A quick preview of what happens next: nothing good. From Doug Casey at internationalman.com:
International Man: In addition to stocks, it seems that almost every asset class is also crashing.
What’s your take on the markets, and where do you think it’s headed?
Doug Casey: Let’s take them in order of size and importance.
The biggest market is bonds. It’s especially dangerous because it’s the most overpriced. Bonds are a triple threat to your capital. First, because of the inflation risk, which is huge and growing. Second, is the interest rate risk; I expect rates to double, triple, or quadruple from here, going back to or above the levels of the early 80s. The third is the default risk, which applies to everything except US Government debt. AAA corporate debt hardly exists anymore.
Interest rates have skyrocketed in the last year, with mortgage rates going from under 3% to over 6%. 30-year treasury bonds still only yield 3.25%. But with inflation running 10, 12, or 15% and going higher, long-term Treasuries have a lot further to fall. I remain short T-bonds.
Everybody’s paying attention to the stock market because they’re fully invested. The meme stocks, SPACs, and tech stocks have all collapsed. The big ones are down 25%, and many are down 80 or 90%. It’s not over yet. People still feel that they can buy the dips. They’re hurting, but they’ve been paper-trained over a couple of generations to believe the Fed will kiss everything and make it better.
Posted in Banking, Business, Collapse, Currencies, Debt, Economics, Economy, Financial markets, Governments, Investing
Tagged Gold mining stocks, interest rates
Interest rates are going up, and given the long swings in the bond market, they’ll probably be going up for many years. From Nick Giambruno at internationalman.com:
Although many don’t realize it, interest rates are simply the price of money.
And they are the most important prices in all of capitalism.
They have an enormous impact on banks, the real estate market, and the auto industry. It’s hard to think of a business that interest rates don’t affect in some meaningful way.
Today, we are on the cusp of a rare paradigm shift in interest rates. Such changes take decades—or even generations—to occur. But when they do, the financial implications are profound.
Interest rates rise and fall through decades-long cycles, as seen in the chart below.
That makes sense, as debt is naturally cyclical. It allows people to consume more than they produce now. But it also forces them to produce more than they consume later to pay it off.
Interest rates last peaked in 1981 at over 15%. Then, they fell for 39 years and bottomed in July 2020 at around 0.62%.
The red line marks the long-term average of 5.6%.
The bond market is oversold and due a pretty substantial rally. Nevertheless, most of us have seen the lowest interest rates were ever going to see in our lifetimes. From Wolf Richter at wolfstreet.com:
Something has to give. And it’s going to be price.
The average 30-year fixed mortgage rate today spiked to 6.18%, from 5.85% on Friday, according to the daily index by Mortgage News Daily. Aside from the sheer magnitude of the spike, this was also the highest mortgage rate since collection of the daily data began in April 2009. This was lightning fast, with mortgage rates nearly doubling since the beginning of the year (chart via Mortgage News Daily):
Mortgage rates follow the 10-year Treasury yield, but there is a spread between them, and the spread varies. The 10-year Treasury yield spiked by 28 basis points today, to 3.43% at the close, a huge move, and the highest since April 2011:
ECB head Christine Lagarde is running into the reality that sooner or later she’s going to have to turn off the fiat debt machine. From Tom Luongo at tomluongo.me:
Interest rates’ spectacular ascent is due a pause, but the long term trend has shifted from the down to up. From Wolf Richter at wolfstreet.com:
So the Fed Gets Ready to Walk Away from the Bond Market, and All Kinds of Stuff Happens.
he price of the iShares 20+ Year Treasury Bond ETF [TLT], which tracks an index of Treasury securities with long maturities, dropped another 1.5% on Friday, after having dropped 2.7% on Thursday. It has plunged 21% year-to-date and 33.7% from the peak in August 2020. In return for this plunge in price, investors get a yield that has risen to 3.0%.
August 2020 marked the peak of the greatest bond-market bubble in US history. It was when the 10-year Treasury yield hit historic lows while our favorite hype mongers predicted that it would drop below zero and become negative. But this bond bubble is blowing up. And this is what the “bond massacre” looks like for investors who’d thought they’d invested in a conservative instrument, when in fact they’d bought a high-risk bet on the continuance of the bond bubble, a bet on long-term interest rates going negative. And WHOOSH went their money:
The Fed cannot fix the enormous problem of monetary inflation it created without throwing the American and probably the global economy into a depression. From David Stockman at zerohedge.com:
Authored by David Stockman via Contra Corner blog,
The 10-year UST yield has crossed the 3% mark. So you’d think this was a sign that a modicum of rationality is returning to the bond bits.
