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Inflation Is Coming: All the Trends That Were Deflationary Are Slowly Going in Reverse

Inflation Is Coming: All the Trends That Were Deflationary Are Slowly Going in Reverse

But of all potential economic outcomes, the one least anticipated and least priced in, is an uptick in inflation.

Investing is all about probabilities. If the perceived odds of an event are high, certain securities will be priced based on those expected probabilities. The corollary is that when an event is perceived as almost impossible, securities do not price in any chance of it occurring. If that event does occur, all sorts of securities need to re-price—often quite rapidly. I like to spend my time pondering what potential events the market completely ignores. Of all potential economic outcomes, the one that is least anticipated and least priced in, is an uptick in inflation.

It is said that generals always fight the last war. In terms of macro-portfolio wars, Japan’s experience with deflation colors all views. This seems odd to me because we have over two millennia of history showing inflation and currency debasements to be universal constants, with one outlier in Japan. The question is if Japan is the new normal or a true outlier?

Academics have studied the causes and effects of inflation ever since emperors and kings fixated on halting its effects. Despite a massive body of work, there is little agreement amongst experts on the causes of inflation. Since I tend to ignore “experts,” let me start by giving you the Kuppy definition of inflation. “Inflation is when too much of a certain currency chases a scarce resource and pushes its price higher when defined in terms of that currency.”

Using that definition, we’ve actually had rather dramatic inflation over the past decade—it just hasn’t shown up yet in the core consumer goods that central bankers are often concerned about.

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

What’s Behind the Subprime Consumer Loan Implosion?

What’s Behind the Subprime Consumer Loan Implosion?

These are the good times, but why are subprime credit cards, auto loans, and short-term installment loans blowing out?

This is the transcript from my podcast last Sunday, THE WOLF STREET REPORT:

OK, we’ve got a situation in subprime consumer loans. The delinquency rate on credit-card loan balances at the nearly 5,000 smaller commercial banks in the United States – this means all banks except the largest 100 – is blowing out, according to Federal Reserve data. In the third quarter, the delinquency rate at these banks rose to 6.25%. That’s higher even than during the peak of the Financial Crisis.

Back in 2016, the credit-card delinquency rate at these banks was in the 3% range. It has more than doubled in two years.

Credit card balances are considered delinquent when they’re 30 days or more past due. This delinquency rate means that out of the banks total credit card balances, 6.25% are 30 days or more past due. This is a disturbingly large rate.

But delinquencies are a flow. Balances are removed from the delinquency basket either when the customer cures the delinquency, such as catching up with past-due payments, or when the bank “charges off” the delinquent balance against its loan loss reserves. But as these delinquent balances were taken out of the delinquency basket, even more new delinquencies fell into the basket, and the delinquency rate rose.

Subprime auto loans have also been blowing out.  In the third quarter, the serious delinquency rate of the $1.3 trillion in auto loans has risen to 4.71%, the highest since the worst months of the Financial Crisis, when the auto industry collapsed, and when the US was facing the worst unemployment crisis since the Great Depression. In the third quarter, about 21% of all subprime auto loans were seriously delinquent – meaning 90 days past due.

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

Fear of “Reversal Rates” Sets in, Says the Fed

Fear of “Reversal Rates” Sets in, Says the Fed

The fear that today’s negative or low interest rates render central banks helpless in face of the next economic crisis.

There is now a new theory cropping up in Fed-speak and more generally in central-bank speak. It’s not actually a new theory. I have been saying the same thing for years. In fact, it’s not even a theory, but reality. But it’s newly cropping up in reports from the Fed and the ECB. It’s the concept of what is now called “reversal rates.”

It’s an official admission that “reversal rates” exist. The term crops up alongside the fear that countries with negative interest rates are at, or are already beyond, those “reversal rates.”

The idea of interest rate repression is to induce businesses to borrow and invest, and to induce consumers to borrow and spend, and the hope is that all this will crank up the overall economy as measured by GDP.

“Reversal rates” is the term for a situation where interest rates are so low that they’re doing more harm than good to the overall economy, and that lowering rates further will screw up the economy rather than boost it.

Central bank monetary policy, such as cutting interest rates and doing QE, takes wealth and income from one group of people and delivers it to another group of people. This is how monetary policy works. It’s not a secret. In central-bank speak, it’s called the “distributive effects of monetary policy.” The idea is that for the overall economy, this income and wealth transfer from these people over here to those people over there translates into more overall economic activity that adds to GDP.

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

THE WOLF STREET REPORT: How the Fed Boosts the 1%, as Told by the Fed

THE WOLF STREET REPORT: How the Fed Boosts the 1%, as Told by the Fed

Even the upper middle class loses share of household wealth to the 1%. The bottom half gets screwed.

