If something happens seven times in a row, do you think that there is a pretty good chance that it will happen the eighth time too? Immediately prior to the last seven recessions, we have seen an inverted yield curve, and it looks like it is about to happen again for the very first time since the last financial crisis. For those of you that are not familiar with this terminology, when we are talking about a yield curve we are typically talking about the spread between two-year and ten-year U.S. Treasury bond yields. Normally, long-term rates are higher than short-term rates, but when investors get spooked about the economy this can reverse. Just before every single recession since 1960 the yield curve has “inverted”, and now we are getting dangerously close to it happening again for the first time in a decade.
On Thursday, the spread between two-year and ten-year Treasuries dropped to just 79 basis points. According to Business Insider, this is almost the tightest that the yield curve has been since 2007…
The spread between the yields on two-year and 10-year Treasurys fell to 79 basis points, or 0.79%, after Wednesday’s disappointing consumer-price and retail-sales data. The spread is currently within a few hundredths of a percentage point of being the tightest it has been since 2007.
Perhaps more notably, it is on a path to “inverting” — meaning it would cost more to borrow for the short term than the long term — for the first time since the months leading up to the financial crisis.
So why is an inverted yield curve such a big event? Here is how CNBC recently explained it…
An inverted yield curve, which has correctly predicted the last seven recessions going back to the late 1960’s, occurs when short-term interest rates yield more than longer-term rates. Why is an inverted yield curve so crucial in determining the direction of markets and the economy? Because when bank assets (longer-duration loans) generate less income than bank liabilities (short-term deposits), the incentive to make new loans dries up along with the money supply. And when asset bubbles are starved of that monetary fuel they burst. The severity of the recession depends on the intensity of the asset bubbles in existence prior to the inversion.
What is truly alarming is that the Federal Reserve can see what is happening to the yield curve, and they can see all of the other indications that the economy is slowing down, but they decided to raise rates anyway.
Raising rates in a slowing economy is a recipe for disaster, but the Fed has gone beyond that and has declared that it intends to start unwinding the 4.5 trillion dollars of assets that have accumulated on the Fed’s balance sheet.
Janet Yellen is trying to tell us that this will be a smooth process, but many analysts are far from convinced. For instance, just consider what Peter Boockvar recently told CNBC…
“They desperately want this to be an easy, smooth, paint-drying type of process, but there’s no chance,” said Peter Boockvar, chief market analyst at The Lindsey Group. “The whole purpose of quantitative easing was to inflame the markets higher. Why shouldn’t the reverse happen when we do quantitative tightening?”
I hope that there are no political motivations behind the Fed’s moves. During the Obama era, interest rates were pushed all the way to the floor and the financial system was flooded with new money by the Fed. But now the Fed is completely reversing the process now that Donald Trump is in office.
When the inevitable stock market crash comes, Trump will get most of the blame, but it will actually be the Federal Reserve’s fault. If the Fed had not injected trillions of dollars into the system, stocks would not have ever gotten this high. And now that they are reversing the process that created the bubble, a whole lot of innocent people out there are going to get really hurt as stock prices come crashing down.
And if you thought that the last recession was bad for average American families, wait until you see what happens this time around. As Kevin Muir has noted, it is utter madness for the Fed to hit the breaks in a rapidly slowing economy…
There are a million other little signs the US economy is rolling over, but that’s not important. What is important is the realization that until financial conditions back up, the Fed will not ease off the brake.
To top it all off, the Fed is not only braking, but they are also preparing the market for a balance sheet unwind. This is like QE in reverse.
It’s a perfect storm of negativity. An overly tight Fed that is determined to withdraw monetary stimulus even in the face of a declining economy.
Even if the Fed ultimately decides not to unwind their balance sheet very rapidly, rising rates will still significantly slow down economic activity.
Rising mortgage rates are going to hit the housing market hard, rising rates on auto loans are horrible news for an auto industry that is already having a horrendous year, and rising rates on credit cards will mean higher credit card payments for millions of American families.
And this comes at a time when indicator after indicator is already screaming that the next recession is dead ahead.
Today, an unelected, unaccountable central banking cartel has far more power over our economy than anyone else, and that includes President Trump and Congress. The more manipulating they do, the bigger our economic booms and busts become, and this next bust is going to be a doozy.
