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Last week, both Janet Yellen of the Fed and Mark Carney of the Bank of England prepared financial markets for interest rate increases. The working assumption should be that this was coordinated, and that both the ECB and the Bank of Japan must be considering similar moves.

Central banks coordinate their monetary policies as much as possible, which is why we can take the view we are about to embark on a new policy phase of higher interest rates. The intention of this new phase must be to normalise rates in the belief they are too stimulative for current economic conditions. Doubtless, investors will be reassessing their portfolio allocations in this light.

It should become clear to them that bond yields will rise from the short end of the yield curve, producing headwinds for equities. The effects will vary between jurisdictions, depending on multiple factors, not least of which is the extent to which interest rates and bond yields will have to rise to reflect developing economic conditions. The two markets where the change in interest rate policy are likely to have the greatest effect are in the Eurozone countries and Japan, where financial stimulus and negative rates have yet to be reversed.

Investors who do not understand these changing dynamics could lose a lot of money. Based on price theory and historical experience, this article concludes that bond yields are likely to rise more than currently expected, and equities will have to weather credit outflows from financial assets. Therefore, equities are likely to enter a bear market soon. Commercial and industrial property should benefit from capital flows redirected from financial assets, giving them one last spurt before the inevitable financial crisis. Sound money, physical gold, should become the safest asset of all, and should see increasing investment demand.

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

Eric Peters: “This Is The Nightmare Scenario For The Next Fed Chair”

October 15, 2017

Eric Peters: “This Is The Nightmare Scenario For The Next Fed Chair”

While we will have much more to share from the latest weekend letter by One River’s Eric Peters shortly, we found the following section on inflation vs asset bubbles – a topic which BofA’s Michael Hartnett has been focusing extensively on in the past year and which serves as the basis for the “Icarus Rally” – particularly notable as it explains all of today’s comments from Janet Yellen and other central bankers, discussing why it is only a matter of time before inflation returns, as the alternative, as Peters’ explains, is a world in which yields simply refuse to go up, leading to a nightmare scenario for the next Fed chair, who will be forced to pop the world’s biggest asset bubble.

Excerpted from the latest weekend notes by One River CIO, Eric Peters:

“Why are we not experiencing deflation?” he asked. “How can the top five stocks in the Nasdaq reduce US GDP but we feel better off?” he asked. “Why are Americans buying no more cars today than in 1978 when our population is 100mm higher?” he asked. “Why compare today to a world of combustion engines when we have so many more interesting things to do without moving an inch?” he asked.

“And why do central banks create endless bubbles to restore an inflation rate from that ancient time?” he asked. “Why is that not the right question?”

“Global profits are rising, unemployment is falling, growth is up, wages too,” said the strategist.

“Yet bond yields seem unable to jump.” US 10yr bond yields are 2.27%, Germany 0.40%, Japan 0.05%. “The cyclical surprise is that the Phillips curve finally kicks in, just as everyone gives in.” US unemployment is 4.2%, a 17yr low. Germany 3.6%, a 37yr low. Japan 2.8%, a 23yr low. “And the biggest structural surprise is that technology has rendered wage inflation a phenomenon for the history books.”

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

Yellen Was Right: “Transitory” Factors of “Low” Inflation Are Reversing, with Much More to Come

October 13, 2017

Yellen Was Right: “Transitory” Factors of “Low” Inflation Are Reversing, with Much More to Come

What’s Boiling Beneath the Surging Inflation?

Consumers are going to shell out more money for the same stuff, that’s for sure. Inflation as measured by the Consumer Price Index jumped 2.2% in September compared to a year ago, the Bureau of Labor Statistics reported this morning. All fingers pointed at energy costs: the index jumped 10.1% year-over-year. Within it, “motor fuel” prices (gasoline and diesel) jumped 19.2%.

Food prices rose 1.2% year-over-year, kept down by prices for “food at home” – the stuff you buy at the grocery store – which inched up only 0.4% year-over-year in part due to the price war currently tearing into the supermarket sector.

