Surging Inflation No Problem, Junk Bond Yields Drop to Record Low, Dish out Negative “Real” Yields to Fed-Whacked Investors

The market is broken. “Raging mania” rules.

By Wolf Richter for WOLF STREET.

In these wondrous credit markets were everything is now completely out of whack, the first thing that happened, after the freak show of CPI inflation hitting 5.0%, was that junk-bond yields fell to new record lows. Even the average yield of B-rated junk bonds – considered “highly speculative,” per my cheat sheet of corporate bond credit ratings – dropped below the rate of CPI. When bond yields drop, bond prices rise, and a good time was had by all.

The average yield of CCC-and-below-rated bonds – ranging from “extremely speculative” to “default is imminent with little prospect for recovery” – dropped to a new record low of 6.83% as of the close yesterday, as investors apparently don’t mind exposing their capital to the massive credit risks offered up by CCC-and-below-rated junk bonds, for a “real yield” (adjusted for CPI inflation) of just 1.83%.

Those CCC-and-below-rated bonds are the only category in the US corporate bond spectrum whose average yield is above the rate of inflation.

Everything else has negative real yields, where the purchasing power of capital is being destroyed by inflation, while yields are too low to compensate for that loss of purchasing power. And there is nothing, zilch, nada in terms of compensation for the substantial risk of default and getting mostly wiped out during a debt restructuring.

The average yield of B-rated bonds – “highly speculative” – dropped to a record low of 4.46%, or to a negative real yield of -0.53%. And the average yield of BB-rated bonds – “non-investment grade speculative” – dropped to a record low of 3.27%, or a negative real yield of -1.73%.

Even if CPI inflation, after averaging maybe 5% this year, comes back down next year, as the Fed keeps promising, the purchasing power of the capital plowed into these bonds would be reduced by 5% for the year, and the yield from those bonds purchased at today’s prices would be below that, and the investor would be in the hole in real terms. And that doesn’t even consider the risks of default:

So, on average, these are very unappetizing substances, except perhaps for leveraged short-term speculators who bet on yields to drop even further, despite the surge in inflation, and who could then sell the bonds for more (when yields drop, bond prices rise) to the greater fool down the road.

But long-term investors – bond funds, pension funds, or insurance companies – buy bonds to hold them, usually to maturity. And those junk bonds at these yields today, given the credit risks of the companies that have issued them, are a shitty deal even if CPI inflation were at 2% for the remainder of their maturity.

But now inflation has been unleashed. The Fed is officially surprised by how fast it jumped, having totally underestimated this in their earlier pronouncements. And they’re still saying it’s just temporary, it’ll pass next year. And if it doesn’t pass next year, and if inflation doesn’t magically go back to 2%, then the Fed will act surprised again.

What is permanent is that the purchasing power of those bonds is getting chopped down by the current rate of inflation, and that purchasing power won’t ever bounce back. It’s just a question of how fast the purchasing power declines further next year, 5% or 3% or 2% or whatever.

The yield from interest payments is supposed to compensate investors for that loss of purchasing power, and also for the risk of default – where they could lose much or all of their capital. But investors aren’t getting compensated for hardly anything.

What it has come down to is this: In the Fed-engineered out-of-whack credit markets that are drowning in a sea of Fed-created cash that is now causing all kinds of issues in the banking system, the Fed is trying to control it with it via overnight reverse repos, while investors are trying to find a place to put this cash, and some accept zero yields or negative yields in the repo market, while others are vigorously chasing yield wherever they can find it regardless of the risks.

With so much excess cash floating around, what else are investors supposed to do with their cash – even as inflation is eating it up on a daily basis? That was a rhetorical question. Everyone is trying to find a place for it, but all assets are already overpriced, and yields are already repressed below the rate of inflation for most bonds, in markets that have aptly been described as “raging mania.”

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  104 comments for “Surging Inflation No Problem, Junk Bond Yields Drop to Record Low, Dish out Negative “Real” Yields to Fed-Whacked Investors

  1. rodolfo says:

    The WTFs keep comin

    • Phoenix_Ikki says:

      WTF is the new normal..better get used to it then fight it I guess.

      • historicus says:

        So the Fed is complicit, via their cheap money policy, in the employment predicament and the record job openings, unfilled. If the federal govt had to borrow at real rates, the doling out would not happen to this degree, or at all. Nice job Fed.
        And we have 5% inflation with zero Fed Funds rates. Never happened before, and all at the hand of the Fed who promotes inflation.
        And we have near record lows in long rates, immoderately low.
        So, lets review.