There have been 18 distinct recessions or depressions since the Federal Reserve was created in 1913, and if we finally want to get off of this economic roller coaster for good we need to abolish the Federal Reserve.
As many of you may have heard, I am very strongly leaning toward running for Congress here in Idaho, and one of the key things that is going to set me apart from any other candidate is that I am very passionate about shutting down the Federal Reserve. I recently detailed why it is imperative that we do this in an article entitled “The Federal Reserve Must Go”. Central banks are designed to create government debt spirals, and the size of the U.S. national debt has gotten more than 5000 times larger since the Fed was initially established.
If we ever want to do something about our national debt, and if we ever want to get our economy back on track on a permanent basis, we have got to do something about the Federal Reserve.
Anyone that would suggest otherwise is just wasting your time.
Has the Federal Reserve gone completely insane? On Wednesday, the Fed raised interest rates for the second time in three months, and it signaled that more rate hikes are coming in the months ahead. When the Federal Reserve lowers interest rates, it becomes less expensive to borrow money and that tends to stimulate more economic activity. But when the Federal Reserve raises rates , that makes it more expensive to borrow money and that tends to slow down economic activity. So why in the world is the Fed raising rates when the U.S. economy is already showing signs of slowing down dramatically? The following are 12 reasons why the Federal Reserve may have just made the biggest economic mistake since the last financial crisis…
#1 Just hours before the Fed announced this rate hike, the Federal Reserve Bank of Atlanta’s projection for U.S. GDP growth in the first quarter fell to just 0.9 percent. If that projection turns out to be accurate, this will be the weakest quarter of economic growth during which rates were hiked in 37 years.
#2 The flow of credit is more critical to our economy than ever before, and higher rates will mean higher interest payments on adjustable rate mortgages, auto loans and credit card debt. Needless to say, this is going to slow the economy down substantially…
The Federal Reserve decision Wednesday to lift its benchmark short-term interest rate by a quarter percentage point is likely to have a domino effect across the economy as it gradually pushes up rates for everything from mortgages and credit card rates to small business loans.
Consumers with credit card debt, adjustable-rate mortgages and home equity lines of credit are the most likely to be affected by a rate hike, says Greg McBride, chief analyst at Bankrate.com. He says it’s the cumulative effect that’s important, especially since the Fed already raised rates in December 2015 and December 2016.
#3 Speaking of auto loans, the number of people that are defaulting on them had already been rising even before this rate hike by the Fed…
The number of Americans who have stopped paying their car loans appears to be increasing — a development that has the potential to send ripple effects through the US economy.
Losses on subprime auto loans have spiked in the last few months, according to Steven Ricchiuto, Mizuho’s chief US economist. They jumped to 9.1% in January, up from 7.9% in January 2016.
“Recoveries on subprime auto loans also fell to just 34.8%, the worst performance in over seven years,” he said in a note.
#4 Higher rates will likely accelerate the ongoing “retail apocalypse“, and we just recently learned that department store sales are crashing “by the most on record“.
#5 We also recently learned that the number of “distressed retailers” in the United States is now at the highest level that we have seen since the last recession.
#6 We have just been through “the worst financial recovery in 65 years“, and now the Fed’s actions threaten to plunge us into a brand new crisis.
#7 U.S. consumers certainly aren’t thriving, and so an economic slowdown will hit many of them extremely hard. In fact, about half of all Americans could not even write a $500 check for an unexpected emergency expense if they had to do so right now.
#8 The bond market is already crashing. Most casual observers only watch stocks, but the truth is that a bond crash almost always comes before a stock market crash. Bonds have been falling like a rock since Donald Trump’s election victory, and we are not too far away from a full-blown crisis. If you follow my work on a regular basis you know this is a hot button issue for me, and if bonds continue to plummet I will be writing quite a bit about this in the weeks ahead.
#9 On top of everything else, we could soon be facing a new debt ceiling crisis. The suspension of the debt ceiling has ended, and Donald Trump could have a very hard time finding the votes that he needs to raise it. The following comes from Bloomberg…
In particular, the markets seem to be ignoring two vital numbers, which together could have profound consequences for global markets: 218 and $189 billion. In order to raise or suspend the debt ceiling (which will technically be reinstated on March 16), 218 votes are needed in the House of Representatives. The Treasury’s cash balance will need to last until this happens, or the U.S. will default.
