These manias and the rising long-term interest rates are on collision course.
By Wolf Richter. This is the transcript of my podcast last Sunday, THE WOLF STREET REPORT.
Everyone can see what’s going on: speculative manias everywhere. This includes the most worthless delisted stocks of companies that had no activity for years that suddenly surged several hundred percent in hours, driven by pump-and-dump schemes in the social media, before re-collapsing.
And it goes all the way via real estate, junk bonds, the most-shorted stocks, cryptos, and well, sneakers, to the newest thingy, so-called NFTs, or non-fungible tokens, that are now being hyped to high heaven.
But facing these manias are long-term US Treasury bonds and high-grade corporate bonds that have been getting crushed for months – as their yields have surged.
For example, the bond market ETF that tracks US Treasury bonds with maturities of 20 years or more with the ticker TLT – its shares are now down 20% since early August last year. When prices of bonds drop, by definition, their yields rise.
A 20% drop in share price of what is promoted as a conservative investment in US government bonds is a big step down.
The Fed has bolted down short-term interest rates pretty well. They’re near zero and haven’t budged.
But long-term interest rates have been rising for months. The 10-year Treasury yield on Friday rose to 1.63%, the highest in over a year. Since August, the 10-year yield has more than tripled.
And mortgage rates turned around in early January and started to follow the 10-year Treasury yield higher. The average 30-year fixed rate mortgage interest is now nearly 3.3%.
This is happening even as the Fed is still buying about $120 billion a month in Treasury securities and mortgage-backed securities as part of its QE, designed to push down long-term interest rates. And yet, they’re rising.
The Fed has been unanimous in accepting and even welcoming the rise in long-term interest rates as a sign of economic growth and rising expectations of inflation – as long as it remains “orderly,” and doesn’t veer into “disorderly” markets, as Jerome Powell emphasized.
And Secretary of the Treasury Janet Yellen has chimed in, also welcoming rising long-term bond yields as a sign of economic growth and rising inflation expectations.
The Fed sees these manias too. While it cannot admit to seeing them, and while it can never say that it would let the steam out of them, it is letting long-term yields rise because that is a form of tightening, and it will take some steam out of the manias. And letting long-term yields rise is a prelude to tapering its bond purchases, which is a prelude to raising its short-term interest rates.
So, there is the latest craze, the non-thing called “NFT” – the non-fungible token. Which means it is unique. It is unique like every dollar bill is unique because every dollar bill has a unique serial number. Every car is unique because it has a unique VIN number. Serial numbers have been around forever.
But now new hype has broken out about non-fungible tokens because these are essentially serial numbers combined with digital entities, such as a PDF file or a video clip, and instead of being in a database somewhere, the code is part of a blockchain, usually the Ethereum blockchain.
And how do you get everyone to talk about NFTs and spread the stuff all over the front pages of the big papers, and how do you get it to show up on TV news and on Google, Facebook, Twitter, various discussion bords, and what not?
You create a big hoopla deal that blows everyone’s socks off, and you do that systematically, and you get one of the biggest art auction houses in the world, Christie’s, to help you promote this non-thing, and voila.
It was masterfully done by some crypto hype mongers. And a crypto hype monger that goes by the handle of Metakovan, whose legal name Christie’s refused to disclose, bought a digital collage created by an artist who goes by Beeple – and the work of art is a PDF file combined with a fancy serial number, and the whole thing is an NFT.
Metakovan paid $69.3 million in ETH, the cryptocurrency on Ethereum, for the PDF file after a two-week online auction whose purpose was to drive up the price and create a sensation. And it worked.
NFTs can be anything digital. People have turned video clips on YouTube and Tweets into NFTs and sold them and traded them, and prices of these digital files have soared.
Obviously, since it’s digital, you can still endlessly copy the video clip, a tweet, or the $69-million PDF file, and you can download it, and share it a million times, for free.
You can copy a Picasso too, but it’s either a photograph of a real Picasso, or a painted fake of a real Picasso. And they’re physically different from the real Picasso. Alas, the digital copies of videos and PDF files are exactly the same as the original, and that $69-million PDF can be copied a million times.
I mean, it’s great to support living artists. The more the better. But a tweet that has been around for years? Or video clips that have been around for years? So now we have an inexplicable speculative mania in NFTs.
Then there’s bitcoin and the many thousands of other cryptos that have cropped up, whose prices soar to unimaginable highs on nothing but hype, with their combined valuations now approaching $2 trillion. This is serious money. Some of these positions are leveraged, in various ways, from buying cryptos on credit cards or with the proceeds from cash-out mortgage refis, to institutional borrowing against cryptos, such as by hedge funds.
And there are the SPACs. These Special Purpose Acquisition Companies are blank-check outfits that go public with no operations and no employees and no nothing, and people who buy these shares to fund the SPAC hope that the SPAC will acquire some startup over the next 18 months. Everyone is doing SPACs now and selling them to the public – star athletes, Hollywood celebrities, rappers, former politicians, including the former Speaker of the House….
It boils down to this: if you’re not doing your own SPAC, you’re no one.
Even the SEC, which has long been asleep, warned retail investors about SPACs.
The sponsors of these SPACs rely on retail investors to come along and buy this stuff at the appointed time. If the SPAC croaks after the hype dies down, and after retail investors get cleaned out, the sponsors are likely to have walked away with a bundle of money beforehand.
And there is the speculative mega-mania in the stock market, across the board. There are the most shorted stocks that suddenly skyrocket several hundred percent in just days, only to spiral down again, and then they jump again, powered by pump-and-dump schemes in the social media.
There’s Tesla, a small automaker with a market capitalization that is worth more than that of the biggest automakers in the world combined. The Tesla mania has been going on for years.
There are the other EV stocks, or anything related to EVs, often tiny companies with nearly no revenues, that suddenly and inexplicably skyrocket. The auto industry is a brutal industry with two decades of no growth in unit sales in the US and the rest of the developed world. Automakers have relied on price increases and China to get their revenues up. EVs are precisely in that space, and now all legacy automakers are making them. And yet there has been a mania in EV stocks. And it even pulled along the legacy automakers stocks
The entire stock market is ludicrously overvalued.
