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«The Fed Reminds Me of a Speculator Who Is on the Wrong Side of the Market»
Jim Grant, editor of Grant’s Interest Rate Observer, warns of the rampant speculation in the stock market. He worries that the central banks are underestimating the threat of persistently high inflation and explains why gold has a bright future.
For Jim Grant, this is an environment that calls for increased caution. According to the editor of the iconic investment bulletin «Grant’s Interest Rate Observer», investors have to beware of an explosive cocktail combining exceptionally easy monetary policy, a pronounced appetite for speculation, and the high degree of leverage. He also thinks that central banks are underestimating the risk of persistent inflation.
«We have one of the most speculative Zeitgeists on record»: Jim Grant.
«The Fed reminds me of a speculator who is on the wrong side of the market», says Mr. Grant. The fact that the Federal Reserve is now beginning to taper its bond purchases makes little difference in his view. «It’s like pouring a little less gasoline on the fire,» he thinks.
In this in-depth interview with The Market/NZZ, which has been edited and condensed for clarity, the outspoken market observer and contrarian investor compares today’s environment with the second half of the 1960s and explains why he expects persistently high inflation rates. He explains what this means for the dollar as well as for gold, and where the best investment opportunities are with respect to the challenge of global warming.
…click on the above link to read the rest of the article…
Today’s Negative Rates Are the Path to Poverty
Today’s Negative Rates Are the Path to Poverty
Almost Daily Grant’s (ADG) made the pronouncement on December 14th that a “new benchmark in financial repression” had been set: ”a record $18.4 trillion in global debt is priced to yield less than zero, up from less than $8 trillion in March and a five-year average of $10.3 trillion.”
ADG consulted interest rate historians Sidney Homer and Richard Sylla, who opined, “nominal negative yielding debt had never been seen in material size in the 4,000 years of interest rate history prior to the current cycle.”
Economist Ludwig von Mises never imagined such a thing, writing in Human Action,
There cannot be any question of abolishing interest by any institutions, laws, or devices of bank manipulation. He who wants to “abolish” interest will have to induce people to value an apple available in a hundred years no less than a present apple. What can be abolished by laws and decrees is merely the right of the capitalist to receive interest. But such decrees would bring about capital consumption and would very soon throw mankind back into the original state of natural poverty.
We can’t be sure what Mises meant by “very soon.” But, to read ADG, the march toward “the original state of poverty” will continue. ADG cites Financial Times’s John Dizard, who believes (paraphrased by Grant’s) that ”The potential catalyst [is]: A swath of T-bills [that] is set to mature in the first half of next year without fresh corresponding issuance on account of the Treasury Department’s ‘historically high’ $1.5 trillion cash cache at the Fed, potentially exacerbating a supply vs. demand imbalance.”
Dizard is not alone. Bank of America’s Mark Cabana says, “there is going to be a train wreck at the front of the [Treasury] curve next year. There is way too much cash chasing too little paper.”
…click on the above link to read the rest of the article…
Loonie Tumbles After BOC Warns There Is “Increased Uncertainty” About Future Rate Hikes
Loonie Tumbles After BOC Warns There Is “Increased Uncertainty” About Future Rate Hikes
Another central bank appears to be throwing in the towel on any future rate hikes.
Just days after Canada reported an abysmal December GDP print, which declined for the second consecutive month and sparked fears of an imminent technical recession…
… the Bank of Canada today kept its rate unchanged at 1.75%, as expected, however the statement was so dovish it shocked the market, which sent the Loonie tumbling.
In keeping the rate flat, the Bank of Canada acknowledged the “mixed” data picture, which suggests “increased uncertainty” about timing of “future rate increases”, and said lower than neutral interest rates are “warranted” given outlook, confirming that just like the Fed, the BOC is now also on “pause.”
Indeed, in borrowing a page from the Fed’s playbook, the BOC said the “outlook continues to warrant a policy interest rate that is below its neutral range” and added that “with increased uncertainty about the timing of future rate increases, Governing Council will be watching closely developments in household spending, oil markets, and global trade policy.”