Fed Goes Nuts with Repos & T-Bills but Sheds Mortgage Backed Securities

Fed Goes Nuts with Repos & T-Bills but Sheds Mortgage Backed Securities

The fastest increase in assets for any two-month period since the post-Lehman freak show in late 2008 and early 2009.

Total assets on the Fed’s balance sheet, released today, jumped by $94 billion over the past month through November 6, to $4.04 trillion, after having jumped $184 billion in September. Over those two months combined, as the Fed got suckered by the repo market, it piled $278 billion onto it balance sheet, the fastest increase since the post-Lehman month in late 2008 and early 2009, when all heck had broken loose – this is how crazy the Fed has gotten trying to bail out the crybabies on Wall Street:

Repos

In response to the repo market blowout that recommenced in mid-September, the New York Fed jumped back into the repo market with both feet. Back in the day, it used to conduct repo operations routinely as its standard way of controlling short-term interest rates. But during the Financial Crisis, the Fed switched from repo operations to emergency bailout loans, zero-interest-rate policy, QE, and paying interest on excess reserves. Repos were no longer needed to control short-term rates and were abandoned.

Then in September, as repo rates spiked, the New York Fed dragged its big gun back out of the shed. With the repurchase agreements, the Fed buys Treasury securities and mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac, or Ginnie Mae, and hands out cash. When the securities mature, the counter parties are required to take back the securities and return the cash plus interest to the Fed.

Since then, the New York Fed has engaged in two types of repo operations: Overnight repurchase agreements that unwind the next business day; and multi-day repo operations, such as 14-day repos, that unwind at maturity, such as after 14 days.

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

What Heavy Trucks Are Saying

What Heavy Trucks Are Saying

“I do believe that in North America it is a cyclical downturn”: Cummins COO.

Orders for heavy trucks, after the historic boom in 2018, plunged this year, but they may have finally bottomed out. In October 2019, truck makers in the US received about 22,072 orders for Class-8 trucks, according to preliminary estimates by FTR Transportation Intelligence. While up by about 10,000 orders from the dismal levels in September, and the highest number so far this year, orders were still down 51% from October last year ago, “signifying a subdued beginning to the traditional start of the ordering season,” FTR said:

“The order level was boosted by a couple of big fleets placing large orders into 2020, but otherwise smaller orders were placed for the first quarter build,” FTR said in a statement. “Cancellations are expected to remain elevated as OEM’s shake out excess 2019 orders from the backlog.”

These OEMs are Freightliner, the largest truck maker in the US, and Western Star, both divisions of Daimler; Peterbilt and Kenworth, divisions of Paccar [PCAR]; Navistar International [NAV]; and Mack Trucks and Volvo Trucks, divisions of Volvo Group.

The historic boom of Class-8 truck orders that started in late 2017 and roared through most of 2018 was a result of a series of events triggered by all kinds of companies trying to front-run potential tariffs. Companies ordered excessively to dodge the tariffs, and they filled their warehouses, and it triggered a shipment boom. To meet this demand, trucking companies responded by ordering a historic number of trucks.

But this boom began to unwind in late 2018, and then turned into a collapse of orders that lasted through September 2019 when it appeared to have hit bottom. October looked better. But October 2016 looked better too, only to be followed by a very tough year. Orders in October 2019 were the lowest for any October since 2016:

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

THE WOLF STREET REPORT: What’s Behind the Fed’s Bailout of the Repo Market?

THE WOLF STREET REPORT: What’s Behind the Fed’s Bailout of the Repo Market?

Whose Bets are Getting Bailed Out by the Fed’s Repos & Treasury Bill Purchases?

THE WOLF STREET REPORT: What Will Stocks Do When “Consensual Hallucination” Ends

THE WOLF STREET REPORT: What Will Stocks Do When “Consensual Hallucination” Ends

What’s astonishing is how long it lasts (9 minutes).

The Crisis in Catalonia & What I Saw in Our Neighborhood in Barcelona

The Crisis in Catalonia & What I Saw in Our Neighborhood in Barcelona

As separatist region is rocked by violence, businesses sound alarm.

Two of Catalonia’s biggest business associations, Foment de Treball and Pimec, have called for calm and dialogue after ten days of non-stop political and civil unrest in the separatist region of Spain. At a gathering of almost 450 Catalan business people and executives on Wednesday, the two associations called for a political solution to what they described as “the grave conflict we are living through in Catalonia,” a region that is riven down the middle by the question of independence.

