Yellen Speaks, Yields Spike, Mortgage Rates Jump, Oil Plunges: But Why?

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7th week of US Government debt “carnage” continues unabated.

Stocks sold off, starting at 2:04 PM, as the Fed’s slightly more hawkish stance was sinking in. The S&P 500 ended the day down 0.8%. Not even a tempest in a teapot. Gold sold off, now down 17.6% since July. Oil plunged over 4%, but unrelated to the Fed: the market is figuring out that nothing beyond wild jabbering by oil potentates is happening to contain the oil glut. But natural gas jumped nearly 3%, based not on the Fed, but on the weather. And bonds? Another opportunity to use the word “rout” or “carnage.”

The Fed increased its target rate for the second time in nearly a decade, after having done so a year ago for the first time. It raised it from next to nothing by nearly nothing to a little above nothing: a range of 0.5% to 0.75%. But according to its dot plot, whose reliability has become a joke, it will raise rates three times next year, up from the prior dot plot which indicated only two hikes.

At the press conference, Fed Chair Yellen explained the rate hike that everyone had taken for granted: “My colleagues and I are recognizing the considerable progress the economy has made toward our dual objectives of maximum employment and price stability….”

Whereby “price stability” is defined as 2% inflation as measured by Core PCE (without food and energy). The Personal Consumption Expenditures price index most often shows an inflation rate that is lower than CPI. So in terms of CPI, the Fed’s idea of “price stability” would be something closer to 2.3%. Then there’s the issue of excluding food and energy. If the oil sector sees its fervent wishes fulfilled, and the price of oil jumps, this will drive up energy costs, but it won’t be reflected in Core PCE. So in terms of CPI, including food and energy, the Fed’s target of “price stability” could be higher still.

Not to speak of the inherent inaccuracy of the CPI measure.

Then there’s this: 2% inflation as measured by Core PCE is the “target.” It’s not a ceiling. And the Fed will allow inflation to exceed that rate by a good margin, before cracking down.

At the same time, the Fed has not bought into the Trump campaign’s economic growth projections. Instead, in its own projections, it sees the same miserably slow growth that the economy has been mired in for the past few years:

  • 2016: 1.9%
  • 2017: 2.1%
  • 2018: 2.0%
  • 2019: 1.9%




And the bond market is beginning to smell a rat. If you bought 10-year Treasurys some time ago with at a yield of 1.8%, and inflation is heading to 3% or higher, you’re experiencing the joys of “inflation without compensation” – for years to come. Bond buyers hate that. They become reluctant, even as sellers become more eager.

So the 10-year Treasury yield jumped today, settling at 2.54% and then rising further in late trading, to currently 2.58%, up from 1.38% during the heyday in July (via StockChart.com):

The 2-year yield jumped to 1.26%, and then continued to rise to 1.29%, the highest since August 2009, and well over double the yield of 0.5% in July (via StockChart.com):

And mortgages followed, with the average 30-year fixed-rate mortgage sporting a rate of 4.27%. Mortgage News Daily provides some color:

Nearly every lender raised rates this afternoon – some of them multiple times. At first that took the form of mere increases in upfront costs (i.e. the contract rate itself wasn’t moving higher), but subsequent reprices added up to an eighth of a point in rate for several lenders. From a range of 4.125-4.25%, top tier conventional 30-year fixed quotes moved up to a range of 4.25-4.375% – well into the highest levels in more than 2 years.

So what is spooking bond markets and mortgage lenders? It wasn’t the rate increase. That was a given. It had been taken for granted by all market participants.

And it wasn’t inflation that caused this surge in yields. The upward trend of inflation has been established and confirmed. And people are starting to believe in it: The market’s inflation expectations as measured by the 10-year break-even inflation rate – based on the yield spread between Treasury notes and Treasury inflation-protected securities – has reached 2% for the first time since September 2014, up from 1.4% this summer, and up from 1.2% earlier this year.

Instead, what might be spooking bond markets and mortgage lenders is a Fed that, while slightly more hawkish than it had been, is not nearly hawkish enough to confront the inflation trajectory in time.