The BOC also said that given the “mixed” data picture, “it will take time to gauge the persistence of below-potential growth and the implications for the inflation outlook.”
Finally, admitting that it too was too optimistic heading into 2019, the bank said that “the slowdown in the fourth quarter was sharper and more broadly based” as “consumer spending and the housing market were soft, despite strong growth in employment and labour income. Both exports and business investment also fell short of expectations.”
Following the sharply dovish announcement, the loonie tumbled further and Canadian bond yields extend declines: the USD/CAD jumped +0.6% at ~1.3426 after rising as much as 0.7% as stops were triggered, rising as high as 1.3441.
The good news for loonie bulls? At least the BOC isn’t discussing rate cuts just yet. That said, Rabobank notes that it does “not expect any further rate increases this cycle and expect the BoC to cut rates 25bp in 2020 Q2.”
Fed Hints During Next Recession It Will Roll Out Income Targeting, NIRP
Fed Hints During Next Recession It Will Roll Out Income Targeting, NIRP
In a moment of rare insight, two weeks ago in response to a question “Why is establishment media romanticizing communism? Authoritarianism, poverty, starvation, secret police, murder, mass incarceration? WTF?”, we said that this was simply a “prelude to central bank funded universal income”, or in other words, Fed-funded and guaranteed cash for everyone.
prelude to central bank funded universal income
On Thursday afternoon, in a stark warning of what’s to come, San Francisco Fed President John Williams confirmed our suspicions when he said that to fight the next recession, global central bankers will be forced to come up with a whole new toolkit of “solutions”, as simply cutting interest rates won’t well, cut it anymore, and in addition to more QE and forward guidance – both of which were used widely in the last recession – the Fed may have to use negative interest rates, as well as untried tools including so-called price-level targeting or nominal-income targeting.
The bolded is a tacit admission that as a result of the aging workforce and the dramatic slack which still remains in the labor force, the US central bank will have to take drastic steps to preserve social order and cohesion.
According to Williams’, Reuters reports, central bankers should take this moment of “relative economic calm” to rethink their approach to monetary policy. Others have echoed Williams’ implicit admission that as a result of 9 years of Fed attempts to stimulate the economy – yet merely ending up with the biggest asset bubble in history – the US finds itself in a dead economic end, such as Chicago Fed Bank President Charles Evans, who recently urged a strategy review at the Fed, but Williams’ call for a worldwide review is considerably more ambitious.
…click on the above link to read the rest of the article…
Prepare For Interest Rate Rises And Global Debt Bubble Collapse
Prepare For Interest Rate Rises And Global Debt Bubble Collapse
– Diversify, rebalance investments and prepare for interest rate rises
– UK launches inquiry into household finances as £200bn debt pile looms
– Centuries of data forewarn of rapid reversal from ultra low interest rates
– 700-year average real interest rate is 4.78% (must see chart)
– Massive global debt bubble – over $217 trillion (see table)
– Global debt levels are building up to a gigantic tidal wave
– Move to safe haven higher ground from coming tidal wave
Source: Bloomberg
Last week, the Bank of England opted to increase interest rates for the first time in a decade. Since then alerts have been coming thick and fast for Britons warning them to prepare for some tough financial times ahead.
The UK government has launched an inquiry into household debt levels amid concerns of the impact of the Bank of England’s decision to raise rates. The tiny 0.25% rise means households on variable interest rate mortgages are expected to face about £1.8bn in additional interest payments whilst £465m more will be owed on the likes of credit cards, car loans and overdrafts.
The 0.25% rise is arguably not much given it comes against backdrop of record low rates and will have virtually no impact on any other rate. However it comes at a time of high domestic debt levels, no real wage growth and a global debt level of over $217 trillion.
Combined with low productivity across the developed world, experts are beginning to wonder how the financial system (and the individuals within) will cope.
After a decade of seeing negative real rates of interest many investors will be quietly celebrating that they may be about to see a turnaround for their savings. Many hope they will start being rewarded for their financial prudence as opposed to the punishing saving conditions of the last decade.
