Monday, December 16, 2019

Bond Market’s “Inflation Expectations” Highest since 2014


by Wolf Richter, Wolf Street:

What’s going on is a sell-off in the Treasury market.

On Friday, the government bond market’s “inflation expectations” rose to the highest level since September 2014. Quite a feat, considering that six months ago, economists were clamoring for the Fed to slow down its already glacial pace of rate hikes – or abandon them altogether – because of “low inflation.”

The Treasury market’s “inflation expectations” show up in the premium that investors demand for buying regular 10-year Treasury Securities over 10-year Treasury Inflation Protected Securities (TIPS). TIPS compensate investors for the loss of purchasing power due to inflation. The principal of TIPS increases at the rate of the annual Consumer Price Index, which effectively protects the principal from inflation to the extent measured by CPI.

TIPS holders also receive a small yield, if any. The spread between the 10-year TIPS yield and the 10-year Treasury yield reflects the bond market’s expectation of where inflation is headed over the next ten years.

The 10-year Treasury yield ended Friday at 2.66%. It has been in this neighborhood all week, the highest yield since April 2014 when the bond market was coming out of its “Taper Tantrum” that it had entered into when Chairman Bernanke suggested the unthinkable, that the Fed might someday start tapering “QE Infinity.”

Bond prices fall when yields rise. So what has been going on is a sell-off in the Treasury market. This chart shows the 10-year yield. Note the closing low of 1.37% on July 5, 2016. On an intraday basis, the yield had dropped to 1.32%, an all-time low. Since then, the 10-year yield has about doubled. July 5, 2016, very likely marked the end of the 35-year bond bull market that had kicked off in October 1981.:

The spread between the 10-year Treasury yield (2.66%) and the 10-year TIPS yield (0.57%) widened on Friday to 2.09%, the highest since September 2014. This is what the Treasury market is now pricing in as its expectations for inflation over the next 10 years:

In the chart, note the inflation dynamics. The oil bust started in mid-2014, and the broader commodities bust was going on at the same time. This filtered into all kinds of prices – not just fuel. At the same time, transportation costs collapsed during the “transportation recession” of 2015 and 2016 not only for freight within the US but also for containerized freight across the oceans.  And there were other elements that pressured inflation lower.

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Flying Blind, Part 2: The Destruction Of Honest Price Discovery And Its Consequences


by David Stockman, David Stockman’s Contra Corner:

In Part 1 we noted that the real evil of Bubble Finance is not merely that it leads to bubble crashes, of which there is surely a doozy just around the bend; or that speculators get the painful deserts they fully deserve, which is coming big time, too; or even that the retail homegamers are always drawn into the slaughter at the very end, as is playing out in spades once again. Daily.

Given enough time, in fact, markets do bounce back because capitalism has a inherent urge to grow, thereby generating higher output, incomes, profits, wealth and stock indices. That means, in turn, investors eventually do recover from bubble crashes—notwithstanding the tendency of homegamers and professional speculators alike to sell at panic lows and jump back in after most of the profits have been made—or even at panic highs like the present.

Instead, the real economic iniquity of central bank driven Bubble Finance is that it destroys all the pricing signals that are essential to financial discipline on both ends of the Acela Corridor. And as quaint at it may sound, discipline is the sine qua non of long-term stability and sustainable gains in productivity, living standards and real wealth.

The pols of the Imperial City should be petrified, therefore, by the prospect of borrowing $1.2 trillion during the upcoming fiscal year (FY 2019) at a rate of 6.o% of GDP during month #111 through month #123 of the business expansion; and doing so at the very time the central bank is pivoting to an unprecedented spell of QT (quantitative tightening), involving the disgorgement of up to $2 trillion of its elephantine balance sheet back into the bond market.

Even as a matter of economics 101, the forthcoming $1.8 trillion of combined bond supply from the sales of the US Treasury ($1.2 trillion) and the QT-disgorgement of the Fed ($600 billion) is self-evidently enough to monkey-hammer the existing supply/demand balances, and thereby send yields soaring.