A lot of these manias are driven by deep-pocket speculators, such as hedge funds and crypto promoters and others, and they’re driven by millions of retail investors trying to make lottery-type returns, and they’re using the social media to spread the word and get enough folks to bet in the same direction, hoping to be able to get out in time.
Then there’s the current mania in real estate, where people buy houses sight-unseen by bidding over asking price, and home prices have skyrocketed across the nation, with double-digit year-over-year increases. In some areas, year-over-year gains clocked in at 20% or more.
And there’s the mania in junk bonds, the riskiest end of the bond market. Junk bond prices have skyrocketed, thereby pushing yields down to record lows. The peak was likely in mid-February, and prices have edged lower since then, and yields have come up, but are still very low.
These manias have a few things in common:
First, a huge amount of liquidity that the Fed and other central banks have created. This money is trying to go somewhere. Many trillions of dollars, euros, yen, etc.
Second, a huge amount of leverage. Draconian interest rate repression encouraged everyone to go whole-hog on borrowing, and it’s everywhere, from record skyrocketing stock market leverage to real estate leverage. Cash-out refis have hit the levels just before the mortgage bust that led to the Financial Crisis. Are people taking cash out of the house, and loading the house up with more debt, to buy NFTs or cryptos with that borrowed money?
I get the willies just thinking about the implications of that.
And then there is the stimulus money in various forms, including stimulus checks. Some people used them to pay for rent or food. Others went speculating with it, chasing after lottery-like returns, of 5,000% or something in three days. And they’re spending a lot of their time on the social media to dig up the latest hoopla deal.
While all these manias are going on, the US Treasury market and the top end of the corporate bond market have been getting crushed as long-term yields have surged, and highly leveraged bets on long-term Treasury securities have blown up.
The 10-year Treasury yield rose to 1.63%, the highest in over a year, more than triple the yield in early August.
The 30-year Treasury yield jumped to 2.4% at the close on Friday, the highest since November 2019.
The difference between the two-year Treasury yield and the 10-year Treasury yield widened to 150 basis points, one-and-a-half percentage points, the most since September 2015. This spread is a measure of the steepness of the yield curve. In other words, that end of the yield curve is now the steepest since September 2015.
The average 30-year fixed-rate mortgage interest rate is now nearly 3.3%, according to the Mortgage Bankers Association. They’re still ludicrously low, given the outlook on inflation, and given the Fed’s insistence that it will let inflation run over 2%.
So long-term interest rates are marching higher. And the Fed is letting them. It’s the Fed’s unspoken way of acknowledging the manias and of allowing some hot air to hiss out of them, before it begins tapering the bond purchases and raising short-term interest rates.
Is 2% the magic line for the 10-year yield? Is 3% the magic line? That 3% Treasury yield would mean 30-year mortgage rates in the range of around 5%, give or take a little. Is this housing mania ready for 5% mortgage rates, when they were 2.8% three months ago?
A 10-year Treasury yield of 3% would do a lot of damage. Last time it hit 3% was in October 2018, and it entailed a nasty sell-off in stocks and a sharp drop in home sales. And a year later, the repo market blew out.
Now there is the scenario of vigorous inflation getting baked into the economy and into inflation expectations by companies and consumers alike. Inflation of this type would power long-term yields higher. And if inflation hits 3% or 4% as measured by CPI, and if the Fed sticks to its promise at those levels that it would let inflation run hot for a while, then the thinking about long-term yields may have to change entirely.
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“A 20% drop in share price of what is promoted as a conservative investment in US government bonds is a big step down.”
The Federal Reserve has created an environment where nothing can be trusted. The policies are short-sighted and destabilize the economy. Corporations easily recognize this, and they refuse to invest in anything except mergers, layoffs, and stock repurchases.
The Fed is an immoral institution by all measures as it deliberately punishes savers to protect asset values of some rich fat cats through uncontrolled counterfeiting of currency.
The only mystery is why the plebs haven’t revolted yet to throw them in the dustbin of history where they rightfully belong.
A large chunk of the plebs don’t have savings or assets, so it wouldn’t matter to them until inflation outpaces wages.
Well, 20 years of ZIRP certainly made a lot *more* plebs have a lot *less* assets or savings.
Amazingly, if you transfer away 80% to 100% of interest from savers to the government (debtor who would otherwise being be *paying* interest in absence of Fed forgery ZIRP) then you end up progressively impoverishing more people.
Great job, DC.
But hey, it bought you another 20 yrs of ignoring fundamental problems.
Amen. As to the comment by Tom S., shadowstats alternative inflation charts show that real inflation already is outpacing any growth in wages and has done so for years.
That is why all of your food, etc., costs much more. See the Shadowstats comparison of official versus real inflation using the 1980s measure, which is just below 10% per year. Only US oil production and its vast resources have so far prevented hyperinflation.
I doubt that will continue for much longer if the banksters’ (not government owned) “Federal” Reserve continues its strategy of QE to infinity and beyond. The “Federal” Reserve has created so many dollars now that the only way to get rid of the liabilities is to inflate the dollar until the real value of the liabilities is miniscule, as will be the value of your social security payments and savings.
However, hyperinflation will get triggered when the economy actually recovers and demand surges, while the number of goods produced does not. Amusingly, the CCP’s subsidies of its factories, so that they have driven US factories out of business by selling goods at prices below what it would cost to make them in the US, has held back hyperinflation, so far.
You have addressed precisely the mirage of the last 25 years. A combination of the pursuit of normal economic principles by business and consumers alike coupled with the nefarious inside efforts of misguided globalists created the illusion of price and supply stability reflected in the apparent rate of currency devaluation.
“The only mystery is why the plebs haven’t revolted yet to throw them in the dustbin of history where they rightfully belong.”
It’s because people are stupid. Ask over 90% of the US politician to explain who/what the FED is and what it does and they will look at you with a blank stare. They have no clue.
*politician = POPULATION
Not sure what happened there.
Imagine the monopoly man as the fed chairman shooting up stimmy$ heroine in a table set up beside the vaccination tables.
Free stimmy$ heroine keeps people tranquilized, for now.
But the withdrawal is insidious, causing low workforce participation; it inflates welfare participation better than workforce.
