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After years of ultra-loose fiscal, monetary, and credit policies and the onset of major negative supply shocks, stagflationary pressures are now putting the squeeze on a massive mountain of public- and private-sector debt. The mother of all economic crises looms, and there will be little that policymakers can do about it.
Renowned geopolitical and financial cycle expert Charles Nenner said, back in September, the markets would sink and then go back up. Both calls happened right on time. What does Nenner see now? Nenner says, “Two days ago, we started to take profits again. So, we are not that bullish. . . . The public we have now do not understand bear markets. . . . They don’t understand that we can have rallies of 15% to 20%, and then it can go down again. . . . So, we took profit and we are mostly in cash again. We are long in the bond market for a change because it looks like inflation is going to moderate for a little bit. We are waiting for the gold cycles to bottom, and we are getting very close, but the bull market in gold will come, but it’s still going to take a few more weeks.”
So, are interest rates on the way down? Nenner says, “Yes, but for very short term. You might remember our interest rate cycles bottomed, and the cycle is up for the next 30 years. I expect interest rates to go back to where they were in the early 1980’s. . . . Longer term interest rates are going much higher. Right now, we have a bounce because commodities are weaker, and I think they will be weak until around February. This is probably why the Fed is not going to talk as aggressive as they were talking. This is still temporary and interest rates are still going to go much higher in the future.”
Nenner also says, “Mortgage interest rates will go to the 8% to 9% range in 2023. . . .and the stock market will go down by about 50%.”
…click on the above link to read the rest…
In Part one of this series, Our Currency The World’s Problem, we discuss the vital role the U.S. dollar plays in the global economy. With an understanding of the dollar’s role as the world’s reserve currency, it’s time to discuss how the Federal Reserve’s monetary policy machinations influence the dollar and, therefore, the global economy and financial markets.
Given the Fed’s recent extreme monetary policy actions, which haven’t been seen in over 40 years, it is more important now than ever to appreciate the potential global consequences of the Fed’s stern fight against inflation.
Triffin’s Paradox
In Part 1, we highlight the following two lines, which help describe Triffin’s paradox.
“To supply the world with dollars, the United States must consistently run a trade deficit. Running persistent deficits, the United States would become a debtor nation.”
“Simply the growing divergence between debt and the ability to pay for it, GDP, is unsustainable.”
Increasingly borrowing without the means to pay it off is unsustainable. The terms zombie company or Ponzi Scheme come to mind when considering such a system. That said, because the printer of the currency and taxer of its citizens is in charge, we can only ask how long the status quo can continue.
The answer is partially up to the Fed. The Fed can use QE and low-interest rates to delay the inevitable. As we now see, the problem is that those tools are detrimental when there is high inflation. Fighting inflation requires higher interest rates and QT, both of which are problematic for high debt levels.
Financial Tremors
The Bank of England is bailing out U.K. pension funds. The Bank of Japan uses excessive monetary policy to protect its currency and cap interest rates…
…click on the above link to read the rest…
Back in 2005, the world economy was “humming along.” World growth in energy consumption per capita was rising at 2.3% per year in the 2001 to 2005 period. China had been added to the World Trade Organization in December 2001, ramping up its demand for all kinds of fossil fuels. There was also a bubble in the US housing market, brought on by low interest rates and loose underwriting standards.
The problem in 2005, as now, was inflation in energy costs that was feeding through to inflation in general. Inflation in food prices was especially a problem. The Federal Reserve chose to fix the problem by raising the Federal Funds interest rate from 1.00% to 5.25% between June 30, 2004 and June 30, 2006.
Now, the world is facing a very different problem. High energy prices are again feeding over to food prices and to inflation in general. But the underlying trend in energy consumption is very different. The growth rate in world energy consumption per capita was 2.3% per year in the 2001 to 2005 period, but energy consumption per capita for the period 2017 to 2021 seems to be slightly shrinking at minus 0.4% per year. The world seems to already be on the edge of recession.
The Federal Reserve seems to be using a similar interest rate approach now, in very different circumstances. In this post, I will try to explain why I don’t think that this approach will produce the desired outcome.
[1] The 2004 to 2006 interest rate hikes didn’t lead to lower oil prices until after July 2008.
