Tag Archives: interest rates

The Cycle That Has Been Saving Home Buyers $3,000 Per Year Just Ran Out Of Fuel

Summary

  • After five years of supporting rising home prices, the latest phase of a long-term financial cycle is nearing its end.
  • While little followed in the real estate market, this cycle of yield curve spread compression has been one of the largest determinants of home affordability and housing prices.
  • Using a detailed analysis of national statistics, it is demonstrated that average home buyers in 2018 have been saving about $250 per month, or $3,000 per year.
  • The reasons why the cycle is ending are mathematically and visually demonstrated.

(Daniel Amerian) Home buyers in every city and state have been benefiting from a powerful financial cycle for almost five years. Most people are not aware of this cycle, but it has lowered the average monthly mortgage payment for home buyers on a national basis by about $250 per month since the end of 2013.

The interest rate cycle in question is one of “yield curve spread” expansion and compression, with yield curve spreads being the difference between long-term and short-term interest rates. This interest rate spread has been going through a compression phase in its ongoing cycle, meaning that the gap between long-term interest rates and short-term interest rates fell sharply in recent years.

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The green bars in the graph above show national average mortgage payments (principal and interest only), and they fell from $861 a month in 2013 to $809 a month in 2016 and have now risen to $894 per month. However, without the narrowing of the spread between short-term rates and long-term rates, mortgage payments would have been entirely different (and likely home prices as well).

Without the cycle of yield curve spread compression then, as shown with the blue bars, average mortgage payments would have been above $900 per month even in 2014, and they would have risen every year since without exception. If it had not been for compression, national average mortgage payments would have reached $978 per month in 2016 (instead of $809) and then $1,138 per month in 2018 (instead of $894).

The yellow bars show the average monthly savings for everyone buying a home during the years from 2014 to 2018. The monthly reduction in mortgage payments has risen from $57 per month in 2014 to $169 per month in 2016, to $244 per month by 2018 (through the week of October 11th).

In other words, the average home buyer in the U.S. in 2018 is saving almost $3,000 per year in mortgage payments because of this little-known cycle, even if they’ve never heard of the term “yield curve.” Indeed, while the particulars vary by location, home affordability, home prices and disposable household income have been powerfully impacted in each of the years shown by this interest rate cycle, in every city and neighborhood across the nation.

While knowledge of this cyclical cash flow engine has not been necessary for home buyers (and sellers) to enjoy these benefits in previous years, an issue has developed over the course of 2018 – the “fuel” available to power the engine has almost run out. That means that mortgage payments, home affordability and housing prices could be traveling a quite different path in the months and years ahead.

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The yield curve spread is shown in the blue area above, and it was quite wide at the beginning of this particular cycle, equaling 2.62% as of the beginning of 2014. It has been steadily used up since that time, however, with the compression of the spread being shown in red. As of the current time, the yield curve compression which has powered the reduction in mortgage payments has almost maxed out, the blue area is almost gone and the ability to further compress (absent an inversion) is almost over.

This analysis is part of a series of related analyses; an overview of the rest of the series is linked here.

(More information on the data sources and calculations supporting the summary numbers above can be found in the rest of series, as well as in the more detailed analysis below. A quick summary is that mortgage rates are from the Freddie Mac Primary Mortgage Market Survey, Treasury yields are from the Federal Reserve, the national median home sale price is from Zillow for the year 2017 and the assumed mortgage LTV is 80%.)

A Cyclical Home Buyer Savings Engine

A yield curve spread is the difference in yields between short-term and long-term investments, and the most common yield curve measure the markets looks to is the difference between the 2-year and 10-year U.S. Treasury yields.

An introduction to what yield curves are and why they matter can be found in the analysis “A Remarkably Accurate Warning Indicator For Economic And Market Perils.” As can be seen in the graph below and as is explored in more detail in some of the linked analyses, there is a very long history of yield curve spreads expanding and compressing as part of the overall business cycle of economic expansions and recessions, as well as the related Federal Reserve cycles of increasing and decreasing interest rates.

https://static.seekingalpha.com/uploads/2018/11/2/566013-1541161506247822.jpg

Since the beginning of 2014, the rapid shrinkage of the blue area shows the current compression cycle, and a resemblance (in broad strokes) can be seen with the compression cycles of 1992-2000 and of 2003-2006.

What has seized the attention of the markets in recent months is what followed next in some previous cycles, which is that yield curve spreads went to zero and then became negative, creating “inversions” where short-term yields are higher than long-term yields (as shown in the golden areas). This is important because, while such inversions are quite uncommon, when they do occur they have had a perfect record in recent decades (over the last 35 years) of being followed by economic recessions within about 1-2 years.

However, yield curves don’t have to actually invert in order to turn the markets upside down, and as explored in the analysis linked here, when the Fed goes through cycles of increasing interest rates, we have a long-term history of yield curve spreads acting as a counter cyclical “shock absorber” and shielding long-term interest rates and bond prices from the Fed actions.

That only works until the “shock absorber” is used up, however, and as of the end of the third quarter of 2018, the yield curve “shock absorber” has been almost entirely used up. So, when the Fed increased short-term rates in late September of 2018, there was almost no buffer, and that increase passed straight through to 10-year Treasury yields. The results were painful for bond prices, stock prices and even the value of emerging market currencies.

The same lack of compression led to a sudden and sharp leap to the highest mortgage rates in seven years. Unfortunately, that jump may also potentially be just a taste of what could be on the way, with little further room for the yield curve to compress (without inverting).

Understanding The Relationships Between Mortgage Rates, Treasury Yields and Yield Curve Spreads

The graphic below shows weekly yields for Fed Funds, 2-year Treasuries, 10-year Treasuries and 30-year fixed-rate mortgages since the beginning of 2014.

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The first relationship is the visually obvious close correlation between the top purple line of mortgage rates and the green line of 10-year Treasury yields. Mortgage amortization and prepayments mean that most mortgage principal is returned to investors well before the 30-year term of the mortgage, and therefore, investors typically price those mortgage rates at a spread (the distance between the green and purple lines) above 10-year Treasury yields. It isn’t a perfect relationship – the 10-year Treasury tends to be a bit more volatile – but is a close one.

The bottom two lines are the short-term yields, with the yellow line being effective overnight Fed Funds rates, and the red line being 2-year Treasury yields. Because the yield curve has been positive over the entire time period shown (as it almost always is), long-term rates have consistently been higher than short-term rates, and 10-year Treasury yields have been higher than 2-year Treasury yields, which have been higher than Fed Funds rates.