A key passage in the event’s joint manifesto hinted at why the crisis shows no sign of abating: “It is the responsibility of politicians, and not the justice system,” to find an “effective and decisive” solution to this conflict. Unfortunately, political dialogue and negotiation have been sorely lacking in relations between Barcelona and Madrid for a number of years. And there’s little sign of that changing. 

As general elections approach, Spain’s main political parties, with the notable exception of the left-wing Podemos, are hardening their stance toward the Catalan separatists. For its part, the separatist government in Barcelona is doubling down on its calls for independence. If the elections on November 10 deliver enough votes for the triumvirate of Spain’s right-wing parties (the People’s Party, Cuidadanos and the far-right Vox, whose support appears to be growing) to form a coalition, they will crack down even harder on Catalan nationalism, which is likely to fuel even stronger pro-independence sentiment in the region.

A little more than two years have passed since more than two million people in Catalonia voted in a banned referendum to leave Spain. On that day, the separatists were given a harsh lesson in the raw power of state violence.

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

THE WOLF STREET REPORT: How the SoftBank Scheme Rips Open the Tech Bubble

THE WOLF STREET REPORT: How the SoftBank Scheme Rips Open the Tech Bubble

The biggest force behind the startup bubble in the US has been SoftBank. But the scheme has run into trouble, and a lot is at stake (12 minutes).

US Gross National Debt Jumps by $1.2 Trillion in Fiscal 2019, to $22.7 Trillion, Hits 106.5% of GDP

US Gross National Debt Jumps by $1.2 Trillion in Fiscal 2019, to $22.7 Trillion, Hits 106.5% of GDP

But what happens if there’s actually a recession?

The US gross national debt jumped by $110 billion on the last two business days of Fiscal Year 2019, and by a breath-taking $1.2 trillion during the entire fiscal year, after having already jumped by $1.27 trillion in Fiscal 2018, the Treasury Department reported today. This ballooned the US gross national debt to a vertigo-inducing $22.72 trillion.

These beautiful trillions whipping by are a joy to behold: so much action in so little time. The flat spots in the chart below are the results of the debt-ceiling charade in Congress. When the debt ceiling is lifted, the debt spikes back to trend, and nothing changed:

During Fiscal 2019, the gross national debt increased by 5.6% and now amounts to 106.5% of current-dollar GDP, up from 105.4% at the end of Fiscal 2018.

The thing to remember here is that this isn’t the Great Recession or the Financial Crisis, when over 10 million people lost their jobs and credit froze up and companies went bankrupt and tax revenues plunged while outlays soared to pay for unemployment insurance and the like. This isn’t even the Collapse of Everything, but the longest expansion of the economy in US history.

Over the last four quarters, the US economy as measured by nominal GDP (not adjusted for inflation) grew by 4.0%. Over the same period, the US gross national debt grew by 5.6% (not adjusted for inflation).

In dollar terms, it looks even funnier: The economy as measured by nominal GDP over the past four quarters grew by $830 billion. The Gross National Debt grew by $1.2 trillion.

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

Metro Bank Teeters after Bond Sale Fails. Shares Collapsed 95%

Metro Bank Teeters after Bond Sale Fails. Shares Collapsed 95%

Hedge-fund manager Steven Cohen and Michael Bloomberg are among those ruing the day they bought the crushed shares of the UK bank touted as a “bargain.”

Even by its own recent standards, Metro Bank has had a torrid week. On Monday, shares of the British retail bank tumbled 5%, on Tuesday, 25%, on Wednesday, 5%, and on Thursday, 4.5%, before staging a brief comeback in the final hours of trading on Friday, to end the week 35% lower. By Friday morning, it was the second most-shorted stock on the FTSE all shares index, behind the collapsed travel & vacation-giant Thomas Cook.

The main trigger for this week’s rout was the bank’s failure on Monday to raise a much-needed £250 million by issuing non-preferred bonds that deeply skeptical investors spurned. Despite trying to lure buyers with an interest rate of 7.5%, double the rate of similar offerings, Metro only attracted £175 million worth of orders, prompting the embattled lender to pull the plug on the bond sale.

“Failure to get enough support for a product that is yielding 7.5% is quite remarkable when you consider how investors are struggling to find generous levels of income in the current market,” said Russ Mould, the investment director of AJ Bell. “It suggests that investors don’t trust the bank or they believe the 7.5% yield is simply not high enough to compensate for the risks of owning such a product.”

Metro Bank opened for business in 2010, becoming Britain’s first new high street bank in over 100 years. One of a handful of so-called “Challenger Banks” — new retail lenders created after the crisis to provide a little more banking competition in a country where the five biggest banks control a staggering 85% of the market — Metro Bank proved particularly adept at luring disillusioned clients from the big banks.