It is easiest to see the impact (or lack thereof) of rising interest rates by looking at average monthly world oil prices.
…click on the above link to read the rest…
Authored by Simon White, Bloomberg macro-strategist,
The macro landscape is changing. Inflation will remain in an elevated and unstable regime, but the first stage of the crisis is drawing to a close. That means the dollar in a downward trend, bonds in an upward trend, stocks underperforming bonds, and growth outperforming value.
Regime shifts can be almost imperceptible in real time, but in retrospect they mark fundamental turning points. Inflation today is going through one of these shifts, analogous to the 1970s. In that decade, inflation could be understood as a play in three acts, a drama that is likely to be repeated in this cycle.
So what’s brought the curtain down on the first act? Three important indicators have made a decisive turn:
All through this cycle, the market has been anticipating a lower peak rate than desired by FOMC members. That changed in the last couple of months, signaling that Fed hawkishness was peaking as the market was amplifying — not inhibiting — the Fed’s intended policy.
The real yield curve had steepened relentlessly as shorter-term real rates kept falling while the Fed rate lagged inflation. But the trend definitively turned in July, pointing to a peak in the dollar…
…click on the above link to read the rest…
Decades of central bank distortions and regulatory / market-share capture by cartels and monopolies have completely gutted “markets,” destroying their self-correcting dynamics.
Unintended consequences introduce unexpected problems that may not have easy solutions. An entirely different set of problems are unleashed as unintended consequences have their own unintended consequences. This is the problem with complex emergent systems such as economies, societies and global supply chains: the system’s feedback, leverage points and phase-change thresholds are not necessarily visible or predictable, yet these dynamics have the potential to cascade small failures into systemic collapse.
The unintended consequences of unintended consequences are called second-order effects: consequences have their own consequences.
So for example, you juice your economy with massive stimulus after a lockdown that upended consumers and global supply chains, crushing both demand and supply, and suddenly you have rip-roaring inflation as demand comes back while supply chains remain tangled.
Shifting critical industrial production to frenemies so corporations could maximize profits while reducing the quality of goods and services seemed like a good idea until the potential costs of that dependence on frenemies become apparent.
Assuming oil and natural gas would always be in abundance made sense when they were abundant, but geopolitical forces kicked that assumption into the gutter. All the reassuring economic stories we told ourselves–energy is only 3.5% of the economy and the household spending budget, so cost really doesn’t matter–fall off the cliff when availability and supply become the paramount issues setting price.
That 3.5% loses meaning when there’s not enough to supply demand and somebody loses the game of musical chairs.
Then there’s the fantasy that monetary policy imposed by central banks control inflation. The inconvenient reality is central bank monetary policy is akin to building sand castles on the beach: when the tide is ebbing, the castles look magnificent. When the tide is rising, the sand castles are quickly washed away.
…click on the above link to read the rest…
Last week, the Federal Reserve delivered a 75-basis point rate hike, but Fed Chair Jerome Powell failed to deliver the more doveish rhetoric that many expected. The messaging did not indicate much softening in the stance on the future trajectory of rate hikes, despite an apparent “soft pivot” the week before.
In his podcast, Peter broke down Powell’s messaging and pointed out a number of very scary admissions that came out of the Fed meeting.
Peter said the Fed did do a soft pivot but was able to back off when the bond market stabilized.
I believe the Fed was forced into making that pivot because it stood on the precipice of a bond market crash, which was in the process of happening. And I think the only way the Fed was able to stop that slow-motion crash from playing out accelerating was by throwing a bone to the markets and indicating through the Wall Street Journal that there was going to be some type of statement that was going to go along with the rate hike that would indicate that maybe there was going to be a pause in the pace, a slowdown in the pace, that the Fed was going to take a step back and reflect and assess, and maybe acknowledge the progress that had been made without indicating complete victory, but at least acknowledging that victory was at least in sight and that the Fed could take a more cautious approach going forward. … Something to that effect was expected.”
However, the Fed didn’t deliver anything close to that.
Initially, the markets thought the Fed was going more doveish. The statement released by the FOMC left some wiggle room for a slowdown in hiking or even a pause with language about monetary policy “lags” and “cumulative” effects.