Now, the long-term rates have been moving together, and while the relationship is not quite as close, the short-term rates have also been generally moving together, with the 2-year Treasury yield more or less moving up with the Fed’s cycle of increasing interest rates (each “step” in the yellow staircase is another 0.25% increase in interest rates by the Federal Reserve).

However, the long-term rates have not been moving with the short-term rates. As can be seen with point “D,” 10-year Treasury yields were 3.01% at the beginning of 2014, 2-year Treasury yields were a mere 0.39% and the yield curve spread – the difference between the yields – was a very wide 2.62%.

About a year later, by late January of 2015 (point “E”), 10-year Treasury yields had fallen to 1.77%, while 2-year Treasury yields had climbed to 0.51%. The yield curve spread – the distance between the green and red lines – had narrowed to only 1.26%, or a little less than half of the previous 2.62% spread.

It can be a little hard to accurately track the relative distance between two lines that are each continually changing, so the graphic below shows just that distance. The top of the blue area is the yield curve spread; it begins at 2.62% at point “D” and falls to 1.26% by point “E.” The great reduction between points “D” and “E” is now visually obvious.

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So, if there had been no change in yield curve spreads, and the 2-year Treasury had risen to 0.51% while the spread remained constant at 2.62%, then the 10-year Treasury yields would have had to have moved to 3.13%.

But they didn’t – the yield curve compressed by 1.36% (2.62% – 1.26%) between points “D” and “E,” and the compression can be seen in the growing size of the red area labeled “Cumulative Yield Curve Compression.” If we start with a 2.62% interest rate spread, and that spread falls to 1.26% (the blue area), then we have used up 1.36% (the red area) of the starting spread and it is no longer available for us.

The critical importance of this yield curve compression for homeowners and housing investors, as well as some REIT investors, can be seen in the graphic below:

https://static.seekingalpha.com/uploads/2018/11/2/566013-15411616777403066.jpg

The top of the green area is the national average 30-year mortgage rate as reported weekly by Freddie Mac. That rate fell from 4.53% in the beginning of 2014 (point “D”) to 3.66% in late January of 2015.

But remember the tight relationship between the green and purple lines in the graph of all four yields / rates. Mortgage investors demand a spread above the 10-year Treasury, mortgage lenders will only lend at rates that will enable them to meet that spread requirement (and sell the mortgages), and therefore, it was the reduction in 10-year Treasury yields that drove the reduction in mortgage rates. And if the yield curve compression had not occurred, then neither would have the major reduction in mortgage rates.

As we saw in the “Running Out Of Room” graphic, the red area of yield curve compression increased by 1.36% between points “D” and “E.” If we simply take the red area of yield curve compression from that graph and we add it to the green area of actual mortgage rates, then we get what mortgage rates would have been with no yield curve compression (all else being equal).

With no yield curve compression, mortgage rates of 3.66% at point “E” would have been 5.02% instead (3.66% + 1.36% – 5.02%).

With a $176,766 mortgage in late January of 2015, a monthly P&I payment at a 3.66% rate is $810. (This is based on a national median home sale price for 2017 of $220,958 (per Zillow) and an assumed 80% mortgage LTV.)

At a 5.02% mortgage rate – which is what it would have been with no yield curve compression – the payment would have been $951. This meant that for any given size mortgage, monthly payments were reduced by 15% over the time period as a result of yield curve spread compression ($810 / $951 = 85%).

Now, at that time, housing prices were still in a somewhat fragile position. The largest decrease in home prices in modern history had just taken place between the peak year of 2006 and the floor years of 2011-2012. Nationally, average home prices had recovered by 9.5% in 2013, and then another 6.4% in 2014.

Here is a question to consider: Would housing prices have risen by 6.4% in 2014 if mortgage rates had not reduced monthly mortgage payments by 15%?

The Next Yield Curve Spread Compression

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Our next key period to look at is between points “E” and “G,” late January of 2015 to late August of 2016. We are now beginning a rising interest rate cycle when it comes to short-term rates. The Fed had done its first slow and tentative 0.25% increase in Fed Funds rates, and 2-year Treasury yields were up to 0.80%, which was a 0.29% increase.

All else being equal, when we focus on the yellow and red lines of short-term interest rates, mortgage rates should have climbed as well. (Graphs are repeated for ease of scrolling.)

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However, that isn’t what happened. After a brief jump upwards at point “F,” yield curve spreads had substantially fallen to 0.78% by point “G,” as can be seen in the reduction of the blue area above. For this to happen, the compression of yield curve spreads had to materially increase to 1.84%, as can be seen in the growth of the red area.

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In the early stages of a cycle of rising interest rates (as part of the larger cycle of exiting the containment of crisis), mortgage rates did not rise, but fell from the very low level of 3.66% at point “E” to an even lower level of 3.46% at point “G,” as can be seen in the reduction of the green area.

To get that reduction in the green area during a rising interest rate cycle required a major growth in the red area of yield curve compression. To see what mortgage rates would have been without yield curve compression (all else being equal), we add the red area of cumulative yield curve compression of 1.84% to the green area of actual mortgage rates of 3.46% and find that mortgage rates would have been 5.30%.

Returning to our $176,766 mortgage example, the monthly mortgage payment (P&I only) is $790 with a 3.46% mortgage rate, and is $982 with a 5.30% mortgage rate. Yield curve compression was responsible for a 20% reduction in mortgage payments for any given borrowing amount by late August of 2016.

However, a problem is that by late August of 2016, the 1.84% cumulative cyclical compression of the yield curve meant that only 0.78% of yield curve spreads remained. A full 70% of the initial yield curve spread had been used up.

(Please note that the mortgage payments in this section of the analysis are calculated based on historical mortgage rates for the particular weeks identified. The annual average payments presented in the beginning of this analysis are the average of all weekly payment calculations for a given year, and therefore, do not correspond to any given week.)

Using Up The Rest Of The Fuel (Yield Curve Spreads):

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After its slow and tentative start, the Federal Reserve returned to 0.25% Fed Funds rate increases in December of 2016, and has kept up a much steadier pace since that time. As of October of 2018, Fed Funds rates are now up a total of 2% from their floor. As can be seen in the line graph of the yield curve over time, 2-year Treasury yields have also been steadily climbing and were up to 2.85% by point “J,” the week ending October 11th.

