Everything is Breaking Everywhere!
When everything is breaking everywhere, it’s hard to find a safe place to stand so late in the day.
Markets are finally starting to get it to such extant that Bank of New York Mellon just coined the term "Pantophobia" to describe the fear flooding the global marketplace.
Suddenly many voices — some of them the big ones — are agreeing with me that we are in for a world of hurt for the very reasons I have been focusing on throughout my publication of The Daily Doom. Today, JPMorgan’s chief said that the burgeoning US debt and “the largest peacetime fiscal deficits ever” present a huge problem for the US and the world in addition to the Ukraine war and Israel war.
“This may be the most dangerous time the world has seen in decades,” CEO Jamie Dimon said in a statement that accompanied the bank’s earnings news release…. [“The wars,” he said,] “may have far-reaching impacts on energy and food markets, global trade, and geopolitical relationships…” and “the largest peacetime fiscal deficits ever” … are raising the risks that inflation and interest rates remain high.
Along with the high rates, he mentioned the Federal Reserve’s efforts to reduce its bond holdings. The process, known as quantitative tightening, “reduces liquidity in the system at a time when market-making capabilities are increasingly limited by regulations,” he said.
Dimon recently has said that he has been warning clients about the possibility that interest rates may not only stay elevated but also could rise significantly from here.
Those are the financial risks I’ve been pounding on for a long time, but especially since the start of summer. It’s good to see some big names waking up to them. It’s also funny to see how some can still so completely miss the obvious. Take, for example, this article on Yahoo!:
Mysterious rise in US Treasury yields perturbs markets
The title, alone, should make one shake their head in disbelief. The ONLY thing that is mysterious about the rise in US Treasury yields is why on earth it took bond investors so long to figure out what they should have been pricing for all along. The sudden price rise of late is easily explained as “making up for lost time,” which is exactly the kind of action I kept saying we could anticipate once markets realized how deep in denial they have been about inflation, how long inflation will have to be fought, its return to rising this year, its natural affect on bond rates, and the affect of bond rates on everything else.
On Friday, the yield on the 10-year US Treasury note climbed to 4.88 percent for the first time since 2007, while the 30-year offering reached 5.05 percent, also a 16-year peak.
The most oft-cited justification for the rise has been expectations that monetary policy will stay hawkish in response to the resilient US economy.
"The Fed expectations have been shifting," said John Canavan, analyst at Oxford Economics.
"From the Fed's perspective, we're seeing stronger than expected economic growth, some increase in inflation and uncertainty, particularly as oil prices surge again."
None of that would be any surprise at all to serious readers of The Daily Doom. I’ve laid out, particularly in my “Deeper Dives” exactly how and why that whole scenario was certainly coming without a shred of expressed doubt all along the way, even when things at brief moments appeared to run the opposite way. Except I’ve noted the “resilient economy” is a mirage that will break up as soon as the damage from the Big Bond Bust is realized. I’ve tried to keep everyone’s attention on those forces as the key ones to keep your eye on in order to get an understanding of tomorrow’s news today.
"Something is happening in the bond market and nobody fully understands how you kind of break it down," said Adam Button of ForexLive.
To their shame if they don’t.
Karl Haeling of LBBW pointed to increased bond issuance by the US Treasury Department, saying markets are increasingly worried that the US "fiscal situation is moving on a long-term unsustainably bad trajectory."
No kidding! Those greater bond issuances as the Treasury makes up for lost time due to the debt ceiling while, at the same time, having to raise more funds in order to roll over all the old debt that the Fed is no longer willing to roll over for them, I’ve said are going to have a profound impact on bond yields this year and next, causing an implosion of the big bond bubble that has formed, which will be damaging in many ways that I’ve laid out, especially in “Deeper Dives” and my former “Patron Posts” back when I was publishing all of this on The Great Recession Blog.
For Yardeni Research, "the bond market has changed recently and disconcertingly," the consultancy said in a recent posting.
Bonds were, as I’ve said many times, late to the party, and would likely continue to be late to the party, not forecasting anything as the yield curve normally would because bond investors are literally behind the curve in terms of where economic, fiscal and financial realities all say they should be. So, just as the inversion of the yield curve inversion arrived late last year because the Fed had formerly held the curve in check with “yield curve control” by what it chose to buy in bonds, so it was late to predict that year’s “technical recession” after it had begun; so, the reversion of the yield curve, I’ve said, will be too late to predict the second dip into a deeper recession.