There’s something else that’s tripping up the US Treasury market: the largest foreign buyers of Treasurys – China and Japan – aren’t buying anymore. In fact, China’s foreign exchange reserves are dwindling, and it has been dumping Treasurys, not because of the Fed but because of its own struggles with capital flight and its impact on the yuan.

And the Japanese aren’t buying anymore. Net purchases of overseas bonds plunged 94% in November from October, to a mere $728 million, according to the Ministry of Finance. With typically 60% to 70% of these purchases in US Treasurys, it marks a sudden and huge shift from the buying binge earlier in the year, when Japanese NIRP refugees chased after better returns overseas. So far this year, Japanese investors bought $194 billion in foreign bonds, the most in the current data series going back to 2005. But that binge stopped in November.

Why did Japanese investors get spooked? They too see the rout in Treasurys and the potential losses lining up in the future. And it comes at a bad time for them: with their watered-down yen against a surging dollar, they have to pay a lot for these bonds, and they have to pay fees to exchange their yen for dollars. It all adds up in what is still a low-yield environment, studded with a lot of unpalatable risks.

Despite the rout in Treasurys, junk bonds have soared for months, as the Hot Money returned to bet on Oil Nirvana. Read…  Treasuries Melt Down, Junk Bonds Boom, Yield Spreads Collapse




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  64 comments for “Yellen Speaks, Yields Spike, Mortgage Rates Jump, Oil Plunges: But Why?

  1. chris Hauser
    Dec 14, 2016 at 10:25 pm

    treasuries are selling off because people have decided they don’t like the loan terms.

    but uncle sugar pays.

    let’s see about everybody else.

  2. Uncle Frank
    Dec 14, 2016 at 10:36 pm

    They are all in disbelief that it actually occurred today.

    • OutLookingIn
      Dec 15, 2016 at 1:46 am

      Heads in the sand.

      As global political uncertainties grow, so should higher bond risk premiums. Historically, risk premiums would rise in sync with heightened political turbulence.
      This is no longer the case. During the past year as global political tensions approach a crises level, the bond yields were moving down.
      This signals a stark level of investor complacency. Many will receive a rude awakening, as bond yields are once again on the march higher, to join the level of globally heightened tensions.

  3. A G
    Dec 14, 2016 at 10:47 pm

    The USD liked it.

    • Greatful again
      Dec 15, 2016 at 9:59 am

      The DXY breached 103 earlier this morning.

  4. NotSoSure
    Dec 14, 2016 at 10:52 pm

    Wanna bet that Dow 20K is just around the corner? Perhaps as early as tomorrow?

    • mynamett
      Dec 15, 2016 at 11:11 am

      I fully agree with you. DOW 25000 and SP 2500 by the end of next year

      • nhz
        Dec 15, 2016 at 12:32 pm

        still nothing compared to the gains of the Venezuela stockmarket ;-)

        Go Weimar!! Worked great the last time so why not again …

  5. agNau
    Dec 14, 2016 at 11:18 pm

    Interest Rate Swaps

  6. Kreditanstalt
    Dec 14, 2016 at 11:33 pm

    I’d REALLY like to know who is so keen on USD at these nosebleed, BTFATH prices…

    A buying panic at these high prices?? An in an upcoming era supposed to be one of “inflation”?

    Are they the same momentum-seeking speculators who are seen in other asset classes? Or someone utterly desperate?

    Hopefully they will have their heads handed to them.

    • Frederick
      Dec 15, 2016 at 3:29 am

      Indeed why would anyone want anything but gold? I cannot understand the mentality as the dollar is under attack by unhappy people and govts around the world I believe there will be a reckoning day in the not too distant future Meanwhile enjoy the Trump rally everyone swamp lizards and all

      • Sidera
        Dec 15, 2016 at 6:54 am

        The dollar is the cleanest dirty shirt right now. Cash gives you flexibility to take advantages of any opportunities that present them selves in the market place. Gold is not always the best safe haven. Look at 2008, gold and silver sold off very dramatically as everyone rushed to the exit. The people with cash were there waiting to pick up the pieces.

