Tag Archives: interest rates

Settling Wreckage from the Past, by MN Gordon

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.

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Dark Forces, Plain Speak, Brighter Gold & The Fed’s Sick End Game, by Matthew Piepenburg

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.

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The Long Dark Winter, by The Zman

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.

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Doug Casey on How “The Most Important Prices in All of Capitalism” Are Rigged

If you mess with interest rates you’re messing with the entire economy. From Doug Casey at internationalman.com:

Prices in Capitalism

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.

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The Treasury Bond Massacre and the Spike to 5% Mortgage Rates: This is All Going Very Fast, by Wolf Richter

The Treasury market is way oversold and is due a substantial relief rally, but longer term, still higher interest rates loom. From Wolf Richter at wolfstreet.com:

Junk bonds are still in la-la-land though, Apocalypse but not now.

When investors demand higher yields on bonds, motivated sellers must lower the price of those bonds in order to sell them. And yields are now spiking and prices of bonds with longer maturities are plunging.

The one-year Treasury yield spiked by 38 basis points during the week, including 12 basis points on Friday, to 1.67%, the highest since October 2019. There is now a huge 150 basis point spread between the one-month yield of 0.17% and the one-year yield of 1.67%:

This is one heck of a fast-moving train. And the Fed hasn’t even done much other than one tiny rate hike and lots of talking about what it’s going to do, which is raise rates far faster and further than previously imagined, and kick off Quantitative Tightening “as soon as” May to finally crack down on inflation which is now spiraling out of control. And the credit markets got the memo.

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JGBs Slide, Yen Spikes As Parazlyed BOJ Fails To Intervene With Yields Hitting 6 Year High, by Tyler Durden

The Bank of Japan faces an especially acute version of a dilemma that confronts many central banks: keep interest rates low and watch the currency crash, or raise them and watch the economy crash. From Tyler Durden at zerohedge.com:

After sliding relentlessly for much of the past month on expectations that the BOJ will be the “odd” central bank out, refusing to join its developed peers in tightening financial conditions, and the USDJPY rising as high as 122.44 earlier (from 115 three weeks ago), the yen jumped on Friday morning in Japan, after the 10Y JGB crossed a critical resistance level without intervention from Kuroda.

Entering the final trading day of the week, with 10Y JGB yields on the verge of rising above 0.23%, traders were bracing for another massive bond market intervention by the BOJ. As Bloomberg’s Wes Goodman put it, “there’s a good chance the Bank of Japan will buy bonds as soon as Friday to curb the advance in yields. JGB ten-year rates are climbing in tandem with yields globally, rising to 0.23%.”

As shown in the chart below, when JGBs hit that level last month, the central bank responded with one of its an unlimited fixed-rate purchases, in effect putting a hard stop to further declines in JGBs.

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Welcome to the Death Zone, by MN Gordon

It’s going to take high interest rates to kill raging inflation, but they’ll also kill the overly indebted economy. From MN Gordon at economicprism.com:

Do you own a house?  Do you rent?

How you answer these questions likely influences your perception of inflation and the economy.

But what if the forces driving your perception are about to reverse…thus, standing your perception on its head?

We believe big, earth-shattering changes are under foot in the credit market.  A seemingly firm foundation may soon give way like liquified soil following an earthquake.

Where to begin…

Many investment gurus in the early 1980s were predicting the future while projecting the past.  After a decade of raging price inflation, the popular dogma was to pack one’s portfolio with gold coins, fine art, and antiques.  This was the proven, surefire way to preserve one’s hard earned wealth.

The United States, it seemed, was about to go full Weimar.  Howard Ruff, in his investment newsletter The Ruff Times,  was predicting the dollar would soon turn to hyperinflationary ash, like conifer trees in a California wildfire.  It was inevitable.  And imminent!

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What May Really Kill the Electric Car, by Eric Peters

If interest rates rise and cheap auto financing disappears, it will put pricey electric cars that much more out of the reach of many Americans. From Eric Peters at ericpetersautos.com:

Electric vehicles are just the ticket for short trips in between long recharge times.

Assuming you can afford one.

The new electric version of Ford’s F-150, for instance. It can go up to 230 miles on a full charge – a bit less than half as far as the base version of the gas engine’d F-150 can go (in the city; on the highway, where gas-engined vehicles go even farther than electric vehicles, the non-electric F150 can go more than 600 miles).

If you want to go farther in the electric F-150, Ford offers a version of it with up to 320 miles of range – for about $15k more than the just shy of $40k base price of the 230 mile version.

The good news is that each version will come with a real-time range-estimator that takes into account such things as the weather – which greatly affects an EV’s range – as well as the effect of towing or hauling a heavy load in the bed. Also the effect of using the truck’s battery pack to power tools and such.

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What is the Strike Price of the Powell Put? by MN Gordon

The level of the stock indexes may be far below where there are now for the Federal Reserve floods the system with liquidity, because past such infusions are already fueling raging price increases. From MN Gordon at economicprism.com:

The Federal Reserve, through a multi-decade series of shady practices, finds itself in a very disagreeable place.  Policies of extreme market intervention have positioned the economy and financial markets for an epic bust.

Price inflation.  Unemployment.  Interest rates.  Stock market valuations.

These metrics are presently situated in such a way that the “Powell put” will be impossible to successfully execute for the foreseeable future.

Price inflation is at a 40 year high.  The unemployment rate is 3.8 percent, which is near its low.  The 10-Year Treasury note is yielding 2.15 percent.  While this key interest rate is certainly trending higher, it’s still near a historical low.

And for all the wild price swings and gnashing of teeth over the last two months, the S&P 500 has hardly slipped.  In fact, as of market close on Thursday March 17 of 4,411, the S&P 500 is down only 7.83 percent from its all-time record close of 4,786 reached on January 3.  It still has another 12.17 percent to fall before reaching official bear market territory.

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Pozsar’s “Margin Call Doom Loop” Prediction Comes True As Trafigura Faces Billions In Margin Calls, by Tyler Durden

The margin calls mount, like the first cracks and crevices on an avalanche. From Tyler Durden at zerohedge.com:

While there have been occasional stories of hedge fund blow ups (especially those trading Chinese stocks) amid the recent market volatility, so far we have yet to hear of a bank or any other “systematically important” market participant running into a solvency or liquidity crisis or needing a bailout, and yet a look at one of the most tangible funding market indicators – the FRA/OIS – has traded at very elevated levels in recent weeks, suggesting that there is indeed some funding trouble below the surface.

But if it is not the banks scrambling for liquidity, then who?

Recall what Zoltan Pozsar warned two weeks ago, when he said that “we could be looking at the early stages Of A Classic Liquidity Crisis” – according to the former NY Fed liquidity guru, none other than the commodity traders themselves, and their associated exchanges and clearinghouses, will be the drain of liquidity during this period of unprecedented commodity volatility, adding that “if you want to express all this in the credit space, look at what CDS spreads on some bigger commodity traders have done in the past few weeks.”

Sure enough, last week’s unprececented LME margin squeeze, where a 250% surge overnight in nickel prices nearly bankrupted Chinese tycoon Xiang Guangda whose Tsingshan Holding Group, the largest stainless steel maker, held a massive 150,000 tons nickel short and which resulted in $8 billion margin call which however even the collecting counterparties (one of which was JPMorgan) did not want to collect on knowing they would default Tsingshan, collect nothing and potentially push the LME itself into insolvency.

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