…click on the above link to read the rest of the article…
700 Years Of Data Suggests The Reversal In Rates Will Be Rapid
700 Years Of Data Suggests The Reversal In Rates Will Be Rapid
Have we been lulled into a false sense of security about the future path of rates by ZIRP/NIRP policies? Central banks’ misguided efforts to engineer inflation have undoubtedly been woefully feeble, so far. As the Federal Reserve “valiantly” raises short rates, markets ignore its dot plot and yield curves continue to flatten. And thanks to Larry Summers, the term “secular stagnation” has entered the lexicon. While it sure doesn’t feel like it, could rates suddenly take off to the upside?
A guest post on the Bank of England’s staff blog, “Bank Underground”, answers the question with an unequivocal yes. Harvard University’s visiting scholar at the Bank, Paul Schmelzing, normally focuses on 20th century financial history. In his guest post (see here), he analyses real interest rates stretching back a further 600 years to 1311. Schmelzing describes his methodology as follows.
We trace the use of the dominant risk-free asset over time, starting with sovereign rates in the Italian city states in the 14th and 15th centuries, later switching to long-term rates in Spain, followed by the Province of Holland, since 1703 the UK, subsequently Germany, and finally the US.
Schmelzing calculates the 700-year average real rate at 4.78% and the average for the last two hundred years at 2.6%. As he notes “the current environment remains severely depressed”, no kidding. Looking back over seven centuries certainly provides plenty of context for our current situation, where rates have been trending downwards since the early 1980s. According to Schmelzing, we are in the ninth “real rate depression” since 1311 as shown in his chart below. We count more than nine, but let’s not be picky.
…click on the above link to read the rest of the article…
Negative interest rates are coming to America
Negative interest rates are coming to America
Well, that didn’t take long! Negative Interest Rate Policy appears to be a gift that keeps on giving.
Just a little while ago I wrote that, in essence, if the Federal Reserve wants to keep the financial party going a little bit longer, it will have to continue lowering interest rates to below zero, as this is the only way to keep broke debtors alive and prevent the gigantic debt bubble from imploding. And now we find out that the Federal Reserve has resolved any legal impediments (such as the Federal Reserve Act) that have kept it from doing just that.
To recap, negative interest rates are a way to pay debtors to hold onto their debt instead of defaulting on it or repudiating it, thus preventing the debt pyramid from pancaking and taking the entire financial system with it. But this effect is temporary, for at least two reasons.
First, negative interest rates are essentially a tax on savings, causing people to think of other ways to store their wealth: land, precious metals, boxes of brass knobs, what have you. In due course, money stops being regarded as wherewithal and starts being regarded as an unreliable way to conduct business.
Second, with a gigantic bubble in bonds now decades old and bond yields now going negative, it is a matter of time before the realization hits that negative-yield bonds are not any sort of safe haven. Their value is now strictly a matter of their market valuation, which can plummet the moment people decide to dump them, with no floor anywhere. After all, there are plenty of other ways to lose money, and negative-yield bonds are nothing special.
…click on the above link to read the rest of the article…
The US Economy Has Not Recovered And Will Not Recover
The US Economy Has Not Recovered And Will Not Recover
The US economy died when middle class jobs were offshored and when the financial system was deregulated.
Jobs offshoring benefitted corporate executives and shareholders, because lower labor and compliance costs resulted in higher profits. These profits flowed through to shareholders in the form of capital gains and to executives in the form of “performance bonuses.” Wall Street benefitted from the bull market generated by higher profits.
However, jobs offshoring also offshored US GDP and consumer purchasing power. Despite promises of a “New Economy” and better jobs, the replacement jobs have been increasingly part-time, lowly-paid jobs in domestic services, such as retail clerks, waitresses and bartenders.
The offshoring of US manufacturing and professional service jobs to Asia stopped the growth of consumer demand in the US, decimated the middle class, and left insufficient employment for college graduates to be able to service their student loans. The ladders of upward mobility that had made the United States an “opportunity society” were taken down in the interest of higher short-term profits.
