The #1 Trigger for Rising Rates, Volatility and a Deflationary Crisis

If you’ve read any of my work, you know I think the iceberg that will ultimately sink the global Titanic is China. It has the greatest overbuilding and debt bubble in history, not to mention the obvious real estate and stock market bubbles.

But the Chinese government has too much control over its economy to just let it slide. No. China won’t be the first domino to fall. Rather, the dubious honor may go to lovely and charming Italy.

Italians are fun, laid-back people. I love visiting the country.

But would I bet on it?

No way!

Italians think they’ve died and gone to heaven, but it looks more like hell’s sneaking up on them!

Outside of Greece, Italy has the highest government debt: 130% of GDP and rising. Greece’s government debt is at 180%, but at least Greece keeps getting bailouts, which it can get because it’s small enough to have little impact on the euro.

But what if Italy starts defaulting?

Scratch that. What happens when Italy starts defaulting?

Default it will!

The country has the great majority of the bad loans in the eurozone. Look at this chart.

Of the worst countries in the eurozone, Italy dominates bad loans in the banking and private sector. It has 29% of the total, or $ 324 billion in bad loans – and that number continues to rise.

Major bank stocks there have already plummeted the most in recent years and are on government life support.

What makes Italy so dangerous is that French banks have the most outside exposure to these bad loans, with Germany taking second spot.

But ultimately Germany has the greatest exposure to a fall in Italy. It is the strongest exporter in Europe, especially to the highly indebted southern European nations.

The euro made that imbalance both possible and attractive. Strong exporters in northern Europe had more favorable exchange rates under the common euro, and the weaker importing nations could borrow more cheaply than under separate currencies.

Since Germany’s exports are 46% of GDP, it has a strong incentive to keep floating these southern importers while criticizing them and forcing austerity at the higher political levels. It’s called Target 2 loans. The German central bank (and others) simply defers payments from companies in Italy to some flexible future date.

It’s like a company that gives more credit to their customers just to keep them buying… even though eventually those patrons will be able to repay a penny.

Look at this next chart.

Of the $ 839 billion in Target 2 loans from Germany’s central bank, half, or $ 418 billion, are to Italy alone.

Given the potential to default on these loans and on foreign bank loans, Italy is strongly incentivized to leave the euro and default, just like Iceland did when it faced an equally dire situation.

A default, a much weaker local currency and higher inflation (from rising import costs) would mean that Italy’s sovereign bonds would see a massive spike in rates. During the euro crisis, they went from 3% to 7%. This time it would be much worse!

But here’s the most important point. Sovereign bonds around the world are overvalued with often negative yields long term (when adjusted for inflation).

Yet continued strong ECB bond buying and QE has put the Italian 10-year bonds yield at 1.85% versus U.S. Treasuries at 2.2%!

That’s insane!

Italy is bankrupt, and we are the best house in this bad global neighborhood. Yet Italy’s bonds are stronger than ours and yielding less.

How much badly could risk be miscalculated?!

When Italy gets in trouble again and bond yields spike, that will cause bondholders to question all sovereign bonds, even the trusted U.S. ones.

The bond bubble will seem to have topped and burst… but NOT.

Talk about volatility!

Bond yields could spike up across the world creating a global crisis and stock crash, and then, after a while, deflation will set in from the collapse of bubbles and debt deleveraging. Deflation will then cause the best sovereign (and corporate) bonds to fall in yields to even lower levels than today’s unprecedented lows.

The bond bubble will continue next time for fundamental reasons, not artificial.

We’re on a financial assets roller coaster ride and the exciting (treacherous?) section is just ahead. And it’s going to be even hairier in traditionally safer and more stable bets like U.S. Treasury bonds.

Wall Street has a new consensus view that such yields can’t go much lower and will rise modestly for years ahead, with mild rising inflation… a typical soft-landing view.

They will be wrong as usual, just like they’ll be wrong on China.

Fortunately, we have solutions and we’ll share the details with you on Wednesday.

Click here to read more “What If…” hypotheses and to add our special event to your calendar.

Harry
Follow me on Twitter @harrydentjr

The post The #1 Trigger for Rising Rates, Volatility and a Deflationary Crisis appeared first on Economy and Markets.

Harry Dent – Economy and Markets ()




Stock Market May Have Peaked in Terms of Gold; Gerald Celente: Interest Rates Go Up, This Goes Down”

Welcome to this week’s Market Wrap Podcast, I’m Mike Gleason.

Coming up the one and only Gerald Celente of the Trends Journal and one of the top trends forecaster in the world joins me for an explosive interview on the dollar, the growing tensions with North Korea and a wildcard that he sees driving a big run in gold. You will not want to miss an incredible interview with Gerald Celente, coming up after this week’s market update.

Well, the invincible U.S. stock market finally came under some selling pressure this week as tensions between the United States and North Korea flared up. Bombastic threats from Kim Jong-un to strike the U.S. military outpost of Guam were met with elevated rhetoric from President Donald Trump and Defense Secretary James Mattis. They warned the North Korean regime that it would be wiped out if it initiated an attack or continued making threats.

As concerned investors sold equities on Thursday, precious metals markets received some significant safe-haven inflows. Gold is up 2.0% this week to bring spot prices to $ 1,286 an ounce as of this Friday morning recording and pushing toward its high for the year at just under $ 1,300. Silver shows a weekly gain of 4.8% and now trades at $ 17.09 per ounce. That’s a 7-week high.

The platinum group metals are also on the move, with platinum up 2.0% to $ 990 an ounce and palladium up 2.2% to $ 899.

Yesterday’s big outperformance in metals has gold bulls eyeing a possible trend change in the Dow to gold ratio. Since mid 2011, blue chip stocks have been trending higher relative to the yellow metal. The Dow-gold ratio has risen from just under 6 to 1 to a high of just under 18 to 1 last month.

That’s still far below the secular high in the ratio from 2000. But it’s also far above the secular low of 1 to 1 seen in 1980. So, there is plenty of room for a major move in the ratio to commence.

Looking at the Dow and the gold market individually, both seem ripe for major moves. In the case of the Dow, the most remarkable feature of this summer’s rally to record highs was vanishing volatility. Day after day prices would inch up in narrow trading ranges.

Extreme lows on the VIX volatility index are unsustainable for very long. And volatility finally came back with a vengeance on Thursday with the Dow dropping 200 points.

In the case of gold, volatility has also been muted in recent months. Even the gold mining stocks, which are notorious for their wild swings, settled into a narrow sideways trading range. But the precious metals sector now appears poised to break out of its summer doldrums to the upside.

It’s too early to call a definitive breakout until gold prices actually close strongly above the $ 1,300 resistance level. If and when that happens, bulls would be back in the driver’s seat.

And it could be just the beginning of a major trend change in the Dow to gold ratio that lasts for years – with gold outperforming the Dow. That’s why it’s definitely not too late for investors to move some wealth out of the seemingly expensive stock market and into physical precious metals.

As we’ve seen this week, it’s not just gold that stands to benefit when equities go out of favor. The more thinly traded white metals of silver, platinum, and palladium can gain even more dramatically when investors seek hard assets.

Successful investors have to think about which trends are exhausted and which ones may just be getting started. Successful investors don’t try to catch exact tops and bottoms, but they do rotate out of old positions and into new ones as opportunities present. They also diversify their holdings to avoid being too heavily concentrated in any one asset.