        If the stock market starts to tank, the ones with the cash will be left to pick up very good companies at pennies on the dollar.

        There is definitely value lost in inflationary pressure, but that’s all you can lose.

        As central banks around the world are into negative rates and devaluing their currencies, people recognize the stability of the US dollar.

        In Canada, the dollar is trading around 75 cents to a CAD and that ratio is going lower. Historically there is support around 60 cents. There is a lot more downside left. And that is why I continue to trade my Canadian dollars for a combination of gold, silver and US dollars.

        We have no idea what asset class prices are going to be. Best have a mix of everything and buy when there is heavy selling. Bonds might be a good opportunity right now. Time will tell.

        • d
          Dec 15, 2016 at 6:59 am

          “The dollar is the cleanest dirty shirt right now. Cash gives you flexibility to take advantages of any opportunities that present them selves in the market place. Gold is not always the best safe haven. ”

          CHF

          Gold is way over priced, driven there by Manipulators ( all the gold bulls creaming BUY BUY BUY GOLD, from me).

          And CB’S protecting their toilet paper fiat.

        • john
          Dec 15, 2016 at 7:57 am

          The guy saving his dollars died yesterday. His kid will buy a Ferrari tomorrow; lucky bastard.

      • Bob
        Dec 15, 2016 at 9:07 am

        Gold is risky. I know it’s been used as a monetary substitute in the past, but its value is clearly dropping with the war against cash and the rise of bitcoin type alternatives. Plus, the governments can outlaw it at any time. If people lose faith in existing currencies, we are more like to see new electronic currencies than a return to the gold standard. Plus, gold is a shady market with very little transparency. Its more a racket than an alternative currency. I think anybody putting more than 5% in gold is out on a speculative limb.

        • Dec 15, 2016 at 9:29 am

          You are correct. Five percent is a very good hedge against the unbelievable unreal uncertainty of the future.

          For myself, I am closer to ten percent than to five, but I believe that either one is a very good choice.

          Gold is a hedge, insurance. By my lights the use of gold as a hedge is proper, but as an investment it is way too risky as you say.

          http://321gold.com/

          SnowieGeorgie

        • nhz
          Dec 15, 2016 at 10:44 am

          shady market, can be confiscated or outlawed at any time … are you suggesting this doesn’t apply to most other securities nowadays?

          Every market is manipulated in the extreme, by central banksters, HFT’s etc. Nothing makes sense and I would rather trust something that worked for over 5000 years than some investment approved by the government, ratings agencies or Goldman $ucks, let alone an electronic currency that can become worthless in an instant if the government decides so, if the internet collapses or if ‘Russian hackers’ want their share (there has been plenty or carnage in Bitcoin already, wake up …).

          The only thing that worked great since 2008 is rampant speculation in assets (whether RE, stawks or bonds), using maximum debt to buy them with maximum leverage. This cannot continue. I won’t be surprised if some day the market remains closed and when it reopens weeks or months later many investments are suddenly worth pennies on the dollar.

          That being said, never put all your eggs in one basket.

  7. Dec 15, 2016 at 12:16 am

    Bond markets (except for bunds) are driven by forex and the various ‘currencies routs’.

    ‘investors’ are selling debt to gain dollars because they are priced favorably to fuel relative to other, ‘Brand X’ currencies. Because fuel is a good deal in dollars, holders of other currencies sell them at any price, driving dollars out of circulation … this leaves the dollars as an even better deal for fuel. In this way the process feeds on itself.

    To defend these pathetic little currencies the central banks sell dollars which are then sped out of the country, ultimately to retire loans in the US which in turn annihilate the dollars — money is created when loans are offered, destroyed with the loans are repaid. The outcome is the onrushing dollar shortage which also feeds on itself.

    The handmaid of this ‘dollar preference’ dynamic is ‘energy deflation’ but I won’t go into it here. Once it and dollar preference take hold there is no escape from it: the fuel industry is destroyed along with its customer base. Dollar preference is similar to gold preference of the 1930s which was the driver of the Great Depression. To escape it was necessary for the world and the US to ‘go off gold’. Likewise, to escape our onrushing dollar-preference driven recession it will be necessary to ‘go off oil’ and break the link between dollars and fuel.