But that’s barely the half of it. All the laws of economics, which are now being insouciantly ignored by the stock market revilers, are also time and place bound. That is to say, deficit finance in a muscle-bound Welfare State/Warfare State democracy like the US is always a questionable idea.

After all, it is virtually guaranteed based on the budgetary doomsday forces now at work that by 2030 the public debt will approach $40 trillion compared to the $930 billion level where it stood when the Gipper took office in January 1981. In a half century, therefore, the GDP—swollen by inflation notwithstanding—will have grown by 8.5X versus a 43X eruption of the debt.

Even then, that’s the long-trend of the thing: The cyclical context is the far more preposterous part. The very idea of running a 6.0% of GDP deficit at the tail end of what would be the longest business expansion in recorded history is just plain insane. Yet as the Donald and his feuding band of Capitol Hill Republicans stumble from one bi-weekly CR (continuing resolution) fix to the next, they exude complete obliviousness to the fiscal time-bomb strapped to their chests.

Admittedly, the Dems are far worse. Even as they appropriately champion the cause of the Dreamers for the wrong reason (i.e. in pursuit of Democrat voters rather than the real economic need for additional workers and Tax Mules), their true agenda at the moment is stasis and parity. That is, no change (stasis) whatsoever in the $2.5 trillion entitlement monster, but a dollar for dollar increase (parity) in domestic appropriations to match the $80 billion per year defense increase demanded by the GOP hawks (which is most of the GOP).

Our point is that prior to the final betrayal of sound money incepting with Greenspan’s arrival at the Fed in 1987, politicians of both parties had a healthy fear of deficits because in the absence of massive monetization by the central banks, rising deficits tended to cause “crowding out” and soaring interest rates.

In effect, even the quasi-honest monetary policies of the 1953-1987 period generated counter-vailing constituencies for fiscal rectitude. Thus, when interest rates rose, the lobbies for small business, homebuilders, Savings and Loans, farmers and capital goods suppliers predictability brought their political heft to bear in behalf of fiscal restraint.

No more. The Fed’s massive and relentless suppression of yields has eliminated the counter-vailing constituencies for fiscal rectitude and, at length, vaporized the politicians’ fear of deficits.

And understandably so. The public debt is up by 220% from the pre-crisis peak (Q4 2007), while interest expense has risen by only 20%.  With the debt rising 10X faster than its service cost, why would anyone expect the politicians to do anything but kick-the-can?

And worst still, why would they not loose all historical memory that might otherwise warn of the extreme dangers posed by radically expanding the deficit at the tail end of the weakest business cycle in modern history?

Indeed, the Fed’s culpability for the nation’s imminent fiscal catastrophe is doubly evident when the full extent of the above chart’s false price signals is dissected.

To wit, not only has the Fed driven the weighted average cost of the Federal debt to under 1.7% and therefore into negative yield territory when inflation is factored in; it is also the case that its massive debt monetization has further minimized the true cost of the public debt owing to the so-called “profit remittance” to the Treasury.

That is, the Fed collects upwards of $125 billion from the yield on its $4.4 trillion of Treasury and GSE notes, but pays essentially nothing for its liabilities, which are printed from thin air. The Fed’s gross interest income less several billion of operating costs and $25 billion of IOER payments to the banks (an inducement to the banks to keep their excess reserves idle and not lend them out at lower than the Fed’s target funds rate) is therefore returned to the Treasury in a round robin of monetary hocus pocus.

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by Egon von Greyerz, Gold Switzerland:

2018 is starting right on cue. Inflationary pressures have been latent for quite some time but have recently shown the world what is to come in the next few years.

How could anyone believe the propaganda that there is no inflation. It has of course suited the market manipulators. But the fake wizardry of the central bankers is now about to be revealed. Since the early 1980s the interest rate cycle were in a strong down trend. When the financial crisis started in 2007, central banks panicked and rates were rapidly lowered around the globe.

US short term rates went from 5% in 2007 to zero in 2008 and stayed at that level until late 2015. In many countries rates were lowered to negative like in Japan, the Euro area, Switzerland, Sweden etc. Low or negative interest rates defy all economic principles and distort the equilibrium of a normal market economy. They discourage savings and without savings there can be no sound investments. Instead, investments have been made with printed or borrowed money. Due to the low cost of money many high risk projects have been undertaken.

