Tag Archives: interest rates

BREAKING: Gravity Works, by Robert Gore

Are you ready for the inevitable?

Why did the stock market fall? The usual suspects are finding all sorts of “causes.” How about this one: when everyone is on the same side of the boat, driven by hope and greed or fear and loathing, the boat capsizes, no matter the economic “fundamentals” or political climate.

Since 2009 the world’s central bank’s have blown up their balance sheets and much of that newly created fiat debt found a home in equity and bond markets and cryptocurrencies. With few interruptions, most asset prices have rallied ever since.

Virtually every stock market sentiment and positioning indicator has, like the stock market itself, gone from new extreme to new extreme for months. Numerous commentators, including SLL, have been warning for months, even years. Pick a valuation measure and stocks, even after the last two weeks, are at peak valuations rivaled only by 1929, 2000, and 2007.

The only mystery was when they would give way. If they are now in fact giving way, then there’s no mystery about how bad it’s going to get. Very bad.

With the world more indebted than it’s ever been on both an absolute basis and relative to the world’s productive capacity, economies and markets are extremely sensitive to interest rates. The Treasury debt market has been the dark cloud on the horizon since short-term bill rates made their low in mid-2015. The Fed followed, as it almost always does, raising the federal funds rate target (from zero) for the first time in seven years December 2015.

That markets lead, not follow the Fed, is an inconvenient truth for the legions of commentators and analysts who routinely assert the Fed controls interest rates. It shoots a hole in a lot of theories and models. (For substantiation that the Fed follows the market, see The Socionomic Theory of Finance, Chapter 3, Robert Prechter.)

The ten-year note made its high in July 2016 and has been trending irregularly lower—and interest rates irregularly higher—since. Higher interest rates raise the cost of leveraged speculation, production, and consumption. Yet, leveraged speculators in the stock market only seem to have noticed rising yields the past couple of weeks.

Given that the government will be borrowing close to $1 trillion this year, yields are still absurdly low. Markets have been conditioned by interest rate suppression, negative yields, governmental debt monetization, QEs, central bank puts, and central banker public pronouncements to think absurdly low yields are forever. A competing hypothesis is that it’s not nice to fool Mother Nature or markets, and after nine years of this nonsense, when they blow they’re really going to blow. SLL endorses the competing hypothesis.

Small coteries of central banking bureaucrats can’t regulate or control multi-trillion dollar, yen, yuan, and euro economies and financial markets. Super-volcanic financial eruptions will expose other truths as well. Watch as rising interest rates and crashing equity markets and economies reveal central, core truths: governments are bereft of real resources, are desperate to acquire same, and will be inconceivably—by today’s standards—rapacious in doing so. That’s quite a statement, because even today they’re pretty damn larcenous.

A generalized crash will also clarify the central conflict of our time: government and it’s string-pullers, minions, beneficiaries, and cheerleaders versus everybody else. Such a characterization suggests a deepening of today’s polarization. Unfortunately, as order breaks down, it will be everybody else versus everybody else, too. Good-bye polarization, hello atomization.

And order will break down. Government always and everywhere rule by force, fraud, and intimidation, but force, fraud, and intimidation need to be paid, preferably in something that can be exchanged for groceries or shoes for the kids. History suggests that the government and central bank will depreciate (speaking of fraud) their fiat debt instruments—Federal Reserve Notes, US Treasury debt, and central bank credit balances—to their marginal cost of production, or zero.

When governments are bankrupt, their praetorians forage—a nice word for theft and extortion. They’ll be competing with hordes of foraging civilians, many of whom will be armed. In such a scenario, one identifiable group has a fighting chance, and it will involve fighting and lots of it. That, of course, is the group who have either been preparing for such a scenario for years or have the skill set and mental fortitude necessary to adapt to it. Much scorned, this group may get the last laugh, but it will be a grim one.

They overwhelmingly supported Trump. It will be a disappointment, but not a surprise, that one man is unable to reverse a collapse long in the making. However, their support for Trump indicates ideological cohesion, which will be absent from the rest of the population.

Take away the undeserved from the undeserving and you get a tantrum. Steal the earned from those who earned it and you get righteous rage. One’s a firecracker, the other a volcano. The game has been to impress upon the useful a moral obligation to support the useless, but the volcano’s about to blow, burying that obscene morality in lava and ash. Given the staggering levels of accumulated debt and promises, the useful know their talents, skills, hard work, productivity and futures have been mortgaged for the useless. This is the salient and intractable social division. No reconciliation is possible between the useful and those who believe themselves entitled to their enslavement.