        Mandate #1 The Fed is supposed to promote maximum employment yet what they do with rates has had the OPPOSITE EFFECT. Fail.

        Mandate #2 The Fed is supposed to promote stable prices, yet they promote just the opposite, INFLATION. Fail

        Mandate #3 The Fed is supposed to promote moderate (not extreme) long term rates, but we have near record lows, 30yrs almost 2% below inflation. Those rates are IMMODERATE and EXTREMELY low. Fail.

        Arrest J Powell for breach of Fiduciary responsibility in his post as Fed Chairman, and let that be a warning shot to all the Fed governors.

        • wiley says:

          SoundsGood!Arrest them all,let Them eat bread and We the people confiscate all their stuff so They own nothing and are happy,or is it dead????Cash should be going into gold and silver,some real estate before Lloyds and Blackrock gobble it all up.Heard Blackheart just gobbled up a whole ,newly built singlefamily Neihhborhood in Texas.Zillow moved into homebuying.Berkshirehathaway signs quietly and quickly popped up all over n.w. Cook County,IL after 08 shakedown evicted thousands of families.More of the same on steroids.Do Not sell a home to them,they jack rents up %30 adding stress to already stressed people.They are also jacking home inflation in some markets.

        • David Hall says:

          They advertise jobs paying below market wages or salaries, then complain they can not find workers.

    • K says:

      This has got to indicate some toxin like lead is in our water supplies or food. Given the Enron like shenanigans in even prominent, US companies, I would not get even investment grade bonds today.

      • Thomas Roberts says:

        It’s not just America, it’s everywhere. Collective global delusion. I wouldn’t buy a bond anywhere in the world, at present.

        • roddy6667 says:

          You buy a bond when rates are high, so that you receive high interest dividends for the term. Right now they are at historic lows.
          Worst. Time. Evar.

      • Depth Charge says:

        Nope, just a corrupt, rotten-to-the-core FED and .gov.

    • Wisoot says:

      Not long now

  2. RobertM700 says:

    Working as planned. But one day the music (printing) will stop.

  3. raxadian says:

    So this is not a Bull market or a Dove market but a “Why are you even bothering?” market?

  4. Phoenix Rising says:

    Inflation is not going to pass, nor is it going back to that (BS hedonic quality adjusted) 2% level next year. It’s like freshly poured concrete that’s currently setting up in the psyche of the consumer. Once it cures, it’s going to take some pretty heavy-duty jackhammers to bust it apart.

    • historicus says:

      “….go back to 2%, then the Fed will act surprised again…”

      And what will be missed is the simple math…
      the 2% will be ADDED ON TOP OF the 5%….
      never gets mentioned…ever…

  5. ARTEM says:

    These rates going higher is very likely. The FED is supposed to start outright selling bond ETFs pretty soon.

  6. MonkeyBusiness says:

    Jeff Bezos does not like inflation. That’s why he’s going to space ;)

  7. Trinacria says:

    “Fed Whacked Investors”….what a great term and so appropriate!!! More than ever, “pay no attention” to that man behind the curtain! That’s why it had to be Toto the dog to expose the “almighty” Wizard of Oz…we people, well, we’re just to smart, in fact so much so, that we fool ourselves. So, the question is: who will be “Toto” to expose the “Almighty” Wizard of FED???
    Wolf: do you have any ideas?

    • historicus says:

      Trinacria…

      “Fed Whacked Investors”…..
      How did the Fed expand their powers to minting and taxation.?
      For to expand the M2 by 27%, on a whim from likely ONE UNELECTED UNACCOUNTABLE man is remarkable.
      And for the Fed, who is obliged to “stable prices” to promote ANY INFLATION is at the least a violation.
      5% inflation and 0% return on savings. That is a THEFT arrangement.

  8. Trucker guy says:

    Such a weird set of circumstances.

    You put money in a bank, inflation eats it.
    You put money in bonds, the yields are lower than inflation.
    You put money in cryptocurrency and you have lost half your gamble since Elon went on SNL.

    You basically can only put money into the vastly overvalued stock market or real estate market and hope it doesn’t crash.

    I don’t see how this ends. Either everyone just keeps funneling money into the only two places turning profits and defying inflation and the system ends up with housing and the stock market being non starters for the working class or it all busts and we have an economic disaster on our hands.

