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47 Percent Of GDP – This Is Definitely The Scariest Corporate Debt Bubble In U.S. History

47 Percent Of GDP – This Is Definitely The Scariest Corporate Debt Bubble In U.S. History

We are facing a corporate debt bomb that is far, far greater than what we faced in 2008, and we are being warned that this “unexploded bomb” will “amplify everything” once the financial system starts melting down. Thanks to exceedingly low interest rates, over the last decade U.S. corporations have been able to go on the greatest corporate debt binge in history. It has been a tremendous “boom”, but it has also set the stage for a tremendous “bust”. Large corporations all over the country are now really struggling to deal with their colossal debt burdens, and defaults on the riskiest class of corporate debt are on pace to hit their highest level since 2008. Everyone can see that a major corporate debt disaster is looming, but nobody seems to know how to stop it.

At this point, companies listed on our stock exchanges have accumulated a total of almost 10 trillion dollars of debt. That is equivalent to approximately 47 percent of U.S. GDP

A decade of historically low interest rates has allowed companies to sell record amounts of bonds to investors, sending total U.S. corporate debt to nearly $10 trillion, or a record 47% of the overall economy.

In recent weeks, the Federal Reserve, the International Monetary Fund and major institutional investors such as BlackRock and American Funds all have sounded the alarm about the mounting corporate obligations.

We have never witnessed a corporate debt crisis of this magnitude.

Corporate debt is up a whopping 52 percent since 2008, and this bubble is continually growing.

And actually the 10 trillion dollar figure is the most conservative number out there. Because if you add in all other forms of corporate debt, the grand total comes to 15.5 trillion dollars. The following comes from Forbes

…click on the above link to read the rest of the article…

The Fed’s Answer to the Ghastly Monster of its Creation

The Fed’s Answer to the Ghastly Monster of its Creation

The launch angle of the U.S. stock market over the past decade has been steep and relentless.  The S&P 500, after bottoming out at 666 on March 6, 2009, has rocketed up over 370 percent.  New highs continue to be reached practically every day.

Over this stretch, many investors have been conditioned to believe the stock market only goes up.  That blindly pumping money into an S&P 500 ETF is the key to investment riches.  In good time, this conditioning will be recalibrated with a rude awakening.  You can count on it.

In the interim, the bull market may continue a bit longer…or it may not.  But, to be clear, after a 370 percent run-up, buying the S&P 500 represents a speculation on price.  A gamble that the launch angle furthers its steep trajectory.  Here’s why…

Over the past decade, the U.S. economy, as measured by nominal gross domestic product (GDP), has increased about 50 percent.  This plots a GDP launch angle that is underwhelming when compared to the S&P 500.  Corporate earnings have fallen far short of share prices.

Hence, the bull market in stocks is not a function of a booming economy.  Rather, it’s a function of Fed madness.  And its existence becomes ever more perilous with each passing day.

Central planners at the Fed – like other major central banks – have taken monetary policy to a state of madness.  Zero interest rate policy, negative interest rate policy, quantitative easing, operation twist, quantitative tightening, reserve management, repo market intervention, not-QE, mass-asset purchases, and more.

These schemes have fostered massive growth in public and private debt with nothing but lackluster economic growth to show.  What’s more, these schemes have produced massive asset bubbles that have skyrocketed wealth inequality and inflamed countless variants of new populism.

…click on the above link to read the rest of the article…

Peter Schiff: If They Were Smart, They Wouldn’t Be in the Stock Market

Peter Schiff: If They Were Smart, They Wouldn’t Be in the Stock Market

Peter Schiff hit a number of subjects in his most recent podcast, including bitcoin, the stock market, wealth inequality, the Fed and the voting age. He also said we should be thankful for capitalism.

Stock markets hit record highs again this week. Some of it was due to more optimism about a trade deal. Peter said he underestimated the impact of QE4on the markets.