Without growth in consumer incomes to drive the economy, the Federal Reserve under Alan Greenspan substituted the growth in consumer debt to take the place of the missing growth in consumer income. Under the Greenspan regime, Americans’ stagnant and declining incomes were augmented with the ability to spend on credit. One source of this credit was the rise in housing prices that the Federal Reserves low inerest rate policy made possible. Consumers could refinance their now higher-valued home at lower interest rates and take out the “equity” and spend it.
The debt expansion, tied heavily to housing mortgages, came to a halt when the fraud perpetrated by a deregulated financial system crashed the real estate and stock markets. The bailout of the guilty imposed further costs on the very people that the guilty had victimized.
…click on the above link to read the rest of the article…
Another Reason Why the Middle Class and the Velocity of Money Are in Terminal Decline
Another Reason Why the Middle Class and the Velocity of Money Are in Terminal Decline
This has three extremely negative consequences.
In response to a recent post on the structural decline in the velocity of money, correspondent Mike Fasano described a key dynamic in both the decline of money velocity and the middle class.
“There is another reason for falling velocity. People like me who have saved all their lives realize that they their savings (no matter how much) will never throw off enough money to allow retirement, unless I live off principal. This is especially so since one can reasonably expect social security to phased out, indexed out or dropped altogether. Accordingly, I realize that when I get to the point when I can no longer work, I’ll be living off capital and not interest. This is an incentive to keep working and not to spend.”
Thank you, Mike, for highlighting the devastating long-term impact of the Federal Reserve’s zero-interest rate policy (ZIRP): with the real (i.e. adjusted for inflation) return on savings near zero (or even negative, for those who have to pay soaring rents, healthcare insurance premiums, college tuition, etc.), those saving for retirement are losing the Red Queen’s Race: no matter how much they save, the income will be too paltry to support retirement.
This has three extremely negative consequences. Those seeking a return above zero are forced to put their savings at risk in boom-and-bust markets that tend to reward only those who get into the bubble expansion early and exit early.
These boom-and-bust markets tend to savage the assets of the middle class when they blow up, but do little to rebuild these assets in the bubble expansion phase, as prudent investors who were burned in the previous bubble bust shun risk assets.
…click on the above link to read the rest of the article…
China Has A “Colossal Credit Bubble” And No One Knows How It Will Unwind, Marc Faber Warns
China Has A “Colossal Credit Bubble” And No One Knows How It Will Unwind, Marc Faber Warns
A little over a week ago, Marc Faber dialed in from Thailand to chat with Bloomberg TV about the outlook for US equities, the American economy, and USTs in the new year.
The US is “already in a recession,” the incorrigible doomsayer said.
Stocks will head lower in 2016, Faber continued, taking the opportunity to mock the sellside penguin brigade for adopting a universally bullish take on markets going forward. “Well, I don’t think that the U.S. will continue to increase interest rates,” he concluded, before predicting what we’ve been saying for years, namely that in the end, the Fed may be forced to do an embarrassing about-face and return to ZIRP and eventually to QE. “In fact, given the weakness in the global economy and the deceleration of growth in the U.S., I would imagine that by next year the Fed will cut rates once again and launch QE4.”
On Wednesday, Faber was back on Skype with Bloomberg to chat more about his outlook for 2016.
Asked why he believes the US is already in a recession, Faber says all one need do is “look at exports, look at industrial production and the slowdown in credit growth.”
As for what’s likely to work as an investment now that central banks have created bubbles everywhere you look, Faber says the following:
“With the exception of those that held Bitcoins, the performance of all asset classes has been poor. The Fed has created an atmosphere where the future return on assets whether it’s stocks or bonds or art will be poorer.”
Next, he bemoans the lack of market breadth, and warns that although the “indices are holding up well, the majority of market is already down 20% or more.” The S&P, he says, peaked in May and will fall 20-40%.