    Honestly, I can’t really blame the fed for lying about inflation. I think they want to believe their lie because this is a bad situation that they’re in, and a lot of it is their fault but not all of it. They can’t fix the system by raising rates and turning off the money spigot due to politics because it’s already too far gone at this point. Anything other than free money at this point will crash the house of cards if you ask me. We’ve seen how easy the market is to spook.

    • Resjudicata says:

      Agree. They are trapped. I expect more of the same. Just my opinion. Of course it’ll all unwind someday. But isn’t the USD the cleanest dirty shirt? I think they have more runway. And when they run out of runway they’ll come up with a new currency or some other trick and life will go on.

      • Rcohn says:

        The US budget deficit was ~ 18% for 2020 and is estimated to be about the same in 2021. The average budget deficit in 2020 for countries in the EU was 8.5%
        After the end of this year the US debt/ gdp will be around 140% , double the 2008 number and is exceeded only by Italy, Greece and Japan among major industrialized countries .
        In 2020 the US dollar was down over 5%
        The US easily leads the world in the amount of trade deficits at north of 650 billion.

        The US might have been considered the “cleanest shirt” in the past. That is no longer the case.It us now among the dirtiest of shirts
        The Feds policies has created massive distortions in ALL markets. It along with the Federal government has resulted in the second highest GINI coefficient( a measure of income inequality) in US history , exceeded only by a short period in the 1920s . We are dependent on the government for 34% of income. By any standards the middle class which has distinguished the US from other countries in the past is at the lowest level in decades.
        We have the highest % of low income and low wealth and the highest % of high income and high wealth groups in many decades.

        • Thomas Roberts says:

          Alot of countries fudge various numbers and metrics. The 2020 and 2021 budgets are ridiculous, but, don’t necessarily reflect future deficits. It also matters who owns the debt. In America, Americans and American corporations own the vast majority of debt.

          Right now, there is only 2 major economies, America and the EU (Japan and China are large economies, but not major economies). The question of who will reign supreme, comes down to many things. The question of how integrated the EU will be in the future, is the biggest factor, if the EU cannot become more integrated successfully, it will probably lose by default. Right now, the EU is at an unsustainable level of integration, it will have to become more or less integrated. There are many factors in play and alot could happen at any time.

    • Robert says:

      “I don’t see how this ends. ”

      Real estate and hard assets are likely not over-priced for the simple reason a great currency reset may very well be coming. Look to Modi in India who nullified much of the nations cash overnight.

      As the US dollar becomes worthless there will eventually come a time when a reset is necessary and a new currency is born, probably valued against gold. All your old dollars will marked be down to their new gold adjusted price.

      Or the US could just tax billionaires at a 90% tax rate like in the 1940s. I doubt though that our millionaire congress will allow such an event to take place. Much easier to destroy the currency since the rich are all flush with assets that don’t suffer from currency depreciation.

      • Rcohn says:

        A sure recommendation for chaos .
        Remember Americans own 450million guns and will use them if they perceive that they have little to lose. The Jan 6 situation in Wash. would be a nothing in comparison to what will happen with a currency reset.

        • bb says:

          Quite true.Also was going to suggest investing in guns and ammo as theyve become scarce or much more expensive.Chickens also would be useful.

    • Depth Charge says:

      “Honestly, I can’t really blame the fed for lying about inflation.”

      Give me a frickin’ break, man. The FED is destroying the poor and middle class and you’re making excuses for them?

    • I don’t have any good guesses as to how exactly this will happen, but I imagine that once the financial system resets, everyone will take a 99% haircut and the whole financial Ponzi game starts over from the beginning with 0% debt to GDP. We’ll just have to have a debt jubilee every 100-200 years until people get tired of it and make up a different economic system.

      All this means is that all prices go up by 100 times. So gasoline now costs $349 a gallon instead of $3.49 a gallon. If you have cash, you lose 99%. If you have a house, maybe the value goes from $300,000 to $5 million. So it goes down 84% in value in real terms, but up 1667% in nominal terms. If you have a $250,000 mortgage, you still have that mortgage, but it’s only 5% of the value of the property, so it’s almost paid off. If your net worth was $1 million, maybe it becomes $75,000 in today’s dollars. Maybe Jeff Bezos and Elon Musk will be worth only a few billion dollars in today’s dollars. But they’ll be one of the few with the purchasing power to snatch up things at bargain basement prices.

