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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…

The Yield Curve Flattens And Bank Stocks Plunge. Here’s The Connection – And The Prediction

December 20, 2018

The Yield Curve Flattens And Bank Stocks Plunge. Here’s The Connection – And The Prediction

Despite all the ominous press being devoted to the soon-to-be-inverted yield curve, it’s not always clear why such a thing matters. In other words, how, exactly does a line on a graph slipping below zero translate into a recession and equities bear market, with all the turmoil that those things imply?

The answer (which is both simple and really easy to illustrate with charts) is that banks – the main driver of our hyper-financialized society – still make at least some of their money by borrowing short and lending long. They take money that’s deposited into savings accounts and short-term CDs (or borrowed in the money markets) and lend it to businesses and home buyers for years or decades. In normal times long-term rates are higher than short-term to compensate lenders for tying their money up for longer periods. The banks earn that spread, which can be substantial if borrowers make their payments.

When the yield curve flattens and then inverts — that is, when short rates exceed long rates — banks lose the ability to make money this way. They lend less, which restricts building and buying and spooks the broader markets.

So, here’s the flattening, apparently soon-to-invert yield curve:

And here’s how bank stocks are behaving in response. The following chart is for the BKX bank stock ETF that includes all the major US banks. Note how it was stable for the first nine months of the year and then fell off a cliff as it became clear that the yield curve really was going to invert.

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

Rates on Their Way to 10-Year High After Hawkish Fed’s Recent Meeting

November 22, 2018

Rates on Their Way to 10-Year High After Hawkish Fed’s Recent Meeting

hawkish fed meeting

Round and round we go, where the hawkish Fed stops, nobody knows…

There was a bit of tension in the markets last week. This tension stemmed from a prediction that the federal funds rate would be well on its way to a decade high even if the Fed did nothing at their November meeting.

Well, that concern has been justified. In a statement issued after the meeting, the Fed kept their funds rate at 2 – 2.25%, the same range after their September meeting.

But nothing in their statement indicated changes in their plan for another rate hike in December and three more in 2019.

In fact, a CNBC article points to a quarter point increase in December. Assuming this happens, that would send the funds rate to its highest since 2008 (see chart below):

us fed funds rate

The primary credit rate remained steady at 2.75%, according to the Fed statement. That is, until December’s anticipated rate hike.

Another CNBC article published just before the meeting statement was released had a telling statement (emphasis ours):

In recent weeks, financial markets have been gripped by worry and volatility, and some analysts think that in its statement Thursday the Fed may take note of that anxiety as a potential risk to economic growth.

The “No comment” response by the Fed didn’t seem to acknowledge this anxiety.

But the market sure seems to be in a state of worry. Since October 3rd, the Dow Jones has lost 1,566 points as this is written (even after modest recovery).

And the Yield Curve Keeps Flattening

In July, the Fed stopped highlighting the yield curve as an indicator of an imminent recession. Instead, they swept it under the rug.

But according to Patti Domm, the market is still paying attention to it:

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

Inverted Global Yield Curve Creates “The Perfect Cocktail For A Liquidity Crunch” As The IMF Warns Of “A Second Great Depression”

October 7, 2018

Inverted Global Yield Curve Creates “The Perfect Cocktail For A Liquidity Crunch” As The IMF Warns Of “A Second Great Depression”

Why would the IMF use the phrase “a second Great Depression” in a report that they know the entire world will read? To be more precise, the IMF stated that “large challenges loom for the global economy to prevent a second Great Depression”. Are they saying that if we do not change our ways that we are going to be heading into a horrific economic depression? Because if that is what they are trying to communicate, they would be exactly correct. At this moment, global debt levels are higher than they have ever been before in all of human history, and in their report the IMF specifically identified “global debt levels” as one of the key problems that could lead to “another financial meltdown”…

The world economy is at risk of another financial meltdown, following the failure of governments and regulators to push through all the reforms needed to protect the system from reckless behaviour, the International Monetary Fund has warned.

With global debt levels well above those at the time of the last crash in 2008, the risk remains that unregulated parts of the financial system could trigger a global panic, the Washington-based lender of last resort said.

And the IMF report also seemed to indicate that global central banks were responsible for the situation in which we now find ourselves.

In the report, an “extended period of ultralow interest rates” was blamed for “the build-up of financial vulnerabilities”…

The IMF Global Financial Stability report read: “The extended period of ultralow interest rates in advanced economies has contributed to the build-up of financial vulnerabilities.