…click on the above link to read the rest of the article…
This Is What Happened The Last Time The Fed Hiked While The U.S. Was In Recession
This Is What Happened The Last Time The Fed Hiked While The U.S. Was In Recession
Back on June 17, Bank of America started its 66-day countdown to the moment it was convinced the Fed would hike rates, September 17, 2015. We, correctly, said that “we disagree entirely” with BofA’s conclusion that the Fed would hike rates, and sure enough, it did not after the Chinese August devaluation unleashed the ETFlash crash, the EM debt rout, a surge in the VIX and a correction in the S&P500, which crushed the Fed’s carefully laid rate-hike plans.
But while we disagreed with BofA’s countdown timing, we agreed with something its strategist Michael Hartnett said, namely that “gradual or otherwise, the first interest rate hike by the Fed since June 2006 marks a major inflection point for financial markets.”
BofA then laid out several key factors why “this time is indeed different” when evaluating the global economy’s receptiveness to a rate hike:
- Central banks now own over $22 trillion of financial assets, a figure that exceeds the annual GDP of US & Japan
- Central banks have cut interest rates more than 600 times since Lehman, a rate cut once every three 3 trading days
- Central bank financial repression created over $6 trillion of negatively-yielding global government bonds
- 45% of all government bonds in the world currently yield <1% (that’s $17.4 trillion of bond issues outstanding)
- US corporate high grade bond issuance as a % of GDP has doubled to almost 30% since the introduction of ZIRP
- US small cap 5-year rolling returns hit 30-year highs (28%) in recent quarters
- The US equity bull market is now in the 3rd longest ever
- 83% of global equity markets are currently supported by zero rate policies
However, to the Fed none of these matter: only the price action of the S&P500 does, which as everyone knows, is trading just shy of its all time highs so “all must be well.”
…click on the above link to read the rest of the article…
Hang Onto Your Wallets: Negative Interest, the War on Cash, and the $10 Trillion Bail-in
Hang Onto Your Wallets: Negative Interest, the War on Cash, and the $10 Trillion Bail-in
In uncertain times, “cash is king,” but central bankers are systematically moving to eliminate that option. Is it really about stimulating the economy? Or is there some deeper, darker threat afoot?
Remember those old ads showing a senior couple lounging on a warm beach, captioned “Let your money work for you”? Or the scene in Mary Poppins where young Michael is being advised to put his tuppence in the bank, so that it can compound into “all manner of private enterprise,” including “bonds, chattels, dividends, shares, shipyards, amalgamations . . . .”?
That may still work if you’re a Wall Street banker, but if you’re an ordinary saver with your money in the bank, you may soon be paying the bank to hold your funds rather than the reverse.
Four European central banks – the European Central Bank, the Swiss National Bank, Sweden’s Riksbank, and Denmark’s Nationalbank – have now imposed negative interest rates on the reserves they hold for commercial banks; and discussion has turned to whether it’s time to pass those costs on to consumers. The Bank of Japan and the Federal Reserve are still at ZIRP (Zero Interest Rate Policy), but several Fed officials have also begun calling for NIRP (negative rates).
The stated justification for this move is to stimulate “demand” by forcing consumers to withdraw their money and go shopping with it. When an economy is struggling, it is standard practice for a central bank to cut interest rates, making saving less attractive. This is supposed to boost spending and kick-start an economic recovery.
…click on the above link to read the rest of the article…
Swiss Bank “Goes There”, Applies Negative Rates To Retail Deposits
Swiss Bank “Goes There”, Applies Negative Rates To Retail Deposits
Back in September in “How Mario Draghi Can Force The Swiss National Bank To Go ‘Nuclear On Depositors,” we discussed the implications of the ECB’s (likely) decision to plunge further into NIRP-dom at the bank’s December meeting.
In short, DM central banks – with the possible exception of the Fed which is about to create a rather meaningful policy divergence with its core CB brethren – are in a proverbial race to bottom. It’s a beggar-thy-neighbor monetary policy regime and the more stubborn inflation expectations prove to be, the more aggressive the tit-for-tat easing, as everyone involved scrambles to protect their currency in the face of incessant competitive devaluations on all sides.