The opening cash balance this month was $189 billion, and Treasury is burning an average of $2 billion per day – with the ability to issue new debt. Net redemptions of existing debt not held by the government are running north of $100 billion a month. Treasury Secretary Steven Mnuchin has acknowledged the coming deadline, encouraging Congress last week to raise the limit immediately.
If something is not done soon, the federal government could be out of cash around the beginning of the summer, and this could create a political crisis of unprecedented proportions.
#10 And even if the debt ceiling is raised, that does not mean that everything is okay. It is being reported that U.S. government revenues just experienced their largest decline since the last financial crisis.
#11 What do corporate insiders know that the rest of us do not? Stock purchases by corporate insiders are at the lowest level that we have seen in three decades…
It’s usually a good sign when the CEO of a major company is buying shares; s/he is an insider and knows what’s going on, so their confidence is a positive sign.
Well, according to public data filed with the Securities and Exchange Commission, insider buying is at its LOWEST level in THREE DECADES.
In other words, the people at the top of the corporate food chain who have privileged information about their businesses are NOT buying.
#12 A survey that was just released found that corporate executives are extremely concerned that Donald Trump’s policies could trigger a trade war…
As business leaders are nearly split over the effectiveness of Washington’s new leadership, they are in unison when it comes to fears over trade and immigration. Nearly all CFOs surveyed are concerned that the Trump administration’s policies could trigger a trade war between the United States and China.
A decline in global trade could deepen the economic downturns that are already going on all over the planet. For example, Brazil is already experiencing “its longest and deepest recession in recorded history“, and right next door people are literally starving in Venezuela.
After everything that you just read, would you say that the economy is “doing well”?
Of course not.
But after raising rates on Wednesday, that is precisely what Federal Reserve Chair Janet Yellen told the press…
“The simple message is — the economy is doing well.” Federal Reserve Chair Janet Yellen said at a news conference. “The unemployment rate has moved way down and many more people are feeling more optimistic about their labor prospects.”
However, after she was challenged with some hard economic data by a reporter, Yellen seemed to change her tune somewhat…
Well, look, our policy is not set in stone. It is data- dependent and we’re — we’re not locked into any particular policy path. Our — you know, as you said, the data have not notably strengthened. I — there’s noise always in the data from quarter to quarter. But we haven’t changed our view of the outlook. We think we’re on the same path, not — we haven’t boosted the outlook, projected faster growth. We think we’re moving along the same course we’ve been on, but it is one that involves gradual tightening in the labor market.
Just like in 2008, the Federal Reserve really doesn’t understand the economic environment. At that time, Federal Reserve Chair Ben Bernanke assured everyone that there was not going to be a recession, but when he made that statement a recession was actually already underway.
And as I have said before, I wouldn’t be surprised in the least if it is ultimately announced that GDP growth for the first quarter of 2017 was negative.
Whether it happens now or a bit later, the truth is that the U.S. economy is heading for a new recession, and the Federal Reserve has just given us a major shove in that direction.
Is the Fed really so clueless about the true state of the economy, or could it be possible that they are raising rates just to hurt Donald Trump?
I don’t know the answer to that question, but clearly something very strange is going on…
Most Americans do not understand this, but the truth is that the Federal Reserve has far more power over the U.S. economy than anyone else does, and that includes Donald Trump. Politicians tend to get the credit or the blame for how the economy is performing, but in reality it is an unelected, unaccountable panel of central bankers that is running the show, and until something is done about the Fed our long-term economic problems will never be fixed. For an extended analysis of this point, please see this article. In this piece, I am going to explain why the Federal Reserve is currently setting the stage for a recession, a new housing crisis and a stock market crash, and if those things happen unfortunately it will be Donald Trump that will primarily get the blame.
On Wednesday, the Federal Reserve is expected to hike interest rates, and there is even the possibility that they will call for an acceleration of future rate hikes…
Economists generally believe the central bank’s median estimate will continue to call for three quarter-point rate increases both this year and in 2018. But there’s some risk that gets pushed to four as inflation nears the Fed’s annual 2% target and business confidence keeps juicing markets in anticipation of President Trump’s plan to cut taxes and regulations.