…click on the above link to read the rest…
Soon, you’ll wake up to hear reports on CNBC and Twitter about ATM machines not working across the country.
JPMorgan Chase CEO Jamie Dimon will appear on CNBC, to explain that for the good of the country, his bank and all the other banks in the country are buying long-dated Treasury bonds. And, to protect America, it’s important that we all take a pause and stop withdrawing cash from the system, which means a “temporary” shutdown of other banking operations for a week or two.
It will happen. It’s unavoidable.
A couple of interesting facts…
The price of U.S. Treasury bonds is collapsing. Since the end of July, the 10-year Treasury rate has risen sharply, from a yield of 2.65% to over 4.3% now. There haven’t been bigger losses in the U.S. Treasury bond market, EVER.
[ZH: The 1-year drawdown of US Equity and Treasury Market Cap is $14 Trillion, the largest draw that we have ever seen in absolute terms…]
Signs of inflation are fading, and the American economy is obviously heading into a severe recession.
But rather than stabilizing – which is what usually happens – the selloff in longer-dated U.S. Treasury securities is intensifying, and liquidity is at its lowest levels since March 2020.
That suggests that the market doesn’t trust the dollar anymore. And that means the entire system is at risk.
Payback’s A Witch
The sell-off in long-dated Treasuries isn’t because of last year’s inflation. It’s because the market knows that the U.S. Treasury cannot possibly afford a real rate of interest on its massive $31 trillion in debt.
…click on the above link to read the rest…
Friend of Fringe Finance Lawrence Lepard released his most recent investor letter this week, with his updated take on the monetary miasma spreading across the globe.
For those that missed it, Larry also talked with me on my podcast just days ago. I believe him to truly be one of the muted voices that the investing community would be better off for considering. He’s the type of voice that gets little coverage in the mainstream media, which, in my opinion, makes him someone worth listening to twice as closely.
Larry was kind enough to allow me to share his thoughts heading into Q4 2022. The letter has been edited ever-so-slightly for formatting, grammar and visuals.
This is Part 1 of his letter. Part 2 can be found here.
In the third quarter, virtually all asset classes went for a roller coaster ride – a sharp bear market rally in July and August, followed by a vicious sell off in September as the Fed continued its Hawkish tone at Jackson Hole in late August and then raised the Fed Funds rate in September to 3.00-3.25%. Recall that as recently as February 2022 Fed Funds was at 0.0-0.25%.
Year to date through 9/30/22, the S&P 500 and Nasdaq are down -24% and – 33%, respectively. Gold and Gold Miners (GDXJ) are down -9% and -30% year to date, respectively. Bloomberg’s US Aggregate Bond Index is down -15%. Only the Bloomberg Commodity Index (broad commodities like oil that are benefiting from inflation) is up year to date (+13.5%).
The Fed’s hawkishness has caused an enormous amount of wealth destruction. As the chart below shows, US stocks and bonds have created a drawdown of $18 Trillion in the US equity and fixed income markets, far worse than 2008 and 2020’s market value destruction….
…click on the above link to read the rest…
Precious metals expert and financial writer Bill Holter said in June it was “game over, they’re pulling the plug.” The Fed went on an aggressive interest rate raising policy and is still raising rates. Now, the economy is staggering. Holter explains, “For sure, we are already in a recession. We are now in the third quarter of negative growth. I think it is laughable that people put odds on whether or not we are going to go into a recession because it is obvious–we are already in a recession. Rates rising have absolutely frozen the real estate market. If you own a property, who is going to buy it? Rates have gone from 3.25% to more than 7%. I am on the record that once we saw a 3% yield on the 10-Year Treasury, you would start to see a tightness in credit. Now, we are over 4%. What few people are talking about is what has this already done to the derivatives market? . . . Think about how big the derivatives market is. Total credit worldwide is $350 trillion, but you have derivatives pushing $2 quadrillion. I have said this all along, derivatives will blow up. Warren Buffett has called them financial weapons of mass destruction. They are far bigger than central banks can fix.”