      If this happens, it must feel pretty stupid to have spent a lifetime toiling for your nest egg only to see it disappear. Actually, this happened to my grandfather who was a wealthy businessman in Japan. He sold most of his real estate prior to the war and bought government war bonds that would pay off big if Japan won the war. After 1945 he survived through subsistence farming.

      • Michael Gorback says:

        “All this means is that all prices go up by 100 times. So gasoline now costs $349 a gallon instead of $3.49 a gallon. If you have cash, you lose 99%. If you have a house, maybe the value goes from $300,000 to $5 million.”

        $5 million isn’t 100 times $300,000, nor is it a bargain basement price.

        “Maybe Jeff Bezos and Elon Musk will be worth only a few billion dollars in today’s dollars. But they’ll be one of the few with the purchasing power to snatch up things at bargain basement prices.”

        What bargain basement prices? That would imply deflation and strengthen the dollar. You said everything would go up in price 100x.

        How about stocks? Up or down? Because up means Bezos and Musk will be 100x richer. Their wealth isn’t in cash. Do you think they have savings accounts holding billions of dollars?

        The lesson that your grandfather taught is to stay diversified.

  9. JustTruth says:

    Lookout below, falling timber…..

    • Michael Gorback says:

      Yep, timber futures fell 5.6% last week due to increased supply and decreased demand. You want another WTF? WTF do you think happens when the price of a commodity soars? People smell opportunity.

      But then there’s this from one of the timber companies’ spokesman:

      “We’re at a new normal,” Reaves said in a phone interview. “We’re going to see this sustained level of housing demand and a new normal for a pricing floor in lumber.”

      I’m trying to decide whether he’s Lawrence Yun’s timber equivalent or the reincarnation of Irving Fisher.

  10. Philip says:

    ” what else are investors supposed to do with their cash….but all assets are already overpriced, and yields are already repressed below the rate of inflation”

    MPLX

  11. Supports my thesis that corporate bonds are bulletproof. Fed sold theirs and etfs are surging. Meanwhile the treasury YC is coming down a bit harder at the short end. That is probably also positive. Interesting that Qa and QE are almost the same thing, conspiracy theories with mainstream credence and support.

  12. ThePeanutGallery says:

    The only logical explanation to investor acceptance of zero or slightly negative yielding bonds is that they believe there is a crash coming soon??

    • Wolf Richter says:

      ThePeanutGallery,

      If you expect a crash of any kind, the last thing you’d buy at the top are junk bonds. They will take a huge beating (look at the yields during the financial crisis) because many of them will default.

      If you expect a crash, you wait (with your money in Treasury bills) until the crash has played out, and THEN you pick through the rubble and buy junk bonds when they yield 30% or 40% and hope that the companies survive.

      These low yields show that no one is expecting a crash (which is of course one of the required conditions for a crash; you don’t get a crash when everyone is expecting one).

      • Resjudicata says:

        Excellent comment. Revealing. It points out the duplicity.

      • Doubting Thomas says:

        Wolf,

        Thank you for yet another fantastic analysis. I am one of those who, sadly for society, expects a painful crash. I am heavy on cash. I stand ready to pick through the post-crash rubble for properly priced assets (“there are no bad assets, just bad prices”). I am sure that assets in all classes are overvalued. But I have no idea *when* the crash will occur. What chain of events might trigger the mass selloff that can reign in the current market mania across asset classes? I think many of the regular readers of this forum have exactly this question on their minds. If you have any insights on triggers and/or timing of a correction, I would love to hear them. Thanks again!

    • Augustus Frost says:

      No, if they believed this, they would get out. A real crash will result in most debtors defaulting.

      The best explanation for this behavior with pension funds, bond funds and insurance companies is that those directly making portfolio decisions aren’t putting their own money at risk. It’s someone else’s. Same goes to a substantial extent for all institutional money.

      This explains a lot of the behavior in this manic environment.

      As for the buyers of the bond funds and insurance products, I’d guess most of them don’t have a clue what they actually bought or own. Those that do presumably are relying on the FRB put.

      Or doing it due to TINA or FOMO (though not for bonds).

      • ivanislav says:

        Mike Green talks about flow of funds into passive index funds being an important feature of today’s markets, without historical precedent. According to him, something like 90% of new money going into the stock market is going through passive index vehicles, so with a diminishing share of active managers (50% of assets), you have an increasingly illiquid market that operates on simple flow-of-funds via automatic IRA contributions, pensions, etc. That is great on the upside, but not on the downside, and would explain some of the manic action in markets.