During the Obama years, the Federal Reserve pushed interest rates all the way to the floor, and this artificially boosted the economy. In a recent article, Gail Tverberg explained how this works…
With falling interest rates, monthly payments can be lower, even if prices of homes and cars rise. Thus, more people can afford homes and cars, and factories are less expensive to build. The whole economy is boosted by increased “demand” (really increased affordability) for high-priced goods, thanks to the lower monthly payments.
Asset prices, such as home prices and farm prices, can rise because the reduced interest rate for debt makes them more affordable to more buyers. Assets that people already own tend to inflate, making them feel richer. In fact, owners of assets such as homes can borrow part of the increased equity, giving them more spendable income for other things. This is part of what happened leading up to the financial crash of 2008.
But the opposite is also true.
When interest rates rise, borrowing money becomes more expensive and economic activity slows down.
For the Federal Reserve to raise interest rates right now is absolutely insane. According to the Federal Reserve Bank of Atlanta’s most recent projection, GDP growth for the first quarter of 2017 is supposed to be an anemic 1.2 percent. Personally, it wouldn’t surprise me at all if we actually ended up with a negative number for the first quarter.
As Donald Trump has explained in detail, the U.S. economy is a complete mess right now, and we are teetering on the brink of a new recession.
So why in the world would the Fed raise rates unless they wanted to hurt Donald Trump?
Raising rates also threatens to bring on a new housing crisis. Interest rates were raised prior to the subprime mortgage meltdown in 2007 and 2008, and now we could see history repeat itself. When rates go higher, it becomes significantly more difficult for families to afford mortgage payments…
The rate on a 30-year fixed mortgage reached its all-time low in November 2012, at just 3.31%. As of this week, it was 4.21%, and by the end of 2018, it could go as high as 5.5%, forecasts Matthew Pointon, a property economist for Capital Economics.
He points out that for a homeowner with a $250,000 mortgage fixed at 3.8%, annual payments are $14,000. If that homeowner moved to a similarly-priced home but had a 5.5% rate, their annual payments would rise by $3,000 a year, to $17,000.
Of course stock investors do not like rising rates at all either. Stocks tend to rise in low rate environments such as we have had for the past several years, and they tend to fall in high rate environments.
And according to CNBC, a “coming stock market correction” could be just around the corner…
Investors are in for a rude awakening about a coming stock market correction — most just don’t know it yet. No one knows when the crash will come or what will cause it — and no one can. But what’s worse for most investors is they have no clue how much they stand to lose when it inevitably happens.
“If you look at the market historically, we have had, on average, a crash about every eight to 10 years, and essentially the average loss is about 42 percent,” said Kendrick Wakeman, CEO of financial technology and investment analytics firm FinMason.
If stocks start to fall, how low could they ultimately go?
One technical analyst that has a stunning record of predicting short-term stock market declines in recent years is saying that the Dow could potentially drop “by more than 6,000 points to 14,800”…
But if the technical stars collide, as one chartist predicts, the blue-chip gauge could soon plunge by more than 6,000 points to 14,800. That’s nearly 30% lower, based on Friday’s close.
Sandy Jadeja, chief market strategist at Master Trading Strategies, claims several predicted stock market crashes to his name — all of them called days, or even weeks, in advance. (He told CNBC viewers, for example, that the August 2015 “Flash Crash” was coming 18 days before it hit.) He’s also made prescient calls on gold and crude oil.
And he’s extremely concerned about what this year could bring for investors. “The timeline is rapidly approaching” for the next potential Dow meltdown, said Jadeja, who shares his techniques via workshops and seminars.
Most big stock market crashes tend to happen in the fall, and that is what I portray in my novel, but the truth is that they can literally happen at any time. If you have not seen my recent rant about how ridiculously overvalued stocks are at this moment in history, you can find it right here. Whether you want to call it a “crash”, a “correction”, or something else, the truth is that a major downturn is coming for stocks and the only question is when it will strike.
And when things start to get bad, most of the blame will be dumped on Trump, but it won’t primarily be his fault.
It was the Federal Reserve that created this massive financial bubble, and they will also be responsible for popping it. Hopefully we can get the American people to understand how these things really work so that accountability for what is coming can be placed where it belongs.