Low or negative interest rates also lead to irresponsible deficit spending by governments. This is why global debt has gone from $120 trillion in 2006 to $240 trillion today.

Explosion in money supply will lead to inflation explosion

Normally this explosion of money would have created very high inflation or hyperinflation. But since virtually none of the fabricated money went to the normal economy, published inflation has been non-existent. Anyone buying food, or paying bills of course knows that official inflation is a fiction of governments’ imagination. And although the official figures show no inflation, there has been an explosion in asset prices. Stocks, bonds and property have all soared. US stock markets for example are up 4 times since 2009.

These assets bubbles do not benefit normal people. They take away valuable investment into the real economy to the benefit of the top 1-5%. This is a very dangerous trend that eventually will lead to social unrest or revolution.

But we have now reached a stage when the explosion in money supply will have a major influence on the real economy. The inevitable consequences of the totally irresponsible mismanagement of the economy that I have been forecasting for quite some time are now starting to take effect.


The most critical areas to watch are commodity inflation, interest rates and the dollar. These three markets are now giving clear signs of the coming inflation and subsequent hyperinflation.

If we start with inflation, official statistics are useless as I mentioned above since these figures are totally manipulated. A very good indicator of inflation are commodities. Below is a chart of the GS commodity index versus the S&P since 1971. That ratio is at an all time low and below the 1971 and 1999 lows. This cycle is now turning and the ratio is likely to go well above the 1974, 1990 and 2008 highs. Thus the minimum target is 10 which is a 10-fold increase from here. This means that stocks will fall at least 90% against commodities. Since the precious metals will be the main beneficiaries of the commodity boom, stocks are likely to fall at least 95% agains gold and silver.


Looking at a short term chart of commodities, the CRB index bottomed in Feb 2016 and is up 30% since then. Since June 2017 the CRB is up 20% and since mid Dec 2017 it is up 8%. This is a clear indication that inflation is now going up fast.

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Jim Rickards: You Must Own a Monster Box; N. Korea Close to Being Able to Destroy U.S.

by Mike Gleason, Money Metals:

Coming up we’ll hear the explosive conclusion of my two part interview with Jim Rickards. Find out what Jim has to say about not just gold but also silver, and where he thinks things are headed between the U.S. and North Korea. Don’t miss this fascinating conversation with Jim Rickards, coming up after this week’s market update.

Gold prices advanced this week to an 18-month high, entering a zone of critically important levels on the charts. As gold bulls sought to push prices up to a 4-year high mark of $1,375 on Thursday afternoon, bears clawed back and regained some lost ground. In volatile trading late Thursday, the gold market swung from $1,365 to roughly $1,340 an ounce.

As of this Friday recording, gold trades at $1,352, good for a 1.4% gain on the week. The silver market checks in at $17.39 per ounce after rising 2.0% since last Friday’s close. The white metal still needs to get above the $18.50 level in order to take out its highs from last year.

Click HERE to listen

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An “Extreme Warning” From Our Doom Index


by Bill Bonner, Casey Research:

When we left you last, we were describing why the situation is getting dangerous for investors, and how the lessons learned over the last 30 years may backfire in the next crisis.

“Dow over 26,000… bitcoin under $10,000,” reports the news… “but could crypto panic spill over into stocks?”

Investors are accustomed to depending on the Greenspan-Bernanke-Yellen Put… which is to say, they are pretty sure that the feds will come in with more booze when the party starts to flag.

“Buy the dip,” they tell each other, confident that the feds can be counted on in a pinch.

Many think the recently passed tax bill is 80-proof, too—sure to rev things up by putting more money in the hands of shareholders and consumers.

Maybe it will raise stock prices. Or maybe it won’t. What it won’t do is make the next crisis disappear.

Bad Tidings

We hate to be the bearer of bad tidings, but bad tidings are all we have to bear.

Corporate America is already pretty flush. The price-to-earnings (P/E) ratio for the S&P 500 is now 70% above its long-term average.

In fact, the price of stocks relative to earnings has only been near this high three times in the last 118 years… each time caused by the aforementioned Fed party favors.