Successful precious metals investors don’t just own one metal in one size. They accumulate multiple bullion products in multiple sizes. You never know when you might find it useful or necessary to sell, trade, or gift a tenth ounce of gold instead of a full ounce, for example.

Money Metals Exchange offers fractional size gold, fractional size silver, and even fractional size platinum and palladium products in addition to plenty of options in the standard one-ounce size. We also offer hefty 10-ounce gold bars and 100-ounce silver bars for serious stackers. And any orders of $ 1,000 or more include free shipping and insurance.

Well now, without further delay, let’s get right to this week’s exclusive interview.

Gerald Celente

Mike Gleason:It is my privilege now to welcome in Gerald Celente, publisher of the renowned Trends Journal. Mr Celente is a well-known trends forecaster and highly sought-after guest on news programs throughout the world and has been forecasting some of the biggest and most important trends before they happen for more than 30 years now. It’s always great to have him on with us.

Mr. Celente, thanks so much for the time today, and we appreciate you joining us.

Gerald Celente: Thanks for having me on, Mr. Gleason.

Mike Gleason: Well, I want to start out talking about the first half of the year of Donald Trump’s presidency. Trump had an ambitious agenda to get the economy going but hasn’t been able to push any significant legislation through this Congress. How do you see that playing out from here, and what bearing does all this have on the dollar, Gerald, because the greenback has been taking it on the chin here recently?

Gerald Celente: Well, you point out something very significant. Go back to when Trump got elected, and going into the beginning of the year, so from November to the beginning of 2017, the dollar was soaring, and it all of a sudden started reversing. I’ve been around a long time, and I’ve never seen anything like this in my life with so much hatred is being sent out by the media, not only against Trump, but the Russians, and any other person or country that they don’t like. Of course, I’m no Trump supporter, I’m a political atheist, I didn’t vote for either of Trump or Clinton in the last election. And I’m not one of these people that say, “Oh, you have to go out and vote. If you don’t vote then you deserve what you get.” No, if you vote, you deserve what you get, because I don’t support the Bloods and the Crips, and that’s what the Democrats and Republicans are to me. They’re murderers and thieves, their track records prove it. So what I’m saying about Trump has nothing to do with me being a Trump supporter.

The hatred that the media has been selling, with hating the Russians, no evidence at all that they hacked into the Democratic National Committee, it’s our assumption, it’s our belief, it’s our analysis. Can you imagine going to a court, Mike, and saying that to a judge? (The judge might say) “Show me some evidence.” “How dare you ask me to show you evidence, judge? Don’t you know who I am? I’m a presstitute for the Cartoon News Network, I’m a presstitute for the New York Times, the toilet paper of record. I’m a presstitute for MSNBC. I’ll shove any crap I want down your throat and you repeat it to the American people. I don’t need proof, all need are assumptions, and you know how good those are. You might remember that Saddam Hussein had weapons of mass destruction and ties to Al-Qaeda.” So what I’m saying is they sell lies, and they sell hatred and dissent in the United States like I’ve never seen before in my life. Every time somebody got elected that you didn’t like, the media would say, “Well you may not have supported that person, but now it’s the president of our United States and we have to all work together. “

So now going back to the dollar. The war against Trump is actually the war against the economy in many ways, because when the Trump rally began, and anybody could go back to the facts, when Trump looked like he was going to win on November 8th, in the morning of November 9th, the Dow futures dove by over 800 points, thinking that he was going to win because the markets wanted Hillary. And then it reversed. And it reversed on the belief that his programs, again whether you like them or not, not the issue, only talking about business, were good for business because of tax reform, because of deregulation – again, whether or not you agree with it isn’t the issue, we’re talking about business – and with also the rebuilding of the infrastructure. None of that happened. That boosted of the dollar, now we’re going into reverse. And, also, the rhetoric keeps heating up. Not only against Russia, but across the globe.

Mike Gleason: It has been almost a decade now since the 2008 financial crisis. We’ve seen evidence since that time that some Wall Street banks have acted like criminal enterprises, and they continue to enjoy the support of politicians in Washington DC. No one has been more vocal on that subject than you. Now we have Donald Trump promising to “drain the swamp,” but more evidence of cheating and market rigging have been piling up. You could be forgiven for thinking that a reckoning will soon come, but experience has shown, these characters are basically untouchable. What are your thoughts, Gerald, any of these folks going to go to jail any time soon?

Gerald Celente: Well, they’re too big to jail, you remember that little freak, Eric Holder. Yeah, you remember him, he was brought in by Obama, the most transparent president he says in his campaigning for the presidency back in 2008. Yeah, so transparent that you could see right through him. He was a guy that promised to bring the banksters to jail. And Eric Holder, where does he go, he goes back to work for one of the white-shoe boy’s firms over there on Wall Street, and wants to protect the banksters, and he says they were basically too big to jail.

We saw, what, $ 150 billion worth of fines, and not one head roll? It’s a neo-feudal society, there are different rules for the political nobility and the economic elite. As you point out, yeah, Trump didn’t drain the swamp, he just brought in new swamp creatures. Whether it’s Mnuchin or all the generals that he brought in. I’ve never seen a White House filled with so much military brass and a bunch of Wall Street billionaires. So when we’re looking at it, no, I don’t see any of that change coming.

But again, going back to the dollar and the strength of it, there may be some positives coming out of it. Wilbur Ross who’s the Commerce Secretary, this isn’t a guy I’d want to do business with, but if this is the guy that’s going to defend my interest on the business field, and he’s going to renegotiate these lousy trade deals, that’s great for America. So, there’s a give and a take on it, but right now it’s only been a one-way street and that is when you look at the polls, that Trump is down at historic lows, and look at Congress, what, only 10% of the people look up to Congress? And yet people argue that their bunch of crooks is better than your bunch of crooks? So I don’t understand what’s going on, how people could take orders from these jerks that play politicians.

Mike Gleason: Speaking of the 2008 financial crisis, it looks to us like history is likely to repeat, perhaps sooner rather than later. You can make a good argument that a number of markets are now in bubble territory, including stocks and bonds. There is also plenty of irresponsible lending –subprime autos, student loans, and hundreds of billions lent to oil companies which may go broke unless oil gets back up towards $ 80 per barrel. Markets are certainly due for a big correction. That said, if the VIX is any indication, traders have never been less worried. What do you think, can the wheel stay on this a while longer?

Gerald Celente: Yeah, they can. And that’s the one thing that I learned, and you really nailed it before when you were talking about the corruption. They’ll rig the system any way they want to make things happen. Look, I would’ve thought this thing would’ve collapsed in 2012. I never heard of negative interest rates. You know Mike, I like you, you’re a nice guy, I got a 10-year bond for you. Yeah, you buy, and then I’m going to give you negative yields after 10 years because I like you so much. I mean, who could get away with this kind of crap? The central banks, the bank of Japan. And it’s the same thing around the world. So people are dying to get anything that’s going to show them any kind of return. So that’s what’s keeping the markets, they’ll rig the game anywhere they can.

I got a better one for you. Hey, how about a thing called Quantitative Easing? Isn’t that nice? Negative rate interest policy, zero interest rate policy, we’ll do anything we can to keep the Ponzi scheme going and the banksters rich. One of our Trends Journal (contributors), Anthony Freda, a great illustrator, did a cover for us, and he had a Jesus Christ with a whip and he’s driving the banksters out of the temple, but now they have names in front of them, JP Morgan, Chase, Goldman Sachs, Merrill Lynch, on and on. Nothing’s really changed. And that’s all it is. I mean, look at the guy, the little boy they elected over there in France – a Rothschild kid, Macron. And it’s one after another.