I mean, I knew QE4 was coming. I was 100% sure of that. I knew the Fed was going to cut rates, and they’ve been doing that. I just kind of underestimated how much upward pressure it was going to put on the US stock market. I actually thought that the dollar would be falling as a result of the Fed surprising everybody by doing exactly what I expected, which was cutting rates and going back to QE. Well, they did exactly what I expected, except the dollar hasn’t gone down. But I just think I want to add ‘yet.’ The dollar hasn’t gone down  – yet. Because it is going to go down and when it falls, it’s going to drop like a stone. And I don’t think that’s going to be a positive for the US stock market or the US bond market, and we’re going to see a much bigger move up in the price of gold.

Peter said a lot of people who are making money in the US stock market think they’re smart, but they’re not.

If they were smart, they wouldn’t be in the stock market. Or if they’re in it, they’re simply in it as a momentum trader that say, look, I know this is BS, but hey, they’re a bunch of idiots buying stocks, so I’m going to buy stocks now so I can sell to these idiots, and I’m going to get out the door before they realize the market has turned.”

…click on the above link to read the rest of the article…

The History Of Interest Rates Over 670 Years

The History Of Interest Rates Over 670 Years

Today, we live in a low-interest-rate environment, where the cost of borrowing for governments and institutions is lower than the historical average. It is easy to see that interest rates are at generational lows, but, as Visual Capitalist’s Nicholas LePan notes below, did you know that they are also at 670-year lows?

This week’s chart outlines the interest rates attached to loans dating back to the 1350s. Take a look at the diminishing history of the cost of debt—money has never been cheaper for governments to borrow than it is today.

The Birth of an Investing Class

Trade brought many good ideas to Europe, while helping spur the Renaissance and the development of the money economy.

Key European ports and trading nations, such as the Republic of Genoa or the Netherlands during the Renaissance period, help provide a good indication of the cost of borrowing in the early history of interest rates.

The Republic of Genoa: 4-5 year Lending Rate

Genoa became a junior associate of the Spanish Empire, with Genovese bankers financing many of the Spanish crown’s foreign endeavors.

Genovese bankers provided the Spanish royal family with credit and regular income. The Spanish crown also converted unreliable shipments of New World silver into capital for further ventures through bankers in Genoa.

Dutch Perpetual Bonds

perpetual bond is a bond with no maturity date. Investors can treat this type of bond as an equity, not as debt. Issuers pay a coupon on perpetual bonds forever, and do not have to redeem the principal—much like the dividend from a blue-chip company.

By 1640, there was so much confidence in Holland’s public debt, that it made the refinancing of outstanding debt with a much lower interest rate of 5% possible.

Dutch provincial and municipal borrowers issued three types of debt:

…click on the above link to read the rest of the article…

Chinese Media Stunner: China Will Be The Next Country To Cut Rates To Zero

Chinese Media Stunner: China Will Be The Next Country To Cut Rates To Zero

One week ago, we showed in one chart why the global economic recovery that so many expect is just a few months away, won’t happen: as the chart below shows, China’s credit intensity since 1994 has exploded. This means that before the Global Financial Crisis, China needed on average one unit of credit to create one unit of GDP. Since 2008, 2½ units of credit are required to create one unit of GDP. In other words, that China needs much more credit than 10 years ago to have the exact same amount of GDP. Injecting more credit in the economy is not the miracle solution it used to be, and the disadvantages of credit push tend to surpass the advantages.

This explosion in China’s credit intensity in the past decade has directly fueled China’s debt engine, the same debt engine that single-handedly pulled the world out of a global depression in 2008/2009. Alas, this will not happen again: China’s public and household debts are at their highest historical levels, respectively at 51% of GDP and 53% of GDP, and the private sector debt service ratio is becoming a burden for many companies, reaching on average 19.7% This records an increase from 13% before the crisis. Overall, China’s debt to GDP is fast approaching an unprecedented 320%!