In the chart below of CPI, note the dreadful “Deflation Monster” – one of those rare and brief occasions in the US when the purchasing power of wages actually rose just a tiny bit on a year-over-year basis. It was caused by the energy bust. And it was “transitory”:

In the chart, note how CPI jumped 2.8% in February and then retreated through June. This retreat was brushed off as “transitory” by Fed Chair Janet Yellen and other Fed governors when they vowed to continue raising rates. She had specifically pointed out a few of those “transitory” factors. And they’re now turning around.

One of these factors that Yellen had pointed out was telephone services, which includes the monthly costs that consumers pay for their smartphones. Those costs plunged as a price war among wireless carriers had broken out in 2016. This summer, the price index for telephone services was down around 9% year-over-year. The wireless component plunged as much as 13%. But that consumer bonanza could not last.

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

Janet Yellen’s 78-Month Plan for the National Monetary Policy of the United States

September 23, 2017

Janet Yellen’s 78-Month Plan for the National Monetary Policy of the United States

Past the Point of No Return

Adventures in depravity are nearly always confronted with the unpleasant reality that stopping the degeneracy is much more difficult than starting it. This realization, and the unsettling feeling that comes with it, usually surfaces just after passing the point of no return. That’s when the cucumber has pickled over and the prospect of turning back is no longer an option.

Depravity and bedlam through the ages. The blue barge of perdition in the lower middle ferries the depraved and degenerate to their final destination, a small slice of which can be glimpsed above… [PT]

In late November 2008, Federal Reserve Chairman Ben Bernanke put in place a fait accompli. But he didn’t recognize it at the time. For he was blinded by his myopic prejudices.

Bernanke, a self-fancied Great Depression history buff with the highest academic credentials, gazed back 80 years, observed several credit market parallels, and then made a preconceived diagnosis. After that, he picked up his copy of A Monetary History of the United States by Milton Friedman and Anna Schwartz, turned to the chapter on the Great Depression, and got to work expanding the Fed’s balance sheet.

Now here is something all those “Great Depression experts” always neglect to mention: the Fed’s holdings of government securities expanded my more than 400% between late 1929 and early 1933. Friedman’s often repeated assertion that the Fed “didn’t pump enough” in the early 1930s – which is held up as the gospel truth by nearly everyone – is simply untrue. It is true that the money supply collapsed anyway – but not because the Fed didn’t try to pump it up.

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

Rate Hike Cycles, Gold, and the “Rule of Total Morons”

September 21, 2017

Rate Hike Cycles, Gold, and the “Rule of Total Morons”

In response to Janet Yellen’s everything is OK speech following today’s balance sheet reduction notice by the FOMC committee, I received an interesting set of comments from Pater Tenebrarum at the Acting Man Blog regarding rate hike cycles, gold, and stock market peaks.

“Rule of Total Morons”

A new bull market in gold started in late 2015 concurrently with the Fed’s first rate hike. That is no coincidence. The gold market is highly sensitive to future changes in liquidity. The more tightening moves the Fed undertakes (which it does in the face of collapsing money supply growth, because its decisions are based on lagging economic indicators), the more gold bullish and the more stock market bearish the fundamental backdrop becomes. Anyone long stocks should actually ask himself how it is possible that gold is up nearly 30% from its low, despite an ostensibly “gold bearish” rate hike cycle.

But they never do ask the right questions, which is why stocks peak with a big lag, particularly in major bubbles. Economic historians found out that the economy was technically very likely already in recession when the stock market peaked in 1929. In the 2007 to 2009 bust, NBER backdated the beginning of the recession to December 2007, but in May of 2008 Bernanke was still talking about how well the economy was doing and how the high oil price was “creating inflation” (thereafter he began to shut up about all that, but not before demonstrating for everyone to see how utterly clueless he was). And of course, stocks peaked in October of 2007, practically two seconds before the economy fell into recession.

In bubble regimes, the final stage is always characterized by the “rule of total morons”. That’s just how it is.