    Otherwise, currency exchange and simple arbitrage will push the dollar price of fuel to the incredible bargain price of $1 per barrel! Nobody will spend and there will be no oil.

    In this light, establishment proposals such as negative yields, bailins and demonetizing amplify dollar preference make matters worse by cutting the supply of forex which increases dollar demand.

    And that’s why bond yields are going up and doing so rather quickly.

  8. OutLookingIn
    Dec 15, 2016 at 12:24 am

    More of the same.

    This is a repeat of the last rate hike exactly one year ago.
    With almost the same immediate resultant market reaction.
    Energy down, gold down, dollar up, credit restrained and nervousness in stocks. To say nothing of the turmoil in bonds.
    The bond market as it affects the derivative sector has far reaching consequences, since almost all tranches of differing derivatives are interest rate sensitive.

    After the rate hike of 2015 the Fed made all kinds of noise about the number of hikes that were to come during 2016, which ended up with but one. Today’s. Now the same noise is being trotted out this year, about the number of hikes coming in 2017. Won’t happen.

    The election and new administration “HoneyMoon” will be done and dusted by the Spring, come April or May. Trump will have to have delivered what he promised or face quickly mounting opposition, which means the Fed will have to reverse course. That should be easy as Trump will have a new Fed “Head” who will follow his game plan. No matter how destructive that plan turns out to be.

    • Frederick
      Dec 15, 2016 at 2:00 am

      Outlookin gold rallied from a low of 1050 before the Dec 2015 rate hike all the way to 1360 so what you wrote about gold isnt true There may have been an initial drop but it was very short lived

      • Brett
        Dec 15, 2016 at 4:32 am

        I think he means the immediate reaction to the rate hike 12 months ago:

        ‘With almost the same immediate resultant market reaction.
        Energy down, gold down, dollar up, ‘

      • nhz
        Dec 15, 2016 at 4:49 am

        IMHO Out has a point … the market gradually realized that the FED wasn’t serious with their rate hike noise; all bark and no bite. And when this became clear gold sold off. It isn’t far above the 2015 low, probably as much as could be expected after two tiny rate hikes.

        We know the FED loves to juice the markets and wants a lot more more inflation (and thinks they can get away with it without causing hyperinflation that would endanger the banks). It is clear from many of their communications that they are determined to stay far behind the curve and will use all the BS they can think of to justify it.

        Even Euro gold price isn’t rising lately although the Euro has been plunging relative to the dollar (lowest value in over 12 years this morning). Rates should be FAR higher than they are now, but maybe it doesn’t happen because the whole world is now in the same boat, with all central banks printing into oblivion.

        • OutLookingIn
          Dec 15, 2016 at 11:03 am

          Yes, an upside down world.

          As of this AM –

          The DOW is nearing 20,000 on irrational exuberance.
          China has halted trading in their bond futures market for the first time ever, after the market crashed hard.
          The USD is surging higher.
          While crude slides below the 50 handle.
          Both gold and silver have been brutally smashed lower, as “someone” dumped $10 billion of notional gold futures onto the market floor.
          Interest rates are rising across the spectrum, as home builders optimistically engage in more, more, more!
          Advance labor market numbers are grim.
          The German 2 year bund has again fallen to a very low level as everyone searches for that elusive European collateral.

          Seems the “crack up boom” that Mises warned about may be near.

    • Stevew
      Dec 25, 2016 at 7:44 am

      @OutlookingIn, “Energy down, gold down, dollar up . . .”

      I think you have that backwards. The value of the dollar is rising CAUSING energy, gold and internationally traded commodities to fall in value, relative to the dollar.

      SteveW

      • d
        Dec 25, 2016 at 4:19 pm

        “I think you have that backwards. The value of the dollar is rising CAUSING energy, gold and internationally traded commodities to fall in value, relative to the dollar. ”

        If you wish to be technical about it then at least finish..

        “The VALUE of the US $ ls not rising, the DEMAND for it is.