So I mean, they’ll rig the game any way they can. Will there be a correction, we’re forecasting a 10% correction. And so are others. But again, we don’t see a crash, because they’re going to do what they can to prop this thing up. I talked about Japan, what do they have, the GDP is, what, 250, that’s a GDP ratio. I mean, look at China, 300. So they just keep the Ponzi schemes going. They’ll invent anything that they can.

Mike Gleason: We definitely want to get your thoughts on North Korea since the mounting tensions there have made big news this week. The prospect of a nuclear exchange is of course what people worry about. We’re well-accustomed to bluster and threats from Kim Jong-un and his predecessors, but now Donald Trump has threatened to use America’s nuclear arsenal. What is your best guess on how this will play out? Will Trump launch a preemptive attack using conventional weapons? Is this brinkmanship, just a negotiating tactic, what?

Gerald Celente: It’s not a negotiating tactic. I mean, I’ve been hearing this North Korea stuff all my life. Read the details of the sanctions that they just put on North Korea. What is it? The UN voted, because they’re testing missiles. You know what North Korea’s GDP is? It’s smaller than West Virginia’s. They have a population the size of Texas. You read the quotes coming out on what they’re doing and why they’re doing it, and it says, “North Korea warns US, rejects talks. The sanction’s resolution aims to cut a third, or $ 1 billion from North Korea annual foreign reserves. And I’m not good at math, but a third, or 1 billion, that’s $ 3 billion is their total foreign revenue. 3 lousy billion dollars. What is Bill Gates worth, 86 billion? Warren Buffet, 76 billion. Bezos, 73 billion. Zuckerberg, 56 billion. Look at the tough talk against the little nobodies. The reason why North Korea has nuclear weapons, and they made this very clear, is because they saw what the United States did to Saddam Hussein and Gaddafi. And they say, “You’re not going to do that to us.”

What countries has North Korea invaded? Look what they did to Libya, overthrowing Gaddafi. Hey, how about that war they launched against Afghanistan, because they had to find a man by the name of Osama bin Laden that was living over there. Oh, and look at that war in Iraq, yeah, they had to get rid of Saddam Hussein, those North Koreans, they can’t stay home. And now they’re in Somalia and Sudan, and they just sold $ 150 billion worth of weapons to Saudi Arabia to slaughter the innocent Yemenis, the poorest nation in the Middle East. Of course I’m talking about the United States.

North Korea and China have been asking the United States and South Korea, “Stop doing these massive military drills on our shores. Stop threatening us constantly.” What if we had North Korea up in Canada, China and Russia doing military drills down in the Gulf of Mexico, and Iran off the coast of New York? They’d be bombing the hell out of them from the United States, these people for getting too close to us. Yet the United States aggression against this country … Do they have a crazy guy running the show? Sure looks it, but hey welcome to America. Look at the freak show that we got going on and have been going on for a long time. So we have no right being there. Honor the Founding Fathers, no foreign entanglements. This is all rhetoric, we’re fighting a nobody that’s done nothing to us. They have not done anything to the United States. Oh, they may have a missile that could hit Topeka, Kansas by 2025. I got a gun, does that mean I’m going to shoot somebody? If there’s 50 cops outside, and somebody shoots in one of them, are the other 49 going to blow your brains out? What threat is North Korea to the United States?

Mike Gleason: With all this said, Gerald, what are your thoughts on gold? It has encountered some road bumps, but it is held in there pretty strong, actually, and never fell below $ 1,200. What trend is in store for the yellow metal in your view?

Gerald Celente: Well, it’s exactly what you said before. When you’re talking about what’s going on with a cheap dollar, that’s keeping gold up and also the instability. Gold is still the ultimate safe-haven asset. And other countries around the world are buying it because they understand that. We get the diluted message in the United States. You could talk all you want about, for example, or did you see earnings coming in, how great they are? Yeah, when you use the Gaap earnings principles, the generally accepted accounting principles, but when you look at the investment research company and they talk about the other measurements, the return on invested capital measurements instead of seeing over 10% growth over the last two years, you’re looking at like a minus 5% (decline). So these numbers are rigged too, when you look at them. The whole thing is being held up on hype and hope.

Then you look at where the gains are coming from, only a few industries. One of them being oil, because oil prices went up a little bit, so the energy sector is going up. But long-term, energy isn’t going to keep going up, it’s a supply and demand issue. And every time the oil prices go up a little bit over $ 50 a barrel, you got more supply coming online, and it keeps the prices in check. So, when you look at the technology, you look at energy, you look at the banking sector, it’s only a few sectors that are driving up the financials. And the cheap dollar is keeping the emerging market game alive as well, because they’re borrowing money for free. Then they borrow that money … If the dollar goes up, then you’re going to start seeing some real panic, and if interest rates really start going up, the game is over.

Again, this is a Ponzi scheme that’s been generated by Quantitative Easing, which means printing tons of cheap money and negative, or zero interest rate policy that allows stock buybacks and merger and acquisition activity. End of story. When interest rates go up, this thing goes down, and it goes down big. But the interest rates have to go up to a percentage much beyond where they are now, they’ve got to get back into the 3.25% range, as we see it, before you’re really going to start feeling the pressure. But even it at 1.5 to 2, you’re going to start seeing it really starting to hit.

Mike Gleason: Well, as we begin to close here, Gerald, any final thoughts or anything that you want to hit on that we haven’t discussed already?

Gerald Celente: I think we’ve hit on it all. The other wildcard to watch also, by the way, is the rhetoric against Iran. That keeps going on and on. Iran has not invaded a country for 250 years. Yeah, but they’re in Syria. Well, that’s because Assad invited them in, and whether you like him or not, he was elected, and an international forum said it was a fair and free election. But the hatred that the United States has against Iran … And again, people know nothing about the history of how the United States, the CIA and the MI6 in the UK overthrew the democratically elected government of Mosaddegh in Iran in 1953, because the guy had the nerve to nationalize the oil company, and that’s when they brought in the Shah. And the oil companies that were going to be hit by that were Anglo-Iranian Oil, better known as British Petroleum (BP) and Standard Oil better known today as Exxon-Mobil.

So we believe the one to really watch, the wildcard there, that could really be a destabilizing force, driving up oil prices, driving up gold prices and really causing major destabilization not throughout just the Middle East, but through much of the world, is if there’s a real war with Iran. And also, keep your eye on Ukraine. That’s very unstable, and that could explode yet again at any moment.

Mike Gleason: Well, Mr Celente, thanks as always for your time and your analysis today. We love having you on, because you really don’t pull any punches, and I know our audience really appreciates that. Now, before we let you go, as we always ask you to do, please let folks know about how they can get their hands on the wonderful information that you put out both online and with the Trends Journal magazine, as well as anything else that’s going on there at the Trends Research Institute that folks should know about.

Gerald Celente: Well, they can go to TrendsResearch.com or TrendsJournal.com. We not only publish the Trends Journal, which is a quarterly, 50-page magazine, no ads, full color and, also, we have a Trends in the News broadcast each weekday night, and we have a Trends Monthly, Trend Alerts, and there’s a money back guarantee. It’s the only place we are going to read and hear history before it happens.