The Useful and the Useless,” SLL, 3/23/17

When the government implodes, those on the receiving end of its largess are going to be united by only two things: their outrage and their inability to do anything about it. They’ll have all the solidarity of cannibals trying to eat one another.

Against that backdrop will be the group who wants to provide for itself…and knows how to do so. Individualism, self-sufficiency, and a love of freedom and inviolable liberties are not dead in America, but those who support them have been driven underground. They’ll stay underground come the collapse—advertising abilities and provisions will be an invitation to brutalization, robbery and murder—but they’ll fend off the rampaging hordes, survive, and reemerge.

Do they have to reemerge, can’t they just emerge to set things right without all the collapse and carnage? Unfortunately not. For those pinning their hopes on political education and action, what are the chances of convincing the half of the country that’s riding the government gravy train to hop off to prevent insolvency and ruin? The question answers itself. They’ll have to be pushed off.

Trump’s election was a cry of protest, and he’s ruffled some feathers. However, eight years of around-the-clock, 24/7 presidential effort couldn’t undo decades of ruinous policies, many of which Trump has actually embraced: out of control spending, deficits, debt, and empire.  Trump will be battling falling equity markets, rising interest rates, and swamp vermin.

Things have to get much worse before they can get better, but just as nothing goes up forever, nothing goes down forever. Collapse’s silver lining may be that it offers a chance for freedom and inviolable liberties to finally emerge from underground.

In the meantime, Doug “Uncola” Lynn’s recent article on The Burning Platform, “BABY STEPS: You’ve Been Woke. Now Exit the Matrix.” is an excellent wake up call and has a lot of useful information and links to other sources about preparing for the inevitable. Nobody is going to be 100 percent prepared, but there’s no excuse for being 0 percent prepared.

Has It Been Years Since

You Read A Novel You Cherish?

Amazon

Kindle

Nook

Advertisements

Unleash The Debt: Why The Senate Budget Deal Is Sending Yields Surging, by Tyler Durden

It’s no mystery why yields are surging: supply and demand. There’s going to be a lot of government debt, and the central bank is now a seller of said debt. From Tyler Durden at zerohedge.com:

When we commented last night on the Senate’s proposed bipartisan “deficit-busting” spending deal – one which will raise spending caps by $300bn over the next two years and incorporate a suspension of the debt limit until March 2019 – we observed that “the agreement will achieve one thing – lead to a surge in US debt issuance, and – by implication – even higher yields, leading to an even steeper drop in the market, not to mention more frequent VIX-flaring episodes.

With yields jumping and stocks sliding, so far this prediction appears on target.

As a reminder, one month ago Goldman predicted that  US debt issuance would more than double, rising from $488bn in 2017 to $1,030 billion in 2018.

asd

Of course, now that the spending caps have been raised by $300 billion, this implications is that the US deficit will surge, and net Treasury debt supply – needed to fund the deficit – in 2018 will get even bigger, something which is duly reflected in today’s surging 10Y yield.

But how much will the proposed deal spike the US deficit by? In a note from BofA’s chief rates strategist, Mark Cabana, we find the answer:

Assuming the bill becomes law, our deficit and Treasury supply estimates will be marked higher.

Yesterday’s bipartisan Senate agreement included a deal to fund the government beyond 8 February and boost spending levels for defense and non-defense programs over the next two years. The $300bn increase over the next two years is modestly larger than we expected and caused us to raise our deficit forecasts by $35bn and $20bn to $825bn and $1,070bn, respectively, assuming the law passage (Table 1).

Not all of the cap increase will translate into direct spending in each fiscal year given actual outlays can be spread over several years. Moreover, some of the increase in the spending caps came from budget gimmicks that just shifted funding toward domestic nondefense spending from other budget provisions; this is why our deficit estimates boost is below the total cap increase. The increase in disaster relief spending was generally in line with our estimates, which did not result in any revisions.

To continue reading: Unleash The Debt: Why The Senate Budget Deal Is Sending Yields Surging

Death Star Headed for the U.S. Economy, by Bill Bonner

Unlike the one in Star Wars, there’s no way to blow up this Death Star. It will, in fact, blow up the global economy. From Bill Bonner at bonnerandpartners.com:

PARIS – “Keep your eye on Friday,” the old-timers used to say.