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

Mortgage Rates Head to 6%, 10-Year Yield to 4%, Yield Curve Fails to “Invert,” and Fed Keeps Hiking

September 20, 2018

Mortgage Rates Head to 6%, 10-Year Yield to 4%, Yield Curve Fails to “Invert,” and Fed Keeps Hiking

Nightmare scenario for the markets? They just shrugged. But homebuyers haven’t done the math yet.

There’s an interesting thing that just happened, which shows that the US Treasury 10-year yield is ready for the next leg up, and that the yield curve might not invert just yet: the 10-year yield climbed over the 3% hurdle again, and there was none of the financial-media excitement about it as there was when that happened last time. It just dabbled with 3% on Monday, climbed over 3% yesterday, and closed at 3.08% today, and it was met with shrugs. In other words, this move is now accepted.

Note how the 10-year yield rose in two big surges since the historic low in June 2016, interspersed by some backtracking. This market might be setting up for the next surge:

And it’s impacting mortgage rates – which move roughly in parallel with the 10-year Treasury yield. The Mortgage Bankers Association (MBA) reported this morning that the average interest rate for 30-year fixed-rate mortgages with conforming loan balances ($453,100 or less) and a 20% down-payment rose to 4.88% for the week ending September 14, 2018, the highest since April 2011.

And this doesn’t even include the 9-basis-point uptick of the 10-year Treasury yield since the end of the reporting week on September 14, from 2.99% to 3.08% (chart via Investing.com; red marks added):

While 5% may sound high for the average 30-year fixed rate mortgage, given the inflated home prices that must be financed at this rate, and while 6% seems impossibly high under current home price conditions, these rates are low when looking back at rates during the Great Recession and before (chart via Investing.com):

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

A Review of “The Production of Money” and Reflection on the Climate Movement

August 23, 2018

A Review of “The Production of Money” and Reflection on the Climate Movement

“…over the past few months the IMF has been sending warning signals about the state of the global economy. There are a bunch of different macroeconomic developments that signal we could be entering into another crisis or recession in the near future. One of those elements is the yield curve, which shows the difference between short-term and long-term borrowing rates. Investors and financial pundits of all sorts are concerned about this, because since 1950 every time the yield curve has flattened, the economy has tanked shortly thereafter.”

-Paul Sliker on Left Out Podcast

Ann Pettifor has a 160 page book that all serious people— organizers and activists, farmers, workers, intellectuals, teachers and students—should read; it’s called The Production of Money: How to Break the Power of the Bankers. At its core, the book’s guiding questions are: How does moneycurrently facilitate a despotic regime of finance and how can it facilitate, as a fiat currency, socially beneficial activity to set us on a better path toward Just Transition and equality?

The Production of Money emerges in a moment where larger movements are taking seriously the concepts of democratizing the economic sphere through initiatives such as public banking, Federal Jobs Guarantees, and the Solidarity Economy. This is a perfect book for the layperson (and latent activist) because it demystifies the currently authoritarian function of central and commercial banks in our world and how they have a stranglehold over our collective ability to address the massive global crises we face. Even more importantly, it presents a winning narrative about how we can begin to tackle financial oligarchy, climate chaos, inequality, and sexism precisely by framing a realistic horizon of dramatically better life conditions for ordinary people.

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

The “Next” Financial Crisis

August 4, 2018

The “Next” Financial Crisis

Photo source Financial Crisis | CC BY 2.0

In this episode of The Hudson Report, we speak with Michael Hudson about the implications of the flattening yield curve, the possibility of another global financial crisis, and public banking as an alternative to the current system.

‘The Hudson Report’ is a Left Out weekly series with the legendary economist Michael Hudson. Every week, we look at an economic issue that is either being ignored—or hotly debated—in the press that week.

Paul Sliker: Michael Hudson welcome back to another episode of The Hudson Report.

Michael Hudson:It’s good to be here again.

Paul Sliker: So, Michael, over the past few months the IMF has been sending warning signals about the state of the global economy. There are a bunch of different macroeconomic developments that signal we could be entering into another crisis or recession in the near future. One of those elements is the yield curve, which shows the difference between short-term and long-term borrowing rates. Investors and financial pundits of all sorts are concerned about this, because since 1950 every time the yield curve has flattened, the economy has tanked shortly thereafter.

Can you explain what the yield curve signifies, and if all these signals I just mentioned are forecasting another economic crisis?

Michael Hudson: Normally, borrowers have to pay only a low rate of interest for a short-term loan. If you take a longer-term loan, you have to pay a higher rate. The longest term loans are for mortgages, which have the highest rate. Even for large corporations, the longer you borrow – that is, the later you repay – the pretense is that the risk is much higher. Therefore, you have to pay a higher rate on the pretense that the interest-rate premium is compensation for risk. Banks and the wealthy get to borrow at lower rates.

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

Kass: Tops Are Processes & We May Be In That Process

July 31, 2018

Kass: Tops Are Processes & We May Be In That Process

The Yield Curve Will Likely Invert by November, 2018

Economic growth is less synchronized than the consensus believes
On a trending and rate of change basis the economic data is slowing down
The Fed’s continued pivot to tighter money will likely lead to curve inversion – which will likely stoke fears of recession

“China, Europe and the Emerging Market Economic Data All Signal Slowdown: It’s in the early innings of such a slowdown based on any realtime analysis of the economic data. The rate of change slowdown (on a trending basis) is as clear as day. A rising US Dollar and weakening emerging market economic growth sows the seeds of a possible US dollar funding crisis.” – Kass Diary, Investors are Not Being Compensated For Risk

At economic peaks everything on the surface looks Rosy (except to some observors like myself and Rosie (David Rosenberg)!) – until it doesn’t.

Towards that end, here is what I wrote yesterday about US and overseas economic growth in my two part opener:

“Global Growth Is Less Synchronized as the trajectory of worldwide growth is becoming more ambiguous. I have featured the erosion in soft and hard high frequency data in the US, Europe, China and elsewhere extensively in my Diary – so I wont clutter this missive with too many charts. But needless to say (and seen by these charts and here), with economic surprises moderating from a year ago and in the case of Europe falling to two year lows – we are likely at ‘Peak Global Growth’ now. (The data is even worse in South Korea, Taiwan, Indonesia and Thailand).

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

Fed Sweeps Yield Curve Under the Rug – What Are They Trying to Hide?

July 22, 2018

Federal reserve and the yield curve

Fed Sweeps Yield Curve Under the Rug – What Are They Trying to Hide?

A few weeks ago we reported the Fed was getting hawkish despite what they were calling “low inflation.”

In that article, we showed rates possibly being raised more than 4 times in 2019. But more importantly, we warned that anyone investing in the market should start preparing to expect the unexpected.

And right now, it looks like the Fed’s bizarre moves are continuing.

This time it involves the yield curve. The yield curve represents the difference in interest rate paid on short-term Treasury notes and long-term Treasury notes in the bond market.

A common signal of economic health from the bond market involves looking at the difference between the 2-year and 10-year rates (also called the “spread”).

Over the last three decades, when 2-year yields are lower than the 10-year bond yields, it signaled a healthy economic outlook.

But when that “spread” shrinks, the yield curve is said to be flattening. If it “reverses” entirely, the yield curve is inverted (or negative).

Since 1980, an inverted yield curve preceded an economic recession with reliable accuracy (see graph below, red arrows point to 3 recent events):

us treasury yield

So the yield curve is a fairly reliable signal for imminent recession. And notice the downward trend of the yield curve on the right side of the graph. That indicates a flattening yield curve heading towards inversion.

And when we zoom in, the picture looks even more dire.

As of July 11th, 2018 the Treasury reported the difference between the 2-year and 10-year bonds to be 27 basis points (or .27% – see chart below).

This is the lowest spread since the 2008 Great Recession, and already much lower than the historical graph above.

us treasy yield

There is no doubt the yield curve is flattening, and at an alarming pace.

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

The Yield Curve Is The Economy’s Canary In A Coal Mine

July 7, 2018

The Yield Curve Is The Economy’s Canary In A Coal Mine

The economy has hit a wall and is now sliding down it. I don’t care what bullish propaganda may or may not be bubbling up in the headlines from the financial media and Wall Street, the hard numbers I look at everyday show accelerating economic weakness. The fact that my view is contrary to mainstream consensus and political propaganda reinforces my conviction that my view about the economy is correct.

As an example of the ongoing underlying systemic decay and collapse conveyed by this week’s title, it was announced that General Electric would be removed from the Dow Jones Industrial Average index and replaced by Walgreen’s. GE was an original member of the index starting in 1896 and was a continuous member since 1907.

GE is an original equipment manufacturer and industrial product innovator. It’s products are used in broad array of applications at all levels of the economy globally. It is considered a “GDP company.” GE was iconic of American innovation and economic dominance. Walgreen’s is a consumer products reseller that sells pharmaceuticals and junk. Emblematic of the entire system, GE has suffocated itself with poor management which guided the company into a cess-pool of financial leverage and hidden derivatives.

As expressed in past issues (the Short Seller’s Journal), I don’t put a lot of stock in the regional Fed economic surveys, which are heavily shaded by “hope” and “expectation” metrics that are used to inflate the overall index level. These are so-called “soft” data reports. But now even the “outlook” and “expectations” measurements are falling quickly (see last week’s Philly Fed report). The Trump “hope premium” that inflated the stock market starting in November 2016 has left the building.

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

Michael Pento: When The Yield Curve Inverts Soon, The Next Recession Will Start

June 28, 2018

Michael Pento: When The Yield Curve Inverts Soon, The Next Recession Will Start

Expected timing: this Fall

Collectively, the world’s major central banks have pumped $1.1 trillion into the markets over the past year.

The result of all this money printing is now well known: massively inflated real estate, stock and bond asset price bubbles, as well as extraordinary wealth and income gaps across society.

Some day all of this insanity will end. But how? Will it unwind in an orderly and polite way, as the world’s central planners hope? Or will be disorderly, resulting in painful portfolio losses and mass layoffs?

Michael Pento, fund manager and author of The Coming Bond Bubble Collapse returns to the podcast this week to offer his prediction that events will most likely take the latter route. In fact, he sees the developing inversion of the yield curve as a dependable precursor to the US economy entering recession as soon as this Fall:

The Fed is now raising rates. They raised rates from 0% up to 2%. They’re supposed to do it again in September/October. And again in December. That will be four hikes this year.

They are also selling assets, aka ‘draining their balance sheet’. I say ‘selling’ because that’s exactly what they have to do. Let’s say the Fed is holding a 10-year note that’s due: if they want to destroy that money, they say “OK, Treasury, give me the principal”. The Treasury doesn’t have any money so it has to go the public and raise money. Well, the Treasury will have to do that to the tune of $50 billion per month come October. Right now it’s $30, it has to go in July to $40 billion a month then it goes to $50 billion. That’s $600 billion a year added to the public supply of Treasurys they have to actually finance at a market rate. That’s on top of the $1.2 trillion debt we’re going to have in fiscal 2019.

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

Not Even Goldman Has Any Clue How The BOJ Will “Control” The Yield Curve

September 22, 2016

Not Even Goldman Has Any Clue How The BOJ Will “Control” The Yield Curve

The biggest news overnight, and certainly far bigger than this afternoon’s non-event from Janet Yellen, was the significant change in monetary policy announced by the BOJ which (belatedly) unveiled its re-revised “QQE”… this time “with Yield Curve Control” (or “QQEWYCC“), a phrase used in lieu of “Reverse Operation Twist”, whereby the BOJ is hoping to steepen the yield curve and undo the damage it itseld created in January when it introduced NIRP for the first time to Japan, without doing much of anything else.

While we laid out the theoretical big picture elements of QQEWYCC both earlier, and two weeks ago, there is a small problem when one gets into the practical nuances of the proposed monetary experiment: nobody really knows how it will work, not even Goldman Sachs, whose BOJ expert Naohiko Baba admitted that he has no clue how the BOJ will actually execute its vision.

Confirming that the “JGB market has become increasingly distorted”, Baba says that

“it is very unclear at this time exactly how the BOJ intends to “control” the yield curve in the future. Based only on the official statement, we think it is likely it will maintain the yield curve at more or less the current level for the time being. However, the question is how it will control the overall level and shape of the curve when financial and economic conditions change in the future. While the JGB market needs to take time to study the BOJ’s intentions, with interest rate movements lessening, we think the pricing function of interest rates as a mirror reflecting real economic and financial conditions will be increasingly lost.”

Ah yes, the old problem with nationalizing a market – whether it’s bonds or stocks – is that it is no longer, by definition, a market but merely a policy tool which has ceased to delivers any informational value whatsoever.

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

The “Terrifying Prospect” Of A Triumph Of Politics Over Economics

March 9, 2016

The “Terrifying Prospect” Of A Triumph Of Politics Over Economics

The Triumph of Politics

All of life’s odds aren’t 3:2, but that’s how you’re supposed to bet, or so they say. They are not saying that so much anymore, or saying that history rhymes, or that nothing’s new under the sun. More and more theys seem to be figuring out that past economic and market experiences can’t be extrapolated forward – a terrifying prospect for the social and political order.

Consider today’s realities:

Global economies have grown to their current scale thanks to a glorious secular expansion of worldwide credit – credit unreserved with bank assets and deposits; credit extended to brand new capitalists; credit that can never be extinguished without significant debt deflation or hyper monetary inflation

Economies no longer form sufficient capital to sustain their scales or to justify broad asset values in real terms

Markets cannot price assets fairly in real terms without risking significant declines in collateral values supporting them and their underlying economies

Politicians that used to anguish (rhetorically) over the right mix of potential fiscal policies, ostensibly to get things back on track (as if somehow finding the right path would have actually been legislated into existence), have come to realize the limits of their power to have a meaningful impact

Monetary authorities have become the only game in town,assassinating all economic logic so they may juggle public expectations in the hope – so far successfully executed – that neither man nor nature will be the wiser.

The good news for policy makers is that man remains collectively unaware and vacuous; the bad news is that nature abhors a vacuum. The massive scale of economies relative to necessary production (not to mention already embedded systemic leverage) suggests this time is truly different.

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

Never Go Full-Kuroda: NIRP Plus QE Will Be Contractionary Disaster In Japan, CS Warns

March 8, 2016

Never Go Full-Kuroda: NIRP Plus QE Will Be Contractionary Disaster In Japan, CS Warns

In late January, when Haruhiko Kuroda took Japan into NIRP, he made it official.

He was full-everything. Full-Krugman. Full-Keynes. Full-post-crisis-central-banker-retard.

In fact, with the BoJ monetizing the entirety of JGB gross issuance as well as buying up more than half of all Japanese ETFs and now plunging headlong into the NIRP twilight zone, one might be tempted to say that Kuroda has transcended comparison to become the standard for monetary policy insanity.

The message to DM central bank chiefs is clear: You’re either “full-Kuroda” or you’re not trying hard enough.

But as we’ve seen, the confluence of easy money policies are beginning to have unintended consequences. For instance, it’s hard to pass on NIRP to depositors without damaging client relationships so banks may paradoxically raise mortgage rates to preserve margins, the exact opposite of what central banks intend.

And then there’s the NIRP consumption paradox, which we outlined on Monday: if households believe that negative rates are likely to crimp their long-term wealth accumulation, they may well stop spending in the present and save more. Again, the exact opposite of what central bankers intend.

In the same vein, Credit Suisse is out with a new piece that explains why simultaneously pursuing NIRP and QE is likely to be contractionary rather than expansionary for the real economy in Japan.

In its entirety, the note is an interesting study on the interaction between BoJ policy evolution and private bank profitability, but the overall point is quite simple: pursuing QE and NIRP at the same time will almost certainly prove to be contractionary for the Japanese.

Here’s how the chain reaction works.

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

Kuroda’s NIRP Backlash – Japanese Interbank Lending Crashes

February 28, 2016

Kuroda’s NIRP Backlash – Japanese Interbank Lending Crashes

Not only has the Yen strengthened and stocks collapsed since BoJ’s Kuroda descended into NIRP lunacy but, in a dramatic shift that threatens the entire transmission mechanism of negative-rate stimulus, Japanese banks (whether fearing counterparty risk or already over-burdened) have almost entirely stopped lending to one another. Confusion reigns everywhere in Japanese markets with short-term interest-rate swap spreads surging and bond market volatility spiking to 3 year highs (dragging gold with it).

As Bloomberg reports,

The outstanding balance of the interbank activity plunged 79 percent to a record low of 4.51 trillion yen ($40 billion) on Feb. 25 since Bank of Japan Governor Haruhiko Kuroda on Jan. 29 announced plans to charge interest on some lenders’ reserves at the monetary authority.

While Kuroda wants to lower the starting point of the yield curve to reduce borrowing costs and spur shift of funds into riskier assets, the interbank rate has fallen only about as far as minus 0.01 percent, above the minus 0.1 percent charged on some BOJ reserves. The swings on bond yields will make it harder for financial institutions to determine how much business risks they can take, weighing on lending in a weak economy even as they are penalized for keeping some of their money at the central bank.

It will take at least another month until the market finds a level where many dealings are settled, as financial institutions face uncertainty over how the new policy affects monthly fund flows, said Izuru Kato, the president of Totan Research Co. in Tokyo.

“Since past patterns don’t apply under the entirely new structure, financial institutions will take a conservative approach until the financing picture is nailed down,” Kato said. “If the funding estimate proves wrong, banks might lose by prematurely lending in negative rates. People are cautious and staying on the sidelines.”

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

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