However, 10-year Treasury yields are not up by nearly that amount. By late August of 2018, 10-year Treasury yields were only up to 2.87%, which was 1.29% above where they had been two years before.

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The difference can be found by looking at the very small amount of blue area left by point “J” – yield curve spreads were down to a mere 0.22% by the week ending August 29th, or less than one 0.25% Fed Funds rate increase. This meant that the red area of total cumulative yield curve compression was up to 2.40%, which means that 92% of the “fuel” that had been driving the compression profit engine had been used up – before the Fed’s 0.25% Fed Funds rate increase of September 2018.

As explored in much more detail in the previous analysis linked here, when the Federal Reserve raised rates for the eighth time in September, the yield curve did not compress. Such a compression could have been problematic, as the yield curve would have been right on the very edge of inverting, and there is that troubling history when it comes to yield curve inversions being such an accurate warning signal of coming recessions.

Instead, the short-term Fed Funds rate increase went straight through to the long-term 10-year Treasury yields, full force, with no buffering or mitigation of the rate increase by yield curve compression. The resulting shock as the 10-year Treasury yield leaped to 3.22% led to sharp losses in bonds, stocks and even emerging market currencies.

The same shock also passed through in mostly un-buffered form to the mortgage market via the demand for mortgage investors to be able to buy mortgages at a spread above the 10-year Treasury bond. Thirty-year mortgage rates leaped from 4.71% to 4.90%, an increase of 0.19%, and the highest rate seen in more than seven years.

(I’ve concentrated on the 2- to 10-year yield curve spread in this analysis to keep things simple, to correspond to the market norm for the most commonly tracked yield curve spread and because it has a strong explanatory power for the big picture over time. If one wants to get more precise (and therefore, quite a bit messier), there are also the generally much smaller spread fluctuations between 1) Fed Funds rates and 2-year Treasury yields; and 2) 10-year Treasury yields and mortgage rates.)

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When we look at the period between points “G” and “J,” it looks quite different than either of the previous periods we looked at. Mortgage rates have been rising, with the largest spike occurring at the time that the Federal Reserve proved it was serious about actually materially increasing interest rates with the Fed Funds rate increase of December 2016 (point “H”).

However, this does not mean that the money saving power of yield curve compression had lost its potency. Between points “D” and “J,” early January of 2014 and early October of 2018, average annual mortgage rates rose from 4.53% to 4.90%, as can be seen in the green area – which is an increase of only 0.37%. Meanwhile, the yield curve spread between the 2- and 10-year Treasuries was compressing from 2.62% to 0.29%, which was a yield curve compression of 2.33%. Adding the red area of cumulative yield curve compression to the green area of actual mortgage rates shows that current mortgage rates would be 7.23% if there had been no yield curve compression (all else being equal).

Mortgage principal and interest payments on a 30-year $176,766 mortgage with 4.90% interest rate are $938 per month, and they are $1,203 per month with a 7.23% mortgage rate. This means that yield curve compression has reduced the national average mortgage payment by about 22%.

Turning The Impossible Into The Possible:

This particular analysis is a specialized “outtake” from the much more comprehensive foundation built in the Five Graphs series linked here, which explores the cycles that have created a very different real estate market over the past twenty or so years.

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As developed in that series, as part of the #1 cycle of the containment of crisis, the attempts to cure the financial and economic damage resulting from the collapse of the tech stock bubble and the resulting recession, the Federal Reserve pushed Fed Funds rates down into an outlier range (shown in gold), the lowest rates seen in almost 50 years.

As part of the #3 cycle of the containment of crisis, in the attempt to overcome the financial and economic damage from the Financial Crisis of 2008 and the resulting Great Recession, the Federal Reserve pushed interest rates even further into the golden outlier range, with near-zero percent Fed Funds rates that were the lowest in history.

By the time we reach early January of 2014 to late January of 2015, points “D” to “E,” Fed Funds rates were still where they had been the previous five to six years – near zero. Mathematically, there was no room to reduce interest rates, without the U.S. going to negative nominal interest rates.

But yet, mortgage rates fell sharply, from an already low 4.53% to an extraordinarily low 3.66%. This sharp reduction in rates transformed the housing markets and would steer extraordinary profits to homeowners and investors over the years that followed. However, none of it would have been possible without the compression of yield curve spreads.

Once the past has already happened, it is easy to not only take it for granted, but to internalize it and to make it the pattern that we believe is right and natural. Once this happens, the next natural step is to then either explicitly or implicitly project this assumed reality forward, as that trend line then becomes the basis for our financial and investment decisions.

However, where this natural process can run into difficulties is when what made the past possible becomes impossible. Yield curve spread compression took what would have been impossible – a plunge in mortgage rates even as short-term rates remained near a floor – and made it possible. But that pattern can’t repeat (at least not in that manner) when there is no longer the spread to compress.

Source: by Daniel Amerian | Seeking Alpha

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Where The Next Financial Crisis Begins

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(Global Macro Monitor) We are not sure of how the next financial crisis will exactly unfold but reasonably confident it will have its roots in the following analysis. Maybe it has already begun.

The U.S. Treasury market is the center of the financial universe and the 10-year yield is the most important price in the world, of which, all other assets are priced. We suspect the next major financial crisis may not be in the Treasury market but will most likely emanate from it.

U.S. Public Sector Debt Increase Financed By Central Banks 

The U.S. has had a free ride for this entire century, financing its rapid run up in public sector debt,  from 58 percent of GDP at year-end 2002, to the current level of 105 percent, mostly by foreign central banks and the Fed.

Marketable debt, in particular, notes and bonds, which drive market interest rates have increased by over $9 trillion during the same period, rising from 20 percent to 55 percent of GDP.

Central bank purchases, both the Fed and foreign central banks, have, on average, bought 63 percent of the annual increase in U.S. Treasury notes and bonds from 2003 to 2018. Note their purchases can be made in the secondary market, or, in the case of foreign central banks,  in the monthly Treasury auctions.

In the shorter time horizon leading up to the end of QE3,  that is 2003 to 2014, central banks took down, on average, the equivalent of 90 percent of the annual increase in notes and bonds.  All that mattered to the price-insensitive central banks was monetary and exchange rate policy. 

Stunning.

Greenspan’s Bond Market Conundrum

The charts and data also explain what Alan Greenspan labeled the bond market conundrum just before the Great Financial Crisis (GFC).   The former Fed chairman was baffled as long-term rates hardly budged while the Fed raised the funds rate by 425 bps from 2004 to 2006, largely, to cool off the housing market.

