Tag Archives: interest rates

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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The Jig Is Up! Covid-19 and the Defenestration of the Central Bankers, by David Stockman

If nothing else, Covid-19 will demonstrate that central bankers are not the omniscient, omnipotent wizards they’re often made out to be. From David Stockman at lewrockwell.com:

Let it be said that historians will surely marvel – and at some point soon – about the grand delusion of the present era. Namely, the near universal belief that central bankers could print, peg and palaver the main street economy into unfailing expansion and ever rising prosperity and that there were essentially no macro-risks to soaring stock prices that their toolkits couldn’t contain and counteract.

That misbegotten belief had huge untoward consequences. It made economies brittle with too much leverage, financialization and speculation; and fragile with too few shock absorbers and insurance mechanism such as just-in-case inventories, second suppliers and local sources for physical production and back-up liquidity lines and balance sheet reserves for financial operations.

Then came the Black Bat of 2020 (or whatever) with its toxic economic contagion. Racing with virtually lightening speed through an infinitely complex and deeply integrated global supply chain anchored in the Red Ponzi, the breakdown of economic activity is already proving that the central banks are not omnipotent after all.

Just as they cannot print antibodies to stop the coronavirus disease, they can’t print raw materials, intermediates, components and subassembly to restart broken supply chains. Super-QE wouldn’t do it; double digit subzero rates wouldn’t help; and open-mouth forward guidance would only call to mind King Canute shouting at the incoming sea.

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David Stockman on What an Audit of the Federal Reserve Could Really Reveal

Massive debt at the top of the business cycle is nobody’s idea of good economics, but that’s what the US is doing. From David Stockman at internationalman.com:

Doug Casey’s Note: David Stockman is a former congressman and director of the Office of Management and Budget under Ronald Reagan.

Now, anyone with connections to the government should elevate your suspicion level. But as you’ll see, David is a genuine opponent of government stupidity. Although his heroic fight against the Deep State during the Reagan Administration was doomed, he remains a strong advocate for free markets and a vastly smaller government.

We get together occasionally in the summer, when we’re both in Aspen. He’s great company and one of the few people in this little People’s Republic that I agree with on just about everything. This absolutely includes where the US economy is heading.

I read his letter the Contra Corner every day, and suggest you do likewise.

International Man: Trump is calling for a weaker dollar and negative interest rates. What does this tell you about Trump’s understanding of economics?

David Stockman: It tells you that he has no understanding of economics at all!

I think Trump is not even a primitive when it comes to economic comprehension. His views are just plain stupid when it comes to exchange rates. He seems to think it’s some grand game of global golf, where the strongest player gets the lowest score.

What sense does it make tweeting as he did recently in attacking the Fed?

According to Trump, the US economy is so much better than the rest of the world’s economies, and therefore we should have the lowest interest rate as a result. It has nothing to do with economic logic or with principles related to sound money. I think he’s just thrashing about trying to create a warning that if things go badly, it’s the Fed’s fault.

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Corporate Debt Time Bomb, by Claudio Grass

Rising interest rates and rising credit downgrades pose twin threats to the corporate debt market. From Claudio Grass at lewrockwell.com:

While I have reportedly highlighted the many risks of the current monetary policy direction and the multiple distortions that it has created in the markets, in the economy, and even in society, one of the most pressing dangers of the unnaturally low rates and cheap money is the staggering accumulation of debt. Nowhere is this more obvious than in the ballooning corporate debt, especially in the US. It has been growing so rapidly and for so long, that many investors and analysts eventually got used to it, accepted it as a fact of life, and became desensitized to the immense risk it poses to the economy at large. Now, another crucial milestone has been reached and a red line has been crossed, that will hopefully force market participants to finally heed the many calls for caution and the clear warnings that have been falling on deaf ears for years.

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