But not really. That’s because inflation is rising even faster than interest rates, meaning that real yields on the fulcrum security for the entire financial system are still dropping ever deeper into negative territory. Thus, at the end of March the inflation-adjusted (Y/Y CPI) rate dropped to -6.4% and even with the rise of nominal yields since then it still stands close to -6%.
Here’s the thing, however. For the past 40-years the Fed had been driving real yields steadily lower, although even during the money-printing palooza of 2009-2019, the real yield entered negative territory only episodically and marginally.
But after the Fed pulled out all the stops in March 2020 and commenced buying $120 billion per month of government debt, the bottom dropped out in the bond pits. Real yields plunged to territory never before visited, meaning that unless inflation suddenly and drastically plunges, the Fed is still massively behind the curve.
The fact is, there is no chance of staunching inflation if real yields remain mired deep in negative territory. Yet if the nominal yield on the UST should rise to 5-7%, and thereby marginally enter positive real yield territory, there would be carnage on Wall Street like never before.
Posted in Banking, Business, Currencies, Debt, Economy, Financial markets, Governments, History, Investing
Tagged interest rates, Monetary inflation, U.S.bonds
Cascading government debt, suppressed interest rates, and wholesale debt monetization have completely boxed in the Federal Reserve, leaving it with nothing but unpalatable options. From MN Gordon at economicprism.com:
Settling wreckage from the past with realities of the present can be difficult and painful. If you do the crime. You must do the time.
When it comes to financial markets and the economy, this can take many forms. Some of the most common include bankruptcy, shuttered businesses, and collapsing share prices.
This week Federal Reserve Chair Jay Powell and his cohorts at the Federal Open Market Committee Meeting (FOMC) raised the federal funds rate 50 basis points. This marked the first 50 basis point rate hike since 2000. It is part of the Fed’s initial efforts to settle up on wreckage from the past.
The world has changed markedly over the last 22 years. Certainly, the economy and financial markets have become twisted and warped. Without the proper perspective everything from the price of a gallon of gas to the price of a house is muddled and confused.
Posted in Banking, Business, Currencies, Debt, Economics, Economy, Financial markets, Government, Politics
Tagged Federal Reserve policies, interest rates, Monetary inflation
The U.S. government is functionally bankrupt and the Federal Reserve has no palatable options. From Matthew Piepenburg at goldswitzerland.com:
Below, we look at debt forces alongside supply and demand forces to help investors see (and prepare for) the darker forces within an entirely rigged end game and shifting financial backdrop.
As usual, the end game will boil down to yield curve controls and more money printing, which means more currency debasement and a central bank system that secretly (and historically) favors inflation over truth and markets over Main Street.
2018: A Template for 2023
Throughout the entire year 2018, as the Fed forward-guided rate hikes at 25 bps a pop, I warned investors of a massive year-end correction and to prepare their portfolios accordingly.
This required no tarot cards or market-timing hype.
Posted in Banking, Business, Collapse, Currencies, Debt, Economics, Economy, Geopolitics, Government
Tagged Bond Market, Federal Reserve, interest rates, U.S. government deficits
Economic options confronting the Biden administration and the Federal Reserve are all unpalatable, with unpopular consequences. From The Zman at thezman.com:
The government released the latest inflation data and the results were the worst we have seen in forty years. The retail number came in at 8.4% and the wholesale number clocked in at 11.2%. Of course, the retail number excludes the things that people buy, like food, fuel and housing. These numbers also rely upon the new math rather than old math used the last time inflation was an issue. By the old inflation standard, retail inflation is over 15%.
The political class is poleaxed by these numbers as they have been assured that inflation at these levels was impossible. Modern economic theory says that inflation is caused by too much money chasing too few goods. We now have top men in place to keep an eye out for this. They just need to manage the money supply to keep inflation under control. This assumption led the top men to assume inflation was transitory, the result of supply chain issues.
Posted in Banking, Business, Currencies, Debt, Economics, Economy, Financial markets, Government, Politics
Tagged interest rates, Monetary inflation, stocks
If you mess with interest rates you’re messing with the entire economy. From Doug Casey at internationalman.com:
International Man: Interest rates are simply the price of money.
They have an enormous impact on banks, the real estate market, and the auto industry. It’s hard to think of a business that interest rates don’t affect in some meaningful way, either directly or indirectly.
That’s why interest rate expert James Grant correctly describes interest rates as the most important price in all of capitalism.
What’s your take?
Doug Casey: It’s absolutely true: the price of money—of capital—is the most important of all prices. Among other things, interest rates help determine whether people prefer to be debtors or savers. That makes a huge difference for a society because when you’re a debtor, you are either mortgaging your future earnings or consuming the capital that other people have saved in the past. Of course, debt can also finance businesses and facilitate production—but most debt today, including almost all government debt, is for consumption, not production. Debt is generally dangerous and often very destructive. Low-interest rates encourage debt.