The data show foreign central banks absorbed 120 percent of all the newly issued T-notes and bonds during the years of the Fed tightening cycle, freeing up and displacing liquidity for other asset markets, including mortgages. Though the Fed was tight, foreign central bank flows into the U.S., coupled with Wall Street’s financial engineering, made for easy financial conditions.

Greenspan lays the blame on these flows as a significant factor as to why the Fed lost control of the yield curve.  The yield curve inverted because of these foreign capital flows and the reasoning goes that the inversion did not signal a crisis; it was a leading cause of the GFC (great financial crisis) as mortgage lending failed to slow, eventually blowing up into a massive bubble.

Because it had lost control of the yield curve, the Fed was forced to tighten until the glass started shattering.  Boy, did it ever.

Central Bank Financing Is A Much Different Beast

The effective “free financing” of the rapid increase in the portion of the U.S debt that matters most to markets, by creditors who could not give one whit about pricing, displaced liquidity from the Treasury market, while at the same time, keeping rates depressed, thus lifting other asset markets.

More importantly, central bank Treasury purchases are not a zero-sum game. There is no reallocation of assets to the Treasury market in order to make the bond buys.  The purchases are made with printed money.

Reserve Accumulation

It is a bit more complicated for foreign central banks, which accumulate reserves through currency intervention and are often forced to sterilize their purchase of dollars, and/or suffer the inflationary consequences.

Nevertheless, foreign central banks park much of their reserves in U.S. Treasury securities, mainly notes.

Times They Are A Chang ‘en

The charts and data show that since 2015, central banks have on average been net sellers of Treasury notes and bonds to the tune of an annual average of -19 percent of the yearly increase in net new note and bonds issued. The roll-off of the Fed’s SOMA Treasury portfolio, which is usually financed by a further increase in notes and bonds, does not increase the debt stock but, it is real cash flow killer for the U.S. government.

Unlike the years before 2015, the increase in new note and bond issuance is now a zero-sum game and financed by either the reallocation from other asset markets or an increase in financial leverage. The structural change in the financing of the Treasury market is taking place at a unpropitious time as deficits are ramping up.

Because 2017 was unique and an aberration of how the Treasury financed itself due to debt ceiling constraint, the markets are just starting to feel this effect. Consequently, the more vulnerable emerging markets are taking a beating this year and volatility is increasing across the board.

The New Market Meta-Narrative 

We suspect very few have crunched these numbers or understand them and this new meta-narrative supported by the data is the main reason for the increase in market gyrations and volatile capital flows this year.   We are pretty confident in the data, and the construction of our analysis. Feel free to correct us if you suspect data error and where you think we are wrong in our analysis. We look forward to hearing from you.

Moreover, the screws will tighten further as the ECB ends their QE in December.  We don’t think, though we reserve the right to be wrong, as we often are, this is just a short-term bout of volatility, but it is the beginning of a structural change in the markets as reflected in the data.

Interest Rates Will Continue To Rise

It is clear, at least to us, the only possibility for the longer-term U.S. Treasury yields to stay at these low levels is an increase in haven buying, which, ergo other asset markets will have to be sold. If you expect a normal world going forward, that is no recession or sharp economic slowdown, no major geopolitical shock, or no asset market collapse,  by default, you have to expect higher interest rates.  The sheer logic is in the data.

Of course,  Chairman Powell could cave to political pressure and “just print money to lower the debt” but we seriously doubt it and suspect the markets would not respond positively.

Stay tuned.

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Source: Global Macro Monitor

Liquidity Crisis Looms As Global Bond Curve Nears “The Rubicon” Level

(Nedbank) The first half of 2018 was dominated by tighter global financial conditions amid the contraction in Global $-Liquidity, which resulted in the stronger US dollar weighing heavily on the performance of risks assets, particularly EM assets.

GLOBAL BOND YIELDS ON THE MOVE AMID TIGHTER GLOBAL FINANCIAL CONDITIONS

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Global bond yields are on the rise again, led by the US Treasury yields, which as we have highlighted in numerous reports, is the world’s risk-free rate.

The JPM Global Bond yield, after being in a tight channel, has now begun to accelerate higher. There is scope for the JPM Global Bond yield to rise another 20-30bps, close to 2.70%, which is the ‘Rubicon level’ for global financial markets, in our view.

If the JPM Global Bond yield rises above 2.70%, the cost of global capital would rise further, unleashing another risk-off phase. Our view is that 2.70% will hold, for the time being.

We believe the global bond yield will eventually break above 2.70%, amid the contraction in Global $-Liquidity.

GLOBAL LIQUIDITY CRUNCH NEARING AS GLOBAL YIELD CURVE FLATTENS/INVERTS

A stronger US dollar and the global cost of capital rising is the perfect cocktail, in our opinion, for a liquidity crunch.

https://www.zerohedge.com/sites/default/files/inline-images/2018-10-04_5-30-11.jpg?itok=ptuerHxP

Major liquidity crunches often occur when yield curves around the world flatten or invert. Currently, the global yield curve is inverted; this is an ominous sign for the global economy and financial markets, especially overvalued stocks markets like the US.

The US economy remains robust, but we believe a global liquidity crunch will weigh on the economy. Hence, we believe a US downturn is closer than most market participants are predicting.

GLOBAL VELOCITY OF MONEY WOULD LOSE MOMENTUM

The traditional velocity of money indicator can be calculated only on a quarterly basis (lagged). Hence, we have developed our own velocity of money indicator that can be calculated on a monthly basis.

https://www.zerohedge.com/sites/default/files/inline-images/2018-10-04_7-36-21.jpg?itok=H5yjtKOu

Our Velocity of Money Indicator (VoM)is a proprietary indicator that we monitor closely. It is a modernized version of Irving Fisher’s work on the Quantity Theory of Money, MV=PQ.

We believe it is a useful indicator to understand the ‘animal spirits’ of the global economy and a leading indicator when compared to PMIs, stock prices and business cycle indicators, at times.

The cost of capital and Global $-Liquidity tend to lead the credit cycle (cobweb theory), which in turn filters through to prospects for the real economy.

Prospects for global growth and risk assets are likely to be dented over the next 6-12 months, as the rising cost of capital globally will likely weigh on the global economy’s ability to generate liquidity – this is already being indicated by our Global VoM indicator.

