer to 10% not the reported 2%.

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Stagflation Subterfuge: The Real Disaster Hidden By The Pandemic, by Brandon Smith

It’s not the coronavirus that’s killing the economy, its the response, notably lockdowns, that done the trick. From Brandon Smith at zerohedge.com:

Authored by Brandon Smith via Birch Gold Group,

In recent economic news, headlines are being dominated by concerns over rising bond yields. Increased bond yields are a sign of a possible spike in inflation and, logically, they call for the Federal Reserve to raise interest rates in order to prevent that inflation.

Higher bond yields also mean there is a competitive alternative to stocks for investors – both factors that could trigger a plunge in the stock market.

If one studies the real history behind the stock market crash during the Great Depression, they will find that it was the Federal Reserve’s interest rate hikes that caused and prolonged the disaster after they had created an environment of cheap and easy money throughout the 1920s. Former Chairman Ben Bernanke openly admitted the Fed was responsible back in 2002 in a speech honoring Milton Friedman. He stated:

“In short, according to Friedman and Schwartz, because of institutional changes and misguided doctrines, the banking panics of the Great Contraction were much more severe and widespread than would have normally occurred during a downturn. Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.”

This then raises the question – inflation or deflation? Will the Fed “do it again?”

Probably not in exactly the same way, but we will see elements of both inflation and deflation soon in the form of stagflation.

It’s a Catch-22 that the central bank has created, and many (including myself) believe that the Fed has created the conundrum deliberately. All central banks are tied together by the Bank for International Settlements (BIS) and the BIS is a globalist institution through and through. The globalist agenda seeks to trigger what they call the “Great Reset,” a complete reformation of the global economy and capitalism into a single one world socialist system… managed by the globalists themselves, of course.

In my view the Fed has always been a kind of institutional suicide bomber; its job is to self-destruct at the right moment and take the U.S. economy down with it, all in the name of spreading its cult-like globalist ideology.

The only unknown at this point is how they will go about their sabotage. Will the central bank continue to allow inflation to explode the cost of living in the U.S., or will they intervene with higher interest rates and allow stock markets to crash?

Either way, we face a serious economic crisis in the near future.

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