        Three things are mainly causing this, lack of $ liquidity in certain nations, a demand for $ to meet $ borrowing commitments due in $, and more Importantly, a flight to $ safe haven in uncertain times.

        Remember US banks aren’t the only ones that create $ US, however foreign banks are demanding a larger premium to do this, as they do not have the $ US on hand, hence $ US buying price to the consumer, rises.

        p45 most defiantly = uncertain times.

  9. michael engel
    Dec 15, 2016 at 2:00 am

    Chinese banks ”want of USD” is rising.
    Their UST reserves are falling.
    China might choose a solution of, practically,
    a debt cancelation and confiscation of US assets
    in China, including intellectual properties.
    On the other side of the world, US Capex
    and Industrial Production will rise.
    Entitlements will be forced down.
    Not a very gentle way. Not easy life.
    Because of the rising interest, UST will be purchased
    @ a discount.
    The value of US debt will slide, despite higher
    debt payments.
    FED assets will be trimmed, too.
    That might be the reality in the not too far future.
    That might be the solution for
    too much debt all over the world.
    A vicious, difficult, way ahead of us.

    • d
      Dec 15, 2016 at 3:54 am

      “China might choose a solution of, practically,
      a debt cancelation and confiscation of US assets
      in China, including intellectual properties.”

      Followed by a global shut out of china by everybody except Russia and thechinese Proxy’s, Cambodia, Laos and various muslim states.

      • nhz
        Dec 15, 2016 at 1:21 pm

        I bet that when real tradewar trouble starts, much of the world will be a lot less docile to their US masters than they are now. Look what is happening in e.g. the Philippines, is takes just a few bold people to make a country shift direction.

        I don’t know if they publish these polls in the US, but in 90% of the world the US and Israel are seen as by far the biggest threat to world peace. If the US gets in severe trouble, many countries will throw a party instead of slavishly coming to their rescue.

        • d
          Dec 15, 2016 at 8:04 pm

          “Look what is happening in e.g. the Philippines, is takes just a few bold people to make a country shift direction.”

          YEAH LOOK

          The chinese brought the election for DU 30.

          DU 30 is murdering the drug dealers who do not work for his chines triad supporters who brought him for Beijing. Along with journalist and low level activist that oppose him and leaving them lying in the street.

          Any politician who opposes him is being silenced or charged with some trumped offense.

          He has successfully dragged the Philippines back to worse than the macros dictatorship in days.

          And yes people are staring to protest against him, and a just like in china the answer to the protest, is the army.

          Thank god Corazon Aquino isn’t alive to see this it would have mentally destroyed her.

          Thirty years of hard work and economic recovery thrown into the garbage in minutes (Effectivly) by a beijing owned death-squad operator.

          Bold in deed, bold chines puppet beasts.

  10. Anon
    Dec 15, 2016 at 9:01 am

    On a trip to my local Costco yesterday, I noticed that my favorite toothpaste’s price had gone up by 10% since my prior trip a couple of weeks earlier. But it still remains much cheaper than my local CVS price. It appears that we are entering a period of stagflation with little growth and more inflation.

    • nhz
      Dec 15, 2016 at 9:13 am

      just imagine how much worse it is in most of the developed world, where the surging US$ / plunging euro causes rapid inflation for everything that is imported or has imported material used in the production. Even most electronic gear is now constantly rising in price instead of a perfectly normal gradual decrease in price.

      My government just promised that all government workers and those on social security will get a 2.5% raise next year; for many government workers this is in addition to the 2.5-5% they already got for this year or next year. Of course, 2017 is an election year… All the while inflation is supposedly running near 0%, so if you believe the government BS, even people on social security will be way better off next year and government workers will see their real income increase by 5-7%.

      At the same time EU savers and those with private pensions get annihilated with plunging currency value, ZIRP/NIRP rates, wealth taxes etc. etc. There is no way to hide because any alternative for storing ones savings is now ridiculously overpriced (except maybe gold/silver).