A new recession is coming, and Donald Trump needs it to begin sooner rather than later. As I explained last week, most American voters tend to care about their pocketbooks more than anything else. If the next recession were to officially start during the first quarter of 2017, it would be very easy for Trump to blame it on Obama, and then he could portray himself as the one that pulled the U.S. economy out of recession in time for the 2020 election. But if the next recession does not begin until 2018 or 2019, everybody is going to blame it on Trump even if it is not his fault. In politics, who gets the blame for whatever goes wrong is often the most important thing, and if Trump wants to avoid blame for the next recession he needs for it to start as quickly as possible.
For most of 2016, the mainstream media was warning that a new recession was probably coming no matter who won the election. For one example, just check out this Bloomberg article.
And for once, the mainstream media was precisely correct. Barack Obama left us with an enormous economic mess, and it would take an economic miracle of unprecedented proportions to keep the U.S. economy from going into a recession at this point.
During the Obama years, the U.S. went on a debt binge unlike anything we have ever seen before.
The U.S. national debt almost doubled. During Obama’s time in the White House, it increased from 10.6 trillion dollars to nearly 20 trillion dollars, and that means that over 9 trillion dollars of future consumption was brought into the present. That incredible boost to spending would have shot U.S. economic growth into the stratosphere during normal times, but because we were struggling so much all we got out of it was eight years of economic stagnation.
In fact, Barack Obama was the only president in modern American history never to have a single year when the U.S. economy grew by at least 3 percent, and he had two terms to try to accomplish that goal.
And remember, Obama also had the benefit of doctored economic numbers. John Williams of shadowstats.com tracks what the figures would look like if honest numbers were being used, and according to his calculations the U.S. economy has actually continually been in a recession since 2005.
In addition to government debt, other forms of debt are way out of control as well. The total amount of consumer debt in the United States has now hit 12 trillion dollars, and corporate debt has approximately doubled since the last recession.
When levels of debt grow much, much faster than the overall economy, it is inevitable that a crash will come.
If you look back throughout history, I don’t know if you can find a single example where debt has grown this quickly and a crash has not happened afterwards.
By some miracle if we are able to avoid a major economic downturn this time, we will literally be defying the laws of economics.
The employment crisis also threatens to get a lot worse in the months ahead. The mainstream media keeps trying to tell us that we are almost at “full employment”, but the truth is that more than 100 million Americans do not have a job right now.
Yes, there are a few areas of the country where jobs appear to be plentiful, but there are many more areas where they are not.
For example, you will never, ever be able to convince 23-year-old Tyler Moore that the job market is good…
Tyler Moore’s late-December drive to Louisville, Ky., was one of desperation. He was headed four hours west on Interstate 64 to interview for a job. Even if he landed the position, filling his gas tank had left him with $8 to his name. He would have to sleep at a friend’s place until he could earn enough to pay rent.
The 23-year-old had run out of options. He’d applied for dozens of jobs within an hour and a half of his hometown of Lovely, once a coal-mining stronghold. Instead of opportunities, he had found waiting lists.
“Minimum-wage jobs, fast-food restaurants, Wal-Mart, anything like that, a lot of them has already been took,” he says in an Appalachian drawl, explaining that the backlog just to interview was as long as a year. “There are no jobs.”
If the U.S. economy is in “good shape”, then why can’t people like Moore find a job?
Yes, there is a tremendous amount of optimism in the financial markets right now and the stock market has been soaring.
But the exact same things were true in 2007, and we remember how that turned out.
There is no possible way that the S&P 500 can continue to generate an 18% annual return without corresponding economic growth. The following comes from David Stockman…
Altogether the S&P 500 now stands at 3.4X its post-crisis low, having generated an 18% annual return (including dividends) for nearly eight years running.
To be sure, in an honest free market that very fact would be a flashing red light, warning that exceptionally high gains over an extended period necessitate a regression to the mean in the period ahead.
A lot of people get caught up in trying to predict exactly when the stock market will crash, but what everybody should be able to agree on is that it will crash.
There is no possible way that stocks can stay at such ridiculously overpriced levels indefinitely.
Throughout history, stocks have always moved back in the direction of the long-term averages, and this time will be no exception.
And just like last time, the beginning of a new recession will likely be accompanied by a major financial correction.