Which brings us to Saxo’s dour conclusion for all those who believe that the global economy is about to enjoy another period of sustainable growth (and has confused the Fed’s QE for economic resilience and fundamentals):

Contrary to previous periods of slowdown, notably in 2008-2010, 2012-2014 and in 2016, China is unlikely to save the global economy once again.

…click on the above link to read the rest of the article…

The Next Wave of Debt Monetization Will Also Be A Disaster

The Next Wave of Debt Monetization Will Also Be A Disaster

According to the IMF (International Monetary Fund) and the IIF (Institute of International finance) global debt has soared to a new record high. The level of government debt around the world has ballooned since the financial crisis, reaching levels never seen before during peacetime. This has happened in the middle of an unprecedented monetary experiment that injected more than $20 trillion in the economy and lowered interest rates to the lowest levels seen in decades. The balance sheet of the major central banks rose to levels never seen before, with the Bank Of Japan at 100% of the country’s GDP, the ECB at 40% and the Federal Reserve at 20%.

If this monetary experiment has proven anything it is that lower rates and higher liquidity are not tools to help deleverage, but to incentivize debt. Furthermore, this dangerous experiment has proven that a policy that was designed as a temporary measure due to exceptional circumstances has become the new norm. The so-called normalization process lasted only a few months in 2018, only to resume asset purchases and rate cuts.

Despite the largest fiscal and monetary stimulus in decades, global economic growth is weakening and leading economies’ productivity growth is close to zero. Money velocity, a measure of economic activity relative to money supply, worsens.

We have explained many times why this happens. Low rates and high liquidity are perverse incentives to maintain the crowding out of government from the private sector, they also perpetuate overcapacity due to endless refinancing of non-productive and obsolete sectors t lower rates, and the number of zombie companies -those that cannot pay their interest expenses with operating profits- rises.  We are witnessing in real-time the process of zombification of the economy and the largest transfer of wealth from savers and productive sectors to the indebted and unproductive.

 …click on the above link to read the rest of the article…

The Fed Is Losing Control Over Rates Again, This Time In The Other Direction

The Fed Is Losing Control Over Rates Again, This Time In The Other Direction

Starting in late March, something unexpected happened: as the Effective Fed Funds rate drifted higher, it broke above the implicit upper bound on the interest rate corridor defined by the Interest on Excess Reserves. It was not meant to do this.

This loss of control over the effective Fed Funds rate prompted many to speculate that reserves (i.e. liquidity) in the system was too low, and sure enough, it all culminated with the end of the Fed’s tightening cycle which was followed by 3 rate cuts in the past 4 months, but more importantly, resulted in the repo crisis in late September (which we had previewed in August) and which served as the catalyst for Powell to launch “NOT QE” in October, whereby the Fed is now injecting $60 billion per month in liquidity via monetization of T-Bills, a process that has promptly sent the Fed’s balance sheet back over $4 trillion, an increase of $280 billion in 7 weeks.

Yet while the Fed’s emergency response to the repo crisis helped restore a “normal” level of liquidity to the system, another unexpected consequence has emerged: the Fed is now losing control of rates again, only this time in the opposite direction!

As Bloomberg points out this morning, as a result of its recent interference with market liquidity levels, the Fed’s key effective fed funds rate – aka the “main interest rate” that the Fed controls – is getting close to the edge of the range the Fed is targeting.

As shown in the chart below, after the Effective Fed Funds rate kept drifting ever high during the period of reserve scarcity, we now find ourselves on the other side of the boat, and as a result of the Fed’s actions such as repo operations and T-bill purchases, the effective fed funds rates has been pushed to 1.55%, just shy of the Fed’s lower bound target of 1.50% (the upper is at 1.75%). 