      I also expect (more) stagflation, but it won’t show up in the numbers because government manipulation will go into overdrive and eliminate everything with price rises from the CPI calculation, or use other tricks to obscure the epic theft from savers that is happening. And for price rises that cannot be denied, they will blame the Russians or Mr. Putin personally…

      • Kent
        Dec 15, 2016 at 12:17 pm

        I’m really considering buying boat loads of euros with my dollars. I can’t imagine them going much lower and there seems to be a 50% upside. I just keep thinking that Italy and Spain may decide to bail and crash the whole thing.

        • nhz
          Dec 15, 2016 at 12:49 pm

          something is going to give real soon because the current trends are unsustainable; difficult to predict where the main faultlines will fall because the real market disappeared long ago, we are flying blind.

          It’s not impossible though that the euro will go much lower against the dollar, with the ECB hell-bent on trashing the currency so the speculators and debtors (the elite and the voting majority) reap the rewards. This in addition to the extremely stupid policies of the EC, like continuing sanctions against one of their important trading partners just because the US elite likes that. But most EU politicians will not even notice what is happening, it’s all good as long as Merkel and her tribe benefit – just like in the Weimar Republic.

    • Intosh
      Dec 15, 2016 at 9:55 am

      Similar anecdotes here. Downstairs in my office building, the prices of food from those food stands in the food court have gone up and/or quantity has decreased. I go down there to buy lunch every day so I have “a great seat” to notice and observe this phenomenon.

  11. Frederick
    Dec 15, 2016 at 9:05 am

    When the price of weed and oxycodone go up than you know we are really in deep doo doo

    • Kent
      Dec 15, 2016 at 12:18 pm

      God forbid!

  12. Arbuthnot
    Dec 15, 2016 at 9:20 am

    Much thoughtful analysis here but lets cut to the quick: “pay the Piper time” is probably just around the corner. It may be that simple.

  13. Greatful again
    Dec 15, 2016 at 9:32 am

    Growing Global instability in an already NIRP world. The USD is looking like a very good option. Capital is flowing to the mother ship. This looks to be a trend that’s gaining momentum…But , If you think this is a trend that’s about played out, short it.

    • nhz
      Dec 15, 2016 at 10:50 am

      the problem is that the little people have to guess when the trend stops; the big players like Goldman KNOW when the trend will reverse, because they orchestrate it (through FED, ECB etc.). You can never win when you play against the owners of the casino and stick to their rules of the game.

      • Greatful Again
        Dec 15, 2016 at 2:05 pm

        The Man, keeping us down

  14. Intosh
    Dec 15, 2016 at 9:45 am

    “My colleagues and I are recognizing the considerable progress the economy has made toward our dual objectives of maximum employment and price stability…”

    A load of bollocks since; it’s all about stock performance. Now that it had a really good run, they pull in the reins a bit.

  15. robert sills
    Dec 15, 2016 at 10:42 am

    rising nationalism feelings are forcing investors to consider the possibility of returning to old state borders. the rise in USD interest rates will smash foreign companies/countries. Pre-election, pricing assumed a continuation of the globalization movement.

    • nhz
      Dec 15, 2016 at 10:57 am

      the rise in US rates might as well smash US companies, if the US dollar keeps surging against all other currencies.

      And I doubt foreign companies like e.g. BMW and Mercedes are worried about rising US interest rates unless most of their debt is in dollars (probably not, borrowing in euro is even cheaper). Rising rates = stronger dollar = their products get cheaper for Americans every day …

      • Smingles
        Dec 15, 2016 at 12:21 pm

        “And I doubt foreign companies like e.g. BMW and Mercedes are worried about rising US interest rates unless most of their debt is in dollars”

        Maybe not BMW and Mercedes… but as of 3Q 2015, there was over $1.1 TN in USD denominated debt held in emerging markets.

        • nhz
          Dec 15, 2016 at 12:56 pm

          yes, there is going to be big trouble in EM countries, but most of these are not competitors to the US …

          Worst case some countries will blow up, some US banks will be in trouble and the taxpayer again has to bail out the banksters.

      • OutLookingIn
        Dec 15, 2016 at 12:21 pm

        “the US dollar keeps surging against all other currencies”.