In recent articles, I have been highlighting some of the reasons why it appears that a new recession is imminent…
-Federal tax receipts have gone negative for the first time since the last recession.
-Job growth at S&P 500 companies has gone negative for the very first time since the last recession.
-The U.S. trade deficit in 2016 was the largest in four years.
-Lending standards have tightened up for medium and large sized firms for six quarters in a row.
-Lending standard are also tightening up for consumers.
-We just saw the largest percentage decline in average weekly hours since the recession of 2008.
-Gross private domestic investment is down.
-Consumer bankruptcies are rising.
-Commercial bankruptcies are rising.
All of this is not necessarily bad news for Trump.
A horrible recession started during the early years of Ronald Reagan’s presidency, but the U.S. economy turned around later in his first term and that momentum helped propel him to an easy victory in 1984.
Similarly, Trump could actually take advantage of the coming economic downturn as long as he is able to pin all of the blame for it on the previous administration.
If there is one thing that is true about U.S. voters, it is the fact that they tend to care about their own economic well-being more than anything else.
If you doubt this, just check out the results of a recent Fox News poll…
The latest Fox News Poll also asks, what defines the American Dream today? At the top, according to the national survey released Wednesday, is “retiring comfortably.” Some 88 percent feel that is extremely or very important to realizing the dream.
Next, 76 percent say “having a successful career” is important. That’s followed by “raising a family” (74 percent) and “making a valuable contribution” to their community (74 percent).
“Owning a home” is seen as a big part of achieving the dream for nearly 7 in 10 (69 percent). About 6 in 10 say “graduating college” (61 percent) and “being better off” than their parents (57 percent).
To most Americans, being “successful in life” comes down to how much money they have.
That should not be true, but it is.
And this is ultimately what Trump will be judged on.
If the economy is improving by 2020, voters will tend to evaluate him favorably. But if the economy is faltering during the next election season, it will be more difficult for him to get a second term.
So what Trump and all those that support Trump should want is for the coming recession to begin and end as quickly as possible.
However, there is also the possibility that the next recession may be a particularly bad one. Because we are in the midst of the biggest debt bubble in human history, any major downturn could ultimately spiral completely out of control. In other words, we may be facing the kind of crisis from which we never quite recover.
One expert that is warning about such a scenario is legendary investor Jim Rogers…
…get prepared because we’re going to have the worst economic problems we’ve had in your lifetime or my lifetime and when that happens a lot of people are going to disappear.
In 2008 Bear Stearns disappeared, Bear Stearns had been around over 90 years. Lehman Brothers disappeared. Lehman Brothers had been around over 150 years. A long, long time, a long glorious history they’ve been through wars, depression, civil war they’ve been through everything and yet they disappear.
So the next time around it’s going to be worse than anything we’ve seen and a lot of institutions, people, companies even countries, certainly governments and maybe even countries are going to disappear. I hope you get very worried.
when you start having bear markets as you I’m sure well know one bad thing happens and another bad thing happens and these things snowball just like in bull markets good news comes out then more good news comes out the next thing you know you’re five or six or seven years into a bull market.
Well bear markets do the same thing and so we have a lot of bad news on the horizon. I haven’t even gotten to war. I haven’t even gotten to trade war or anything like that but you know things do go wrong.
If it is as bad as Rogers is suggesting, it wouldn’t be too long before conditions in America would begin to resemble those portrayed in my novel.
Let’s hope that does not turn out to be the case.
Let’s hope that the next recession begins and ends as quickly as possible and that the U.S. economy is on a solid upswing by 2020.
And if you are a Trump supporter, don’t be too dismayed if the U.S. economy takes a major downturn in 2017. As I discussed above, it could actually be just the thing that Trump needs to set the stage for another election victory in 2020.
Since Donald Trump’s victory on election night we have seen the worst bond crash in 15 years. Global bond investors have seen trillions of dollars of wealth wiped out since November 8th, and analysts are warning of another tough week ahead. The general consensus in the investing community is that a Trump administration will mean much higher inflation, and as a result investors are already starting to demand higher interest rates. Unfortunately for all of us, history has shown that higher interest rates always cause an economic slowdown. And this makes perfect sense, because economic activity naturally slows down when it becomes more expensive to borrow money. The Obama administration had already set up the next president for a major recession anyway, but now this bond crash threatens to bring it on sooner rather than later.