It is a short term high that reduces the velocity of money, thereby, insuring an eventual crash once the stimmy$ heroin wears off.
All money is created out of thin air when banks issue loans. Banks charge interest for loaning something they never had to begin with. The privately-owned Fed does this on a relatively small scale. but the vast majority of money creation by banks is performed by commercial banks.
Re: Fed mistakes
A great read on ZH: The Bubble is Just Beginning by Dylan Grice. It’s dated the 19 th but is a ways in.
As far as linking the Fed’s obsession with CPI, while ignoring wild speculation, this one nails it.
Up to the 29 Great Crash, the 1999 Dot.com Nasdaq Crash, the 2008 Housing Crash (that almost took down the world’s banks ), the Fed was complacent in each case AND said why: the CPI was showing no signs of excess. The Fed Chairs respectively were: Strong, Greenspan, Bernanke.
The message for Powell could not be clearer: a benign CPI is a very poor predictor of looming disaster.
It does not respond to the lowest real interest rates in 500 years, even as speculation goes to extremes not seen in 500 years. (At least tulips were real)
My parents bought a home in 1969 for 20,000 and sold it in 1977 for 55,000. Speculative mania? Real estate bubble? Nope: 1970’s stagflation. The prices never crashed, despite tripling in under ten years. Today that house is worth 550,000 (zillow). This is what we are experiencing, and will continue to experience for the next decade.
NFTs seem like the latest scheme to launder money. Its so laughably stupid it can’t possibly be legitimate.
No buble on RE market.
Just suburb migration, low mortgage rates and asset inflation.
If mortgage rates are unsustainably low, and as a result home prices are unsustainably high… why would we not call that a bubble?
“No buble on RE market.”
How old are you, and how long have you studied real estate? Because this is one of the most delusional statements I’ve ever read. We are in the most massive real estate bubble in history. Nothing even remotely compares. You learned NOTHING from the last bust. This, ladies and gentlemen, is why we are where we are.
Exactly. To me, the surest sign of a bubble is when the average person in a particular geographic area can’t afford the average house being sold in that geographic area.
It means that people are buying them up as “investment” properties, which to most people, means to flip. That only works so long as you have a greater fool.
Home prices in the 1970’s went up 700%, and there was never a crash. Even high rates in the early 1980’s didn’t collapse the market. This is what we are starting to experience: 1970’s-style stagflation. Get used to it, because it could last a decade.
In New Zealand I have heard of Chinese investors buying entire auctions of 45 houses, over the phone, without looking at them. Real estate agents tell me these stories.
They then keep them empty. Thousands of houses are empty because of this. They just want the price to go up. Chinese love empty houses it seems.
I guarantee you “Metakovan” and “Beeple” are related, of not the same person.
Husband and wife team is my bet. Or maybe siblings. Money was passed from the right hand to the left hand. The hype machine did the rest.
.
What about GDP growth and employment to population?
The hope is these policies are causing those to grow.
.
The only thing pumping those numbers is the pumping of M2.
The Fed stopped using M2, as an inflation metric, three weeks ago. Also, thanks to the new 7% loan portfolio limits on Fannie Mae second homes and/or investment properties, mortgage rates are climbing dramatically through added points. Those buying second homes or investment properties, with a down payment of less than 25%, will be hit with five points at closing. In other words, it will cost an extra $15,000 for a $300,000 Fannie Mae mortgage. Points, of course, are prepaid interest.
Are the points paid at closing, or are they tacked onto the loan principal?
VA loans have a similar upfront funding fee of up to 3 1/2%. So the Vet instead of getting a benefit for his service to his country winds up paying a huge commission just for the act of taking out a huge loan with no money down, with the taxpayer picking up the tab if he defaults. Of course the lender after pocketing the 3 1/2% upfront fee then sells the loan to some other entity who then packages the loan into some CDO junk security which is unloaded to some sucker in the Netherlands. This is a classic example of how the system is rigged in a reverse Robinhood fashion.
Who checks after the closing if what is stated on the loan application purportedly for a ‘first home owner occupied’ when it fact it’s an investment property to flip?
You can see the employment-to-population graph in the “The Jobs Recovery, Compared to the “Good Times” Trend” Wolfstreet piece.
I wonder whether internal links are allowed? If so, it’s here: https://wolfstreet.com/2021/03/05/briefly-where-we-are-on-the-jobs-front-and-compared-to-the-good-times-trend/
Thank you.
Yesterday, Turkey hiked their one-week repo rate from 17% to 19% to reign in their 15% inflation and falling currency.
But but but….. they have their own currency so they can print their own money and the central bank can buy their bonds?!?!
That’s MMT for you, bitchez!
Ow, I had not seen your previous post yet Wolf! :)
All money in the western world is created out of thin air when private banks issue loans. Central Banks are not part of the government; they are all privately-owned by bankers. So when you say, “Turkey has their own currency,” you are blaming puppet governments for something exclusively-controlled by private banks.
Head fake. Like in all bankrupt countries.
Greece went to 20% then…0%.
Biden will continue to waste money by the billions in an accelerated manner.
So should the rates increase the US would default quickly.
We know what will happen: the Fed will buy with fake money and interest rates will go negative, just like Europe and Japan.
Very predictable. And guaranteed.
The other thing keeping a lid on long term rates is what are the rates in other developed stable countries? Most are lower than the USA.
When you look at the difference in the rates, add in some currency hedging, I don’t know if USA 10 yr can hit 3% when all the others are at 0%???
Regardless, real interest rates on govt debt after inflation will be negative for some time. They can’t afford to pay “market rate” so they manipulate it.
“They can’t afford to pay “market rate” so they manipulate it.”
Can’t afford to pay? When has that been a consideration (since 2009)?
The Fed can QE to create the money to service the debt…just like nearly everything else.
“They can’t afford to pay “market rate” so they manipulate it.”
If you think you can print $6T in one year and hand it out to subsidise your corporate sponsors and buy votes, you can also print enough money to pay a few percent yield.
I’m so happy that some areas of private money is starting to move to a gold standard again. With physical allocated gold and silver on the blockchain, we can choose to use gold again for our everyday expenses and savings.