Bonds are now scrambling to make up for lost time, but the driving forces have changed in the reality around them now as the two wars the world is caught up in are creating a natural drive for financial safety, which is typically seen in US Treasuries. So, the latest war in particular is aiding the US in selling Treasuries; yet, even then, we have seen two horrid Treasury auctions recently. One can only venture to guess how much worse they would be without the global flight of capital toward US Treasuries.
Perplexing moves by US treasuries in response to economic news "suggest a shift in bond investors' focus from what monetary policymakers may do, to rising alarm about what fiscal policymakers are doing."
As well they should be. I will be pointing out even some more in this week’s “Deeper Dive” this continuing theme about the dangers now seriously imposed on us by the reckless past polices of the US Federal Reserve and the US government. And NO party gets off my hook for this desperate situation they have foisted on all of us. Always blaming the other party for the financial profligacy is exactly the ego-driven approach that got us here.
"The worry is that the escalating federal budget deficit will create more supply of bonds than demand can meet, requiring higher yields to clear the market," added Yardeni Research.
No kidding, and that particular note I’ve been pounding for a few years as something that would come with the Fed’s attempt to unwind its balance sheet, forcing the US to find other buyers than its longstanding buyer of first resort.
While some are starting to get it, others are as dull-minded as ever:
"We can blame higher long-run yields on many things, but deficits are not one of them," said Nick Colas of DataTrek Research.
You can blame them on many things AND blame them on our massive and rapidly expanding deficits, which are already contribution to credit downgrades for US debt.
Peter Boockvar, chief investment officer of Bleakley Financial Group, said that the US central bank may not be able to pull off "quantitative tightening," noting that the Fed reversed course in 2019 following turbulence in markets.
I started saying that over and over back in 2016, regarding the Fed’s attempt that would begin near the end of 2017, and that attempt failed miserably by the end of 2018, resulting in the “Repocalypse” in 2019, which I covered every week, saying the Fed would only be able to end it by reversing course, which they did.
After we returned to QE to end the Repocalypse, I started saying that the Fed’s next attempt to unwind the massively greater Everything Bubble it blew up in response to the Covidcrisis would require far more QT than the first attempt, starting from a more perilous height, so the Fed would clearly be even less able to pull this one off.
We saw the first impact from that this past March when banks began crashing for the reasons I said we could expect — bond values being devalued as interest rose, and since then interest has soared, making the problem even worse across a likely broader number of banks, who will all admit nothing they don’t have to (and maybe not anything they DO have to), lest they create their own bank runs. Other bond funds will show up suffering the same peril.
A "failure" by the Fed means "things cracking in the financial system well before the Fed's balance sheet shrinks by much and we're left with this perpetually large Fed presence in the markets."
Also bad because that presence is what makes the markets so delusional, of fact-free from true price discovery. And the question to ask at this point is how deep and broad and widespread are those cracks going to become, given we already saw the first cracks appear in March and have readily slipped into thinking we easily paved over them with a few banking tricks?
The US central bank might be forced to resume quantitative easing "just to help absorb the massive amount of Treasury supply coming down the DC pike," Boockvar said.
That is called directly financing the government debt by printing money — or “monetizing the debt” and is strictly illegal under the Fed’s charter because it is fully the stuff of banana republics. That is the nonsense nations like Zimbabwe do to save themselves from their own insane spending as they slide off the monetary cliff.
"Someone else has to buy the debt and there is a lot more of it now," Wilson said. "This can only result in lower prices, higher yields."
“Only” is the catch word the bond market should have EASILY figured out for itself several years back. All of this was readily predictable back then as obvious cause and effect. Hence, why I also repeatedly said “The Fed clearly has no end game here.” There would be no way out that didn’t result in soaring bond yields and, therefore, corresponding crashing bond values, hurting anyone holding bonds they have to sell to raise cash with all of that cascading into stocks and housing and everything else. Inflation would force the Fed to tighten even though it could not. I dedicated entire articles to explaining why it would critically hit bond funds and banks.
Last week, I reported another big talking head, who is repeated in today’s news:
"We're going to have a debt crisis in this country," Ray Dalio, head of the hedge fund Bridgewater Associates, warned in an interview on CNBC.
"How fast it transpires, I think, is going to be a function of that supply-demand issue."
Alas, the lunacy of the delirious optimist rages on:
"There's going to be an exceptional amount of global savings," Caravan said. "And that global savings glut is going to continue to look for a home in US treasuries, which remain the safest and most liquid asset on the planet."
Yes, and there will be a flock of pink unicorns flying over and pooping diamonds any day now to save us, too.
Still, what can you expect from him? He’s an Oxford economist.