        Case in point – The Euro has now fallen to 1.03 to the US dollar, back to 2003 levels. Parity or below is now a conclusion. This magnifies the financial pressure on the ECB as it faces increased turmoil on the fringes, from Greece (pensioners), Italy (banks), all the while struggling against the UK over Brexit and corresponding movements, within some of the remaining Euro members.

        • nhz
          Dec 15, 2016 at 12:54 pm

          why would it magnify pressure on the ECB? I bet they are popping champagne bottles today at ECB headquarters :-(

          And Greek pensioners or Dutch/ German savers? The ECB could not care less. As Draghi says: this isn’t a problem, because there are also people who benefit from our policy. The real Italian maffia were saints compared to this scum.

  16. Tom Kauser
    Dec 15, 2016 at 11:48 am

    The fed is now caught in the same trap that sprung the great recession?
    Everyone of the 17 quarter point raises in 2005-2008 was demanded by the markets?
    Even as housing was in free fall the fed was put under amazing pressure to continue its rate regime?
    It took the 17 rate hikes out in 6 months l
    The economy did not signal the Fed to raise,
    The pressure from the banks thru the markets did?

    • Frederick
      Dec 15, 2016 at 12:13 pm

      Can anybody answer this question How can Trump bring jobs back to the states with such a strong dollar Labor costs are already much higher than in say Asia or Mexico and this just makes it worse no?

      • Kent
        Dec 15, 2016 at 12:26 pm

        GE wants to sell refrigerators to Americans. The average sale price to wholesalers is $800. The cost to produce and ship from China is $300. In America it is $450. (All made up numbers).

        Trump puts a $200 tariff on imported refrigerators. GE’s profit drops from $500 to $350 per fridge. However, overall revenues increase as newly employed workers can now purchase new refrigerators and higher end ones. So GE’s pain isn’t quite so bad.

        Simple really.

        • nhz
          Dec 15, 2016 at 1:05 pm

          plus for many high value electronics products (probably not refrigerators though …) the real production cost nowadays is just a fraction of the consumer price. Most of the enduser price is marketing, profits for various parties and taxes.

          The longer term problem will be that whatever they do, the cost of robots is declining and sooner or later much of that human low/medium skill assembly work can only exist if it is subsidized. This in addition to the advantage of not having to negiotiate with unions. Given the speed at which robotization is proceeding, I suppose that for many factories bringing back production to the US would be a bad investment.

          Also, I don’t think the Chinese will sit idle when the US slams all their production with huge import tariffs. They might start selling to Europe and unless Europe adopts the same tariffs, this can soon get ugly.

        • Frederick
          Dec 15, 2016 at 1:07 pm

          That would REALLY piss off the Chinese right? Arent they holding alot of treasuries? WW3 anyone?I think it was Gerald Celente who said Currency wars, trade wars, World war Looks like he was right

        • Smingles
          Dec 15, 2016 at 1:15 pm

          “(All made up numbers).”

          Yes, clearly.

          Assuming you had this imaginary pool of trained workers in the US who were willing to work for $5.15/hour, which is the lowest minimum wage in the country (reality: you don’t), depending on what you’re manufacturing, conservative estimates would have you doubling your costs. So in your example, the cost to produce and ship from China is $300, and using our fairytale assumptions of trained, minimum wage workers ($5.15/hour!), the cost in the US is $600.

          So your profit in this case has gone from $500 to $200. And just how many high end GE refrigerators do you think minimum wage workers purchase? Let’s say you pay $10.30 / hour (which by the way amounts to only about $21,000 a year), you’re now losing money on every unit.

          “Simple really.”

          It’s only simple because it’s a totally made up example that bears no relevance in real life.

          If by bringing manufacturing back to the US, GE could increase their own profits, THEY WOULD HAVE ALREADY DONE SO. Unless you somehow think that you, Kent on wolfstreet.com, just solved corporate America’s profitability problem with one quick post…

        • nhz
          Dec 15, 2016 at 1:16 pm

          @Frederick:
          yes, China cannot challenge the US army except maybe on their own turf; but they know the US financial economy is vulnerable and if things get out of hand I don’t doubt they will take advantage of that. In addition to their Treasury wildcard, I bet they are keeping track of Chinese products and materials that the US needs for weapons and other critical stuff ;-)

          What happens to the US economy if someone kills the casino on Wall Street for more than a few days, or the GPS system or some main internet nodes? The US is probably the most vulnerable country when we get fullscale financial or cyber war.