I don’t understand why the crypto backed gold hasn’t really caught on. It seems it solves the biggest obstacle to using gold as currency and anyone or any 3rd world country could just start using it from their phone. Why are people so fixated on crypto not backed by anything when you can have the same thing backed by gold!?
The way I see it, crypto backed by nothing (like BTC) is really a momentum trade and nothing else. The reason they are a hype now is because they have seen massive price increases and no other reason.
But the thing is: these big price gains (or falls) are also only possible BECAUSE they are backed by nothing. Compare that with the Kinesis currencies KAU and KAG (which are really allocated gold – direct ownership – on a blockchain). They just follow the actual metal price exactly, because if these currencies fall below spot price that would be free money. A KAU or KAG owner then simply takes delivery of the bullion and if they rise above spot you buy bullion and convert them into KAU or KAG (which takes a fraction of a second).
So you are not going to make 10000% profit (or 99% loss) on that, but that is EXACTLY what makes it a viable currency and store of value (unlike BTC).
I do expect that soon they will get widespread use as everyday money, which is only just starting now. You can already spend your gold and silver with a Visa debit card in some countries (USA?) and this will get rolled out in Europe and the UK too this year.
Kinesis is also offering white-label solutions to anybody to integrate this in their app or banking solution. This is the most advanced in Indonesia now, where they are working with the biggest banks and post office. A giant travel organisation that organises pilgrimage to Mecca for millions of Indonesians has adopted KAU as the currency that people use to save for this once in a lifetime (for most) pilgrimage.
So yes, gold is an actual spendable currency once again! :)
In the end, it comes down to having to trust somebody/something.
1) With a fiat dollar, you have to trust that the G won’t behave like a self-serving sh*t at the expense of those who save.
2) With a crypto, you have to have trust that supply limiting algorithm is foolproof and
3) With a backed crypto, you have to trust in the ongoing existence of claimed backing…but how to be certain?
@cas127
“3) With a backed crypto, you have to trust in the ongoing existence of claimed backing…but how to be certain?”
Regular audits by a trusted independent party. This is what they do. They check that what is on the blockchain is actually present in the vaults. Report is public (and of course the blockchain can also be checked by everybody).
YuShan, I love reading what you post, but remember, Enron had independent auditors too.
I’m just gun-shy of stuff I have no control over and BTC is in the front running in that regard.
All,
In the days of gold backed fiat, the “reality check” on honest backing occurred as foreign nations would present aggregated expatriate USD back to DC, which was then obligated to hand over large shipments of gold to the presenting foreign government, thus,
1) proving the gold really existed and
2) shifting gold supplies internationally, allowing for controlled international shifts in domestic money supply, thus regulating foreign exchange rates and providing the FX price signals that kept import/export largely in balance.
In theory, individuals could also present their fiat IOUs and walk off with gold.
Broadly speaking, backed crypto could do the same, the trick is convincing everyone there is *enough* backing for *everyone’s* crypto at all points in time.
A third party audit is better than nothing but all it really does is shift the trust question to the third party.
I think there are near fixes (and I think I favor backed, ideally utilitarian use, crypto) but there is still a lot of work to be done.
That (and eventual fiat government counterattacks) are why I am not immediately a 100% BitCoin/NotDollar proponent immediately.
There is also (a little) to be said for a decent, honorable fiat government that can use fiat dilution to ameliorate huge asymmetries in purely laissez faire economies.
But fiat dilution is like opium and the US G has been living in the opium den too long and for too many bad reasons.
(It actually amazes me a bit that nobody in DC has ever made the connection between perpetual trade deficits with China and the lessons China learned from the Opium Wars, vis a vis international relations/economics. By foregoing some current consumption in order to subsidize exports, the Chinese have really helped addict America to consumption un-offset by equivalent US production. Of course, China did not initiate this trend, but they did conceive of how exorbitant privilege could be turned into hopeless addiction).
@Anthony A.
“Enron had independent auditors too.”
Yes I agree. There is never 100% safety in this world. This includes holding the metals yourself. Your house can burn down, burglars could steal it, etc. So it’s mainly a question WHICH risk you are going to take.
So who do you trust? It does give me some confidence that the people involved in Kinesis are allocated physical bullion guys, including Andrew Maguire, the whistle-blower who presented evidence to United States regulators alleging that fraud had been committed, and that prices in the international gold and silver markets had been manipulated.
Actually, the single biggest risk that I see personally comes from governments that could all kind of nasty things when they feel threatened by this new gold and silver backed money.
@cas127
Yes, the ability to take physical delivery is key in any honest gold/ silver backed system. And Kinesis provides this. You can take delivery for a fee of 0.45% + $100 (minimum 100g gold or 200oz silver) and of course some shipping cost on top of that. Users have tested this already.
I also agree with you that fiat currency isn’t all bad. In fact, I would argue that a fiat system is actually superior if done correctly and honestly. The problem however is that last part: done correctly and honestly. And there it seems we are really beyond repair now.
But IF done right, fiat is better because it can offer more stability. In a purely 100% gold backed backed system you will always have bigger price fluctuations and that uncertainty has an economic cost. Unfortunately the greater flexibility of fiat is now abused to run permanent deficits and keep debasing the currency (i.e. wealth transfers).
Fiat is not going away, but I hope that the emergence of alternative monetary systems such as BTC and gold-backed digital currency will (probably after some kind of crisis) force a return to more honest fiat money again. So I think these things will exist side by side.
However, once Kinesis brings their yield sharing online (they will share fees revenues among participants – planned to start phasing in Q2), holding gold and silver could actually have a higher yield than holding bonds! (certainly in Europe where bond yields are in deep negative territory). This is going to be a real game-changer and I can’t wait to see it happening.
See last article where Russia, Turkey and Brazil are raising rates or are on the verge to do so.
Russia just did today, against the “expectations” of 27 of the 28 analysts polled by Reuters. I added that update to the article :-]
Still way behind inflation in Braz
There are many strange sounds emitting from various Govt and Fed mouths that don’t add up. Yes, the market is getting twitchy but that is at the same time as over 700,000 new unemployment claims each week since Christmas. I find it hard to believe anything at the moment but then maybe everybody is lying. If they are, then who the “heck” can predict what is going to happen unless you are, maybe, Michael Burry….