Missing Inflation

Central banks cannot see inflation because they are totally clueless how to measure it: Central Banks Puzzled as Global Inflation Hits Lowest Level Since 2009: Solving the Puzzle

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

“Bad Options” Regarding 2% Inflation Targets (And Other Silly Notions)

September 14, 2017

“Bad Options” Regarding 2% Inflation Targets (And Other Silly Notions)

The Wall Street Journal and Bloomberg both posted ridiculous articles regarding today regarding inflation.

The former was on “bad options” the latter on “inflation expectations”.

Let’s take a look at both articles because both represent widely believed nonsense.

In Bad Options for Addressing Too-Low Inflation, Wall Street Journal writer Greg Ip says the Fed’s choice is to overheat the economy or give up its 2% target.

Unemployment and inflation are near their lowest levels in decades. Who wouldn’t love that?

Janet Yellen, for starters.

What looks like a dream economy could be a nightmare for the Federal Reserve chairwoman. Ms. Yellen’s worldview assumes that when unemployment is this low—4.4% in August—inflation should move up to the Fed’s target of 2%. Instead, it may have stabilized around 1.5%. That presents the Fed with some unpalatable options: deliberately overheat the economy for years to get inflation back up, then potentially induce a recession to stop it from overshooting; or give up on the 2% target, which could hobble its ability to combat future recessions.

This isn’t scaremongering: It’s the logical consequence of how central banks believe inflation operates. At the center of their model is the Phillips curve, according to which inflation edges lower when unemployment is above its natural, equilibrium level and putting downward pressure on prices and wages. Below that natural rate, also known as full employment, inflation crawls higher.

Until recently, Fed officials scoffed at the possibility [Trend inflation has fallen]. They noted surveys that suggest the public still expects inflation to return to 2% and credit their oft-repeated promise to hit their 2% target. But are they fooling themselves? Expectations of inflation are determined in great part by what inflation actually has been, and after every recession since 1982, core inflation has averaged less than in the previous business cycle: 4.1% in the 1980s, 2.1% in the 1990s, 1.9% in the 2000s, and 1.5% since 2009.

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

“10-Year Treasury Yields Headed to Zero Percent” Saxo Bank CIO

September 8, 2017

“10-Year Treasury Yields Headed to Zero Percent” Saxo Bank CIO

In his latest Email article, Steen Jakobsen, Saxo Bank Chief economist and CIO has a bold prediction about interest rates.

With nearly everyone, even Janet Yellen at the Fed, predicting wage-induced inflation, Jakobsen makes a bold call in the opposite direction.

This is a guest post by Steen Jakobsen

Steen’s Chronicle: All Great Things are Simple, Except Right Now

“All the great things are simple, and many can be expressed in a single word: freedom, justice, honour, duty, mercy, hope” — Winston Churchill

Let’s start with what is currently simple, and what has been simple all year.

The US dollar has peaked and started a multi-year cycle lower as both US and world growth can’t work without a weaker dollar (a stronger dollar kills growth through debt service, emerging markets, and commodities).
Everything is deflationary: demographics, technology, energy, and the debt mountain.
The credit impulse peaked in late 2016/early 2017 leaving global growth vulnerable in the fourth quarter of 2016 and into Q1’17.
US interest rates are headed to 0% in 10-year government yields by the end of 2018, early 2019.

I am enclosing the word “simple” between a generously-sized pair of quotation marks because nothing is truly simple. But the themes outlined above have served us well throughout 2017 with the market having now given up on the Federal Reserve hiking rates beyond December. This is because inflation in the US (and Europe) is more likely to hit 1% than 2%, and because growth – despite certain green shoots – remains considerably below historically normal recovery levels.

Meanwhile, most central banks – most prominently the Fed – continue to believe in the old-school Phillips curve model, and through this mistake, they misguide markets on both inflation and growth – a classically dogmatic, bureaucratic way of thinking whose limits in a world of ever-changing technology are obvious.