Source: ZeroHedge

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The “VaR Shock” Is Back: Global Bonds Lose $880 Billion In One Week

 

 

Debts & Deficits: A Slow Motion Train Wreck

Europe’s Junk Bond Bubble Has Finally Burst

Are Bonds Sending A Signal?

Michael Lebowitz previously penned an article entitled “Face Off” discussing the message from the bond market as it relates to the stock market and the economy. To wit:

“There is a healthy debate between those who work in fixed-income markets and those in the equity markets about who is better at assessing markets. The skepticism of bond guys and gals seems to help them identify turning points. The optimism of equity pros lends to catching the full run of a rally. As an ex-bond trader, I have a hunch but refuse to risk offending our equity-oriented clients by disclosing it. In all seriousness, both professions require similar skill sets to determine an asset’s fair value with the appropriate acknowledgment of inherent risks. More often than not, bond traders and stock traders are on the same page with regard to the economic outlook. However, when they disagree, it is important to take notice.”

This is an interesting point given that despite the ending parade of calls for substantially higher interest rates, due to rising inflationary pressures and stronger economic growth, yields have stubbornly remained below 3% on the 10-year Treasury.

In this past weekend’s newsletter, we discussed the current “bullish optimism” prevailing in the market and that “all-time” highs are now within reach for investors.

“Currently, the “bulls” remain clearly in charge of the market…for now. While it seems as if much of the “tariff talk” has been priced into stocks, what likely hasn’t as of yet is rising evidence of weakening economic data (ISM, employment, etc.), weakening consumer demand, and the impact of higher rates.

While on an intermediate-term basis these macro issues will matter, it is primarily just sentiment that matters in the short-term. From that perspective, the market retested the previous breakout above the March highs last week (the Maginot line)which keeps Pathway #1 intact. It also suggests that next weekwill likely see a test of the January highs.

https://www.zerohedge.com/sites/default/files/inline-images/SP500-Chart3-080318%20%281%29.png?itok=aOPYMJ1K

“With moving averages rising, this shifts Pathway #2a and #2b further out into the August and September time frames. The potential for a correction back to support before a second attempt at all-time highs would align with normal seasonal weakness heading into the Fall. “

One would suspect with the amount of optimism toward the equity side of the ledger, and with the Federal Reserve on firm footing for further rate increases at a time where the U.S. Government is about to issue a record amount of new debt, interest rates, in theory, should be rising.

But they aren’t.

As Mike noted previously:

“Given our opinions on the severe economic headwinds facing economic growth and steep equity valuations, we believe this divergence poses a potential warning for equity holders. Accordingly, we thought it appropriate to provide a few graphs to demonstrate the ‘smarter’ guys are not on board the growth and reflation train.”

In today’s missive, we will focus on the “price” and “yield” of the 10-year Treasury from a strictly “technical”perspective with respect to the signal the bond market may be sending with respect to the stock market. Given that “credit” is the “lifeblood” of the Government, corporate and consumer markets, it should not be surprising the bond market tends to tell the economic story over time.

We can prove this in the following chart of interest rates versus the economic composite of GDP, inflation, and wages.

https://www.zerohedge.com/sites/default/files/inline-images/Rates-GDP-Composite-080618.png?itok=lcRcPHyd

Despite hopes of surging economic growth, the economic composite has remained in an elongated nominal range between 40 and 60 since 2011. This stagnation has never occurred in history and is a function of the massive interventions by the Government and the Federal Reserve to support economic growth. However, now those supports are being removed as the Federal Reserve lifts short-term borrowing costs and reduces liquidity support through their balance sheet reinvestments.

As I said, credit is the “lifeblood” of the economy. Think about all the ways that higher rates impact economic activity in the economy:

1) Rising interest rates raise the debt servicing requirements which reduces future productive investment.

2) Rising interest rates will immediately slow the housing market taking that small contribution to the economy away. People buy payments, not houses, and rising rates mean higher payments.

3) An increase in interest rates means higher borrowing costs which leads to lower profit margins for corporations. 

4) The “stocks are cheap based on low interest rates” argument is being removed.

5) The massive derivatives and credit markets are at risk. Much of the recovery to date has been based on suppressing interest rates to spur growth.

6) As rates increase so does the variable rate interest payments on credit cards. 

7) Rising defaults on debt service will negatively impact banks.

8) Many corporate share buyback plans and dividend issuances have been done through the use of cheap debt, which has led to increases corporate balance sheet leverage.

9) Corporate capital expenditures are dependent on borrowing costs. Higher borrowing costs lead to lower CapEx.

10) The deficit/GDP ratio will begin to soar as borrowing costs rise sharply. The many forecasts for lower future deficits will crumble as new forecasts begin to propel higher.

I could go on, but you get the idea.

So, with the Fed hiking rates, surging bankruptcies for older Americans who are under-saved and over-indebted, stumbling home sales, inflationary prices rising from surging energy costs, what is the 10-year Treasury telling us now.

Short-Term

On a very short-term basis, the 10-year Treasury yield has started a potential-topping process. Given that “yield” is the inverse of the “price” of bonds, the “buy” and “sell” signals are also reversed. As shown below, the 10-year yield appears to be forming the “right shoulder” of a “head and shoulder” topping formation and is currently on a short-term “buy” signal. Such would suggest lower yields over the next couple of months.

https://www.zerohedge.com/sites/default/files/inline-images/Rates-Weekly-080618.png?itok=astGcYCm

The two signals above aren’t a rarity. The chart below expands this view back to 1970. There have only been a few times historically that yields have been this overbought and trading at 3 to 4 standard deviations above their one-year average.

https://www.zerohedge.com/sites/default/files/inline-images/Rates-Weekly-Crisis-080618.png?itok=8OuknfhB

The outcome for investors was never ideal.

Longer-Term

Even using monthly closing data, which smooths out volatility to a greater degree, the same message appears. The chart below goes back to 1994. Each time yields have been this overbought (remember since yield is the inverse of price, this means bonds are very oversold) it is has signaled an issue with both the economy and the markets.

https://www.zerohedge.com/sites/default/files/inline-images/Rates-Monthly-SP500-080618-Crashes.png?itok=8bs9_JzH

Again, we see the same issue going back historically. Also, notice that yields are currently not only extremely overbought, they are also at the top of the long-term downtrend that started back in 1980.

https://www.zerohedge.com/sites/default/files/inline-images/Rates-Monthly-SP500-080618.png?itok=gJpuxCHG

Even Longer Term

Okay, let’s smooth this even more by using quarterly data closes. again, the picture doesn’t change.

https://www.zerohedge.com/sites/default/files/inline-images/Rates-Quarterly-SP500-080618-Crashes.png?itok=32JtcmDe

As I noted yesterday, the economic cycle is extremely advanced and both stocks and bonds are slaves to the full market cycle.

https://www.zerohedge.com/sites/default/files/inline-images/Historical-Recoveries-Declines-080518.png?itok=qWOsFTAd

“The “full market cycle” will complete itself in due time to the detriment of those who fail to heed history, valuations, and psychology.”