HA! Yes, that would explain the SEC paying Michael Burry a visit and in turn limiting his free speech..
“When you tear out a man’s tongue, you are not proving him a liar, you’re only telling the world that you fear what he might say.”
― George R.R. Martin, A Clash of Kings
The dollar has been strengthening after the dollar index hit a trough in late December.
The panic to leave cities might end with an expanding vaccination program. Affordable multifamily housing might be a viable alternative as lumber prices are high and people speculated in buying single family vacant lots driving prices up. Multifamily housing had more people under the same roof and shared interior walls.
Maybe so, maybe no dh.
Mostly depends on how much political manipulation of the current and especially future pandemics occurs in future.
Unfortunately, if the current situation is any indication, WE the PEEDONs are likely to continue to be inundated with dis and mis information going forward.
Otherwise, if we are somehow able to rely on science based policies and practices, and somehow are able to educate the vast majority as opposed to the slight majority today who are cooperating with the instructions from the science based folks we may progress immensely.
IMHO, we will get to the point with the current virus and variations, likely after another wave or two, similar to the annual ”flu” and that will mean the return to the cities and MFH for all their clear advantages, especially the ability to walk to any and every thing needed or wanted in the cities.
Then, maybe we can reach some sort of rational basis for finance and the economy??? HAH, just joking of course.
This bubble will break the world.
We just went through a hellish global downturn, and it is not unusual for rates to climb as the world’s economies recover. Anyone with half a brain knew the bond market was radioactive and got out. The bottom in the bond market will be a process and a great opportunity. Things are in flux right now and I’m not buying anything, but as always I will let you know here when I do start putting cash to work. The Fed can keep printing and buying assets for decades, and they will, and as an investor you have to deal with it. As far as the latest speculative fads, they will play out and people will get burned, but crashing the market is unlikely. What is more concerning is the ongoing direct payments to consumers. This is eating away at the foundation of our society.
Rates have been near zero since 2009.
“What is more concerning is the ongoing direct payments to consumers. This is eating away at the foundation of our society.”
Agreed. Throwing a few crumbs to the plebs sets a perilous precedent and could destroy the work ethic of the nation and lead to the eventual downfall of society. We should stick to counterfeiting trillions, laundering it through the bond market and channeling that money into assets through negative real interest rates to make the rich richer. This should continue to provide the underpinnings and foundation for a truly just financial system that everyone can trust and believe in where hard, productive work is genuinely rewarded.
Sen. Grassley yesterday claimed that an annual salary of 400k USD is “middle income”. They need another trillion-dollar round of tax cuts.
Meanwhile his friend Lou Dobbs has claimed that poor people shouldn’t get any government funds ‘cos “99% of them own refrigerators”.
I guess if someone makes 400k and does not own a refrigerator, it makes them destitute.
As for me, I’m figuring out how to sell a pic of my unique Idaho license plate. It even has “Famous Potatoes” on it.
I have two refrigerators but do not make $400 K (retired on SS). I’m thinking of making a collage out of my toe nail clippings and turning it into an NFT, then auction it off for millions ($$$$$).
I have a plan, and a goal, I just now have to start the implementation. Wish me luck!
400k ain’t middle income…but it ain’t top hatted capitalist millionaire of yore either. 400k is the marked-down “millionaire” of the future, the new “rich” for whom the tax guillotine is “appropriate”.
And 400k isn’t 400k anymore, either.
The proposed taxes “only” hitting “people” at 400k refers only to married households.
For singles, the “rich” tax starts at $ 200k.
Bear in mind that $400k can be a professional couple, living in a high cost of living area, with consequently high child care expenses (with no deductions, due to the income caps) and getting no financial aid for college, and so forth.
I’m not asking you to cry for a couple making $400k, but it isn’t “rich” by any means.
I dunno. I think Lou Donna lost his marbles somewhere along the way.
Even someone making $400,000 income is actually working, or at least most are, right? Different than living off accumulated wealth, especially inherited.
I get what you’re saying. I’d like to see a chart with mean, mode and medium along with standard deviations. Both of income and wealth per individual and household.
I heard Ken Griffin, in addition to having numerous palatial homes, has about $3,000,000,000 (that’s with a ‘B’) of rare fine artworks stashed. And that’s after the divorce.
Somehow I think it’s all beyond the reach of Biden and Governor Pritzker’s income taxes.
Indeed, the bailouts during the GFC and housing bubble burst and endless QE were the beginning of our downfall. Stimulus checks, extended unemployment benefits, loan forgiveness and other direct payments will make things much, much worse. Taken together, it is truly leading to the end of this great country’s spectacular run. We can only hope that when the new digital federal currency is issued that it all stops.
Good points and there is undoubtedly huge waste and unfairness in the stimulus and direct payments but it pales in comparison to what is taking place with the Fed’s printing press and interest-rate repression policy.
“What is more concerning is the ongoing direct payments to consumers. This is eating away at the foundation of our society.”
Agreed, but the cancer in our society falls at the feet of the Fed, which funds Wall Street/Government bonfires, while devouring Middle Income families and entrepreneurs.
I see the last 3 years of the Weimar Republic ahead of us.
Oh boy, are you ready for the fascist death squads that come after?
:D
i wonder if, once the death squads become normalized, they will lighten up on the whole suppressing of free speech thing? yikes, i fear i am becoming an optimist.
It would also do mucho good.
“A 10-year Treasury yield of 3% would do a lot of damage.”
Give me 3% T Bills and Ill load up on them with my retirement nest egg.
What if CPI by then is rising at 5%? Will you still buy the 3% T-bills?
It’s a better return than my mattress is giving me.
?
Still better than if Fed chairman in his lair, stroking his cat, achieves his inflation goal of (who knows) 7%, 8%?
CPI equivalent (maybe 4%?)
In the end, 3% on savings beats 1%.
(Although I get your point, Wolf…a 3% T with inflation on its way to 8% ain’t no prize.
In addition to the Fed luring/prodding savers into the equity casino, they have forced everyone into becoming a hopped up bond trader just to maintain buying power.
Amazing that the Fed/DC let their other policy failures (trade deficit) destabilize the monetary system to this extent.