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

See No Evil, Speak No Evil…

September 8, 2017

SEE NO EVIL, SPEAK NO EVIL…

The Jackson Hole speeches of Janet Yellen and Mario Draghi last week were notable for the omission of any comment about the burning issues of the day:

…where do the Fed and the ECB respectively think America and the Eurozone are in the central bank induced credit cycle, and therefore, what are the Fed and the ECB going to do with interest rates? And why is it still appropriate for the ECB to be injecting raw money into the Eurozone banks to the tune of $60bn per month, if the great financial crisis is over?ⁱ

Instead, they stuck firmly to their topics, the Jackson Hole theme for 2017 being Fostering a dynamic global economy. Both central bankers told us how good they have been at controlling events since the last financial crisis. Ms Yellen majored on regulation, bolstering her earlier-expressed belief that financial crises are now unlikely to happen again, because American banks are properly regulated and capitalised.

Incidentally, more regulation hampers economic dynamism, contra to the subject under discussion, and confirms Ms Yellen has little understanding of free markets. Mario Draghi, however, told us of the benefits of financial regulation and globalisation, and how that fostered a dynamic global economy. But a cynic reading between the lines would argue that Mr Draghi’s speech confirms the ECB is in thrall to Brussels and big business, and is merely representing their interests. And he couldn’t resist the temptation to have a poke at President Trump by expressing the benefits of free trade.

Hold on a moment, free trade? Does Mr Draghi really understand the benefits of free trade?

That’s what he said, but his speech was all about the importance of regulating everything Eurozone citizens can or cannot do. It is permitted free trade in a state-regulated environment. It is a version of free trade according to the EU rule book, agreed with big European business, which advises Brussels, which then sets the regulations. It is a latter-day Comintern that allows you to trade freely only on terms set by the state for prescribed goods with other states of a similar disposition. Draghi’s speech was essentially justifying the status quo laced with Keynesian-based central bank dogma.

Jackson Hole and the Appalachians

August 27, 2017

Jackson Hole and the Appalachians

Henri Cartier-Bresson Trafalgar Square on the Day of the Coronation of George VI 1937

The Jackson Hole gathering of central bankers and other economics big shots is on again. They all still like themselves very much. Apart from a pesky inflation problem that none of them can get a grip on, they publicly maintain that they’re doing great, and they’re saving the planet (doing God’s work is already taken).

But the inflation problem lies in the fact that they don’t know what inflation is, and they’re just as knowledgeable when it comes to all other issues. They get sent tons of numbers and stats, and then compare these to their economic models. They don’t understand economics, and they’re not interested in trying to understand it. All they want is for the numbers to fit the models, and if they don’t, get different numbers.

Meanwhile they continue to make the most outrageous claims. Bank of England Governor Mark Carney said in early July that “We have fixed the issues that caused the last crisis.” What do you say to that? Do you take him on a tour of Britain? Or do you just let him rot?

Fed head Janet Yellen a few days earlier had proclaimed that “[US] Banks are ‘very much stronger’, and another financial crisis is not likely ‘in our lifetime’. “ While we wish her a long and healthy life for many years to come, we must realize that we have to pick one: it has to be either a long life, or no crisis in her lifetime.

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

How Dumb Is the Fed?

July 13, 2017

How Dumb Is the Fed?

Bent and Distorted

POITOU, FRANCE – This morning, we are wondering: How dumb is the Fed?

The question was prompted by this comment by former Fed insider Chris Whalen at The Institutional Risk Analyst blog.

They’re not the best map readers, that much is known for certain. [PT]

[O]ur message to the folks in Jackson Hole this week [at the annual central banker meeting there] is that the end of the Fed’s reckless experiment in social engineering via QE and near-zero interest rates will end in tears.

“Momentum” stocks like Tesla, to paraphrase our friend Dani Hughes on CNBC last week, will adjust and the mother of all rotations into bonds and defensive stocks will ensue. We must wonder aloud if Chair Yellen and her colleagues on the FOMC fully understand what they have done to the US equity markets. […]

Once the hopeful souls who’ve driven bellwethers such as Tesla and Amazon into the stratosphere realize that the debt driven game of stock repurchases really is over, then we’ll see a panic rotation back into fixed income and defensive stocks.

If you believe the newspapers, the Fed has begun a “tightening cycle.” It is on course to raise its key interest rate, little by little, in quarter-point increments.