        • RightNYer says:

          I assume you say it’s bad on the downside because the “good” companies get dragged down with the bad?

        • ivanislav says:

          RightNYer – when I say “good on the upside / not on the downside”, I just mean for whoever is invested at that time. It’s not a social or economic critique on what a desirable outcome would be.

    • fajensen says:

      Maybe they just shorted the hell out of them, like some did in 2008, but it didn’t go as expected and now we have got a good short squeeze going?

  13. David Hall says:

    Core inflation is at its highest rate in nearly 30 years. People warned about the dangers of deflation. Have not seen it in awhile.

    Once they get this computer chip shortage solved, they might output more new vehicles.
    People working from home may not need two cars.

    More states will be ending extended unemployment benefits this month.

    Eviction moratoriums are also scheduled to end. A landlord put the tenants’ furniture by the curb and changed the locks. They were evicted.

    • Winston says:

      “Once they get this computer chip shortage solved”

      Due to pent up demand from the now known to have been pointless shutting the world down for a year combined with the HUGE lead time and COST for more integrated circuit production facilities (“foundries”) and a reluctance to greatly ramp up capacity due to that lead time and great cost only to have expensive excess capacity sitting idle after the crunch is over, the shortage is going to last a long time. One industry expert claims at least into 2022.

  14. Noelck says:

    It’s amazing junk bonds are trading at less than a 5% yield. Pension funds can’t buy them so who is buying all these? Is it Hedge Funds?

    How the bond market shrugs off inflation risk is unbelievable.

    This economy will be a case study in the future.

    • Bead says:

      Stocks are wildly overpriced. Gold doesn’t provide any income. Vaporcoin is gambling. So pension/insurance hold their noses and go in the Fed’s outhouse.

    • historicus says:

      The Fed is making water run uphill…
      by creating, now….$120 Billion A MONTH!
      The Fed is the biggest enemy of free market economics and forces.
      They print and print….
      They promote inflation when the understandings and mandates for their existence is to FIGHT INFLATION (Stable prices).
      They STEAL the value of past labors (savings) and steal the value of present earnings and wages.
      Where is the the outrage?

      • Phoenix Rising says:

        There’s no outrage because the majority of the population is financially illiterate. It’s difficult to be pissed about something that you don’t care enough to understand.

        • makruger says:

          You’re absolutely correct. It would take Fox news or OAN to break everything down into more digestible sound bites to get the masses riled up over it. I got to hand it to the right side of the political spectrum, they have messaging figured out.

          Anyway…more to the point, the masses are far more interested in baseball than the economy.

    • Rcohn says:

      AMC sold 800m in stock last week. It can use this money partly to buy back bonds. As long as companies can sell stock at silly prices , there is no need to finance via the bond markets. Those companies whose stock prices are selling at the silliest prices often are the same companies with the most junk bonds. At this rate there will no longer be junk bonds

  15. Swamp Creature says:

    This economic stew is turning my stomach. I thought the Carter administration’s economy was the worst in US history but now I feel this is worse. There is nowhere to run and nowhere to hide. Whatever you do you are a loser. So said Rich Edelman on his financial talk show to people who play it too safe. He advocated getting into the casino because there is no other choice to preserve capitol.

    I’m getting so fed up I’m going to protest by cleaning out my bank account and holding cash. Yes, green US dollar bills. I will only keep enough to cover monthly expenses. Why leave anything in there when they are giving you negative interest.

    • VV says:

      Thanks Wolf for your great coverage of what’s going on!

      SC,

      Read this and immediately thought if you. We’ve been here before.

      “Deustche Bank’s chief credit strategist Jim Reid correctly points out that “the data isn’t going to change anyone’s mind of whether inflation is transitory or not.”

      Still, as an aside for those who still care about fundamentals, he notes that the current gap between 10yr US yields (c.1.5%) and US CPI (5.0%) is a whopping 3.5%, the highest since 1980. In fact, the gap has only been more negative for 10 months in the last 70 years, all of which were in 1974, 1975 or 1980.”🤔

    • whatever says:

      Max out $10k a year at Treasury Direct ibonds yielding 3.5%, which are basically inflation adjusted. As a US bond no risk of default

      https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_ibuy.htm#what

      • Swamp Creature says:

        Sorry, this 10K is chump change. Its not protecting the rest of my nest egg from inflation.