But it’s not just a few now brining these words of doom. The Hill, liberal as it leans, wrote the following today:
Troubles are coming to the world economy — not as single spies, but as battalions. They are doing so on multiple fronts, in the United States, China and Europe. Coupled with renewed geopolitical strains in the Middle East, those troubles heighten the chances of a full-blown world economic and financial market crisis by the middle of next year.
I think they are being generous with the time frame.
And their reason? Again, the very one I warned people to particularly keep their eye on as the big trouble-causer during the Fed’s Great Rewind:
Among the greatest threats to the U.S. and world economic recoveries is the recent spike in U.S. Treasury bond yields, the key interest rate in the world economy. In the short space of two months, the 10-year Treasury bond yield spiked from less than 4 percent to over 4 ¾ percent — a 16-year high.
And for the very same reasons that I said the stock and bond markets were delusional in their level of denial:
It did so in response to Federal Reserve warnings that interest rates would stay high for longer to contain inflation, as well as to growing market fears about how the U.S. government will fund its budget deficit, at 8 percent of gross domestic product….
The sharp rise in interest rates has already sent the 30-year mortgage rate toward 8 percent and substantially increased the interest rate cost for automobile purchases. This must be expected soon to constitute a major headwind for both home and automobile sales at the very time when most households have run through their pandemic savings and the government faces another shutdown.
It is also likely to exacerbate problems in the commercial property space where property developers are already struggling with low occupancy rates in a post-COVID world.
All of those highlighted items are the watchpoints I’ve been keeping track of here as certain trouble-causers. It’s not bad enough that commercial real-estate is hard pressed these days to find renters, but …
The last thing that these developers needed was to have to pay higher interest rates on the more than $500 billion in commercial property loans that come due over the next few years.
And there is this spillover I’ve been warning about, now being recognized in the mainstream media:
Worse yet, the spike in Treasury bond yields must be expected to soon lead to a U.S. credit crunch. It is likely to do so by raising solvency questions in large swaths of the U.S. banking system in general and the regional banks in particular.
You’ve had the advantage of being warned that all of this was coming for many months as I’ve laid out the path brick by brick as it was developing, particularly in the headlines I carried in The Daily Doom, including:
It would never be a good time for the world economy to have China, the world’s second largest economy and until recently its main engine of economic growth, move to a decidedly lower economic growth path. It would be a particularly inopportune time for such an occurrence when the United States appears to be on the cusp of a meaningful economic recession. Yet that is what now seems to be occurring in the wake of the bursting of that country’s outsized housing and credit market bubble.
Then we have this developing, which I haven’t covered as much:
Similarly, now would seem to be an inopportune time for Europe to succumb to an economic recession and to experience another round of its sovereign debt crisis centered on Italy, a country with an economy some 10 times the size of that of Greece. Yet that now seems to be very much in prospect as the European Central Bank continues to raise interest rates to regain inflation control at a time of economic weakness, and when the Italian government has introduced an expansionary budget while its public debt level is very much higher than it was in 2012. The German economy has now already experienced three consecutive quarters of negative economic growth, as the spread between Italian and German bond yields is increasing at a troubling rate.
Inflation that has to be fought at a time of economic weakness. The term I’ve been using for that, which came from former US Treasurer Larry Summers after the inflation and recession of the 80s, is “stagflation.” I’ve used to term when predicting we would be entering a stagflationary recession — one where prices rise, even as recession settles in.
From there, however, The Hill goes back to dumb answers of, essentially, “We need to go back to doing more of the same thing that got us here in order to avoid the pain of this mess,” which was the rinse-and repeat cycle I wrote about in my little book, DOWNTIME: Why We Fail to Recover from Rinse and Repeat Recession Cycles. I started writing on economics when the Fed started down this debt-funded, stimulus path to get us out of the Great Recession, saying back then that it was a path that guaranteed we’d wind up right back in a worse recession with bigger bubbles.
Here we are. The Everything Bubble is imploding, and that’s why the big voices that people actually listening to are finally starting to worry out loud. This time, however, there is no path for the Fed to go back to because going back will make inflation much worse. Last time, the Fed couldn’t get inflation to rise to save its sorry life.
MarketWatch says the Bank of New York Mellon just created a name for the new market conditions that are forming as the Everything Bubble collapses. They are calling it: “Pantaphobia” — “the fear of everything.