For those that are not familiar with the bond market, when yields go up bond prices go down. And when bond prices go down, that is bad news for economic growth.
So we generally don’t want yields to go up.
Unfortunately, yields have been absolutely soaring over the past couple of weeks, and the yield on 10 year Treasury notes has now jumped “one full percentage point since July”…
The 10-year Treasury yield jumped to 2.36% in late trading on Friday, the highest since December 2015, up 66 basis point since the election, and up one full percentage point since July!
The 10-year yield is at a critical juncture. In terms of reality, the first thing that might happen is a rate increase by the Fed in December, after a year of flip-flopping. A slew of post-election pronouncements by Fed heads – including Yellen’s “relatively soon” – have pushed the odds of a rate hike to 98%.
As I noted the other day, so many things in our financial system are tied to yields on U.S. Treasury notes. Just look at what is happening to mortgages. As Wolf Richter has noted, the average rate on 30 year mortgages is shooting into the stratosphere…
The carnage in bonds has consequences. The average interest rate of the a conforming 30-year fixed mortgage as of Friday was quoted at 4.125% for top credit scores. That’s up about 0.5 percentage point from just before the election, according to Mortgage News Daily. It put the month “on a short list of 4 worst months in more than a decade.”
If mortgage rates continue to shoot higher, there will be another housing crash.
Rates on auto loans, credit cards and student loans will also be affected. Throughout our economic system it will become much more costly to borrow money, and that will inevitably slow the overall economy down.
Why bond investors are so on edge these days is because of statements such as this one from Steve Bannon…
In a nascent administration that seems, at best, random in its beliefs, Bannon can seem to be not just a focused voice, but almost a messianic one:
“Like [Andrew] Jackson’s populism, we’re going to build an entirely new political movement,” he says. “It’s everything related to jobs. The conservatives are going to go crazy. I’m the guy pushing a trillion-dollar infrastructure plan. With negative interest rates throughout the world, it’s the greatest opportunity to rebuild everything. Ship yards, iron works, get them all jacked up. We’re just going to throw it up against the wall and see if it sticks. It will be as exciting as the 1930s, greater than the Reagan revolution — conservatives, plus populists, in an economic nationalist movement.”
Steve Bannon is going to be one of the most influential voices in the new Trump administration, and he is absolutely determined to get this “trillion dollar infrastructure plan” through Congress.
And that is going to mean a lot more borrowing and a lot more spending for a government that is already on pace to add 2.4 trillion dollars to the national debt this fiscal year.
Sadly, all of this comes at a time when the U.S. economy is already starting to show significant signs of slowing down. It is being projected that we will see a sixth straight decline in year-over-year earnings for the S&P 500, and industrial production has now contracted for 14 months in a row.
The truth is that the economy has been barely treading water for quite some time now, and it isn’t going to take much to push us over the edge. The following comes from Lance Roberts…
With an economy running at below 2%, consumers already heavily indebted, wage growth weak for the bulk of American’s, there is not a lot of wiggle room for policy mistakes.
Combine weak economics with higher interest rates, which negatively impacts consumption, and a stronger dollar, which weighs on exports, and you have a real potential of a recession occurring sooner rather than later.
Yes, the stock market soared immediately following Trump’s election, but it wasn’t because economic conditions actually improved.
If you look at history, a stock market crash almost always follows a major bond crash. So if bond prices keep declining rapidly that is going to be a very ominous sign for stock traders.
And history has also shown us that no bull market can survive a major recession. If the economy suffers a major downturn early in the Trump administration, it is inevitable that stock prices will follow.
The waning days of the Obama administration have set us up perfectly for higher interest rates, a major recession and a giant stock market crash.
Of course any problems that occur after January 20th, 2017 will be blamed on Trump, but the truth is that Obama will be far more responsible for what happens than Trump will be.
Right now so many people have been lulled into a sense of complacency because Donald Trump won the election.
That is an enormous mistake.
A shaking has already begun in the financial world, and this shaking could easily become an avalanche.
Now is not a time to party. Rather, it is time to batten down the hatches and to prepare for very rough seas ahead.
All of the things that so many experts warned were coming may have been delayed slightly, but without a doubt they are still on the way.
So get prepared while you still can, because time is running out.