Mike Gleason: Well, excellent stuff once again. I hope we can catch up with you later this year as these events begin to unfold, and ultimately, what it will likely mean for precious metals’ investors. Thanks again, Mr Celente for being so generous with your time. I hope you enjoy the rest of your summer and have a great weekend.

Gerald Celente: Thank you, and thank you for all you do, Mike.

Mike Gleason: Well that will do it for this week. Our sincere thanks to Gerald Celente, Publisher of the renowned Trends Journal. For more information, the website again is TrendsResearch.com. Be sure to check that out.

Check back next Friday for our next Weekly Market Wrap Podcast. Until then, this has been Mike Gleason with Money Metals Exchange. Thanks for listening and have a great weekend everybody.

Precious Metals News & Analysis – Gold News, Silver News




Falling Interest Rates Have Postponed “Peak Oil”

Falling interest rates have huge power. My background is as an actuary, so I am very much aware of the great power of interest rates. But a lot of people are not aware of this power, including, I suspect, some of the people making today’s decisions to raise interest rates. Similar people want to sell securities now being held by the Federal Reserve and by other central banks. This would further ramp up interest rates. With high interest rates, practically nothing that is bought using credit is affordable. This is frightening.

Another group of people who don’t understand the power of interest rates is the group of people who put together the Peak Oil story. In my opinion, the story of finite resources, including oil, is true. But the way the problem manifests itself is quite different from what Peak Oilers have imagined because the economy is far more complex than the Hubbert Model assumes. One big piece that has been left out of the Hubbert Model is the impact of changing interest rates. When interest rates fall, this tends to allow oil prices to rise, and thus allows increased production. This postpones the Peak Oil crisis, but makes the ultimate crisis worse.

The new crisis can be expected to be “Peak Economy” instead of Peak Oil. Peak Economy is likely to have a far different shape than Peak Oil–a much sharper downturn. It is likely to affect many aspects of the economy at once. The financial system will be especially affected. We will have gluts of all energy products, because no energy product will be affordable to consumers at a price that is profitable to producers. Grid electricity is likely to fail at essentially the same time as other parts of the system.

Interest rates are very important in determining when we hit “Peak Economy.” As I will explain in this article, falling interest rates between 1981 and 2014 are one of the things that allowed Peak Oil to be postponed for many years.

Figure 1. 10-year Treasury Interest Rates. Chart prepared by St. Louis Fed.

These falling interest rates allowed oil prices to be much higher than they otherwise would have been, and thus allowed far more oil to be extracted than would otherwise have been the case.

Since mid 2014, the big change that has taken place was the elimination of Quantitative Easing (QE) by the US. This change had the effect of disrupting the “carry trade” in US dollars (borrowing in US dollars and purchasing investments, often debt with a slightly higher yield, in another currency).

Figure 2. At this point, oil prices are both too high for many would-be consumers and too low for producers.

As a result, the US dollar rose, relative to other currencies. This tended to send oil prices to a level that is too low for oil producers to make an adequate profit (Figure 2). In addition, governments of oil exporting countries (such as Venezuela, Nigeria, and Saudi Arabia) cannot collect adequate taxes. This kind of problem does not lead to immediate collapse. Instead, it “sets the wheels in motion,” leading to collapse. This is a major reason why “Peak Economy” seems to be ahead, even if no one attempts to raise interest rates.

The problem is not yet very visible, because oil prices that are too low for producers are favorable for importers of oil, such as the US and Europe. Our economy actually functions better with these low oil prices. Unfortunately, this situation is not sustainable. In fact, rising interest rates are likely to make the situation much worse, quickly.

In this post, I will explain more details relating to these problems.

 

Low interest rates are extremely beneficial to the economy; high interest rates are a huge problem.

Low interest rates allow consumers to purchase high-priced goods with affordable monthly payments. With low interest rates, consumers can afford to buy more consumer goods (such as homes and cars) than they could otherwise. Thus, low interest rates tend to lead to high demand for commodities of all kinds, thus raising the price of commodities, such as oil.

Low interest rates are also good for businesses and governments. Their borrowing costs are favorable. Because consumers are doing well, business revenues and tax revenues tend to grow at a brisk pace. It becomes easier to afford new factories, roads, and schools.

While low interest rates are good, a reduction in interest rates is even better.

A reduction in interest rates tends to make asset prices rise. The reason this happens is because if someone already owns an asset (examples: a home, factory, a business, shares of stock) and interest rates fall, that asset suddenly becomes more affordable to other people, so the price of that asset rises because of increased demand. For example, if the monthly mortgage payment for a house suddenly drops from $ 600 per month to $ 500 per month because of a reduction in interest rates, many more potential homeowners can afford to buy the house. The price of the house may be bid up to a new higher level–perhaps to a price level where the monthly payment is $ 550 per month–higher than previously, but still below the old payment amount.

Furthermore, if interest rates fall, owners of homes that have risen in value can refinance their mortgages and obtain the new lower interest rate. Often, they can withdraw the “excess equity” and spend it on something else, such as a new car or home improvements. This extra spending tends to stimulate the economy, and thus tends to raise commodity prices. Suddenly, investments in oil fields that previously looked too expensive to extract, and mines with ores of very low grade, start looking profitable. Businesses hire workers to staff the investments that are now profitable, stimulating the economy.

Businesses receive other benefits, as well, when interest rates fall. Their borrowing cost on new loans falls, making new investment more affordable. Demand for their products tends to rise. The additional demand that results from lower interest rates allows economies of scale to work their magic, and thus allows profits to rise.

Companies that have large portfolios of investments, such as insurance companies and pension funds, find that the values of their assets (stocks, bonds, and other investments) rise when interest rates fall. Thus, their balance sheets look better. (Of course, the low interest payments when interest rates are low provide a different problem for these companies. Here, we are talking about the impact of falling interest rates.)

Of course, the reverse of all of these things is also true. It is truly bad news when interest rates rise!

Wages Depend on Interest Rates and Debt Growth

When interest rates fall, debt levels tend to rise. This happens because expensive goods such as homes, cars, and factories become more affordable, so customers can buy more of them. Thus, falling interest rates are very closely associated with rising debt levels.

We find that when we look at debt levels, rising debt levels seem to be highly correlated with rising US per capita wages, (especially up until China joined the World Trade Organization in 2001, and globalization took off). “Per capita wages” are calculated by dividing total wages and salaries by total population. Per capita wages thus reflect the impact of both (a) changes in the wages of individual workers and (b) changes in workforce participation. Using this measure “makes sense,” if we think of the total population as being supported by the wages of the working population, either directly or indirectly (such as through taxes).

Figure 3. Growth in US Wages vs. Growth in Non-Financial Debt. Wages from US Bureau of Economics “Wages and Salaries.” Non-Financial Debt is discontinued series from St. Louis Federal Reserve. (Note chart does not show a value for 2016.) Both sets of numbers have been adjusted for growth in US population and for growth in CPI Urban.

What does oil price depend upon?

Oil price depends upon the amount customers can afford to pay for oil and the finished products it produces. The amount customers can afford, in turn, depends very much on interest rates, since these influence both wages and monthly payments on loans. If the price that a significant share of consumers can afford is below the selling price of oil, we get an oil glut, as we have today.