Monetary crack is a helluva drug.)
If inflation takes off, I’ll sell those 3% T Bills and buy the stuff that has a higher return. What else are us retirees going to do with our nest eggs? Gamble? Not in this crazy environment.
Anthony A.
Let me mention “I-series Bonds.” These are Treasuries you buy direct by opening an account at Treasurydirect.gov. Interest is a composite of a base rate that remains the same over the life of the bond (on the ones you can buy now = 0%) PLUS a variable rate that matches CPI.
I Bonds are inflation protected Treasuries for small investors. They don’t make coupon interest payments, but accumulate the interest and add them to the principal value. So the value of the bonds grows over time by about the increase in CPI over the same period.
But purchases are limited to $10,000 per year, per person/entity. So you could buy $10,000 a year, your wife could buy $10,000 a year, and Anthony’s Rocket Repair Inc. could buy $10,000 a year. If CPI hits 10%, the interest paid by all your I Bonds that you bought over the years rises with CPI.
I Bonds are designed to be accumulated over many years as part of your portfolio. So over a period of 20 years, a couple could put in $400K. But you cannot all of a sudden move $400K into I Bonds.
There are some other restrictions and details. You can take a closer look here:
https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds.htm#irate
We have Treasurydirect accounts where we hold all our Treasuries, including I Bonds. We continue to buy them at the maximum annual amount. They’re part of our diversification. It’s very easy to do.
Does Christie’s see they have signed their own death warrant?
“You create a big hoopla deal that blows everyone’s socks off, and you do that systematically, and you get one of the biggest art auction houses in the world, Christie’s, to help you promote this non-thing, and voila.”
The TLT has some support at 132 and 130
Break that and it’s a whoosh to 120
Higher rates are going to stick around
Your short will start to pay soon Wolf
Thanks for your analysis Wolf. There are a lot of smart well informed people on this blog, but I don’t consider myself in their league. I feel like I at least have an idea whats happening thanks to you.
I feel the same. Still have cash in the bank waiting for a particular piece of property to come available. And if not? Life goes on.
Leverage for NFTs? Really? Is there another race of humans just coming to light? For me the key word is ‘token’.
Definitions: …..a voucher that can be exchanged for goods or services, typically one given as a gift or offered as part of a promotional offer.
and: ……a thing serving as a visible or tangible representation of a fact, quality, feeling, etc.
Nah, I think I’ll wait for the property. Spent yesterday (rainy day) refurbishing my wee machine shop including the 60 year old Southbend lathe and the ‘just as ancient’ drill press. Today, dunging out the wood shop. No tokens, just stuff that works and produces for decades. Read this morning about projected food price increases. Rising interest rates for margin investors? Kaboom.
48 years ago a flight instructor asked me if I had never heard of the 5 Ps? Because if I had, I wouldn’t have bounced so damn hard trying to ‘stuff’ the landing. He then recited them and I have remembered them forever.
Poor
Planning
Precludes
Poor
Performance
This article is scary. Thanks Wolf for all the work you do.
Paulo:
Precedes, not precludes.
I stopped my flight training when I realized paying attention wasn’t my strong suit.
K
6 Pees
Prior Preperation Prevents Piss Poor Performans
Inflation has just started. We are in the second inning. Real estate has more room to run. Stocks should be very volatile but no major trend moves as long as the fed remains dovish.
You read like a real estate shill. Are you a REALTOR, perhaps? By the way, this is the biggest real estate bubble in history. You sound like a Pied Piper leading people off a cliff for a quick buck.
Eventually, it will be a big bubble. But, it is not a big bubble yet. In time.
A strong dollar is in the interests of our rulers. All other conditions causing ups and downs during this process is just tactical maneuvering to acquire more of those dollars. Nuff said.
I am frantically looking for Green Shoots in the economy, but I fail to see any aside from Stuck at Home beneficiaries via online retail and the associated supply chains to same. This dead cockroach global economy ain’t going to have a CHANCE of getting off the matt until the lock-downs and the pesky Bat Flu subside. And there is such a mountain of DEBT to service now, that future spending via discretionary income will be as tight as an oyster’s lips as we head toward Fall.
Mealy Mouthed Powell (MMP vs. MMT) deserves an Oscar for his last press conference, he merely INTIMATED everything that Wolf SAID above. Can he sleep at night, knowing he and his gaggle of Warlocks at the FED (-UP) are letting the markets, FOR ONCE IN 30 YEARS, set interest rates based on Inflation Expectations AND Credit Default Risk??? Wow. He must have gone to church last Sunday.
Now that the Crazies have started buying bytes and pixels on Wall Street, and using buckets’ full of borrowed Dollars to do so, THERE IS NO CLEARER SIGN THAT THE FAT LADY HAS SUNG. The financial market top is in! Was in for the bond market months ago. There are plenty of FAT MAN’S OUT THERE, but let’s not change everything historical and traditional in our society to be POLITICALLY CORRECT. I am erecting a bronze statue of Alfred E. Neuman in my backyard, he epitomizes America today.
The most dangerous financial markets in the history of the world. Take a bow, instigators. You manipulators will be hiding in the Hamptons when the Nuclear Bubble implodes, but the pitchfork crowd of Sheeple can read a map.
In a world where all assets are inflated, what does one do with his money? Damn if you invest, damn if you don’t. What would one do to at least not lose his shirt? Spread a bit of money everywhere (gold, silver, different types of stocks, crypto, food stock, cigarettes, beanie babies, tulip seeds)? Stay in cash? Seriously, how does one prepare for the downfall?
That’s the most frustrating thing. They have made all the wrong choices work the best for the time being so our choices are go with what we can see is a shaky house of cards and risk 50% maybe…or stay out and make nothing. I wish we would just reset and make some common sense adjustments so people could just forget about all this nonsense, it’s stressful and I just want to set it and forget it but at reasonable levels with reasonable expectations and interest bearing investments based on solid fundamentals. Impossible now.
I keep a certain percentage in gold (as a tail hedge) and have a rather risky bet on one company (but with possibly a massive payoff if things go my way).