Of course, during the late stage of any market advance, there is always the argument which suggests “this time is different.” Mike made an excellent point in this regard previously:

“Given the divergences shown between bond and equity markets, logic says somebody’s wrong. Another possibility is that neither market is sending completely accurate signals about the future state of the economy and inflation. It is clear that bond traders do not buy into this latest growth narrative. Conversely, equity investors are buying the growth and reflation narrative lock, stock and barrel. To be blunt, with global central banks buying both bonds and stocks, the integrity of the playing field as well as normally reliable barometers of market conditions, are compromised.

This divergence between bond and equity traders could prove meaningless, or it may be a prescient warning for one or both of these markets. Either way, investors should be aware of the divergence as such a wide gap in economic opinions is unusual and may portend increased volatility in one or both markets.”

While anything is certainly possible, historical probabilities suggest that not only is “this time NOT different,” it will likely end the same way it always has for investors who fail to heed to bond markets warnings.

Source: ZeroHedge

Who Does America Really Belong To?

Not to Americans…

(Paul Craig Roberts) The housing market is now apparently turning down. Consumer incomes are limited by jobs offshoring and the ability of employers to hold down wages and salaries.  The Federal Reserve seems committed to higher interest rates – in my view to protect the exchange value of the US dollar on which Washington’s power is based.  The arrogant fools in Washington, with whom I spent a quarter century, have, with their bellicosity and sanctions, encouraged nations with independent foreign and economic policies to drop the use of the dollar.  This takes some time to accomplish, but Russia, China, Iran, and India are apparently committed to dropping  or reducing the use of the US dollar.

 https://www.zerohedge.com/sites/default/files/inline-images/The-Dollar-Crash-Is-Coming.jpg?itok=DF5zS-Xy

A drop in the world demand for dollars can be destabilizing of the dollar’s value unless the central banks of Japan, UK, and EU continue to support the dollar’s exchange value, either by purchasing dollars with their currencies or by printing offsetting amounts of their currencies to keep the dollar’s value stable.  So far they have been willing to do both.  However, Trump’s criticisms of Europe has soured Europe against Trump, with a corresponding weakening of the willingness to cover for the US.  Japan’s colonial status vis-a-vis the US since the Second World War is being stressed by the hostility that Washington is introducing into Japan’s part of the world.  The orchestrated Washington tensions with North Korea and China do not serve Japan, and those Japanese politicians who are not heavily on the US payroll are aware that Japan is being put on the line for American, not Japanese interests.

If all this leads, as is likely, to the rise of more independence among Washington’s vassals, the vassals are likely to protect themselves from the cost of their independence by removing themselves from the dollar and payments mechanisms associated with the dollar as world currency.  This means a drop in the value of the dollar that the Federal Reserve would have to prevent by raising interest rates on dollar investments in order to keep the demand for dollars up sufficiently to protect its value.

https://www.zerohedge.com/sites/default/files/inline-images/download%20%283%29_8.jpg?itok=6mgF7kPT

As every realtor knows, housing prices boom when interest rates are low, because the lower the rate the higher the price of the house that the person with the mortgage can afford. But when interest rates rise, the lower the price of the house that a buyer can afford. 

https://www.zerohedge.com/sites/default/files/inline-images/2018-08-01_11-52-53_0.jpg?itok=1zdTfccK

If we are going into an era of higher interest rates, home prices and sales are going to decline.

The “on the other hand” to this analysis is that if the Federal Reserve loses control of the situation and the debts associated with the current value of the US dollar become a problem that can collapse the system, the Federal Reserve is likely to pump out enough new money to preserve the debt by driving interest rates back to zero or negative. 

Would this save or revive the housing market?  Not if the debt-burdened American people have no substantial increases in their real income.  Where are these increases likely to come from? Robotics are about to take away the jobs not already lost to jobs offshoring. Indeed, despite President Trump’s emphasis on “bringing the jobs back,” Ford Motor Corp. has just announced that it is moving the production of the Ford Focus from Michigan to China.  

Apparently it never occurs to the executives running America’s off shored corporations that potential customers in America working in part time jobs stocking shelves in Walmart, Home Depot, Lowe’s, etc., will not have enough money to purchase a Ford.  Unlike Henry Ford, who had the intelligence to pay workers good wages so they could buy Fords, the executives of American companies today sacrifice their domestic market and the American economy to their short-term “performance bonuses” based on low foreign labor costs.

What is about to happen in America today is that the middle class, or rather those who were part of it as children and expected to join it, are going to be driven into manufactured “double-wide homes” or single trailers.  The MacMansions will be cut up into tenements.  Even the high-priced rentals along the Florida coast will find a drop in demand as real incomes continue to fall. The $5,000-$20,000 weekly summer rental rate along Florida’s panhandle 30A will not be sustainable.  The speculators who are in over their heads in this arena are due for a future shock.

For years I have reported on the monthly payroll jobs statistics.  The vast majority of new jobs are in lowly paid nontradable domestic services, such as waitresses and bartenders, retail clerks, and ambulatory health care services. In the payroll jobs report for June, for example, the new jobs, if they actually exist, are concentrated in these sectors: administrative and waste services, health care and social assistance, accommodation and food services, and local government.

High productivity, high value-added manufactured jobs shrink in the US as they are offshored to Asia.  High productivity, high value-added professional service jobs, such as research, design, software engineering, accounting, legal research, are being filled by offshoring or by foreigners brought into the US on work visas with the fabricated and false excuse that there are no Americans qualified for the jobs.

America is a country hollowed out by the short-term greed of the ruling class and its shills in the economics profession and in Congress.  Capitalism only works for the few. It no longer works for the many.

On national security grounds Trump should respond to Ford’s announcement of offshoring the production of Ford Focus to China by nationalizing Ford.  Michigan’s payrolls and tax base will decline and employment in China will rise. We are witnessing a major US corporation enabling China’s rise over the United States. Among the external costs of Ford’s contribution to China’s GDP is Trump’s increased US military budget to counter the rise in China’s power.