It is important to note that oil and other energy products are important in determining the cost of finished products, such as cars, homes, and factories. Thus, high prices on energy products tend to ripple through the economy in many different ways. Many people consider only the change in the cost of filling a car’s gasoline tank; this approach gives a misleading impression of the impact of oil prices.

Affordability is also affected by growing wage disparity. Growing wage disparity tends to occur because of growing complexity and specialization. Globalization also contributes to wage disparity. These are other problems we encounter as we approach energy limits. Demand for commodities is to a significant extent determined by the wages of non-elite workers because there are so many of them. High wage workers tend to influence commodity prices less because their purchases are skewed toward a greater share of services, and toward the purchase of financial assets.

Because interest rates, debt, wages, and oil prices (and, in fact, commodity prices of all kinds) are linked, the system is much more complex than what most early modelers assumed was the case.

Hubbert’s Theory Underlies Many Mainstream Energy Beliefs 

Today’s mainstream beliefs about our energy problems seem to be strongly influenced by Peak Oil theory. Peak Oil theory, in turn, is based on an analysis by geophysicist M. King Hubbert. This view does not consider interest rates, debt, or prices.

Figure 4. M. King Hubbert’s symmetric curve explaining the way he saw resources depleting from Nuclear Energy and the Fossil Fuels, published in 1956.

In this view, the amount of any exhaustible resource that we can extract depends on the resources in the ground, plus the technology we have to extract these resources. In general, Hubbert expected an approximately symmetric curve of extraction, as illustrated in Figure 4. The peak is expected when about 50% of the resource is extracted. Hubbert believed that improved technology might allow more exhaustible resources to be extracted after peak, making the actual extraction pattern somewhat asymmetric, with a larger share of a resource, such as oil, being extracted after peak.

With this theory, we can expect to extract a considerable amount of resources in the future, even if the energy supply of a particular type starts to fall, because it is “past peak.” With the relatively slow decline rate shown in Figure 4, it should be possible to “stretch” supplies for some years, especially if technology continues to improve.

At some point, the standard view is that we will “run out” of energy supplies if we don’t make substitutions or conserve the use of these nonrenewable resources. Thus, an increase in efficiency is viewed as one part of the solution. Another part of the solution is viewed as substitution, such as with wind and solar energy.

In the mainstream view, the major influence on commodity prices is scarcity, not affordability. The expectation is that scarcity will cause oil prices will rise; as a result, expensive substitutes will become cost competitive. The higher prices will also encourage more conservation and more high-cost technologies. In theory, these can keep the economy operating for a very long time. The very inadequate models that economists have developed have encouraged these views.

The Usual Energy Model Is Overly Simple

Hubbert assumed that the amount of oil extracted would depend only upon the amount of resources available and available technologies. In fact, the amount of oil extracted depends on price, in part because price determines which technologies can be used. It also governs whether oil can be extracted in areas that are inherently expensive–for example, deep under the sea, or heavily polluted with some other material that must be removed at significant cost. Because of this, if oil prices are high, new technologies can be brought into play, and resources that are expensive to reach can be pursued.

If oil prices are lower than really needed, for example in the $ 40 to $ 80 per barrel range, the situation is more complex. The problem is that taxes on oil are important, especially for oil exporters. In this range, many producers can continue to produce, but their governments collect inadequate taxes. Their governments find it necessary to borrow money to maintain programs upon which the populations of the countries depend. Governments with inadequate tax revenue tend to get into more conflicts with other countries, such as is happening today with other Middle Eastern countries fighting with Qatar.

The situation of inadequate tax revenue is inherently unstable. It can eventually be expected to lead to the collapse of oil exporting countries.

Factors Underlying the Rise and Fall of Historical Oil Prices

The fundamental problem regarding the cost of resource extraction is that we tend to extract the cheapest-to-extract resources first. Thus, the cost of extracting many types of resources, including oil, tends to rise over time. Wages grow much more slowly.

Figure 5. Average per capita wages computed by dividing total “Wages and Salaries” as reported by US BEA by total US population, and adjusting to 2016 price level using CPI-Urban. Average inflation adjusted oil price is based primarily on Brent oil historical oil price as reported by BP, also adjusted by CPI-urban to 2016 price level.

This mismatch between wages and oil price tends to cause increasing affordability problems over time, even as we switch to cheaper fuels and increased efficiency. Part of the reason why affordability problems get worse has to do with our inability to keep reducing interest rates; at some point, they reach an irreducible minimum. Also, as I mentioned previously, there is a growing wage disparity problem caused by growing complexity and globalization. Those with low wages find themselves increasingly unable to afford goods such as homes and cars that require oil products in their construction and use.

Looking at Figure 5, we see two major price “humps.” The first of these is in the 1970-1998 period, and the second is in the 1999 to present period. In the first of these two periods, we often hear that the run up in oil prices was the result of an oil supply problem. This occurred because the US oil supply peaked in 1970, and the Arabs made the situation worse with an oil embargo.

In fact, I think that at least half of the problem in the 1970-1981 period may have been that wages were growing rapidly during this period. The rapid run up in wages allowed oil prices to increase in response to a fairly small oil shortage. Thus, the run up in prices was caused to a significant extent by greater demand, made possible by greater affordability. Note that timing of wage increases is slightly ahead of the timing of increases in CPI Urban. This suggests that wage growth tends to cause price inflation. It seems likely that globalization reduces the influence of US wages on oil prices, and thus on price inflation, in recent years.

Figure 6. Growth in US wages versus increase in CPI Urban. Wages are total “Wages and Salaries” from US Bureau of Economic Analysis. CPI-Urban is from US Bureau of Labor Statistics.

The large increases in wage payments shown in Figure 6 were made possible by growing total population, by rapidly growing productivity, and by an increasing share of women being added to the workforce. Figure 6 shows that the big increases in wages stopped after interest rates were raised to a very high level in 1981.

Economists hope that rising oil prices will bring about new supply, substitution, and greater efficiency. In the 1970s and 1980s, oil prices did seem to come back down for precisely these reasons. I explain the situation in more detail in the Appendix. Rising inflation rates and interest rates were a problem during this period for insurance companies. One insurance company I worked for went bankrupt; another almost did.

We have not been able to achieve the same new supply–substitution–efficiency result in the 1999 to 2016 period, partly because whatever easy efficiency and substitution changes could inexpensively be made were made earlier, and partly because we are reaching diminishing returns with respect to extracting energy products, especially oil. Also, the wage disparity of workers is growing. Growing wage disparity makes debt growth increasingly ineffective in raising wages. Instead of debt growth funding more wages and more affordable goods for the working poor, the additional debt seems to go to the already rich.

The decreases in interest rates since 1981 have given the economy an almost continuous upward lift. This long-term decrease tends to get overlooked because it has gone on for such a long time. The major exception to the long-term decrease in interest rates since 1981 was the big increase by the Federal Reserve in target interest rates in the 2004-2006 period (shown indirectly in Figure 7).

Figure 7. Three-month treasury rates. Graph prepared by the St. Louis Fed.

The problem started when Alan Greenspan dropped target interest rates very low in the 2001-2004 period to stimulate the economy, and then raised them in the 2004-2006 period to cut back growth (Figure 7). This seems to have been one of the major causes of the Great Recession. The other major cause of the Great Recession was fact that oil prices rose far more rapidly than wages during the 2003-2008 period. More information is  provided in the Appendix.