However, the majority is in cash (or actually 0% yielding bank accounts at several banks). Yes I know, cash = trash. But don’t forget that cash has a certain option value. If history is any guide, there is some chance you’ll be able to buy the S&P500 with a 60-70% discount at the end of this cycle. Then suddenly cash won’t look like such a lousy investment anymore.
Is cash in a checking account safe or are short term CDs a safer place to park dry powder while waiting for the meltdown? In the rare case of a bank failure I mean.
Nothing is truly safe of course. However, I had money in three banks that went bust in 2008-2009 and got all my money back from all three through the deposit insurance.
It is sometimes said that government bonds are safest, but nobody has ever lost money (below the insurance limit) in a bank bust in the Euro area (that exists since 1999) while government debt HAS been defaulted on (Cyprus, and I think Greece too) in the sense that terms got adjusted (lower interest, longer maturities).
Bottom line is that real wealth, which is based on production, is falling. You cannot base an economy off of borrowing and spending… at least not very long. Historically, these debt bubbles always end in disaster. Return on debt decreases as debt balance increases.
We are in a false economy based on speculation instead of production. Speculation is nothing except a bet on the future based on irrational exuberance. It will blow up, and when it does, it is going to be apocalyptic.
Trillions of dollars will disappear overnight as it becomes obvious even to the most bullish that much of the outstanding debt will never be paid.
The laws of economics cannot be evaded in the long run.
My bank Wychovia went bust in 2009. They were taken over by Wells Fargo. I didn’t lose a dime. My funds were insured by the FDIC.
YuShan,
It’s odd that you mention Cyprus, because I think that was the one European example where a bank account WAS a liability.
If I remember correctly from my research, Cyprus did the controversial “bail-ins,” wherein bank accounts and bank CD holders over a certain amount (100K euros I think) got raided by the government.
The whole economy of the island was largely banking, so I guess they didn’t have anywhere else to steal from.
Missouri Jon,
Yes that is correct. Only deposits below €100,000 are guaranteed in the eurozone. That’s why you need to spread your money across several bank accounts at different banks.
It was initially announced that Cyprus would not honour this guarantee, but the ECB quickly rowed back on that because it would have caused a bankrun across the entire eurozone.
So in the end, the deposit insurance was honoured but gov bond holders got the shaft. And so did a bunch of people who kept deposits above the insurance limit, notably some Russian oligarchs.
To be clear: deposits above the limit were always fair game, even before the financial crisis. They actually raised the insured amount substantially during the crisis.
In the Netherlands (if I remember it correctly), before 2008 only €20,000 was fully insured, the next €20,000 incurred some risk (I think it was 10% or so at risk) and above that 100% was at risk (though you were in front of the bankruptcy queue, only after the taxman who always comes first ;) ).
Actually, this old system was better because it made people do some due diligence before putting money in a dodgy bank that offers higher interest rates than others. Now, you just deposit in the crappiest of banks when it has a 0.1% higher interest rate because it’s insured by government anyway.
The answer is just so different for everyone it seems. What is my haven is certainly not for everyone. And to me, gold is just a shiny metal. I liked YuShan’s reply, but then I would not be buying stocks at age 65 regardless of the fall. I would buy more property that produces a modest income. If rates rise property costs should fall, and if it is slow to fall at least there will be a return on savings.
The take away from the comments (for me) is that people are mindful of how dodgy this situation is. People have made a plan. Plus, readers are making up their own minds after some critical thought and evaluation. Interesting ride.
Hussman’s has some good thoughts and graphs on stocks. If you have 35 year drawdown period there have been times after a market crash that your drawdown rate on a portfolio is as high as 10%, now I think it is something around 3%. If you are retired your spending is one of the few things you can directly control.
Other idea he has is duration of stocks. SP500 with div yield of 1.4% gives a duration of about 70 years. If you are trying to get a blended duration of 17.5 years using cash only and no bonds that puts you at 25% stocks. Point he is trying to make is per cent of stocks you should hold depends on your time horizon AND the div yield of the index. It’s much different than when div yield was 4%. Some people going to get smoked.
I agree. I scooped some properties in 2010-2011 and sold few recently.
I have been heavily invested in BTC and stock, made a killing although I have no faith in any of them.
Personally, I see long term deflation coming unless govt is sending $5K to everyone and/or the wages go up bigly. I don’t see either of them happening.
It’s simple. Reduce risk. The only way to do that is to adjust your expectations of investment return.
The problem today is most people are expecting to earn a 10% return while taking minimum risk. It’s not possible.
Remember, wealth is relative. In the next crash, you just have to lose less wealth (as a percentage) than the average person to come out ahead.
“Remember, wealth is relative. In the next crash, you just have to lose less wealth (as a percentage) than the average person to come out ahead.”
so the poors finally win! they have nothing to lose.
The answer is not about the intricate investing techniques based on age/income/timeline/etc.. The answer to your question is how to overcome the fear of diving into anything that is inflated. It is a psychological problem. The way to do it, and the way even Warren Buffet does it, is “a little at a time.” Build your position slowly. Choose something reasonable, a Vanguard Balanced fund or even the S&P 500 Index. Open an account and add to it over time. Once a month, once a week, even every day. It may take a few years depending on how much cash you have to put to work. Take full advantage of the big pullbacks and buy a lot more then. You could also buy quality real estate. Even Gold, Just a little at a time. Putting it all to work all at once is foolish.
^^^ Good advice for the risk adverse, especially if your investment time horizon is very long.
and corporate High Yield bonds are no longer bulletproof..
Wolf,
Well the supplemental loan ratio is halted verbally, but we will see. Still rate upheaval will not be avoided. In 2018 I was ranting to myself for them to rise, and we finally got a house on a 50k drop in 2018. This is just ridiculous, never in my life would have expected all this money floating around. I’m sure the banks will have a say or plead their cause about it. The Fed is just reacting like they always have. Ranting rates higher, IMO.
The Fed is now doing large reverse repo operations to prevent the MMA rates going negative. Yields from 1-month to 1-year are zero due to the large reduction in the Treasury’s cash.
Les,
The Fed is not doing any repo operations. Zero.
What the Fed is doing is “reverse repo” operations – meaning, it borrows (drains) cash from the repo market in exchange for Treasury securities that it posts as collateral. So this is the opposite of repos. And yes, this might help keep repo rates above 0%.