      • makruger says:

        Since my total holdings outside of tax advantaged accounts are still rather meager, I’ve been considering these I-bonds. However, with official inflation figures moderately understated, I’d still be losing purchasing power.

        In this regard, stocks look more attractive. But we also know the equity markets are eventually going to reset and return to the mean. So, perhaps for the next year or two, I-Bonds might make sense. When the dust settles for the equity markets then naturally I would want to revert to stocks once again.

      • Ensign_Nemo says:

        If they are paying interest based on the CPI, then they are paying you below the real rate of inflation. The website states that they pay a fixed rate and an inflation-based rate, but that fixed rate is set at 0.00%. They are thus paying interest based on the government numbers for inflation, which are widely believed to be intentionally set low.

        They are paying 3.54% right now but the CPI just hit 5.0%, so it’s really paying interest based on the lagging CPI numbers from the last full half of a year.

        This is indeed better than nothing, and actually beats the interest on most bank accounts, but it’s still not a good long-term investment in a time of accelerating inflation. If you want to park $10k because you intend to buy something big such as a car or house in a year or longer, then it would be a sensible alternative to a checking or savings account. You can’t redeem the bond for a year, so it’s not suitable as an emergency fund.

        If somebody wanted to build up $10k a year for a down payment on a house, and they don’t intend to buy for a year from now, then this might be a good spot to park the money every year.

    • historicus says:

      “There is nowhere to run and nowhere to hide”
      Yep…
      and not a condition created by free market economics, but by decision making by people who have power, power based on assumptions of conduct as outlined in their mandates, who IGNORE THOSE MANDATES!
      “Stable Prices”? “Moderate long term rates?”
      The Fed promotes INFLATION which is a TAX…
      they are suppose to FIGHT INFLATION and they have no power to TAX.

  16. Mark says:

    Gold is not over-valued

    • Wolf Richter says:

      I understand. But the people that sold Gold today thought so or they wouldn’t have sold :-]

      • Mark says:

        Great Site Wolf, Thank you. In reply, I am not worried about daily moves or even short-term changes , just the preservation of my hard earned money.

      • Anthony says:

        Not much physical gold being sold only the paper stuff

        • Depth Charge says:

          Doesn’t matter. When you go to sell physical, the first thing they do is look at the paper price.

      • Michael Gorback says:

        Who “sold” gold today? Were there big lines at the local coin shops? Did people empty their safes?

        No, it was gold contracts and the vast majority of buyers will not stand for delivery. Theyll settle in cash. Comex is bullshit.

        The US Mint announced months ago that they would not be producing certain silver coins due to the fact that they couldn’t get enough physical silver. Why isn’t silver at $100 if the US Mint can’t find enough? That’s definitely a broken and manipulated market.

        • Michael Gorback says:

          BTW spreads between spot and physical have been increasing for quite a while. You can’t buy physical anywhere near the spot quote.

          Spreads tend to widen during times of uncertainty. In 2008 physical gold cost 25% more than spot. So if spot was $800, physical was $1,000.

          At the beginning of this month spot was about $1900 while a 1 oz gold coin went for about $2100. 10% premium.

          THAT IS ALL ABOUT TO CHANGE (maybe. I hope)

          Basel 3 is going to destroy the fake gold market. Before Basel 3 banks could hold reserves in either physical or paper form. Perversely, unallocated paper gold (contracts) could be valued at 100% for calculating reserves. Physical gold (allocated) was valued at 50% for reserves. Hey, we found another WTF!

          Basel 3 moves physical gold from Tier-3 to Tier-1, allowing it to be valued at 100% for reserves. Up until Basel 3 there was obviously a disincentive for banks to own physical.

          Paper gold going forward will be valued at 85% for assessing the banks assets, but the bank will need the equivalent value in reserves to offset those assets. Unallocated gold would no longer be considered reserves; it would be an asset requiring matching reserves.

          Starting to look unappealing? These rules go into effect at the end of the month. It will either kill or badly cripple paper gold. Then there will be little or no spread between physical and paper.

          There will also be no monthly slams of the price as expirations approach.

          ATTENTION FED HATERS: another reason to hate the Fed (and its fellow travelers the US government, BIS, and other central banks)

          The paper market enables these entities to manipulate the silver and gold prices through . . . . . wait for it . . . . fractional reserve trading.