Where We Are Now

We have many leaders who do not seem to understand what our real problems are, and how successful programs have been to date in keeping the system from crashing. Way too much of their understanding has come from traditional models regarding “land, labor and capital,” “supply and demand,” and “higher prices bring substitution.” These models are not suitable for understanding how the economy, as a self-organized networked system, really works.

These leaders seem to believe that QE worldwide is no longer working well enough, so it should be removed. In addition, securities currently held by central banks should be sold. Also, the growth in debt should be slowed, because it is getting too high. Whether or not debt is too high, this strategy will lead to “Peak Economy.” As I explained in an earlier post, debt is what pulls an economy forward. It is the promise (which may or may not actually be kept) of future goods and services. These goods will be made with energy resources and other resources that we may or may not actually have in the future. Once we pare back our expectations, the system is likely to spiral downward.

It is not entirely clear the extent to which interest rates have already started to influence the economy. Long term interest rates, such as 10 year Treasuries, have not yet changed in yield (Exhibit 1). But short-term interest rates clearly have increased (Figure 7). An increase from 0% to 1% is a huge increase, if someone is using very short-term interest rates to fund highly levered investments.

Worldwide, the International Institute of Finance reported an increase in debt of $ 70 trillion, to $ 215 trillion between 2006 and 2016. This sounds like a huge increase, but it only amounts to a 4.0% increase per year during that period. It is doubtful this is enough to support the GDP growth the world needs, plus the increase in commodity prices demanded by diminishing returns.

There is evidence the economy is already headed downward. A recent report indicates that in the US, the smallest increase in consumer credit in 6 years took place in April 2017.

Another worrying area is auto loans. This is an area where interest rates have already begun to increase a bit, making monthly payments on cars higher.

Figure 8. Finance rate on 48-month new car loans through February 2017. Chart by St. Louis Fed.

The average finance rate in February 2017 was 4.52%, compared to an average finance rate of 4.00% in November 2015 (the low point). We don’t yet have information on what the increase would be to May 2017. A person would expect that if finance rates are following the interest rates on short to medium term US government securities, the finance rate would continue to rise. This interest rate rise would be one of the things that discounts provided by auto dealers would act to offset.

Because of the higher cost to the buyer of rising auto financing rates, a person would expect such a rise to adversely affect new auto sales. Higher interest rates would also affect lease prices and auto resale prices. We don’t yet know the extent to which higher interest rates are currently affecting auto sales, but the kinds of changes we are seeing are precisely the kinds of changes we would expect to see from higher interest rates. We have had a long history of falling interest rates (plus longer maturities) helping to prop up auto sales. Simply getting to the end of this cycle could be part of the problem.

Peak Economy is likely not very far away. We do not need to encourage it, by raising interest rates and selling securities held by the Federal Reserve. We badly need more people to understand the connection between interest rates and oil prices, and how important it is that interest rates not rise–in fact, more QE would be better.

Appendix – More Detail on Changes Affecting Oil Prices

(a) Between 1973 and 1981. Our oil problems started when US oil production began to decline in 1970, and Arab countries took advantage of our problems with an oil embargo. We immediately started work on extracting oil from other locations that we knew had oil available (Alaska, North Sea, and Mexico). Also, Japan was already making smaller cars. We started building smaller, more fuel-efficient cars in the US, too. We also began to substitute other fuels for oil in home heating and in the making of electricity.

(b) Between 1981 and 1998. In 1981, Paul Volker decided to force oil prices down by raising target interest rates to a very high level. He knew that such a high interest rate would lead to recession, which would reduce demand and thus prices. Also, earlier efforts at new oil supply and demand reduction approaches began to be effective. The new oil supply was somewhat higher priced than the pre-1970 oil. Falling interest rates made it possible for consumers to tolerate the somewhat higher oil prices required by the new higher priced oil.

(c) Between 1999 and 2008. Oil prices rose rapidly during this period, in large part because of rising demand. Globalization added huge demand for oil. Also, Alan Greenspan reduced target interest rates at about the time of the 2001 recession. (Target interest rates affect 3-month interest rates, shown in Figure 7.) At the same time, banks were encouraged to be more lenient in lending standards, and to offer loans based on the very favorable short-term interest rates available at that time. This combination of factors led to rapidly rising housing debt and much refinancing activity. All of this activity also added to oil demand.

Fortunately, these demand increases coincided with an increase in the cost of oil extraction. The world’s supply of “conventional oil” was becoming limited in supply, and began to decline in 2005. The higher demand raised prices, thus encouraging producers to pursue more expensive unconventional oil production.

(d) The 2008 Crash occurred after the Federal Reserve raised target interest rates in the 2004-2006 period, in an attempt to damp down rising food and energy prices. This interest rate rise made home buying more expensive. Oil prices were also increasing in the 2002-2008 period. The combination of rising interest rates and rising oil prices reduced demand for new homes and cars. Home prices fell, debt levels fell, and oil prices fell. Many people blamed the problems on loose mortgage underwriting standards, but the basic issue was falling affordability of oil, as oil prices rose and as higher interest rates took away the huge boost the economy previously had received. See my article, Oil Supply Limits and the Continuing Financial Crisis.

(e) 2009-2011 ramp up in prices was enabled by QE. This QE brought a broad range of interest rates to very low levels.

(f) 2011-2014. Oil prices gradually slid downward, because there was no longer enough upward “push” created by QE, since interest rates were no longer falling very much.

(g) Mid to late 2014 to Present. The US removed its QE, leading to a sharp reduction in carry trade in US dollars. Many currencies fell relative to the US dollar, making oil products less affordable in these currencies. As a result, oil prices fell to a level far below that needed by oil producers, especially oil exporters.

 

Republished with permission from Our Finite World.




Real Interest Rates STILL Negative after Fed Hike

Precious metals markets enter the last trading week before Christmas near multi-month lows. Gold and silver succumbed to another round of selling last Thursday following the Federal Reserve’s rate hike announcement.

Bulls are hoping for a Santa Claus rally to take metals into year’s end on a positive note. Bears say “bah humbug” and will aim to keep the intense selling pressure on in the futures markets.

US Dollar Index

The U.S. Dollar Index now trades at a 14-year high.

It looks impressive – until you consider all the other currencies that trade against the dollar. Dollar “strength” is really just an expression of the fact that other currencies are weak.

The strong dollar isn’t real, and neither are the Federal Reserve’s rate hikes. Yes, Fed policymakers did just bump up their benchmark rate by a quarter of a percent. But the Fed’s two measly moves over the past year have NOT raised short-term interest rates above the inflation rate. Therefore, rates remain negative in real terms, which is bullish for precious metals.

Even if Janet Yellen pushes through three rate increases in 2017, as she now suggests she will, the result will still be an interest rate that sits below the Fed’s own 2017 inflation projection of 1.8%.

Precious Metals News & Analysis – Gold News, Silver News




After Raising Rates Once During The Obama Years, The Fed Promises Constant Rate Hikes During The Trump Era

janet-yellen-public-domainNow that Donald Trump has won the election, the Federal Reserve has decided now would be a great time to start raising interest rates and slowing down the economy.  Over the past several decades, the U.S. economy has always slowed down whenever interest rates have been raised significantly, and on Wednesday the Federal Open Market Committee unanimously voted to raise rates by a quarter point.  Stocks immediately started falling, and by the end of the session it was their worst day since October 11th.

The funny thing is that the Federal Reserve could have been raising rates all throughout 2016, but they held off because they didn’t want to hurt Hillary Clinton’s chances of winning the election.