 …click on the above link to read the rest of the article…

The Austrian School Warned, the ECB Didn’t Listen

The Austrian School Warned, the ECB Didn’t Listen

Looking at the current situation, one can easily perceive that our economic environment is not in the best condition. The whole of Europe is suffering from an economic stagnation, if not in some countries even a slowdown, that could very well turn into an economic recession sooner than later if appropriate measures are not taken to restructure many parts of our monetary system. The US could start experiencing the same effects soon, as we can observe from current trends on employment and productivity. Short-sighted economic policy, as that of President Trump asking the Fed for lower interest rates, or the ECB’s loose monetary policy (necessary in great part due to the lack of structural reforms by European governments), has severe effects -mostly that it only works in the short term, and leaves a tremendous economic hangover, composed of huge debt burdens and skyrocketing deficit levels.

The Austrian Business Cycle Theory (ABCT) can also shed some light on the situation in Europe by looking at how the European Central Bank has acted over the last decade, and how its actions, even if they had mild positive economic effects in the short term, are now slowing down productivity growth, impeding economic reforms, and sending countries into debt oceans – and, thus, finally, potentially accelerating the economic slowdown.

The ABCT is an economic theory primarily developed by the Austrian School of Economics from the 19th century onwards, mainly by Friedrich Hayek and Ludwig von Mises. Briefly explained, this theory is based on the idea that a tinkering with the interest rates, leading to excessive increases in the money supply of a country, by a central bank or through fractional reserve banking, inevitably creates a cycle of economic booms and busts.

 …click on the above link to read the rest of the article…

Fed Has Shovel, Digs Bigger Hole

Fed Has Shovel, Digs Bigger Hole

Let’s get to the bottom line on all this “rate cut” nonsense.

The Fed made a fatal mistake in first promoting “fiscal” actions (during the 08 crash) and then continuing to support them well after the bottom in 2009.  This allowed Barack Obama to run trillion dollar deficits for years and, once he did so to push policies that were economically bankrupt (e.g. the ACA) and got them embedded it was faced with the reality of the creature of its own design.

It appears that Yellen thought she could leave her office with a belated “goodbye” of “normalization”, after having been complict herself, and evade the impending blow up — at least until after her chair had cooled off from her ugly ass sitting on same.

She was wrong.

Powell not only ratified Bernanke’s policy he doubled down on his and Yellen’s insanity instead of putting up the middle finger when Donald Trump was elected.  By supporting Trump’s crazy deficit spending ramp he managed to stick ~30% on the stock market at the cost of trapping The Fed, permanently, in financing deficits.

If there was no cost to the real economy or real people in doing this it would defensible.  But there is such a cost, and it falls on 90% of the population — which owns only a tiny percentage of equities.  Worse, that cost falls not only on savers but those who have a fiduciary responsibility toward safety and return, which also typically have as their beneficiaries that same 90% of the population!

Then there’s the impact on state and local governments who can’t earn that return either and thus this ramps property taxes in response.  And while ultra-low rates seem to be good in some other places (e.g. home values) that’s a chimera.

 …click on the above link to read the rest of the article…

Warning! Interest Rates, Inflation, And Debt Do Matter

Warning! Interest Rates, Inflation, And Debt Do Matter 

With our national debt blowing past 23 trillion dollars nothing is as sobering as looking at future budgets. We should be worried. Central banks across the world claim the lack of inflation is the key force driving their QE policy and permitting it to continue, however, the moment inflation begins to take root much of their flexibility will be lost. This translates into governments being forced to pay higher interest rates on their debt. For years the argument that “This Time Is Different” has flourished but history shows that periods of rapid credit expansion always end the same way and that is in default. This also underlines the reality that any claims Washington makes about the budget deficit being under control is a total lie.

Click (Here) To View National Debt Clock

America is not alone in spending far more than it takes in and running a deficit. This does not make it right or mean that it is sustainable. Much of our so-called economic growth is the result of government spending feeding into the GDP. This has created a false economic script and like a Ponzi scheme, it has a deep relationship to fraud.

Global debt has surged since 2008, to levels that should frighten any sane investor because debt has always had consequences. Much of the massive debt load hanging above our heads in 2008 has not gone away it has merely been transferred to the public sector where those in charge of such things feel it is more benign. A series of off-book and backdoor transactions by those in charge has transferred the burden of loss from the banks onto the shoulders of the people, however, shifting the liability from one sector to another does not alleviate the problem.