Trump should also nationalize Apple, Nike, Levi, and all the rest of the offshored US global corporations who have put the interest of a few people above the interests of the American work force and the US economy.  There is no other way to get the jobs back.  Of course, if Trump did this, he would be assassinated.

https://www.zerohedge.com/sites/default/files/inline-images/ilustra-BolSemanal8.jpg?itok=xd1bMWSN

America is ruled by a tiny percentage of people who constitute a treasonous class. These people have the money to purchase the government, the media, and the economics profession that shills for them. This greedy traitorous interest group must be dealt with or the United States of America and the entirety of its peoples are lost.

In her latest blockbuster book, Collusion, Nomi Prins documents how central banks and international monetary institutions have used the 2008 financial crisis to manipulate markets and the fiscal policies of governments to benefit the super-rich.

These manipulations are used to enable the looting of countries such as Greece and Portugal by the large German and Dutch banks and the enrichment via inflated financial asset prices of shareholders at the expense of the general population.

One would think that repeated financial crises would undermine the power of financial interests, but the facts are otherwise. As long ago as November 21, 1933, President Franklin D. Roosevelt wrote to Col. House that “the real truth of the matter is, as you and I know, that a financial element in the larger centers has owned the Government ever since the days of Andrew Jackson.”

Thomas Jefferson said that “banking institutions are more dangerous to our liberties than standing armies” and that “if the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks . . . will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered.”

The shrinkage of the US middle class is evidence that Jefferson’s prediction is coming true.

Source: ZeroHedge

Top Restructuring Banker: “We’re All Feeling Like It’s 2007 Again”

There is a group of bankers for whom “better” means “worse” for everyone else: we are talking, of course, about restructuring bankers who advising companies with massive debt veering toward bankruptcy, or once in it, how to exit from the clutches of Chapter 11, and who – like the IMF, whose chief Christine Lagarde recently saidWhen The World Goes Downhill, We Thrive– flourish during financial chaos and mass defaults.

Which is to say that the past decade has not been exactly friendly to the world’s restructuring bankers, who with the exception of two bursts of activity, the oil collapse-driven E&P bust in 2015 and the bursting of the retail “bricks and mortar” bubble in 2017, have been generally far less busy than usual, largely as a result of abnormally low rates which have allowed most companies to survive as “zombies”, thriving on the ultra low interest expense.

However, as Moody’s warned yesterday, and as the IMF cautioned a year ago, this period of artificial peace and stability is ending, as rates rise and as a avalanche of junk bond debt defaults. And judging by their recent public comments, restructuring bankers have rarely been more exited about the future.

https://s14-eu5.startpage.com/cgi-bin/serveimage?url=http%3A%2F%2Fprod-upp-image-read.ft.com%2F9eb98cae-36da-11e6-a780-b48ed7b6126f&sp=7a7ec5c1567b57624e3bbad2e33954ca

Ken Moelis

Take Ken Moelis, who last month was pressed about his rosy outlook for his firm’s restructuring business, describing “meaningful activity” for the bank’s restructuring group.

“Your comments were surprisingly positive,” said JPMorgan’s Ken Worthington, quoted by Business Insider. “Is this sort of steady state for you in a lousy environment? Can things only get better from here?”

Moelis’ response: “Look, it could get worse. I guess nobody could default. But I think between 1% and 0% defaults and 1% and 5% defaults, I would bet we hit 5% before we hit 0%.”

He is right, because as we showed yesterday in this chart from Credit Suisse, after languishing around 1%-2% for years, default rates have jumped the most in 5 years, and are now “ticking higher”

https://www.zerohedge.com/sites/default/files/inline-images/default%20rates%20rising.jpg

Moelis wasn’t alone in his pessimism: in March, JPMorgan investment-banking head Daniel Pinto said that a 40% correction, triggered by inflation and rising interest rates, could be looming on the horizon.

These are not isolated cases where a gloomy Cassandra has escaped from the asylum: already the biggest money managers are positioning for a major economic downturn according to recent research from Bank of America. And while nobody can predict the timing of the next collapse, Wall Street’s top restructuring bankers have one message: it’s coming, and it’s not too far off.

However, the most dire warning to date came from Bill Derrough, the former head of restructuring at Jefferies and the current co-head of recap and restructuring at Moelis: “I do think we’re all feeling like where we were back in 2007,” he told Business Insider: There was sort of a smell in the air; there were some crazy deals getting done. You just knew it was a matter of time.”

What he is referring to is not just the overall level of exuberance, but the lunacy taking place in the bond market, where CLOs are being created at a record pace, where CCC-rated junk bonds can’t be sold fast enough, and where the a yield-starved generation of investors who have never seen a fair and efficient market without Fed backstops, means that the coming bond-driven crash will be spectacular.

“Even if there is not a recession or credit correction, with the sheer volume of issuance there are going to be defaults that take place,” said Neil Augustine, co-head of the restructuring practice at Greenhill & Co.

The dynamic is familiar: since 2009, the level of global non-financial junk-rated companies has soared by 58% representing $3.7 trillion in outstanding debt, the highest ever, with 40%, or $2 trillion, rated B1 or lower. Putting this in contest, since 2009, US corporate debt has increased by 49%, hitting a record total of $8.8 trillion, much of that debt used to fund stock repurchases.  As a percentage of GDP, corporate debt is at a level which on ever prior occasion, a financial crisis has followed.

https://www.zerohedge.com/sites/default/files/inline-images/corporate%20debt%20to%20gdp%202.jpg

The recent glut of debt is almost entirely attributable to the artificially low interest-rate environment imposed by the Federal Reserve and its central bank peers following the crisis. Many companies took advantage and refinanced their debt before 2015 when a large swath was set to mature, kicking the can several years down the road. 

But going forward “there’s going to be refinancing at significantly higher rates,” said Steve Zelin, head of the restructuring in the Americas at PJT Partners.

And as the IMF first warned last April, refinancing at higher rates will further shrink the margin of error for troubled companies, as they’ll have to dedicate additional cash flow to cover more expensive interest payments.

“When you have highly leveraged companies and even a modest rise in interest rates, that can result in an increase in restructuring activity,” said Irwin Gold, executive chairman at Houlihan Lokey and co-founder of the firm’s restructuring group.

So with a perfect debt storm coming our way, many restructuring firms have been quietly hiring new employees to be ready when, not if, the economy takes a turn for the worse.