And if stocks go higher, it merely gives them further to fall.

In order to get back to more traditional levels, notes Martin Feldstein in a recent Wall Street Journalarticle, the next bear market would have to wipe out some $10 trillion of stock market wealth.

This, he says, would take 2% off annual GDP… tipping the country into recession.

Extreme Warning

How close is this crisis?

We turn to our Doom Index, put together by our ace researcher, Joe Withrow:

The Doom Index spiked back up to “7” this month – our extreme warning level.

After a surprisingly expansive third quarter in 2017, credit growth fell back to 1.6% in the fourth quarter. Paraphrasing your friend and economist Richard Duncan, bad things happen when credit growth falls below 2%.

Looking at the credit markets, corporate bond downgrades continued to come in at an elevated level last quarter. And junk bonds are starting to show some cracks, falling more than 1% on the quarter. That said, junk bonds still closed out 2017 in positive territory.

Stock valuations are still high relative to their historical averages. But we still haven’t really seen the spike in “animal spirits” that we usually see at the end of each bull market.

But that is starting to change. Investor bullishness spiked by more than 20 percentage points last quarter, as measured by the American Association of Individual Investors survey that we follow.

Our financial metrics were the first to scream warnings at us back in 2000 and 2007… but the markets did not crash until we started to get warnings from our productivity metrics also. I suspect that will be the case this time around as well… But you can never know for sure.

What you can know, however, is that we are much closer to doom today than we were last quarter. Might be a good idea to dust the old Crash Alert Flag off… Make sure it looks presentable.

Inevitable Bear

We’ve hung out the old black-and-blue Crash Alert flag so often—and without effect—that both it and our reputation for market timing are in tatters.

We’re reluctant to expose either to further ridicule now.

But a bear market is inevitable. We recall the 1970s…

It was in 1973 that the Dow first crested above 1,000. Then, it went down… and didn’t get back to 1,000 for another decade.

During that time, the ’70s, “nominal” stock prices—without accounting for inflation, that is—went down, but never by more than about 25%.

The damage didn’t seem so bad. But consumer price inflation was also steadily eating away at “real” (inflation-adjusted) values. You can see what really happened by looking at the Dow in gold terms.

The peak occurred in 1965, when it took about 25 ounces of gold to buy the Dow stocks.

Then, stock prices fell… down… down… down – to the point where you could buy the entire Dow with a single ounce of gold.

In real terms, stocks had lost 96% of their value.

Ready… Aim… Fire!

We see a similar debacle coming. The Dow sells for 20 times the price of an ounce of gold—below the level of ’65, but higher than the level of ’29.

Central banks are raising rates. Inflation seems to be picking up. And the feds have huge deficits to finance.

The bond market is going to be squeezed between more supply and less demand. Bond prices will fall as yields rise. Recently, the yields on the 10-year Treasury rose to 2.58%, up from a low of 1.40% set in July 2016.

Stock prices will fall, either because of rising interest rates… or in spite of them. Expect initial losses of about 50%.

Then, once again, investors will turn their lonely eyes to the Fed.

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End of the 9-Year Rental Housing Boom?


by Wolf Richter, Wolf Street:

Since the Financial Crisis, the number of renters surged at a blistering pace, and renters became a majority in 42 cities, but the trend has now reversed.

The number of people living in rented housing in the US has surged by 23 million over the past 10 years. This is the period that includes the Housing Bust. But the number of people living in owner-occupied homes (“homeowners”) inched up only by 679,000.

Over the same period, the total US population has increased by 23.7 million. In other words, the growth in the renter population absorbed nearly the entire growth in the population.

In 2006, of the 100 largest cities, only 20 had a higher renter population than owner population. Ten years later, 42 cities do.

Of the top 100 cities, only three experienced a decrease in rentership rate: Anchorage, AK (-1.3%), Irving, TX (-2.5%) and Winston-Salem, NC (-3.6%). The other 97 cities all experienced an increase in rentership rates, according to a report by RentCafé, based on data from the Census Bureau’s American Community Survey.

