Interest rates are going up, which is generally not a good thing for heavily indebted economies. That would be most of them. From Wolf Richter at wolfstreet.com:
Ironically, after having lamented the flattening yield curve for a year, soothsayers now lament the steepening yield curve.
On Friday, capping a rough week in the US Treasury market, the 10-year yield closed at 3.23%, the highest since May 10, 2011, and stocks fell for the second day in a row. This is an unnerving experience for pampered equity investors who’ve come to take endless stock-price inflation for granted, who’d figured for years that interest rates would never rise, and as short-term interest rates began rising, figured that long-term interest rates would never rise – and now they’re rising too.
Cheap credit keeps alive a lot of corporations who should be dead. From Charles Hugh Smith at oftwominds.com:
The defaults and currency crises in the periphery will then move into the core.
It’s funny how unintended consequences so rarely turn out to be good. The intended consequences of central banks’ unprecedented tsunami of stimulus (quantitative easing, super-low interest rates and easy credit / abundant liquidity) over the past decade were:
1. Save the banks by giving them credit-money at near-zero interest that they could loan out at higher rates. Savers were thrown under the bus by super-low rates (hope you like your $1 in interest on $1,000…) but hey, bankers contribute millions to politicos and savers don’t matter.
2. Bring demand forward by encouraging consumers to buy on credit now. Nothing like 0% financing to incentivize consumers to buy now rather than later. Since a mass-consumption economy depends on “growth,” consumers must be “nudged” to buy more now and do so with credit, since that sluices money to the banks.
Remember how painful the Greek debt was, and how hard it was to resolve. Italy’s unfolding debt crisis will be many times larger and more difficult to resolve. From Don Quijones at wolfstreet.com:
A serious showdown is brewing in the Eurozone as Italy’s anti-establishment coalition government takes on the EU establishment in a struggle that could have major ramifications for Europe’s monetary union. The cause of the discord is the Italian government’s plan to expand Italy’s budget for 2019, in contravention of previous budget agreements with Brussels.
The government has set a public deficit target for next year of 2.4% of GDP, three times higher than the previous government’s pledge. It’s a big ask for a country that already boasts a debt-to-GDP ratio of 131%, the second highest in Europe behind Greece. To justify its ambitious “anti-poverty” spending plans, proposed tax cuts, and pension reforms, the government claims that Italy’s economic growth will outperform EU forecasts.
Two financial market truisms: markets can change on a dime, and they go down quicker than they go up. From John Rubino at dollarcollapse.com:
“How did you go bankrupt?”
“Two ways. Gradually, then suddenly.”
― Ernest Hemingway, The Sun Also Rises
On the surface, nothing much changed last week. The Fed, as expected, raised short-term interest rates very modestly, the US, Canada and Mexico cut a new NAFTA deal (kind of a pleasant surprise), unemployment fell again, Trump continued to tweet while Democrats and Republicans continued to express their mutual disdain via dirty tricks and contrived insults. Business as usual, in other words, in our dysfunctional new normal.
Has society gotten so complex that it’s unmanageable…and disaster looms? From James Howard Kunstler at kunstler.com:
The opening chapters of Michael Lewis’s new book, The Fifth Risk, detail the carelessness of the Trump transition team in the months leading up to his swearing-in as president. Former New Jersey governor Chris Christie led the team, with its binders full of possible agency chiefs, before he was summarily canned by Steve Bannon, who would be dumped soon himself by the ascending Golden Golem of Greatness. There was, in fact, a set of rigorous protocols for managing the transition of power based on decades of cumulative practice — and anxiety over the frightening nuclear demons at the core of US power — and they were disdained, to the horror of the permanent bureaucracy waiting in place for leadership.
In those months after the election, Mr. Trump was apparently dazed and confused by his unexpected victory, and completely unprepared to actually run the country. His super-sized “stable genius” brain surveyed the scene and his field-of-view saw nothing but swamp from sea to shining sea, populated by lizards, snakes, raptors, and poisonous insects, with higher-order mammalian predators in the C-suites. When he finally caught on to the game being played, Mr. Trump rounded up his own menagerie of crispy critters and sent them forth to run operations like the Department of Energy — in that case, former Texas governor Rick Perry, who knew next-to-nothing about the department’s responsibilities, and had sworn to abolish it in the primary elections (when he remembered it existed).
US interest rates are breaking out to multi-year highs. It’s hard to see how that will be good for the stock market. From Tyler Durden at zerohedge.com:
Having broken above its multi-decade trendline, 30Y Yields are starting to levitate faster than even the equity markets can handle…
Following this week’s bond-market rout, DoubleLine’s Jeff Gundlach noted that the 30 Year Treasury yield “has broken above its multi-year base” which “should lead to significantly higher yields for investors.”
Gargantuan projects with slim or no hope of repaying their original investors seem to invariably crop up towards the end of debt-fueled expansions. From Simon Black at sovereignman.com:
Hudson Yards is a gigantic real estate project on New York City’s western edge that will be the most expensive development in US history when it’s completed in 2025.
At $25 billion, the project costs more than the size of the entire economy of Iceland… which is saying a lot given that Hudson Yards is only 28 acres… literally one millionth the size of Iceland.
According to the plan, in seven years (so they say) Hudson Yards will be a neighborhood of gleaming towers with high-end retail, fancy law firms and private equity shops, overpriced apartments, and ridiculous works of art like “the Vessel”.
The Vessel is basically a giant woven staircase made from copper; it stands 15 stories, weighs 600 tons and has 2,500 climbable steps inside.