"Markets have a fear of everything today -- call it pantophobia -- and yet that hasn't fully manifested into a panic."Bob Savage, head of markets strategy and insights, BNY Mellon
It hasn’t manifested into a panic yet because markets are still delusional, but the message is getting through enough that they are becoming fearful of everything, which is what they should be when the EVERYTHING Bubble is breaking. And its breaking was easily predictable along clear lines of cause and effect. That is important to clearly note because many will claim, "No one could have seen this coming,” and by selling that argument they open a path to try to do it all over again, rather than deal with the true darker facts that lie underneath all of this, particularly regarding the role so much debt plays in it since debt is the only cure they seem to know: roll it all up in a bigger ball and do it all again. That won’t work this time, though, because inflation will not allow it to work. If we do that, we go to Zimbabwe-style hyperinflation (which they’ll also tell you is nonsense that could never happen in the US, but it will IF they go back to money printing to fund the now impossible crumbing mountain of US debt as was — also predictably — just suggested).
Bob Savage, head of markets strategy and insights at the bank, said instead of panic, there was an "orderly unwinding of the optimism that drove most of the week" until Thursday's consumer prices, which put both peak rate and inflation views "back in doubt."
Yes, that was the return of inflation that I not only said we would be seeing this year, but said it would spark great fear when other people finally started to see for themselves that inflation actually was returning after all the Fed has done and as long as it has already taken. Time is the enemy here because one can weather high inflation and high interest for awhile, but over time it wears everyone down.
The problem, he says, is that service sector inflation is dominating the U.S. and in China where data also on Thursday showed flat overall inflation, but a 1.3% gain in service inflation.
Even the one metric I said would be the Fed’s failed gauge is now turning out to be that failing gauge that is not giving the Fed any clear stopping point for its tightening:
"There is little evidence that rate hikes have much effect on such unless unemployment shifts and that failed to show up in the U.S. jobless claims just as it isn't evident in most of the rest of the world from Korea to the EU where historic record low unemployment remains in play."
My statement for almost two years has been that, by the time those metrics turn, the Fed will have tightened us deep into recession because the gauges themselves are not working right … or not meaning what they used to mean.
The analyst said investors also remain confused about where they can find a haven investment "in a world with two wars threatening to escalate beyond their borders.
Just one more proof that this is the Everything Bubble collapsing. When everything collapses, there are no safe havens. At least none of the conventional ones because it’s all going down.
The following, too, I’ve said to watch, and both of them I’ve suggested might be more reasonable as safe havens than many other things:
Oil prices … climbed more than 3% on Friday, while gold … was at three-week highs as investors watched an intensifying nearly week-old war between Israel and Gaza.
Still, those are not without their risks when everything is crashing. Shipments of commodities you bought or funds you are invested in bought can be cut off or hijacked during war. Companies invested in them can get caught in the crossfire of a widening conflict. So, be careful. There are landmines everywhere. The land you hold close is probably safe, as is the gold and silver — probably, but there are always fires and floods for land and thieves for precious metals, so be cautious.
The weekend risk of further Israeli war escalation seems obvious as the driver of bond buying, gold buying and oil buying. The markets perhaps justly have been trained to fear the unknown most of all and that stands out as the driver of the day.
We’ve never seen an Everthing Bubble collapse so we really don’t know what it looks like. There are no historic comparisons that even remotely match the global scale of this one. That is why I’ve also warned that unknown black swans become far more likely when everything is breaking up — things no one expected that fly in out of nowhere, which can also cause far more damage than they normally would because they impact an economy that is already crumbling, sending it into dust. The black swans get created by all the things breaking unseen beneath the surface. They rise out of hell through the cracks in the earth that are opening up.
In all, Savage said it would be tough to return to the optimism fueled by Federal Reserve speakers and the Fed minutes earlier in the week.
So, the mood has become doomy and gloomy, but if you’ve been a reader of The Daily Doom, you’ve seen all this coming, so it is no sudden surprise for you. I wish I had more solutions to individuals to offer, and I will certainly be thinking about that; however, the ground is shifting everywhere right now, and this movement has barely begun and will get worse, making it harder to suggest safe ground. However, maybe you can use the comments below to share some of your own best ideas of how to prepare for it as a forum of people who have a better sense than most of what they need to look out for, or use the “notes” tab provided for The Daily Doom. At least, in this space, you’ve known exactly what is coming, which others are just beginning to see. That’s why I’ve started calling it “the news before it happens.” Half the battle is knowing what is going to hit you — having a reliable map that gives you the clear lay of the land ahead.
In the meantime, I’ll be writing more on this debt crisis in my “Deeper Dive” this weekend, where I have been tracking all of these forces in greater detail.
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