          By selling large amounts of unallocated metal without having to deliver it in physical form the US government and the NY Fed can make it appear that there is a lot more metal than there is, thus suppressing prices.

          Precious metal prices are a reflection of perception of the stability of the economy. If PM prices rise, currency values will likely fall and interest rates go up. You might have seen discussions about how bonds went this way while gold went that way. That’s what’s behind it. There are some who say the Comex was formed in the 70s precisely to enable fractional reserve trades.

          It’s estimated that the ratio of paper gold to physical is about 100:1. That’s why I have said repeatedly that if only 5% of Comex traders stood for delivery it would destroy the Comex. There wouldn’t be enough physical gold for delivery.

          Paper gold is down but not beaten. There are very powerful forces with huge stakes here: The US government, the Fed, BIS, Comex, LBMA, and banks in general.

          There are a lot of pigs feeding at this trough. We have about 3 weeks til lift-off and I wouldn’t be surprised to see the implementation date moved back to allow more arm twisting or back room deals.

          Anything to deny us free markets.

    • w says:

      Neither is silver.

  17. Micheal Engel says:

    1) UST10Y = 1.5%. // German 10Y = (-)0.27%. // US inflation rate spike = 5%.
    2) If US real rates will be minus 1%-2%, in the next 10Y, on $30T
    debt, the gov will collect : 10Y x $30T x 0.02NR = $6T. For 1% = $3T.
    3) US pension & health promises are down, because 500K elderly perished
    during the pandemic.
    4) US gov can sustain an average deficit of 5% – 7%, for 10Y, to stabilize the economy, including few deficit spikes. It cannot be done under
    the gold standard.

  18. Jdog says:

    I am so old, that when I began paying into Social Security, a dollar was actually worth a dollar. Today Social Security is repaying me in dollars that are worth less than nickels.
    So think about that if you are a younger worker… If that trend continues by the time you retire your benefits will be worth about 1/4 of one cent per dollar….. But at least you can look forward to 1.5% increases as inflation goes up 8%…

    • historicus says:

      Premeditated THEFT by the Fed that exists with the understanding they will promote “stable prices’.
      We have been made love to right up the digestive canal.

      • Anthony A. says:

        You sure are drilling this FED is not doing their mandated job message into our heads!

        • SnotFroth says:

          I remember actually hearing Kashkari smirking over the radio in 2017 when he said “… and the Fed defines stable prices as two percent inflation”

          Well, that’s stable inflation, not stable prices.

  19. WES says:

    My take on all of this financial repression is that governments are slowly but surely closing all of the escape routes out of fiat currencies.

    An example of this is the new Badel III gold regulations. The net result of making it more expensive to operate in the gold market, whether paper or physical gold, is to reduce the number/and or size of market makers involved. This reduces the overall size of the gold market. This then reduces the number of market options available for investors to invest in gold.

    So if investors suddenly decide they want to buy gold with their fiat currency, the door maybe too narrow to squeeze through or even be closed during a crisis.

    While physical gold supposedly pays no interest, holding some over long periods of time, pays a higher rate of return than fiat currencies do. One can also sleep better for whatever little that is worth.

  20. Bruce Adlam says:

    The USA the leader and protector of the Democratic free world BULL SHIT .Your FED and congress are so corrupt and have been robbing you and the rest of the world blind You sleepy stupid Americans are allowing it to happen. A disgrace to your forbearers.The mistake they made the fed should have been elected by the people not appointed by government where is the independents. How bad does it have to get before you stupid Americans wake up to being lied to and screwed where is the protests at the Fed and congress what a big FAT DISGRACE not only to your country but to the rest of the world

    • drifterprof says:

      World keeps buying U.S. Treasuries and investing in U.S. for most stable safe yields.

      Which means the world are greedy insecure amoral enablers.

    • Zantetsu says:

      Given your rant I am going to assume that you would do no better. It’s easy to be an internet keyboard warrior. Perhaps you should be protesting outside your own government demanding that they take action. If your government is letting these stupid Americans “rob you blind” then maybe you should be complaining to them.

    • Depth Charge says:

      What country are you from, Bruce?

    • historicus says:

      The Fed should be held to their mandates…

      Mandate #1 The Fed is supposed to promote maximum employment yet what they do with rates has had the OPPOSITE EFFECT. Fail.