As we outlined in great detail in the post linked above, the ECB’s ultra dovish lean has the potential to create a lot of problems for the Riksbank, the Norges Bank, and the SNB.
Sweden is running out of options for a QE program that’s already broken once (see here and here) and although Stefan Ingves will probably tell you there’s more room to cut in the event Draghi moves on the depo rate, the Riksbank is already at -0.35 and the housing bubble has reached epic proportions. Of course staying on hold in the event of an ECB cut means the krona will soar and then, well, there’s goes any hope of hitting the elusive inflation target.
Norway, on the other hand, can’t even begin to think about QE because frankly, they’re too rich. That is, the Norges Bank wouldn’t have enough assets to buy without breaking the market pretty much immediately. That leaves rate cuts and to be sure, at +0.75 (yes, that’s right, not everyone is in NIRP), there’s probably a bit of breathing room there for Oeystein Olsen and he may need it come next month.
…click on the above link to read the rest of the article…
Oil Prices Testing August Lows As Inventories Swell
Oil Prices Testing August Lows As Inventories Swell
There has been little in the way of economic data out overnight, leaving comments from European Central Bank President Mario Draghi to clobber the euro, propel the dollar higher. As the prospect of a US rate hike in December sits around ~70%, the WTI December contract is charging lower ahead of its contract expiry today.
The chart below shows the combined rising production from two leading sources since 2012, the US and Iraq, plotted versus OECD oil inventories. Production from the two has risen nearly 60% over the near-four year time-frame, with them currently pumping the equivalent of 4.88 billion barrels a year. In comparison, OECD inventories have only risen 10%, or 314 million barrels, as stronger demand and weaker supply elsewhere have offset the rampant additions from the two nations.
Looking ahead to next year, we are set to see aggregate production from the two countries drop, as modest rising supply from Iraq will not be enough to offset falling US production.
Below is another nifty graphic from the folks over at Bloomberg, which shows the share of deepwater oil fields for various African governments. Six out of the ten largest global oil discoveries in 2013 were made in Africa, but the drop in oil prices over the last year and a half means two out of three investment projects on the continent are not viable at a price below $50. African production is already 19% below its peak in 2008 at 10.2 million bpd, and is set for a third consecutive drop this year.
…click on the above link to read the rest of the article…
Hang Onto Your Wallets: Negative Interest, the War on Cash, and the $10 Trillion Bail-in
Hang Onto Your Wallets: Negative Interest, the War on Cash, and the $10 Trillion Bail-in
In uncertain times, “cash is king,” but central bankers are systematically moving to eliminate that option. Is it really about stimulating the economy? Or is there some deeper, darker threat afoot?
Remember those old ads showing a senior couple lounging on a warm beach, captioned “Let your money work for you”? Or the scene in Mary Poppins where young Michael is being advised to put his tuppence in the bank, so that it can compound into “all manner of private enterprise,” including “bonds, chattels, dividends, shares, shipyards, amalgamations . . . .”?
That may still work if you’re a Wall Street banker, but if you’re an ordinary saver with your money in the bank, you may soon be paying the bank to hold your funds rather than the reverse.
Four European central banks – the European Central Bank, the Swiss National Bank, Sweden’s Riksbank, and Denmark’s Nationalbank – have now imposed negative interest rates on the reserves they hold for commercial banks; and discussion has turned to whether it’s time to pass those costs on to consumers. The Bank of Japan and the Federal Reserve are still at ZIRP (Zero Interest Rate Policy), but several Fed officials have also begun calling for NIRP (negative rates).
The stated justification for this move is to stimulate “demand” by forcing consumers to withdraw their money and go shopping with it. When an economy is struggling, it is standard practice for a central bank to cut interest rates, making saving less attractive. This is supposed to boost spending and kick-start an economic recovery.
That is the theory, but central banks have already pushed the prime rate to zero, and still their economies are languishing. To the uninitiated observer, that means the theory is wrong and needs to be scrapped. But not to our intrepid central bankers, who are now experimenting with pushing rates below zero.
…click on the above link to read the rest of the article…