Holter goes on to say, “The real economy runs on credit. Everything you look at, everything you touch and everything you do every day has many uses of credit to get to the final product or situation. So, once credit freezes up, it’s completely game over. In a past interview, I said they are pulling the plug. They have to pull the plug because, mathematically, the debt cannot be paid. The derivatives cannot perform. So, they have to pull the plug. They also have to do one other thing, and that is they have to kick the table over…
…click on the above link to read the rest…
It takes a special kind of cynical self-interest to make people pay twice for something they already cannot afford, while claiming you are doing them a favour. This though, is the energy price relief package announced by Liz Truss yesterday. The package plays that old political card of being not quite as bad as it might otherwise have been, while still being a lot worse than it was.
Politically, the announcement confirms a great deal of what we suspected. In recent years there has been a growing belief that the Versailles-on-Thames technocracy pulls the strings and that incoming prime ministers are simply given their script on arrival in 10 Downing Street – this is born out by an energy package – drawn up by technocrats over the last six weeks – which is wholly at odds with Truss’s policy announcements during her leadership campaign. The announcement also demonstrates that despite her third-rate tribute act, Truss is no Margaret Thatcher, nor even the economic liberal that she claims… because a true libertarian – and likely Saint Margaret herself – would have allowed the energy companies to go bust rather than ignore the inflationary impact of state intervention… so now we know.
The package itself involves capping the average energy bill at £2,500 for the next two years, rather than the immediate rise to £3,549 and the anticipated rise above £6,000 in 2023. There is also a reduction on the regressive standing charge for electricity as the various green levies are removed. A reduction in VAT is also expected in future, and the national £400 bill reduction, together with the £650 for people on low incomes remains and may be extended next year.
…click on the above link to read the rest…
It’s wake up time. For months, there has been a tremendous amount of denial out there. So many of the “experts” assumed that the Federal Reserve and other central banks had everything under control and that things would “return to normal” before too long. But that hasn’t happened. Instead, the wheels seem to be coming off the bus and nobody seems to know what to do. The Fed appears to be determined to keep raising interest rates in a desperate attempt to fight inflation, and this has forced other central banks all over the globe to raise rates as well in order to keep their currencies from absolutely tanking. But all of these interest rate hikes are taking us into a major global economic downturn, and central bankers in Europe are literally screaming at the Fed to end the madness.
But the Fed is not going to end the madness, and so things are going to get really bad.
In fact, Bank of America is now projecting that the U.S. economy will lose 175,000 jobs a month during the first quarter of 2023…
As pressure from the Fed’s war on inflation builds, nonfarm payrolls will begin shrinking early next year, translating to a loss of about 175,000 jobs a month during the first quarter, the bank said. Charts published by Bank of America suggest job losses will continue through much of 2023.
“The premise is a harder landing rather than a softer one,” Michael Gapen, head of US economics at Bank of America, told CNN in a phone interview Monday.
In my opinion, if our job losses are that small during the first three months of next year I think that will be a huge win.
…click on the above link to read the rest of the article…
Update (1030ET): Despite The BoE promises to do almost ‘whatever it takes’, long-dated gilt prices are collapsing today. 30Y gilt yields are up a stunning 34bps now, soaring towards crisis highs…
What next for BoE?
The pain in the UK is spreading to US yields (remember US bond market holiday today but futures trading)…
10Y UST yields are implied around 6bps higher for now.
* * *
Over the weekend, Band of England (BoE) Deputy Governor Dave Ramsden indicated that the bank intends to charge forward on interest rate hikes, suggesting that this is the only way to tame the ongoing inflation crisis.
“However difficult the consequences might be for the economy, the MPC must stay the course and set monetary policy to return inflation to achieve the 2% target sustainably in the medium term, consistent with the remit given to us.”
Just two days after that statement, BoE on Monday announced further measures to ensure financial stability in the U.K., building on its intervention in the long-dated bond market.
Specifically, The BOE said it will:
Additionally, regular repo-related operations also remain available to help.
So far, investors haven’t taken up as much of the support as the BOE has offered. In the eight auctions to date, the BOE bought just £4.6 billion of bonds, about 12% of the £40 billion capacity of the program.
…click on the above link to read the rest of the article…
This time, it’s war.