“The restructuring business is a good business during normal times and an excellent business during a recessionary environment,” Augustine said. “Ultimately, when a recession or credit correction does happen, there will be a massive amount of work to do on the restructuring side.” Here are some additional details on recent banker moves from Business Insider:

Greenhill hired Augustine from Rothschild in March to co-head its restructuring practice. The firm also hired George Mack from Barclays last summer to cohead restructuring. The duo, along with Greenhill vet and fellow co-head Eric Mendelsohn, are building out the firm’s team from a six-person operation to 25 bankers.

Evercore Partners in May hired Gregory Berube, formerly the head of Americas restructuring at Goldman Sachs, as a senior managing director. The firm also poached Roopesh Shah, formerly the chief of Goldman Sachs’ restructuring business, to join its restructuring business in early 2017.

“It feels awfully toppy, so people are looking around and saying, ‘If I need to build a business, we need to go out and hire some talent,'” one headhunter with restructuring expertise told Business Insider.

“In our world, people are just anticipating that it’s coming. People are trying to position their teams to be ready for it,” Derrough said. “That was the lesson from last cycle: Better to invest early and have a cohesive team that can do the work right away and maybe be a little bit overstaffed early, so that you can execute for your clients when the music ultimately stops.”

Of course, if the IMF is right (for once), Derrough and his peers will soon see a windfall unlike anything before: last April, the International Monetary Fund predicted that some 20%, or $3.9 trillion, of the total global corporate debt is in danger of defaulting once rates rise.

https://www.zerohedge.com/sites/default/files/images/user5/imageroot/2017/04/19/IMF%20debt%20warning%201.jpg

Although if and when that day comes, perhaps a better question is whether companies will be doing debt-for-equity swaps, or fast forward straight to debt-for-lead-gold-and canned food…

Source: ZeroHedge

***

Fortunately, the Dying Do Die

July 6, 2016 marks the point when the US government’s condition became irretrievably terminal. On that date the US Treasury’s 10-year note yield hit its low, 1.34 percent, and has been trending irregularly higher ever since. Historically, debt has been the life support for regimes in extremis. No regime has ever been more in debt than the US government. Its annual deficit and debt service expense are growing, old-age pension and medical programs face a demographic crunch, and now interest rates are rising. One way or the other, the government walking away from some or all of its promises is as set in stone as anything in this life can be.

Bond Yields And Barbarians

I know Kung Foo, Karate, Bond Yields and forty-seven other dangerous words.

– The Wizard

For forty-four years I have trafficked in the bond markets. I have seen massive inflation, Treasury yields in the stratosphere and risk asset spreads that could barely be included on a chart. At four investment banks I ran Capital Markets, and was on the Board of Directors of those companies, and I have witnessed both extreme anger and one fist fight. It is funny, you know, how people behave when money is sitting there on the table.

One of the things rarely discussed in the Press are the mandates of money managers. Almost no one is unconstrained and virtually everyone is bound by regulations, the tax laws and FINRA and SEC stipulations. Life insurance companies and casualty companies and money managers and Trust Departments and everyone is sidled with something. There are no escapes from the dilemmas.

The markets are a random lottery of meaningless tragedies, a couple of wins and a series of near escapes. So, I sit here and I smoke my cigars, staring raptly at it all. Paying very close attention.

There are two issues, in my mind, to be considered carefully when assessing future interest rates. The first is supply, especially the forward borrowing by the U.S. government. “It’s supply,” Michael Schumacher, head of rate strategy at Wells Fargo (NYSE:WFC), told CNBC’s Futures Now. “When you think about the enormous amount of debt that U.S. Treasury’s got to issue over not just this year, frankly, but next year, it’s staggering,” he said.

Using Michael’s calculations, the Treasury will issue more than $500 billion in notes and bonds in the second to the fourth quarter, pushing the total to around $650 billion for the year. Last year, the total came to just $420 billion. That is approximately a 35% increase in issuance. This raises a fundamental question, who are going to be the buyers and at what levels?

The second issue centers on the Fed and what they might do. They keep calling for rate hikes, like it is a new central bank mantra, and they are increasing the borrowing costs of the nation, corporations and individuals, as a result. I often wonder, in their continual clamor for independence, just who they represent.

You might think that the ongoing demand for higher yields does not exactly help the Treasury’s or the President’s desire to grow the economy as the Fed moves in the opposite direction and tries to slow it down by raising rates. I have often speculated that there might be some private tap on the shoulder, at some point, but no such “tap” seems to have taken place or, if it has occurred, it is certainly being ignored, at least in public.

Here are some interesting questions to ponder:

How much of our U.S. and global growth is real?

How much of it, RIGHT NOW, is still being manufactured by the Fed’s, and the other central banks’, “Pixie Dust” money?

Does the world seem honestly ready to economically walk on its own two feet?

If you answered “No,” to the last question, how do you believe the financial markets will react when they realize that the Central Banks are trying to take away the safety net for the global economies?

Are you really worried about inflation running away from us?

Do you believe that a flat/inverted yield curve has been an accurate predictor of events to come, historically?

Have you run the numbers, can the world’s sovereign nations even afford 4% rates, as predicted by many?

If you answered “No,” do you believe that these nations will suppress yields for as long as they can to push back the “end game?”

Across the pond Reuters states,

Italy’s two anti-establishment parties agreed the basis for a governing accord on Thursday that would slash taxes, ramp up welfare spending and pose the biggest challenge to the European Union since Britain voted to leave the bloc two years ago.

That is quite a strong statement, in my opinion. There are plenty of reasons to be worried about Italy and the European Union now, in my view.

A draft of the accord, reviewed by Reuters, lays out a plan to cut taxes, increase welfare payments and rescind the recent pension reforms. To me, this seems incompatible with the EU’s rules and regulations. These new policies would cost billions of euros and would certainly raise Italy’s debt to GDP ratio, which already stands at approximately 132%.
Reuters also states,

The plan promised to introduce a 15 percent flat tax rate for businesses and two tax rates of 15 and 20 percent for individuals – a reform long promoted by the League. Economists say this would cost well over 50 billion euros in lost revenues.

Ratings agency DBRS has already warned that this new proposal could threaten Italy’s sovereign credit rating. If you have been to Rome, you probably visited the Coliseum. I make an observation today:

The Barbarians are at the Gates!
– Mark J. Grant

Source: by Mark J. Grant | Seeking Alpha