The list below shows the 25 cities where the rentership rate has increased the fastest from 2006 to 2016. Gilbert, AZ, is number one. Its rentership rate grew by 53.4%. But Gilbert is special. While the absolute number of renters in Gilbert surged over the decade, the city’s overall population experienced a spectacular boom, and the number of homeowners surged too, and the rentership rate, at 30.6%, remains the second lowest of the top 100 cities, though it grew the fastest.

By contrast, Toledo is number five on this list. In 2006, its rentership rate was 38.3%. Over the past 10 years, the rate grew by 31.3% to reach 50.3%. But Toledo’s overall population declined over the period, which helped boost the rentership rate.

The cities in the list are in order of how fast their rentership rates grew (right column). Even for number 25, Baton Rouge, the rentership rate still grew by over 22%!

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by Joseph P Farrell, Giza Death Star:

Something is going on in the world of gold, if these two articles shared by Ms. K.M., and Mr. P.K., are any indicator, and as one might imagine, both trigger some high octane speculation for the day, particularly the article shared by Mr. P.K. Here’s the first article from Ms. K.M.:

Paper Gold Trading Days for London & New York Numbered

And now the article shared by Mr. P.K. from RT:

New global gold standard in kilobar may soon be coming

Regular readers here and of my books are aware that I have speculated for several years that there has been in existence since World War Two’s end a “secret” or “hidden financial system,” based in part on recovered Japanese and Nazi loot, including gold, which was all to be managed by the National Security Council. As part and parcel of this system, I’ve also argued that the international drug trade was a huge component of it, and that the “gold backed bearer bonds” scandals were also a component, given that “gold” in the criminal underworld is often a code-name for “drugs” or other contraband, hence “gold-backed bearer bonds” might also mean drug or other contraband-backed bearer bonds, with the bonds themselves acting as media of exchange in such a system. While this blog is not the place to review all my speculations on this system, it is also worth recalling that I have argued that the obfuscation of the actual amount of gold in existence is probably a huge component of such a system, for if there was more gold in existence than is actually the case with the “numbers”, the opportunities for manipulation become quite severe.

Enter the first article, which speculates that the gold reserves of the USA might not be up to the assaying standards of the actual physical gold trade. This speculation has been around for years if not decades, since the last “audit” of the American reserves was a partial affair, and only one “room” of the Fort Knox reserves was opened to the process. Such sub-par gold reserves could also obviously be used within such a system.

And that brings us to the RT article shared by Mr. P.K., who wrote in his email asking if this new move could be used to weed out sub-standard gold. Certainly the moves by China and Russia to acquire massive amounts of gold and to back a quest for a new trading standard do raise the possibility that they might suspect that American and other western reserves are sub-standard in assay quality.

But there’s another possibility looming here that really caught my eye, and it caught my eye because of its potential utility in serving a greatly expanded system of finance and liquidity. Consider the following lines from the RT article:

“The plan is to create a standard for kilobars that can be adopted around the world, delivered anywhere, possibly using blockchain to identify the bars, their origins,” a physical gold trading source said. Rigid standards and blockchain would bring in people who are worried they could be getting conflict metal.” (Boldface emphasis added)

There you have it: blockchain technologies – and hence, the linkage between crypto-currencies and gold – are being touted as a means of making the actual physical gold “traceable”, in this case, so the RT article has it, of eliminating “conflict metals,” the “blood diamonds” of bullion trade. Once again, the implicit meme is being driven that the whole technology is “secure” and that there’s “no need to worry.”

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A2A with Clif High

by Craig Hemke, TF Metals:

Clif High kicks off the 2018 A2A calendar with a fascinating discussion of the “web bot” predictive technology and its application toward the year to come in cryptos, the metals and more.

There was high demand for Clif as an A2A guest and, after you listen to this podcast, you’ll know why. Clif is clearly an extremely intelligent guy and his thoughts on a wide-range of topics are insightful and compelling. Among the items discussed:

  • the cryptocurrencies and where they are headed in 2018 and beyond
  • how blockchain can help end the precious metal price manipulation
  • the idea of free energy
  • what’s going on in Antarctica
  • the health benefits of Carbon60
  • and so much more your head will be spinning!

Click HERE to listen

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