And during Barack Obama’s eight years, there has only been one rate increase the entire time up until this point.

But now that Donald Trump is headed for the White House, the Federal Reserve has decided that now would be a wonderful time to raise interest rates.  In addition to the rate hike on Wednesday, the Fed also announced that it is anticipating that rates will be raised three more times each year through the end of 2019

Fed policymakers are also forecasting three rate increases in 2017, up from two in September, and maintained their projection of three hikes each in 2018 and 2019, according to median estimates. They predict the fed funds rate will be 1.4% at the end of 2017, 2.1% at the end of 2018 and 2.9% at the end of 2019, up from forecasts of 1.1%, 1.9% and 2.6%, respectively, in September. Its long-run rate is expected to be 3%, up slightly from 2.9% previously. The Fed reiterated rate increases will be “gradual.”

So Barack Obama got to enjoy the benefit of having interest rates slammed to the floor throughout his presidency, and now Donald Trump is going to have to fight against the economic drag that constant interest rate hikes will cause.

How is that fair?

As rates rise, ordinary Americans are going to find that mortgage payments are going to go up, car payments are going to go up and credit card bills are going to become much more painful.  The following comes from CNN

Higher interest rates affect millions of Americans, especially if you have a credit card or savings account, or want to buy a home or a car. American savers have earned next to nothing at the bank for years. Now they could be a step closer to earning a little more interest on savings account deposits, even though one rate hike won’t change things overnight.

Rates on car loans and mortgages are also likely to be affected. Those are much more closely tied to the interest on a 10-year U.S. Treasury bond, which has risen rapidly since the election. With a Fed hike coming at a time when interest on the 10-year note is also rising, that won’t help borrowers.

The higher interest rates go, the more painful it will be for the economy.

If you recall, rising rates helped precipitate the financial crisis of 2008.  When interest rates rose it slammed people with adjustable rate mortgages, and suddenly Americans could not afford to buy homes at the same pace they were before.  We have already been watching the early stages of another housing crash start to erupt all over the nation, and rising rates will certainly not help matters.

But why does the Federal Reserve set our interest rates anyway?

We are supposed to be a free market capitalist economy.  So why not let the free market set interest rates?

Many Americans are expecting an economic miracle out of Trump, but the truth is that the Federal Reserve has far more power over the economy than anyone else does.  Trump can try to reduce taxes and tinker with regulations, but the Fed could end up destroying his entire economic program by constantly raising interest rates.

Of course we don’t actually need economic central planners.  The greatest era for economic growth in all of U.S. history came when there was no central bank, and in my article entitled “Why Donald Trump Must Shut Down The Federal Reserve And Start Issuing Debt-Free Money” I explained that Donald Trump must completely overhaul how our system works if he wants any chance of making the U.S. economy great again.

One way that Trump can start exerting influence over the Fed is by nominating the right people to the Federal Open Market Committee.  According to CNN, it looks like Trump will have the opportunity to appoint four people to that committee within his first 18 months…

Two spots on the Fed’s committee are currently open for Trump to nominate. Looking ahead, Fed Chair Janet Yellen’s term ends in January 2018, while Vice Chair Stanley Fischer is up for re-nomination in June 2018.

Within the first 18 months of his presidency, Trump could reappoint four of the 12 people on the Fed’s powerful committee — an unusual amount of influence for any president.

By endlessly manipulating the economy, the Fed has played a major role in creating economic booms and busts.  Since the Fed was created in 1913, there have been 18 distinct recessions or depressions, and now the Fed is setting the stage for another one.

And anyone that tries to claim that the Fed is not political is only fooling themselves.  Everyone knew that they were not going to raise rates during the months leading up to the election, and it was quite clear that this was going to benefit Hillary Clinton.

But now that Donald Trump has won the election, the Fed all of a sudden has decided that the time is perfect to begin a program of consistently raising rates.

If I was Donald Trump, I would be looking to shut down the Federal Reserve as quickly as I could.  The essential functions that the Fed performs could be performed by the Treasury Department, and we would be much better off if the free market determined interest rates instead of some bureaucrats.

Unfortunately, most Americans have come to accept that it is “normal” to have a bunch of unelected, unaccountable central planners running our economic system, and so it is unlikely that we will see any major changes before our economy plunges into yet another Fed-created crisis.

The Economic Collapse




We Are Being Set Up For Higher Interest Rates, A Major Recession And A Giant Stock Market Crash

bear-market-bull-market-public-domainSince 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.

The Economic Collapse




Polls Signal Trump Surge; Gold Strengthens; Celente: The Fed Is Lying about Rates

Welcome to this week’s Market Wrap Podcast, I’m Mike Gleason.

Coming up we’ll hear from the one and only Gerald Celente of the Trends Journal and TrendsResearch.com. Gerald goes off on the Fed and the presidential reality show as he calls it in a highly entertaining interview and also gives us a look into how gold and silver will do after the election. You’ll definitely want to stick around for my conversation with Gerald Celente, coming up after this week’s market update.

Well, we suggested there was the potential for volatility in markets to escalate this week, and that’s exactly what’s happening. As the stock market sold off, precious metals prices surged ahead of the Federal Open Market Committee’s policy announcement.

As of this Friday recording, gold prices are up 2.1% for the week to trade at $ 1,303 an ounce. Silver shows a weekly advance of 3.6% to bring spot prices to $ 18.46. Also on the move is platinum, gaining 2.3% since last Friday’s close to trade at $ 1,006 per ounce. Palladium, meanwhile, little changed thru Thursday is rallying a bit today and now comes in $ 634, now showing a 1.8% weekly gain.

On Wednesday, the Fed left interest rates unchanged as expected. The official statement contained no major surprises and few linguistic deviations from the previous one. Policymakers made the case for an improving economy and a future rate hike. The reaction in the markets was largely subdued.

Financial Times Report

John Authers: I can’t remember an FOMC meeting ever causing such little interest. This is where the market puts the chances that rates stay unchanged for the whole year, i.e. that we don’t get a rate raise next month. It seems there’s about an 80% shot that we do. The big risk that we don’t (get a rate increase in December) comes across from the risk that Donald Trump is elected president next week, which is a growing risk.

The consensus on Wall Street is that Janet Yellen and company will finally hike rates in December. But that doesn’t necessarily mean they will. Fed officials still say they are data dependent. What’s unsaid is that they are also stock market dependent. The sell-off in stocks this week can be attributed largely to jitters over the election. Market gyrations could continue depending on how the results come in.

Yes, in case you haven’t heard, there is an election next Tuesday. And in recent days, the polls have narrowed dramatically. Just a couple weeks ago, it appeared a Hillary Clinton victory was all but inevitable. Some in the media declared the election to be effectively over. Now those same smug partisans masquerading as reporters are having to process new polling data showing Donald Trump in a dead heat with Hillary Clinton nationally.

The dramatic turnaround for the Trump campaign comes as a slew of scandalous and potentially incriminating revelations hit Team Hillary. Reams of classified information winding up on Anthony Weiner’s computer; attempted cover ups inside the Justice Department; revolt within the FBI; pay for play scandals in The Clinton Foundation; collusion between top DNC officials and establishment media outlets; and rigging the debates. Yes, the hits just keep on coming.