      • Smingles
        Dec 15, 2016 at 12:31 pm

        He can’t. Not in any substantial, long-term way, at least.

        Even the much vaunted infrastructure spending would A) take a while to actually process into the economy, and B) consist of short-term jobs, not careers. And while it probably won’t apply meaningfully in the next 5 years, automation is eyeing the construction industry. Autonomous bulldozers directed by drones flying overhead are here, today.

        • nhz
          Dec 15, 2016 at 1:11 pm

          yes, I have been reading about large printers and more powerful drones (with lifting capabilities of e.g. 25-100 kg) that could do much of the construction in e.g. home building. Humans would still be required for some finishing jobs, but this could have huge consequences both for the workers and for price structure.

          In my country roughly half the cost of a new home is the price of the land (government ransom, another cost factor that IMHO cannot continue indefinitely) and for the rest of the cost about 3/4 is human labor and just 1/4 is materials, unless it is a very special home.

  17. DB Turton
    Dec 15, 2016 at 12:28 pm

    Simple arithmetic: $14,250,000,000.00 per year interest payments, an increase of $4,750,000,000.00 with the latest FED rate increase. Who the hell is going to pay for all this???? And with 3 more increases!!!!! And this is just the federal debt – what about states, municipalities, businesses, home owners, credit card holders? Even the vaunted Exxon and its CEO have to borrow $8,000,000,000.00 to pay dividends!!! Who is going to get burned????

    • Frederick
      Dec 15, 2016 at 2:43 pm

      Take a wild guess

  18. Iskabibble
    Dec 15, 2016 at 12:55 pm

    Did Janet raise the interest an excess reserves, as she did at the time of the last rate “hike”?

  19. Frederick
    Dec 15, 2016 at 2:29 pm

    nhz says that the Chinese cant challenge the US army He must be kidding right? Just imagine the trannies leading the assault on Nanking Ridiculous thought actually Dont even get me started with Russia and the moronic neocons Didnt they learn anything from history?

    • nhz
      Dec 15, 2016 at 3:17 pm

      note that I said “except maybe on their own turf” (depending on the kind of weapons/warfare that is at play, with a ground war I don’t think the US would have much chance indeed).

      For the next 5-10 years or so, the Chinese navy and airforce are no match for the US Army, especially far away from the Chinese borders. Even their nuclear missile capability is purely defensive and of no use for starting/winning a war. This will surely change as the US is suffering from imperial overstretch (and lots of other ‘cultural’ problems…) while China is aspiring to take back the place it had on the world stage for most of the last millennium or so; but not within the next few years but they don’t care, Chinese leaders have the long view.

  20. chris Hauser
    Dec 15, 2016 at 7:14 pm

    investors don’t want to lend at sub 2 for 10 years to the usg. what is so hard to understand?

    probably not at sub 3 very soon.

    on the other hand, who else you gonna lend to?

  21. PrototypeGirl1
    Dec 15, 2016 at 11:10 pm

    Another thing that foreigners have on Americans is that the families stick together to raise the kids, and they cook their own food. It saves a huge amount of money and stress. We need to do a lot more of that in America if we are going to be great again.

  22. Ishkabibble
    Dec 16, 2016 at 2:26 pm

    I guess Janet did indeed raise the IOER along with the “overnight” interest (fed funds) rate, as she did a year ago.

    https://www.federalreserve.gov/monetarypolicy/reqresbalances.htm

    Notice the following from the above:

    “The Board will continue to evaluate the appropriate settings of the interest rates on reserve balances in light of evolving market conditions and will make adjustments as needed.”

    In other words, the Fed fully intends to keep manipulating “the market”. The question is: for what purpose? The answer is to keep the “excess reserves” exactly where they are.

    I wonder if this will be the pattern for future overnight rises. It’s another experiment that won’t be allowed to fail.

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