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

Use of “Hidden Debt Loophole” Spreads Among Australian Corporations

Use of “Hidden Debt Loophole” Spreads Among Australian Corporations

Situation already so bad that hiding debt becomes a priority?

Australian engineering group UGL, which is working on large infrastructure projects such as Brisbane’s Cross River Rail and Melbourne’s Metro Trains, recently sent a letter to suppliers and sub-contractors informing them that as of October 15, they will be paid 65 days after the end of the month in which their invoices are issued. The company’s policy had been, until then, to settle invoices within 30 days.

The letter then mentioned that if the suppliers want to get paid sooner than the new 65-day period, they can get their money from UGL’s new finance partner, Greensill Capital, one of the biggest players in the fast growing supply chain financing industry, in an arrangement known as “reverse factoring”. But it will cost them.

Reverse factoring is a controversial financing technique that played a major role in the collapse of UK construction giant Carillion, enabling it to conceal from investors, auditors and regulators the true magnitude of its debt.

Here’s how it works: a company hires a financial intermediary, such as a bank or a specialist firm such as Greensill, to pay a supplier promptly (e.g. 15 days after invoicing), in return for a discount on their invoices. The company repays the intermediary at a later date. This effectively turns the company’s accounts payable into debt that is owned a financial institution. But this debt is not disclosed as debt and remains hidden.

In its letter to suppliers, UGL trumpeted that the payment changes would “benefit both our businesses,” though many suppliers struggled to see how. One subcontractor interviewed byThe Australian Financial Reviewcomplained that the changes were “outrageous” and put small suppliers at a huge disadvantage since they did not have the power to challenge UGL. Some subcontractors contacted by AFR refused to be quoted out of fear of reprisal from UGL.

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

Here’s What I’m Worried About. And It’s Not a Recession

Here’s What I’m Worried About. And It’s Not a Recession

A rout in the hyper-inflated bond market can blow up everything at this point.

The locker room at my swim club has become the litmus test. When a complex topic, after years of being absent or ignored, suddenly crops up in conversation, and not just sporadically but all the time, it means that there is some kind of peaking going on. This suddenly hot topic now is a “coming recession.”

Just about everyone is talking about it. This means that fears of a recession or thoughts of a recession have now penetrated into the core of the previously recession-free zone: the swim-club locker room. It means that these recession fears might be peaking.

It makes sense. Recession-fear headlines are popping up everywhere. You cannot escape the drama. It’s not that there is a recession in the United States – far from it. It’s all about a coming recession.

And another term has penetrated into the musty locker room at my swim club, perhaps for the first time ever in its illustrious 100-plus-year history: “Inverted yield curve.”

People who didn’t care about it, who never cared about it, and who don’t know what it is, who don’t even really understand what a bond yield is, and who don’t really want to know what it is – in other words, perfectly sane people that have other things to worry about – are suddenly fretting about the inverted yield curve.

They’re fretting about it because everyone else is fretting about it. And every time the inverted yield curve comes up, recession talk is attached to it. But there’s a lot more to it than meets the eye.

In a survey released this week by the National Association of Realtors, 36% of active homebuyers – so people actively trying to buy a home – said they expect a recession starting next year, up from 30% a few months ago.

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

How Negative Interest Rates Screw Up the Economy

How Negative Interest Rates Screw Up the Economy

Now they’re clamoring for this NIRP absurdity in the US. How will this end?

Now there is talk everywhere that the United States too will descend into negative interest rates. And there are people on Wall Street and in the media that are hyping this absurd condition where government bonds and perhaps even corporate bonds, and eventually even junk bonds have negative yields. All of that NIRP absurdity is already the case in Europe and Japan.

There is now about $17 trillion – trillion with a T – in negative yielding debt in the world, government and corporate debt combined.

This started out as a short-term emergency experiment. And now this short-term emergency experiment has become the new normal. And now more short-term emergency experiments need to be added to it, because, you know, the first batches weren’t big enough and haven’t worked, or have stopped working, or more realistically, have screwed things up so badly that nothing works anymore.

So how will this end?

The ECB rumor mill over the past two weeks hyped the possibility of a shock-and-awe stimulus package, on top of the shock-and-awe stimulus packages the ECB has already implemented, namely negative interest rates, liquidity facilities, and QE.

The entire German government bond market, even 30-year bonds have negative yields. And the German economy shrank in the last quarter. That gives Germany two out of the last four quarters where its economy shrank – despite negative interest rates from the ECB and despite the negative yields on its government bonds, and despite the negative yields among many corporate bonds.

In other words, the German economy, the fourth largest in the world, is hitting the skids despite or because of negative yields. And now the ECB wants to flex its muscles to get yields to become even more negative.

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

Olduvai IV: Courage
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Olduvai II: Exodus
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