But the amounts are relatively small ($18 billion today, overnight repo to unwind on Monday).
I remember working with repos in the early ’90s. Reverse repos are the other side of the repo transaction. Back then we sometimes called them resale agreements. It looks like the current market moves in treasuries are due to dealers rebalancing their books in anticipation of the cancelation of the emergency liquidity requirement relaxation. We’ll see if the move continues next week, and if so whether the Fed reacts to it.
LoL-once again, the commenter that flips the cash is trash on it’s head is the winner-
Bonds=certificates of confiscation by inflation.
So, here we are in 1968, guns and butter going full blast, and the value of the dollar is ultimately the question.
The real question is how hard will the Fed eventually have to contract this disaster to influence real interest rates on top of inflation to earn back the credibility squandered since 2001.
I dunno, but making money scarce is the opposite of what has happened, and that outcome will be terrifying.
One of the biggest problems is money does not tend to circulate long in the domestic economy, and instead flees into dead reserves outside the US.
So, paradoxically when we stimulate the domestic economy directly we get an outsized temporary boost, then our exorbitant privilege soaks up that “free money” and ships it outside our economy.
Hence the useless M2 and moribund M0, M1 etc.
All those dollars printed to circulate in Mexico, Africa, China, etc etc etc.
Now, as long as the Fed maintained the ability to drain the US economy, we have the ability to soak up those dollars and keep our own inflation low….
But how long will this continue? I dunno.
Not forever, because
Someday this war’s gonna end…
It is not the Fed which is holding down short term Treasury rates. It is the Eurodollar system, which can’t get enough of this top shelf collateral. As for long term rates, the rise actually presages an economic downturn and a collateral bottleneck.
The Ehrodollar system is in the $ quadrillions. Fed policies do not affect it AT ALL.
Wolf,
This article is a real thingy that is a work of art which you should promote on social media as a PDF and then have Christie’s auction off for you but please please please keep writing your articles even after retiring on the Christie’s auction galactic sales amount proceeds.
Smiles!
JWB
Why is everyone so pessimistic on here? You do know thats the feds can’t just stop this game they are playing. Pensions crash, layoffs, you name it. They are forced to do this now. So bet accordingly. Cash is indeed trash at this time. I also notice most here dont fully understand crypto. You all bash the planning or the cb’s and then call btc a bubble! Sounds like some of you are stuck in your old ways. Respectfully.
In order to pay for this 2 trillion boondogle the administration is looking to raise taxes on small businesses that are already struggling with the fallout from the pandemic. I heard one of the tax hikes being considered (labeled as eliminating a loophole) so as to make it more palatable is reversing a provision in the 2017 tax bill. In the bill they game small businesses and self employed and Subchapter S Corps a 20% write-off as a tax deduction on line 13 on the 1040 Fed tax form. I was able to take advantage of this deduction as well as a lot of other small businesses and sole proprietorships.. Well, no more if the administration gets its way.
This administration is out to destroy small mom & pop businesses while pretending to be the savier. The ones that haven’t been eliminated with illegal lockdowns, and fines will face gigantic tax increases. They remind me of a Company Commander in Vietnam who said he had to destroy the village in order to save.it.
“Then there’s bitcoin and the many thousands of other cryptos that have cropped up, whose prices soar to unimaginable highs on nothing but hype, with their combined valuations now approaching $2 trillion.”
“Then there’s bitcoin and the many thousands of other cryptos that have cropped up, whose prices soar to unimaginable highs on nothing but hype, with their combined valuations now approaching $2 trillion.”
The amount of US dollars in circulation (M0) is about 5.24 trillion dollars. What will happen to all the Feds glorious economic models if transactions begin to clear in crypto? How can you measure the velocity of money when the value is perceived as outside the dollar system? The concept of high powered money vanishes unless you start crypto based banking.
The fact that crypto is so volatile makes it a poor currency. You’d have to do forwards and swaps on every transaction as you would with international commerce. No one would know what they’re getting paid for sales even a few weeks out!!
I would guess the days of crypto are numbered based on the above simple observations. Of course the other alternative is that the Fed embraces crypto (but it probably won’t be bitcoin or etheruem) and creates an acceptable alternative.
Still, I think it’s much easier to kill off crypto than save it. (see India).
Agreed. But Yellen’s time is running out before it gets too embedded in financial systems. Possibly its money laundering and sanctions busting usage might spur her.
what would happen if the FED does not bring the rates up but inflation shoots up ?
FED can keep the rates low by buying all the treasuries..
That won’t work. Inflationary expectations will nullify all the Fed purchases and interest rates will go up anyway.
Just as likely rates will rise and inflation will not follow. Fed purchases are not affected, the interest remits to Treasury, and the loss of principle value on the IOU makes its way into the dollar. Money supply shrinks, credit tightens, rates rise some more?
More inflation. A lot more.
Sorry “heroin”
We live in a funny world.
Somebody working hard on a minimum wage gets paid less in 2021 (in real terms) than in the 1970’s.
Somebody sitting on his/her ass doing nothing is in some cases is better off than the person above
Somebody who mined BTC a few years ago, doing nothing, just running his PC, can now buy a Tesla with every BTC he/she mined
Total “Covid” (yeah right) “stimulus” in the US is $5T in 12 months and counting. That’s more than $15,000 for every man, woman and child, or $34,700 per taxpayer. How much did you get?
“I get the willies just thinking about the implications of that.”
Don’t worry Wolf
Just think, 3yrs down the road how you’ll feel when they all lodge their compensation claims for ‘miss-selling’ and maybe you as a taxpayer end up with the tab. They’ll all claim then your report never existed. Make it legal to scalp suckers that way they might be more careful in future. A fool and their money?
I believe the 30 year bond interest rate is the key metric to watch. I don’t think the Fed has much control over those rates. If these rates keep going up the Fed will not be able to buy all of them, and will lose credibility (Not that they have much now anyway) if they purchase a large portion of the existing bonds or new issues coming on the market just to keep rates down. So 30 year bond rates could keep going up, with a spillover to the 15 year and 10 year bond rates as investors seek safety in shorter maturities. That will kill the Mortgage financing market and the real estate bubble in short order.