 …click on the above link to read the rest of the article…

The Fed is Lying to Us

The Fed is Lying to Us

“When it becomes serious, you have to lie”

The recent statements from the Federal Reserve and the other major world central banks (the ECB, BoJ, BoE and PBoC) are alarming because their actions are completely out of alignment with what they’re telling us.

Their words seek to soothe us that “everything’s fine” and the global economy is doing quite well. But their behavior reflects a desperate anxiety.

Put more frankly; we’re being lied to.

Case in point: On October 4, Federal Reserve Chairman Jerome Powell publicly claimed the US economy is “in a good place”. Yet somehow, despite the US banking system already having approximately $1.5 trillion in reserves, the Fed is suddenly pumping in an additional $60 billion per month to keep things propped up.

Do drastic, urgent measures like this reflect an economy that’s “in a good place”?

The Fed’s Rescue Was Never Real

Remember, after a full decade of providing “emergency stimulus measures” the US Federal Reserve stopped its quantitative easing program (aka, printing money) a few years back.

Mission Accomplished, it declared. We’ve saved the system.

But that cessation was meaningless. Because the European Central Bank (ECB) stepped right in to take over the Fed’s stimulus baton and started aggressively growing its own balance sheet — keeping the global pool of new money growing.

Let’s look at the data. First, we see here how the Fed indeed stopped growing its balance sheet in 2014:

And we can note other important insights in this chart.

For starters, you can clearly see how in 2008, the Fed printed up more money in just a few weeks than it had in the nearly 100 years of operations prior.

 …click on the above link to read the rest of the article…

We Finally Understand How Destructive Negative Interest Rates Actually Are

We Finally Understand How Destructive Negative Interest Rates Actually Are

We are in the midst of a strange economic experiment. Vast quantities of negative-yielding debt are currently sloshing around the global economy. While the amount of negative-yielding bonds has dropped recently from a mind-boggling number in excess of $17 trillion, reinvigorated central bank easing across the globe ensures that this reduction is only temporary.

We are slowly starting to understand how destructive negative interest rates actually are. Central banks control short-term interest rates in an economy by setting the rate banks receive on their deposits, that is, on the reserves they hold at the central bank. A new development is the control central banks now exert over long-term rates through their asset purchase, or “QE” programs.

Banks profit from the interest rate differential between “lending long” but “borrowing short”. Essentially, the difference between lending and deposit rates determine a bank’s profitability. However, with today’s very low interest rates, this difference becomes almost non-existent, and with negative rates, inverts completely.

When a central bank pushes rates to negative, banks need to pay interest on the reserves they hold there. But they are not relieved of the obligation they have to pay interest on customer deposits, who are understandably reluctant to pay interest on money they place at a bank. Consequently, the whole earnings logic of banking goes haywire if banks are required to pay interest on loans and receive interest on deposits. As profit margins of banks are squeezed, profitability falls and lending activities suffer.

However, the problems created by negative interest rates do not stop there. In 2008, an influential article describing the economic malaise in Japan after the financial crash of the early 1990s found that instead of calling-in or refusing to refinance existing debts, large Japanese banks kept loans flowing to otherwise insolvent borrowers.

 …click on the above link to read the rest of the article…

Will the Bank of England join the loose money bandwagon?

Will the Bank of England join the loose money bandwagon?

As the year of the 325th anniversary of the Bank of England’s foundation, and as the month of one of the Bank’s more important rate-setting decisions since 2008, September provides a congruous occasion on which to reflect on the history of the BoE and consider what the future holds for it. Founded in 1694 as a private bank to the government, it was in 1998 that the BoE was granted independence from the government in setting monetary policy. Now the UK faces perhaps its greatest political uncertainty in a generation, it is worth asking the question: to what extent will this independence continue? 