One day after we wrote that “OPEC Is Taking On The Fed“, the oil cartel did just that when it announced that it was cutting output by 2mmb/d the despite a furious diplomatic campaign by the White House hoping to avoid the inevitable, and warning that any cut would be seen as a “hostile act” by the Soros administration. Of course, despite Biden’s fondest wishes that OPEC+, which of course counts Russia among its members, would help Demcrats win the midterms by keeping the price of gas low, this was not going to happen…
… and not just for political reasons, but also due to the Fed’s increasingly challenging monetary policy. Yesterday, we summarized the dynamic as follows:
This morning, Rabobank’s Michael Every expanded on this, laying out the feedback loop OPEC and the Fed find themselves in:
Fed pivot is possible against a backdrop where oil prices march higher on supply destruction in response to demand destruction as monetary policy is tightened…
So what happens next? For one answer we go to Goldman Sachs which overnight expanded on the “OPEC+ takes on the Fed” concept and revised it to “OPEC+ takes on the West” (available to pro subs in the usual place)…
…. in which Goldman writes that the OPEC+ cut represents a return to the Old Oil Order, where core-OPEC acts under the rational behavior of a dominant producer with pricing power: “In that sense, while exceptional, this cut is also logical as it maximizes the group’s revenues today with minimal sacrifice of future profits.”…
…click on the above link to read the rest of the article…
Below we track how the Powell Fed serves as a contemporary weapon of mass destruction.
Powell’s so-called “war against inflation” will fail, but not before crushing everything from risk asset, precious metal and currency pricing to the USD. As importantly, Powell is accelerating global market shifts while sending a death knell to the ignored middle class.
Let’s dig in.
The Fed: Creators of Their Own Rock & Hard Place
In countless interviews and articles, we have openly declared that after years of drunken monetary driving, the Fed has no good options left and is literally caught between an inflationary rock and a depressionary hard-place.
That is, hawkishly tightening the Fed’s monthly balance sheet (starting in September at $95B) while raising the Fed Funds Rate (FFR) into a recession was, is and will continue to be an open head-shot to the markets and the economy; yet dovishly mouse-clicking more money (i.e., QE) would be fatally inflationary.
Again, rock and a hard place.
What’s remarkable and unknown to most, however, is that the Chicago Fed recently released a white paper during the Jackson Hole meeting which says the very same thing we’ve been warning: Namely, that Powell’s WMD “Volcker 2.0” stance (arrogance/delusion) is only going to make inflation (and stagflation) worse, not better.
To quote the Chicago Fed:
“In this pathological situation, monetary tightening would actually spur higher inflation and would spark a pernicious fiscal stagflation, with the inflation rate drifting away from the monetary authority’s target and with GDP growth slowing down considerably. While in the short run, monetary tightening might succeed in partially reducing the business cycle component of inflation, the trend component of inflation would move in the opposite direction as a result of the higher fiscal burden.”
In short, Powell can’t be Volcker.
Why?
Simple.
…click on the above link to read the rest of the article…
NEW YORK – The world economy is lurching toward an unprecedented confluence of economic, financial, and debt crises, following the explosion of deficits, borrowing, and leverage in recent decades.
In the private sector, the mountain of debt includes that of households (such as mortgages, credit cards, auto loans, student loans, personal loans), businesses and corporations (bank loans, bond debt, and private debt), and the financial sector (liabilities of bank and nonbank institutions). In the public sector, it includes central, provincial, and local government bonds and other formal liabilities, as well as implicit debts such as unfunded liabilities from pay-as-you-go pension schemes and health-care systems – all of which will continue to grow as societies age.
Just looking at explicit debts, the figures are staggering. Globally, total private- and public-sector debt as a share of GDP rose from 200% in 1999 to 350% in 2021. The ratio is now 420% across advanced economies, and 330% in China. In the United States, it is 420%, which is higher than during the Great Depression and after World War II.
Of course, debt can boost economic activity if borrowers invest in new capital (machinery, homes, public infrastructure) that yields returns higher than the cost of borrowing. But much borrowing goes simply to finance consumption spending above one’s income on a persistent basis – and that is a recipe for bankruptcy..
…click on the above link to read the rest…