It must know that this is a perilous thing to do. After so much market manipulation over such a long period, prices all up and down the capital structure – from junk bonds to quality stocks and solid real estate – have been bent and distorted.

After all, that was the idea: drive up the price of stocks and bonds by driving down interest rates. People would be forced to spend or invest their money rather than save it. And higher financial asset prices would make the rich feel even richer.

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

On Borrowed Time

July 12, 2017

On Borrowed Time

There are a number of things you don’t want to hear a central banker say. One of those things just popped out of Janet Yellen’s mouth – “I don’t believe we will see another financial crisis in our lifetime.” That has to be up there with Irving Fisher’s deathless observation from 17 October 1929 that “Stock prices have reached what looks like a permanently high plateau” or John Maynard Keynes’ comparably adept forecast from 1927 that “We will not have any more crashes in our time.”

So far, so anecdotal. How about some data to back up the thesis that, as Thorstein Polleit puts it, the super bubble is in trouble ?

First, define your Super Bubble. We can do this in two ways. One relates to longevity (how long has the bull run lasted ?), the other to valuation (how expensive is the market now ?). The global bond bull began back in 1981, when 30 year US Treasury yields peaked at 15.2%. Now, over 35 years later, long bond yields are below 3%.

Polleit expresses it a little differently, citing the p/e ratio of bonds so that they might more fairly be compared to stocks. To calculate the p/e ratio of a government bond, he divides 1 by the 10 year government bond yield. His results are shown below.

Source: Thomson Financial / Thorstein Polleit

¹For bonds, calculated as 1 divided by the 10 year government bond yield

In his words,

You do not need to be a financial market wizard to see that especially bond markets have reached bubble territory: bond prices have become artificially inflated by central banks’ unprecedented monetary policies. For instance, the price-earnings-ratio for the US 10-year Treasury yield stands around 44, while the equivalent for the euro zone trades at 85. In other words, the investor has to wait 44 years (and 85 years, respectively) to recover the bonds’ purchasing price through coupon payments.

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

Fed Chair Janet Yellen Warns Congress: US Debt Trajectory Is Unsustainable

July 12, 2017

Fed Chair Janet Yellen Warns Congress: US Debt Trajectory Is Unsustainable

During her tesimony this morning, Fed Chair Janet Yellen urged Congress to take into account the growth trajectory of the federal debt when making decisions about spending and taxation.

She said lawmakers need to work toward achieving “sustainability of this debt path over time,” …

“Let me state in the strongest possible terms that I agree” the U.S. federal debt trend is unsustainable, may hurt productivity, and living standards of Americans.

Of course she is correct, but we do not remember her being so forthright during the last few years of President Obama’s reign as he doubled the national debt?

As a reminder, the Congressional Budget Office estimated last month the national debt could reach 91% of gross domestic product by 2027. Lawmakers are weighing major fiscal policy changes, including tax cuts, changes to health care and infrastructure spending, that could drive deficits higher in the coming years. Furthermore, at the cuirrent spending/taxation rates, debt/GDP expected to hit 150% by 2047 if the current government spending picture remains unchanged.

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

Janet Yellen: False Prophet of Prosperity

July 10, 2017

Janet Yellen: False Prophet of Prosperity

Federal Reserve Chair Janet Yellen recently predicted that, thanks to the regulations implemented after the 2008 market meltdown, America would not experience another economic crisis “in our lifetimes.” Yellen’s statement should send shivers down our spines, as there are few more reliable signals of an impending recession, or worse, than when so-called “experts” proclaim that we are in an era of unending prosperity.

For instance, in the years leading up to the 2008 market meltdown, then-Fed Chair Ben Bernanke repeatedly denied the existence of a housing bubble. In February 2007, Bernanke not only denied that “sluggishness” in the housing market would affect the general economy, but predicted that the economy would expand in 2007 and 2008. Of course, instead of years of economic growth, 2007 and 2008 were marked by a market meltdown whose effects are still being felt.