Despite her scandals and personal unpopularity, Hillary Clinton still has a structural advantage on the electoral map. All she needs to do is hang on to the “solid Democrat” and “lean Democrat” states. Trump, on the other hand, has to win all the Republican states, plus win Ohio, Florida, and all the other swing states, plus find a way to flip one of the Democrat-leaning states such as Virginia, Pennsylvania, or New Hampshire.

It’s a tall order. But if the national momentum surge Trump has enjoyed over the past week carries over into next Tuesday, then we could see some normally blue parts of the country light up red.

A Trump win figures to be bad for the stock market, bad for the dollar, and good for precious metals – at least in the near term. Over time, investors may come to like Trump’s tax cuts. But for now they don’t like the uncertainty a potential Trump presidency would bring.

Unfortunately for the stock market, uncertainties may persist even if Hillary Clinton emerges victorious. Will she face indictment or impeachment? Will she even be sworn in as president or will she heed calls to step down and hand over the presidency to Tim Kaine?

Will social unrest spread if the election results are contested? Needless to say, whoever is finally sworn in come January will have to preside over a very divided country. Moreover, the next president will have to preside over a $ 20 trillion national debt with projections for rising deficits in the years ahead.

Eventually, the cold hard reality will set in that regardless of who occupies the Oval Office, and regardless of which party controls the Senate, meaningful fiscal reforms will be politically impossible. For investors, it’s not a question of whether the deficit spending will continue, but what the consequences of it will be. One big consequence is likely to be a weakened and globally discredited dollar.

Well now, without further delay, let’s get right to this week’s exclusive interview.

Gerald Celente

Mike Gleason: It is my privilege now to be joined by Gerald Celente, publisher of the renowned Trends Journal. Mr. Celente is a highly sought after guest on news programs throughout the world and has been forecasting some of the biggest and most important trends before they happen, for more than 30 years now. And it’s always a real honor to have him on with us. Mr. Celente, welcome back and thank you very much for joining us again.

Gerald Celente: Well thank you Mike.

Mike Gleason: The fed just kicked the can down the road here again on rate hikes, opting against any increase at this week’s meeting. Market’s still think they will inch up rates in December. Is this just more bluster or do you think they will actually tighten anytime soon?

Gerald Celente: You know the Fed should called out for the frauds that they are. Let’s call a spade a spade. These low life central banksters, who raised interest rates for the first time in nearly 10 years last December, just about a year ago, 11 months ago, had said that they were going to raise rates 4 times in 2016. One little low life shill, FOMC, how about an FUC? I don’t want to use the last letter, because then I would sound as though I was being disrespectful to these low-life little SOB’s. And what they did, keep shooting their lying mouths off for almost a year saying they were going to raise rates, raise rates four times after they raised them last December. And all they keep doing is keep saying that to push down the price of gold. Because their failure, as evidenced by the tepid economic growth, not only in the United States, but all the central banks. Whether it’s negative interest rates coming out of Japan and the EU. Whether it’s near zero interest rate policy in the United States. It has done nothing, nothing to increase global growth for the majority of the people.

Those aren’t empty words, for example here in the USSA we’ve seen 95% of the wealth go to the 1% since 2009. Those are facts. So these little Fed flunkies are doing nothing more than shooting their mouth off in an attempt to drive down gold prices, because what gold shows is that these fiat currencies backed by nothing, these digital currencies backed by nothing, and printed on nothing are worth nothing. So now the Fed, maybe they’ll raise interest rates in December. Big deal. It will be the second time. What are they going to raise, 25 basis points? And that will be the second time in what? Over 11 years? This is a war against the savers. It’s a war against we the little people used to put money in safe deposits, and we used to a get a return on the investment, a term called, “interest rates.” And now there are none.

What they’re doing only is to keep the phony equity markets alive. Do you need any more proof Mike? Then look back at last month. Oh it’s only October a couple of days ago, what do we see? 500 billion dollars in merger and acquisition activity, thanks to cheap money that the Feds give their friends. And stimulus programs of government buy backs, whether it’s in Europe, or Japan, and corporate bonds. So not only government bonds, but corporate bonds. The whole thing is a sham. The Federal Reserve is a disgrace. You look at their track record, one failure after another. But you know what they have a lot of? Is bad attitude. And the little presstitutes suck up and buy it, and the politicians bow down and take it, and they shove it onto us, and we’re the ones who pay for it.

Mike Gleason: We’re just a few short days away from learning the outcome of one of, if not the most anticipated elections in history. It certainly gets crazier by the day. A week ago the bombshell story about the FBI reopening the case on Hillary Clinton’s email abuses, where state secrets may have ended up on cyber stalker Anthony Wiener’s laptop. Trump was trailing leading up to that, but now it looks like he may actually pull this thing out with just a few days to go here. So what are you expecting to happen next Tuesday Gerald?

Gerald Celente: It’s anybody’s guess. We’ve been saying this…first we called Trump the winner, we called Hillary Clinton a winner before Trump got in. Then we’ve been calling Trump a winner for the better part of a year. We said that the only thing that could destroy Trump’s chances was himself. And he’s done a pretty good job of that as well. Right now it’s just up in the air because each day there’s new data coming out, information from WikiLeaks. And as you pointed out, last Friday the FBI said they’re going to look deeper into her private email servers that she used when she was Secretary of State. And that’s taken a big hit on her, and you can see it in the poll numbers. So this thing is really up for grabs.

And what’s really important about this Michael is that we’re just looking at WikiLeaks going into one person’s email, Podesta, one. Could you imagine if they looked into the many emails of the people in politics, and in government that are lying to us in front of our faces and doing dirty deals behind our backs? Again, this is only one. So there’s a lot more to come out here, and then you’re seeing the new WikiLeaks (info) showing how the Clinton campaign was getting inside information from the Department of Justice. What justice? Just us, they’re spelling it wrong. It’s J-U-S-T U-S. It’s one piece of information after another that’s showing how the government is controlled by so few, and the elites really do run the game.

And by the way, that’s the popularity that’s going toward Trump. It’s the anti-elitist movement, and of course he’s a pop-populist as we see it. He’s not the real deal compared to what’s going on in Europe with the alternative for Deutschland, the AFD Party. The Freedom Party in Austria. La Pen’s Party in France. So he’s playing into that discontent, but again this thing is just up in the air, and we don’t think it’s going to be decided until election eve. And it will be a close vote, and it’s anybody’s guess.

Mike Gleason: That leads me right into my next question with Trump there. He has been given a fair amount of credit as a political outsider, and someone who can bring reforms to Washington. On the one hand we can see the establishment fighting him, and it does not appear he is beholden to the usual roster of undesirables for raising money. He’s already wealthy. We give him points for that, but on the other hand, a lot of what he’s promising sounds pretty status quo. He wants to strengthen Social Security and entitlement, spend more on the military, borrow and spend a fortune on infrastructure. He hasn’t talked much about addressing the Federal Reserve debt deficits, the issues that are driving the American empire toward collapse Gerald.

Gerald Celente: No, none of them have. Again, look at these stupid debates. They’re not debates, they’re game shows. It’s the presidential reality show. “Here you go Mike, you have 2 minutes to answer a question on what your foreign policy is with domestic policy on the economy.” What imbecile would answer a question like that in 2 minutes? If somebody said that to me I’d say, “Screw off, who are you talking to? This takes more than 2 minutes to go through.” And that’s what they’ve done. So you haven’t had any real discussion, deep discussion about policies, it’s only sound-bytes. And as you pointed out, