Category Archives: Banking

Wells Fargo: ‘Shareholders Can’t Sue Us Because They Should Have Known We Were Lying’

Wells Fargo is adopting an unusual defense against a shareholder lawsuit: claiming, essentially, that shareholders can’t hold the bank accountable for CEO Tim Sloan’s statements that it was “working to restore trust” and be “more transparent” about its scandals – because it should have been obvious that Sloan was lying.

The defense, which Wells Fargo put forth in a legal filing aimed at getting a shareholder lawsuit dismissed, relies on the legal concept of “puffery,” according to a Los Angeles Times report.

Generally, businesses engage in “puffery” when they make advertising claims that are vague or transparently untrue – a restaurant claiming it has “the world’s best burgers,” for instance. Judges and regulators have ruled that claims like that are so obviously inflated that consumers won’t take them seriously. Such claims aren’t actionable in court, the Times reported.

The thing is, “puffery” usually applies to out sized advertising claims. Wells Fargo is now claiming that the “puffery” defense should be applied to statements CEO Tim Sloan made to investors, and that a lawsuit filed by shareholders should be dismissed on those grounds.

The lawsuit stems from one of the bank’s many scandals – in particular the July 2017 revelation that Wells Fargo had for years been charging auto loan customers for unnecessary insurance. The lawsuit is seeking class certification for all investors who bought the company’s stock after Nov. 3, 2016, through Aug. 3, 2018, the Times reported.

It was on Nov. 3, 2016, that Sloan announced at an investor’s conference that he was “not aware” of any undisclosed scandals. In fact, Wells Fargo already knew that its improper auto insurance charges had pushed as many as 275,000 customers into delinquency and resulted in 25,000 improper repossessions. In fact, top bank executives allegedly knew of the problem as early as 2012, but took no action until 2016, according to the Times. Regulators have already slammed the bank for its inaction; earlier this year, the Consumer Financial Protection Bureau and the Office of the Comptroller of the Currency fined Wells Fargo $1 billion for the auto-insurance scandal and a rash of improper mortgage fees.

The shareholder lawsuit focuses on efforts by Sloan and other Wells Fargo executives to conceal the auto-loan scandal, the Times reported. Wells Fargo execs were, at the time, already dealing with the bank’s massive fake-accounts scandal. They insisted that Wells Fargo would be “more transparent” about its scandals even while failing to disclose the auto-insurance issue.

During an investor call in January 2017, Sloan said that the bank wanted “to leave no stone un-turned. If we find something that’s important, we’ll communicate that.”

By that time, Sloan had already received an independent report on the auto-insurance scandal, the Times reported. The scandal did not become public, however, until the independent report was leaked to the media in July 2017.

The shareholder lawsuit contends that Wells Fargo lied about its intent to be transparency. Wells Fargo, however, maintains that Sloan’s statements were “puffery.” According to the bank’s legal filing, Sloan’s comments were generic statements “on which no reasonable investor could rely.”

“This is just another example of corporate actors making statements to the market, and then trying to avoid liability for the representations they made,” Darren Robbins, the attorney bringing the shareholder suit, told the Times.

Source: by Ryan Smith | Mortgage Professional America

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U.S. National Trade Council Director Peter Navarro Warns Wall Street Globalists: “Stand Down” Or Else…

(TheLastRefuge) The words from Peter Navarro will come as no surprise to any CTH reader who is fully engaged and reviewing the multi-trillion stakes, within the Globalist (Wall St-vs- Nationalist (Main Street) confrontation.

For several decades Wall Street, through lobbying arms such as the U.S. Chamber of Commerce (Tom Donohue), has structurally opposed Main Street economic policy in order to inflate profits and hold power – “The Big Club”. This manipulative intent is really the epicenter of the corruption within the DC swamp.

U.S. National Trade Council Director Peter Navarro discusses how Wall Street bankers and hedge-fund managers are attempting to influence U.S.-China trade talks. He speaks at the Center for Strategic and International Studies in Washington, D.C.

This article was built around the following short news clip…

Originally outlined a year ago. At the heart of the professional/political opposition the issue is money; there are trillions at stake.

President Trump’s MAGAnomic trade and foreign policy agenda is jaw-dropping in scale, scope and consequence. There are multiple simultaneous aspects to each policy objective; however, many have been visible for a long time – some even before the election victory in November ’16.

https://theconservativetreehouse.files.wordpress.com/2018/11/trump-tweet-trade-deals-waiting-me-out-2.jpg?w=625

If we get too far in the weeds the larger picture is lost. CTH objective is to continue pointing focus toward the larger horizon, and then at specific inflection points to dive into the topic and explain how each moment is connected to the larger strategy.

If you understand the basic elements behind the new dimension in American economics, you already understand how three decades of DC legislative and regulatory policy was structured to benefit Wall Street and not Main Street. The intentional shift in fiscal policy is what created the distance between two entirely divergent economic engines.

https://theconservativetreehouse.files.wordpress.com/2018/03/lobbyist-1.jpg?w=293&h=195

REMEMBER […] there had to be a point where the value of the second economy (Wall Street) surpassed the value of the first economy (Main Street).

Investments, and the bets therein, needed to expand outside of the USA. hence, globalist investing.

However, a second more consequential aspect happened simultaneously. The politicians became more valuable to the Wall Street team than the Main Street team; and Wall Street had deeper pockets because their economy was now larger.

As a consequence Wall Street started funding political candidates and asking for legislation that benefited their interests.

When Main Street was purchasing the legislative influence the outcomes were -generally speaking- beneficial to Main Street, and by direct attachment those outcomes also benefited the average American inside the real economy.

When Wall Street began purchasing the legislative influence, the outcomes therein became beneficial to Wall Street. Those benefits are detached from improving the livelihoods of main street Americans because the benefits are “global”. Global financial interests, multinational investment interests -and corporations therein- became the primary filter through which the DC legislative outcomes were considered.

There is a natural disconnect. (more)

As an outcome of national financial policy blending commercial banking with institutional investment banking something happened on Wall Street that few understand. If we take the time to understand what happened we can understand why the Stock Market grew and what risks exist today as the monetary policy is reversed to benefit Main Street.

https://theconservativetreehouse.files.wordpress.com/2017/05/trump-mnuchin-banks1-e1495162388382.jpg?w=600&h=298

President Trump and Treasury Secretary Mnuchin have already begun assembling and delivering a new banking system.

Instead of attempting to put Glass-Stegal regulations back into massive banking systems, the Trump administration is creating a parallel financial system of less-regulated small commercial banks, credit unions and traditional lenders who can operate to the benefit of Main Street without the burdensome regulation of the mega-banks and multinationals. This really is one of the more brilliant solutions to work around a uniquely American economic problem.

♦ When U.S. banks were allowed to merge their investment divisions with their commercial banking operations (the removal of Glass Stegal) something changed on Wall Street.

Companies who are evaluated based on their financial results, profits and losses, remained in their traditional role as traded stocks on the U.S. Stock Market and were evaluated accordingly. However, over time investment instruments -which are secondary to actual company results- created a sub-set within Wall Street that detached from actual bottom line company results.

The resulting secondary financial market system was essentially ‘investment markets’. Both ordinary company stocks and the investment market stocks operate on the same stock exchanges. But the underlying valuation is tied to entirely different metrics.

Financial products were developed (as investment instruments) that are essentially wagers or bets on the outcomes of actual companies traded on Wall Street. Those bets/wagers form the hedge markets and are [essentially] people trading on expectations of performance. The “derivatives market” is the ‘betting system’.

♦Ford Motor Company (only chosen as a commonly known entity) has a stock valuation based on their actual company performance in the market of manufacturing and consumer purchasing of their product. However, there can be thousands of financial instruments wagering on the actual outcome of their performance.

There are two initial bets on these outcomes that form the basis for Hedge-fund activity. Bet ‘A’ that Ford hits a profit number, or bet ‘B’ that they don’t. There are financial instruments created to place each wager. [The wagers form the derivatives] But it doesn’t stop there.

Additionally, more financial products are created that bet on the outcomes of the A/B bets. A secondary financial product might find two sides betting on both A outcome and B outcome.

Party C bets the “A” bet is accurate, and party D bets against the A bet. Party E bets the “B” bet is accurate, and party F bets against the B. If it stopped there we would only have six total participants. But it doesn’t stop there, it goes on and on and on…

The outcome of the bets forms the basis for the tenuous investment markets. The important part to understand is that the investment funds are not necessarily attached to the original company stock, they are now attached to the outcome of bet(s). Hence an inherent disconnect is created.

Subsequently, if the actual stock doesn’t meet it’s expected P-n-L outcome (if the company actually doesn’t do well), and if the financial investment was betting against the outcome, the value of the investment actually goes up. The company performance and the investment bets on the outcome of that performance are two entirely different aspects of the stock market. [Hence two metrics.]

♦Understanding the disconnect between an actual company on the stock market, and the bets for and against that company stock, helps to understand what can happen when fiscal policy is geared toward the underlying company (Main Street MAGAnomics), and not toward the bets therein (Investment Class).

The U.S. stock markets’ overall value can increase with Main Street policy, and yet the investment class can simultaneously decrease in value even though the company(ies) in the stock market is/are doing better. This detachment is critical to understand because the ‘real economy’ is based on the company, the ‘paper economy’ is based on the financial investment instruments betting on the company.

Trillions can be lost in investment instruments, and yet the overall stock market -as valued by company operations/profits- can increase.

Conversely, there are now classes of companies on the U.S. stock exchange that never make a dime in profit, yet the value of the company increases. This dynamic is possible because the financial investment bets are not connected to the bottom line profit. (Examples include Tesla Motors, Amazon and a host of internet stocks like Facebook and Twitter.) It is this investment group of companies that stands to lose the most if/when the underlying system of betting on them stops or slows.

Specifically due to most recent U.S. fiscal policy, modern multinational banks, including all of the investment products therein, are more closely attached to this investment system on Wall Street. It stands to reason they are at greater risk of financial losses overall with a shift in fiscal policy.

That financial and economic risk is the basic reason behind Trump and Mnuchin putting a protective, secondary and parallel, banking system in place for Main Street.

Big multinational banks can suffer big losses from their investments, and yet the Main Street economy can continue growing, and have access to capital, uninterrupted.

Bottom Line: U.S. companies who have actual connection to a growing U.S. economy can succeed; based on the advantages of the new economic environment and MAGA policy, specifically in the areas of manufacturing, trade and the ancillary benefactors.

Meanwhile U.S. investment assets (multinational investment portfolios) that are disconnected from the actual results of those benefiting U.S. companies, and as a consequence also disconnected from the U.S. economic expansion, can simultaneously drop in value even though the U.S. economy is thriving.

https://theconservativetreehouse.files.wordpress.com/2018/04/trump-friends-trade-team-ross-mnuchin-navarro-lighthizer.jpg?w=623&h=1047https://theconservativetreehouse.files.wordpress.com/2018/01/trump-dow-25k.jpg?w=623&h=615

Source: by Sundance | The Conservative Tree House

JP Morgan BUSTED for Rigging Precious Metals Markets For Years

https://s16-us2.ixquick.com/cgi-bin/serveimage?url=http%3A%2F%2Fmedia.salon.com%2F2013%2F02%2Fjamie_dimon.jpg&sp=0b75c357def09705e3b7052650b2dcb9JP Morgan is the custodian responsible for safe keeping physical silver backing the SLV ETF

  • John Edmonds, 36, pleaded guilty to one count of commodities fraud and one count of conspiracy to commit wire fraud, price manipulation and spoofing.
  • Edmonds, a 13-year J.P. Morgan veteran, said that he learned how to manipulate prices from more senior traders and that his supervisors at the firm knew of his actions.

An ex-J.P. Morgan Chase trader has admitted to manipulating the U.S. markets of an array of precious metals for about seven years — and he has implicated his supervisors at the bank.

John Edmonds, 36, pleaded guilty to one count of commodities fraud and one count each of conspiracy to commit wire fraud, price manipulation and spoofing, according to a Tuesday release from the U.S. Department of Justice. Edmonds spent 13 years at New York-based J.P. Morgan until leaving last year, according to his LinkedIn account.

As part of his plea, Edmonds said that from 2009 through 2015 he conspired with other J.P. Morgan traders to manipulate the prices of gold, silver, platinum and palladium futures contracts on exchanges run by the CME Group. He and others routinely placed orders that were quickly cancelled before the trades were executed, a price-distorting practice known as spoofing.

“For years, John Edmonds engaged in a sophisticated scheme to manipulate the market for precious metals futures contracts for his own gain by placing orders that were never intended to be executed,” Assistant Attorney General Brian Benczkowski said in the release.

Of note for J.P. Morgan, the world’s biggest investment bank by revenue: Edmonds, a relatively junior employee with the title of vice president, said that he learned this practice from more senior traders and that his supervisors at the firm knew of his actions.

Edmonds pleaded guilty under a charging document known as an “information.” Prosecutors routinely use them to charge defendants who have agreed to cooperate with an ongoing investigation of other people or entities.

His sentencing is scheduled for Dec. 19. Edmonds faces up to 30 years in prison but is likely to receive less time than that. The guilty plea was entered under seal Oct. 9 and unsealed on Tuesday.

New York-based J.P. Morgan declined to comment on the case through a spokesman. It was reported earlier by the Financial Times.

J.P. Morgan learned about this case only recently, according to a person with knowledge of the matter. A recent regulatory filing from the bank didn’t make any mention of the issue.

Source: by Hugh Son & Dan Mangan | CNBC

Wells Fargo Just Reported Their Worst Mortgage Number Since The Financial Crisis

(ZeroHedge) When we reported Wells Fargo’s Q1 earnings back in April, we drew readers’ attention to one specific line of business, the one we dubbed the bank’s “bread and butter“, namely mortgage lending, and which as we then reported was “the biggest alarm” because “as a result of rising rates, Wells’ residential mortgage applications and pipelines both tumbled, sliding just shy of the post-crisis lows recorded in late 2013.”

Then, a quarter ago a glimmer of hope emerged for the America’s largest traditional mortgage lender (which has since lost the top spot to alternative mortgage originators), as both mortgage applications and the pipeline posted a surprising, if modest, rebound.

However, it was not meant to last, because buried deep in its presentation accompanying otherwise unremarkable Q3 results (modest EPS miss; revenues in line), Wells just reported that its ‘bread and butter’ is once again missing, and in Q3 2018 the amount in the all-important Wells Fargo Mortgage Application pipeline shrank again, dropping to $22 billion, the lowest level since the financial crisis.

Yet while the mortgage pipeline has not been worse in a decade despite the so-called recovery, at least it has bottomed. What was more troubling is that it was Wells’ actual mortgage applications, a forward-looking indicator on the state of the broader housing market and how it is impacted by rising rates, that was even more dire, slumping from $67BN in Q2 to $57BN in Q3, down 22% Y/Y and the the lowest since the financial crisis (incidentally, a topic we covered recently in “Mortgage Refis Tumble To Lowest Since The Financial Crisis, Leaving Banks Scrambling“).

https://www.zerohedge.com/sites/default/files/inline-images/wells%20originations%20q3%202018.jpg?itok=Dbsxmy32

Meanwhile, Wells’ mortgage originations number, which usually trails the pipeline by 3-4 quarters, was nearly as bad, dropping  $4BN sequentially from $50 billion to just $46 billion. And since this number lags the mortgage applications, we expect it to continue posting fresh post-crisis lows in the coming quarter especially if rates continue to rise.

https://www.zerohedge.com/sites/default/files/inline-images/wells%20mrg%20originations%20q3%202018.jpg?itok=r_bBgJv5

That said, it wasn’t all bad news for Wells, whose Net Interest Margin managed to post a modest increase for the second consecutive quarter, rising to $12.572 billion. This is what Wells said: “NIM of 2.94% was up 1 bp LQ driven by a reduction in the proportion of lower yielding assets, and a modest benefit from hedge ineffectiveness accounting.” On the other hand, if one reads the fine print, one finds that the number was higher by $80 million thanks to “one additional day in the quarter” (and $54 million from hedge ineffectiveness accounting), in other words, Wells’ NIM posted another decline in the quarter.

https://www.zerohedge.com/sites/default/files/inline-images/NIM%20wfc%20q3%202018.jpg?itok=gJVsqDb3

There was another problem facing Buffett’s favorite bank: while true NIM failed to increase, deposits costs are rising fast, and in Q3, the bank was charged an average deposit cost of 0.47% on $907MM in interest-bearing deposits, nearly double what its deposit costs were a year ago.

https://www.zerohedge.com/sites/default/files/inline-images/wells%20deposit%20costs.jpg?itok=JO34-sed

Just as concerning was the ongoing slide in the scandal-plagued bank’s deposits, which declined 3% or $40.1BN in Q3 Y/Y (down $2.3BN Q/Q) to $1.27 trillion. This was driven by consumer and small business banking deposits of $740.6 billion, down $13.7 billion, or 2%.

https://www.zerohedge.com/sites/default/files/inline-images/wells%20deposits%20q3.jpg?itok=xouQsmDd

But even more concerning was the ongoing shrinkage in the company’s balance sheet, as average loans declined from $944.3BN to $939.5BN, the lowest in years, and down $12.8 billion YoY driven by “driven by lower commercial real estate loans reflecting continued credit discipline” while period-end loans slipped by $9.6BN to $942.3BN, as a result of “declines in auto loans, legacy consumer real estate portfolios including Pick-a-Pay and junior lien mortgages, as well as lower commercial real estate loans.”  This is a problem as most other banks are growing their loan book, Wells Fargo’s keeps on shrinking.

https://www.zerohedge.com/sites/default/files/inline-images/wells%20avg%20loans%20q3%202018.jpg?itok=2z7cvTpD

And finally, there was the chart showing the bank’s overall consumer loan trends: these reveal that the troubling broad decline in credit demand continues, as consumer loans were down a total of $11.3BN Y/Y across most product groups.

https://www.zerohedge.com/sites/default/files/inline-images/wells%20consumer%20loans%20q3%202018.jpg?itok=SH0tD3LV

What these numbers reveal, is that the average US consumer can barely afford to take out a new mortgage at a time when rates continued to rise – if not that much higher from recent all time lows. It also means that if the Fed is truly intent in engineering a parallel shift in the curve of 2-3%, the US can kiss its domestic housing market goodbye.

Source: Wells Fargo Earnings Supplement |ZeroHedge

J.P. Morgan Chase Laying Off 400 Mortgage Staff In 3 States

Chase, one of the biggest home lenders, announces cutting employees in Florida, Ohio, Arizona.

https://ei.marketwatch.com/Multimedia/2017/03/01/Photos/ZH/MW-FG893_jpm_20170301100024_ZH.jpg?uuid=ccb2443e-fe8f-11e6-b1dc-001cc448aedeJ.P. Morgan Chase CEO Jamie Dimon, Getty Images

JPMorgan Chase & Co. is laying off about 400 employees in its consumer mortgage banking division as parts of the market slow down, people familiar with the matter said.

The bank JPM, -0.56% one of the largest mortgage lenders with about 34,000 mortgage-banking employees, is in the midst of laying off employees in cities including Jacksonville, Fla.; Columbus, Ohio; Phoenix and Cleveland particularly as mortgage servicing has fallen, the people said.

Home sales have slowed as the rise in mortgage rates has been compounded by a lack of homes for sale, increasing prices and a tax bill that reduced some incentives for home ownership. Rising interest rates have also discouraged homeowners from either refinancing their current mortgage or moving and having to get a new mortgage.

JPMorgan isn’t the only bank to lay off mortgage employees. Wells Fargo & Co. WFC, -0.60% the largest U.S. mortgage lender, said in August it is laying off about 650 mortgage employees who mainly work in retail fulfillment and mortgage servicing “to better align with current volumes.”

Source: Market Watch

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More layoffs at Movement Mortgage mean about 200 jobs have been cut since opening Norfolk headquarters in 2017

Movement Mortgage CEO Casey Crawford addresses employees at the weekly Friday Morning Meeting.

***

Verizon Lays Off 44,000, Transfers 2,500 More IT Jobs To Indian Outsourcer Infosys

https://thumbor.forbes.com/thumbor/960x0/https%3A%2F%2Fspecials-images.forbesimg.com%2Fdam%2Fimageserve%2F1680509%2F960x0.jpg%3Ffit%3Dscale

 

Wells Fargo Announces 10% Staff Cuts As CEO Struggles To Impress Analysts

As hopes for a steeper yield curve have lifted bank stocks, Wells Fargo CEO Tim Sloan is apparently trying to bolster Wells’ lagging share price as the numerous scandals that have tarnished the banks credibility and triggered fines, criminal probes and an unprecedented Fed sanction have continued to take their toll.

Per Bloomberg, Sloan is planning to trim its workforce by between 5% and 10% over the next three years with the explicit goal of propping up the company’s shares. While the cuts could provide the bank with necessary cover to purge bad apples from its employee ranks, they have also been broadly expected since the bank reported one of its worst-ever mortgage numbers as the division struggles under the yoke of Fed sanctions and with a housing market that is already beginning to roll over.

https://www.zerohedge.com/sites/default/files/inline-images/2018.09.21wells.JPG?itok=zyfrT_cDWells Fargo CEO Tim Sloan

In recognition of Wells’ collapse in mortgage lending, Sloan announced last month that the bank would lay off more than 600 employees from its mortgage division after losing the mantle of America’s top mortgage lender to non-bank fintech phenom Quicken Loans. Also, the fact that the housing market is beginning to roll over isn’t helping bolster the bank’s assets.

Sloan, who made the announcement to employees at a town-hall meeting on Thursday, has reduced headcount as he cleans up the bank and streamlines operations. The San Francisco-based lender is struggling to grow under the weight of a Federal Reserve assets cap. It had 265,000 employees as of June 30, according to a regulatory filing.

“It says something about the revenue environment for them,” Charles Peabody, an analyst at Portales Partners, said in an interview. “If they’re not in the midst of recognizing that revenues are in trouble, they’re anticipating it.”

Sloan has already promised $4 billion in cost cutbacks by the end of next year. The cuts announced Thursday have already been incorporated into the bank’s year-end expense targets for 2018, 2019 and 2020, according to the company.

“We are continuing to transform Wells Fargo to deliver what customers want – including innovative, customer-friendly products and services – and evolving our business model to meet those needs in a more streamlined and efficient manner,” Sloan said in a statement.

Wells shares have climbed 23% since Sloan took the reins in October 2016. However, it continues to lag the KBW Ban Index by 53%.

https://www.zerohedge.com/sites/default/files/inline-images/2018.09.21wellchart_0.jpg?itok=CJTGO48X

Meanwhile, analysts’ continued pessimism has sparked rumors that the bank’s board is seeking to oust Sloan. Earlier this year, reports circulated that they had approached Gary Cohn about taking over.

Analysts cut their estimates for Wells Fargo earnings again and again after the Fed punished the bank with an unprecedented cap on growing assets. The analysts began this year predicting a record $24 billion annual profit, and now the average estimate is for less than $21 billion, the weakest since 2012. Speculation that the bank wants a new CEO spilled into public this week when the New York Post said the board had approached former Goldman Sachs Group Inc. executive Gary Cohn. Cohn, who earlier this year finished a stint as a White House adviser, denied the report, as did Wells Fargo Chair Betsy Duke, who said Sloan “has the unanimous support of the board, and this support has never wavered.”

But with the bank unable to meaningfully expand its assets thanks to the Fed’s sanctions, Sloan has few alternatives aside from trimming head count and costs if he wants to impress the analysts. Expect more heads to roll in the near future.

https://i.imgur.com/49aCNlo.jpg

Source: ZeroHedge

End Of Cheap Debt: Fall & Rise Of Interest Rates

Perhaps the greatest single trend impacting the next decade

https://www.zerohedge.com/sites/default/files/inline-images/rising-interest-rates.jpg?itok=6FMgp8x6

Total debt (public + private) in America is currently at a staggering $67 trillion.

That number has been rising fast over the past 47 years, following the US dollar’s transformation into a fully-fiat currency in August of 1971.

Perhaps this wouldn’t be such a big concern were America’s income, measured by GDP, growing at a similar rate. But it’s not.

Growth in debt has far outpaced GDP, as evidenced by this chart:

https://www.zerohedge.com/sites/default/files/inline-images/debt-chart-annotated.png?itok=kjVsHDBE

In 1971, the US debt-to-GDP ratio was 1.48x. That’s roughly the same multiple it had averaged over the prior century.

But today? That ratio has spiked to to 3.47x, more than doubling over just 4 decades.

There are many troubling conclusions to draw from this, but here’s a simple way to look at it: It’s taking more and more debt to eke out a unit of GDP growth.

Put in other words: the US economic engine is seizing up, requiring increasingly more effort to function.

At some point — quite possibly some point soon — the economy will no longer be able to grow because all of its output must be used to service the ballooning debt load rather than future investment.

Accelerating this point of reckoning are two major recent trends: rising interest rates and the end of global QE.

Why? Because much of the recent explosion in debt has been fueled by central bank policy:

  • Interest rates have been on a steady decline since the 1980s, making debt increasingly cheaper to issue and to service.
  • Since 2008, central banks have been voracious buyers of debt. Countries/companies have been able to borrow $trillions, enabled (both directly and indirectly) by these “buyers of last resort”.

But both of those trends are ending, fast.

Interest rates have been rising off of their all-time rock-bottom lows over the past two years. While still low by historic standards, the rise is certainly material enough already to make the US’ $70 trillion in total debt more expensive to service, putting an even greater weight on America’s already-burdened economy.

And all indicators point to even higher rates ahead; with the Federal Reserve expected to increase the federal funds rate another 50% by 2020:

https://www.zerohedge.com/sites/default/files/inline-images/2018-09-08_11-34-35.jpg?itok=176rOxA1

These higher rates make the US debt overhang even more expensive to service, while also forcing valuations downwards for major asset classes like bonds, housing and equities (the prices of which are derived in part by interest rates, as explained here).

These higher expected rates also co-incide with the cessation of global quantitative easing (QE). The world’s major central banks have announced that they will cease making purchases by 2020:

https://www.zerohedge.com/sites/default/files/inline-images/2018-09-08_11-35-11.jpg?itok=ZjyXt4RW

Without these indiscriminate buyers-of-last-resort, debt issuers will need to offer higher rates to entice the next marginal buyer. How much higher will rates need to rise as a result? It’s pretty easy to make the argument for “a lot”.

We’ve been talking quite a bit recently about the implications of hitting America’s “Peak Debt” threshold with David Stockman in preparation for our upcoming seminar with him next week. He’s extremely concerned. Here’s what he has to say on the matter (4m:42s):

He also fears that we have the exact wrong expertise in place inside our financial markets to deal with the coming crisis, as there’s an entire generation of Wall Streeters who have never seen rates as high as they are today. More than that, there’s virtually no one left in today’s financial industry with actual experience operating within a rising interest rate environment (2m:09s):

James Howard Kunstler, another co-presenter at next week’s seminar, is similarly worried that the current state of the financial system is so fragile that a “convulsion” (i.e., a painful downdraft that violently reprices assets) is inevitable at this point (5m:46s):

Source: by Adam Taggart via PeakProsperity.com