We have already seen the effect of populist leaders on central banks that are ostensibly independent. The obvious case is that of the US, but there are other examples to be found of central banks facing political pressure to keep monetary policy easy, from Turkish President Erdogan’s sacking of the then central bank governor, to the ECB’s reaction to persistently low growth in Europe. Even if Trump doesn’t control the Fed directly, he certainly controls the market, which in turn has forced the hand of the central bank and led to the Fed cutting rates with the economy in expansion. And with ever more monetary sweets to choose from in the jar, which politician could resist raiding the cupboard and giving their economy a sugar high of rate cuts, QE and lending? 

Pressure on the Fed is likely only to increase as the 2020 elections approach: if President Trump is able to engineer further cuts, and then get the markets soaring with a trade deal and promises of tax cuts just in time for elections, we might begin to agree he is – in his words – “a very stable genius”.

Peter Schiff: Negative Interest Rates Are Boneheaded

Peter Schiff: Negative Interest Rates Are Boneheaded

Donald Trump has been badgering Federal Reserve Chairman Jerome Powell for months, begging for lower interest rates. Yesterday, he took things to another level, saying that the “boneheads” at the Fed need to push rates into negative territory.

In his podcast, Peter Schiff said negative interest rates are boneheaded.

Trump used a pair of tweets to push for negative interest rates.

The Federal Reserve should get our interest rates down to ZERO, or less, and we should then start to refinance our debt. INTEREST COST COULD BE BROUGHT WAY DOWN, while at the same time substantially lengthening the term. We have the great currency, power, and balance sheet………The USA should always be paying the the lowest rate. No Inflation! It is only the naïveté of Jay Powell and the Federal Reserve that doesn’t allow us to do what other countries are already doing. A once in a lifetime opportunity that we are missing because of ‘Boneheads.’

Peter said he can’t think a more boneheaded thing to do than to push interest rates negative.

Trump is basically saying negative rates would allow the federal government to refinance its debt. It could roll over short-term debt into longer termed bonds and lock up the low rates. But as Peter pointed out, interest rates are already near historic lows.

If President Trump actually cared about refinancing the national debt and lengthening the maturity of the debt – the duration – and locking in these low interest rates, lock them in! They’re already super low.”

Peter said if the Fed did cut rates to zero or lower, he thinks yields on long-term bonds would actually start to go up because the market would begin factoring in higher inflation.

 …click on the above link to read the rest of the article…

How Is Negative Interest Possible?

HOW IS NEGATIVE INTEREST POSSIBLE?

Germany has recently joined Switzerland in the dubious All Negative Club. The interest rate on every government bond, from short to 30 years, is now negative. Many would say “congratulations”, in the belief that this proves their credit risk is … well … umm … negative(?) And anyways, it will let them borrow more to spend on consumption which will stimulate … umm… well… all of the wasteful consumption for which governments are rightly infamous.

While those who are about to borrow may find cause to cheer (as opposed to those who have already borrowed, at higher rates, who are now disadvantaged by this move), the savers are harmed. How can anyone save in an environment where savings has a cost?

John Maynard Keynes called for the “euthanasia of the rentier”. Congratulations, Germany, we say in all sarcastic seriousness. You have gone even beyond Keynes vicious idea. Your rate is now negative!

The Preference of the Savers

Instead of writing more on the destructiveness of this, we want to tackle a different question today. How is this possible? What are the mechanics? Why don’t savers rebel?

We wrote about the Crime of ’33 a few months ago, and it’s worth re-reading before going on. 1933 is when President Roosevelt made the dollar irredeemable. Prior to that, if you didn’t like the interest rate, you could sell the bond and hold gold coins instead. The gold coin has no default risk. And, back then—in the gold standard–it had no price risk.

Today one can own gold, to avoid default risk. This is a big part of why gold is now $1,500. But one takes price risk. And price volatility to be is considered a feature, not a bug, by the gold bugs!

 …click on the above link to read the rest of the article…

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Olduvai II: Exodus
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