Yellen’s happy talk ignores a number of signs that the economy is on the verge of another crisis. In recent months, the US has experienced a decline in economic growth and the value of the dollar. The only economic statistic showing a positive trend is the unemployment rate — and that is only because the official unemployment rate does not count those who have given up looking for work. The real unemployment rate is at least 50 percent higher than the manipulated “official” rate.

A recent Treasury Department report’s called for rolling back of bank regulations could further destabilize the economy. This seems counterintuitive, as rolling back regulations usually contributes to economic growth. However, rolling back bank regulations without ending subsidies like deposit insurance that create a moral hazard that incentivizes banks to engage in risky business practices could cause banks to resume the unsound lending practices that were a major contributor to the growth, and collapse, of the housing bubble.

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

Yes, Ms. Yellen…There Will Be Another Financial Crisis

June 29, 2017

Yes, Ms. Yellen…There Will Be Another Financial Crisis

Janet Yellen, Federal Reserve Chair, recently stated;

“Will I say there will never, ever be another financial crisis? No, probably that would be going too far. But I do think we’re much safer and I hope that it will not be in our lifetimes and I don’t believe it will.”

That is a pretty bold statement to make considering that every one of her predecessors failed to predict the negative consequences of their actions.

Will there will be another “Financial Crisis” in our lifetimes?

Yes, it is virtually guaranteed.

The previous “crisis” wasn’t about just “an asset gone bad,” but rather the systemic shock caused by a “freeze” in the credit markets when Lehman Brothers filed for bankruptcy. Counterparties evaporated, banks froze lending and the credit market ceased to function.

Credit, not the stock market, is the “lifeblood” of the economy.

Of course, it is all good now because the Federal Reserve says so with Ms. Yellen placing a great amount of faith in the Federal Reserve’s own carefully constructing, and recently released results, of “bank stress tests.” Interestingly, EVERY bank passed with flying colors. In other words, the Millennial generation has now passed the baton of “Everybody Gets A Trophy” to the banking sector.

“Test results released by the Federal Reserve show that the 34 institutions under scrutiny have enough capital to make it through the two scenarios regulators posed — one akin to the financial crisis and another entailing a shallower downturn.

Under the scenarios, the banks tested ‘would experience substantial losses.’ However, in total, the institutions ‘could continue lending to businesses and households, thanks to the capital built up by the sector following the financial crisis.’

In the most severe scenario, bank losses are projected to be $493 billion. In the less severe, the losses were put at $322 billion.”

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

There Is No Excuse For Janet Yellen’s Complacency

June 28, 2017

There Is No Excuse For Janet Yellen’s Complacency

Janet Yellen has been reported by Reuters as saying in London yesterday that “she does not believe that there will be a run on the banking system at least as long as she lives”:

“Would I say there will never, ever be another financial crisis? You know probably that would be going too far but I do think we’re much safer and I hope that it will not be in our lifetimes and I don’t believe it will be,” Yellen said at an event in London. “Fed’s Yellen: Not another financial crisis in ‘our lifetimes’”

The only word I can use to describe this belief is “delusional.”

NEW YORK, NY – JUNE 14: Traders work as a television monitor displays Federal Reserve Chair Janet Yellen announcing the Fed’s decision to raise interest rates on the floor of the New York Stock Exchange (NYSE) June 14, 2017 in New York City. The Federal Reserved raised interest rates today .25 percent for a new target range of 1 percent to 1.25 percent. (Photo by Drew Angerer/Getty Images)

The only way in which her belief could be justified would be in financial crises were truly random events, caused by something outside the economy—or just by a very bad throw of the economic dice.

This is indeed the perspective of mainstream “Neoclassical” economic theory, in which Yellen was trained, and because of which she was deemed eligible—and indeed eminently suitable—to Chair the Federal Reserve.

This is the theory that led the OECD to proclaim, two months before the crisis began in August 2007, that “the current economic situation is in many ways better than what we have experienced in years”, and that they expected that “sustained growth in OECD economies would be underpinned by strong job creation and falling unemployment.” (OECD, June 2007, “Achieving Further Re-balancing”).

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

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