When the pros are worried, they sell on Friday so they can spend the weekend without sweating.

When they are confident, they buy on Friday so they don’t miss out on weekend gains (when traders engage in electronic “after-hours” trading).

Last Friday, selling pressure left the Dow 666 points lower by the closing bell. And this morning, stock markets everywhere from Tokyo to London are sliding.

Markets go up and down. This market will go down, no doubt about it. If not now, later. That would be nothing new. Hardly worth mentioning.

But there’s more to the story: In addition to plunges for stocks and bonds, the entire financial system is headed for a long, painful destruction.

So far, hardly anyone notices.

Today’s New York Times makes no mention of the Death Star headed for the U.S. economy. Instead, all we find is the typical public nonsense.

Trump did this… Russia did that… Nunes… Mueller… Israel… Poland… blah-blah. If we’re right about what is coming, none of this will matter.

But that’s the way it works.

The old-timers also say that a bear market will always try to take as many investors down with it as possible.

It would not be unusual for stocks to recover… so that investors think the danger is over. And then – whack! – a real crash.

As always, we wait to find out. We will do our best to enjoy it… trying always to understand it.

We watch. We wonder. The dots come together – slowly, slowly… then all of a sudden.

To continue reading: Death Star Headed for the U.S. Economy

Bond Panic Spreads, by Bill Bonner

The bond market, having topped in July, 2016, is leading the stock market, which may have topped last month. Bonds usually lead stocks. Higher interest rates will certainly not help the economy. From Bill Bonner at bonnerandpartners.com:

CORK, IRELAND – “U.S. Stocks Drop as Treasury Sell-Off Gains Steam,” was headline news at Bloomberg yesterday.

Meanwhile, bitcoin tumbled toward $8,000, wiping about $100 billion off its market value in just 24 hours.

And the price of the 10-year Treasury note dived, driving up its yield to above the 2.75% mark.

Already, the 30-year fixed mortgage rate – which gets its cue from the 10-year T-note yield – has jumped from 3.7% a year ago to 4.2% today.

On a $200,000 mortgage, that comes to about the same amount as the savings promised in the tax cut.

World of Hurt

The feds giveth; the feds taketh away…

…and the feds maketh a mess of things.

They have engineered a grotesquely exaggerated credit cycle – holding short-term interest rates below the rate of inflation for far too long.

They’ve been giving out free money, in other words.

Now they have an economy burdened by far too much debt… just as the credit cycle turns.

A few basis points doesn’t seem like much. But when you have to borrow, every extra basis point (one one-hundredth of a percentage point) hurts. And when you have $67 trillion in debt, a few basis points can be a disaster.

To be more precise, a one-basis point increase in carrying costs would add $6.7 billion to the nation’s annual interest rate charge.

In Tuesday’s Diary, we looked at how the U.S. government is going to be in a world of hurt when interest rates rise to a modest 5%.

We said it would add $600 billion to the cost of carrying $30 trillion of debt, which is the expected government debt level within 10 years.

A dear reader wrote in to wonder where we went to school. If all the $30 trillion yielded 5%, it would be a total extra annual interest charge of $1.5 trillion, not $600 billion. If the dear reader is right, the situation is even worse than we thought.

The feds collect about $3.5 trillion in tax revenue. So you can see why paying so much interest would be out of the question.

To continue reading: Bond Panic Spreads

Ray Dalio Says Bond Bear Market Has Begun, Expects Historic Crash, by Tyler Burden

Here is what the head of the world’s largest hedge fund has to say about the bond market. From Tyler Durden at zerohedge.com:

Joining the likes of Bill Gross and Jeffrey Gundlach, and echoing his ominous DV01-crash warning to the NY Fed from October 2016, Bridgewater’s billionaire founder and CEO Ray Dalio told Bloomberg  TV that the bond market has “slipped into a bear phase” and warned that a rise in yields could spark the biggest crisis for fixed-income investors in almost 40 years.

“A 1 percent rise in bond yields will produce the largest bear market in bonds that we have seen since 1980 to 1981,”Bridgewater Associates founder Dalio said in a Bloomberg TV interview in Davos on Wednesday. We’re in a bear market, he said.

Readers may recall that when addressing the NY Fed in October 2016, Dalio made virtually the same prediction when he commented on the bond market’s DV01:

… it would only take a 100 basis point rise in Treasury bond yields to trigger the worst price decline in bonds since the 1981 bond market crash. And since those interest rates are embedded in the pricing of all investment assets, that would send them all much lower.

Dalio is referring to the record DV01 in the bond market, which according to the latest OFR report released in December, has risen to $1.2 trillion: that’s the P&L loss from a 100bps rise in rates.

The watchdog found that “valuations are also elevated” in bond markets. Of particular interest is the OFR’s discussion on duration. Picking up where we left off in June 2016, and calculates that “at current duration levels, a 1 percentage point increase in interest rates would lead to a decline of almost $1.2 trillion in the securities underlying the index.”

 

To continue reading: Ray Dalio Says Bond Bear Market Has Begun, Expects Historic Crash

Rising Interest Payments, by the Northman Trader

Rising interest rates will slow down the economy, and probably the capital markets. From the Northman Trader at northmantrader.com:

Is anyone paying attention? I don’t know, but the cost of carrying debt has been rising and it’s already showing measurable impacts despite the Fed Funds rate still being very low.

My concern of course is that the global debt construct will bring global growth to a screeching halt (see also The Debt Beneath).

As the 10 year is already piercing above the 2.6% area now I want to pay attention to the data coming in as the Fed is dot plotting more rate hikes to come:

After all the Fed has hiked 5 times off the bottom floor in the past 2 years:

Can we see any measurable impact? You bet we can.

Here are personal interest payments for consumers:

Mind you we are still near the lows of the previous cycle and already total interest payments are near record highs.

The driver of course is record consumer debt and credit card debt (see also macro charts). But despite rates still being historically low this rise in interest rates has an impact on the consumer.

Already we see this:

“The big four US retail banks sustained a near 20 per cent jump in losses from credit cards in 2017, raising doubts about the ability of consumers to fuel economic expansion. “People are using their cards to get from pay cheque to pay cheque,” said Charles Peabody, managing director at the Washington-based investment group Compass Point. “There’s an underlying deterioration in the ability of the consumer to keep up with their debt service burden.”Recently disclosed results showed Citigroup, JPMorgan Chase, Bank of America and Wells Fargo took a combined $12.5bn hit from soured card loans last year, about $2bn more than a year ago.”

I repeat: “There’s an underlying deterioration in the ability of the consumer to keep up with their debt service burden.”

That’s a problem given the Fed’s dot plot. Before you know it consumers will be handing over a good portion of their tax cuts to credit card companies. Winning.

Is the government carrying record debt immune to this? Nope.

To continue reading: Rising Interest Payments

Bond Market Smells Inflation, Begins to React, by Wolf Richter

The bond market probably topped out in July 2016. Interest rates are starting to move up again. From Wolf Richter at wolfstreet.com:

Inflation expectations now exceed the Fed’s target.

The 10-year US Treasury yield breached 2.5% on January 9 and hasn’t looked back since, closing on Friday at 2.55%. The three year yield closed at 2.12%, the highest since October 2008. The two year yield, after breaching 2% on Friday intraday, closed at 1.99%, the highest since September 2008.

Bond prices fall when yields rise. And the selloff in three-year maturities and below shows that the short end of the bond market is reacting to the Fed’s rate-hike environment.

The moves in the 10-year yield, however, defied the Fed in much of 2017, with the yield actually dropping. With long-term yields falling and short-term yields rising, the yield curve “flattened,” and there were fears that the yield curve would “invert,” with 10-year yields dropping below two-year yields – a scenario that has proven dreadful in the past, including just before the Financial Crisis. But recently, the 10-year yield too has begun to respond.

Though the “new Fed” in 2018 hasn’t fully taken shape yet, with several key vacancies still to be filled, there is already tough talk even among the “doves.” And that’s where tough talk matters.

On Thursday it was New York Fed President William Dudley who outlined the “two macroeconomic concerns” he is “worried about”: “The risk of economic overheating,” and that the markets are blowing off the Fed. In the end, the Fed “may have to press harder on the brakes,” he said.

On Friday, it was Boston Fed President Eric Rosengren who told the Wall Street Journal that he expected “more than three” rate hikes this year to get this under control before it’s too late. “I don’t want to get to a situation where we have to tighten more quickly,” he said, citing specifically the “fairly ebullient financial markets,” and the risks of waiting too long.

These “doves” are worried that the Fed will have to speed up its rate hikes to get a grip on asset price inflation, wage inflation, and consumer price inflation before they become difficult to control.

To continue reading: Bond Market Smells Inflation, Begins to React, by Wolf Richter