      Mandate #2 The Fed is supposed to promote stable prices, yet they promote just the opposite, INFLATION. Fail

      Mandate #3 The Fed is supposed to promote moderate (not extreme) long term rates, but we have near record lows, 30yrs almost 2% below inflation. Those rates are IMMODERATE and EXTREMELY low. Fail.

      Arrest J Powell for breach of Fiduciary responsibility in his post as Fed Chairman, and let that be a warning shot to all the Fed governors.

  21. Seneca’s Cliff says:

    Obviously you have to get in to meme stonks , AMC and GME to the moon.

  22. breamrod says:

    as long as there’s beer and ball games it’s all good! ( sarc) You know either the fed is buying everything forcing rates down or there is an incredible deflationary collapse coming out there somewhere and that’s being reflected in these low rates.

  23. LK says:

    Waiting for Wolf’s posts to bust past WTF and into Dogs-On-Fire “This Is Fine” messaging.

    Can the crash come so Wolf doesn’t get whiplash whenever he checks market data?

  24. historicus says:

    Jerome Powell…

    “Let them eat inflation” June, 2021

  25. DR DOOM says:

    Chasing yields is fine if you have no debts of any kind and all your living expenses for the next 10 years is salted away and you don’t need that money for even a whim.Inflation on $700 a month for food for two at home and at restaurants at 10% a year ain’t going to bother you and in fact the masses will revolt way before you collapse. The Fed, which is Congress’s bitch, cannot inflate its way out of its box without destroying the country. The Oligarch’s are not part of the country and they will be made whole,always are. Not you or me. There has never been a nation that has inflated or taxed itself to claim the sound money it de-based. It’s a bullshit wet dream that people repeat and never think about it. If you are chasing yields while carrying debt you may get screwed when this bizzaro economy flushes out , and it will. It is not different this time and you ain’t going to know when it will happen. Price of junk silver is $35 an ounce which is a 20% fear premium over the “market price” of silver at $28 an ounce. When you see fear premiums of 20% on a tangible there is no rational market. If you ain’t an oligarch you better start thinking like the peasant you are in the neo-feudal system that we have allowed to happen.

  26. Swamp Creature says:

    The music may have stopped playing for condos in the Swamp.

    Just did one today in a good location and it had sat on the market for almost 90 days. They had to drop the price 5K to make the deal. The sellers had already bought another townhouse and were trading up, so they owned 2 homes for 90 days or more. If this is indicative of a trend then look out below. This is what happened in 2005/2006 when time houses sat on the market increased dramatically.

  27. Micheal Engel says:

    1) CCC Labor Force Participation 16Y – 19Y old : at nadir since mid 2010 < 35%. It's not about $15 min wage.
    Solutions :
    2) Send them to protest in the streets, to BLM, or the gangs.
    3) Mommy will take care of them.
    4) Send them to colleges to pileup $2T student loans debt.
    5) A mandatory army service to get them some discipline, train and give them tech skills and pledge loyalty to the country.
    6) The Labor Force Participation was rising between 1965 and 1978,
    during the inflation period, peaking @60%.
    7) The baby boomers were either in colleges, or the army, in the labor force, or hippies in NYC streets.
    8) A hot summer of love is coming to Portland. De-fund the police will
    send a former black cop to Gracie mansion. Chicago might form paramilitary units to patrol the streets with the police.

    • Michael Gorback says:

      You can’t put them in the military. A lot of them don’t meet the physical requirements. As in too fat and and soft.

      • Micheal Engel says:

        1) Fat and soft. Skinny ironmen within three months.
        2) A change of character.
        3) The cause : 70% of them are unemployed
        4) The reasons : reasons don’t matter. Any reason can be a spark and ignite. The reasons are the symptoms. Treat the cause of the disease : 70% unemployment.
        5) Young people between 16 – 28 are sick, angry, jealous, with nothing to do all day, desperate young people with nothing to lose, nothing !

  28. Micheal Engel says:

    Comment moderation : Re instate the men of the house and fatherhood authority.

  29. Andy says:

    How it all ends:

    1. 20% inflation in the US for each of the next 5 years.

    2. US govt debt reduced to zero in 5 years – Happy times

    3. Fed doesn’t care – the Fed is private bankers who take a fee, whatever happens. Happy times

    3. Joe Blow (and all the Blows, nod to Michael Moore) see a 95% reduction in net worth. Not so happy times.

    Ho Hum, next please?

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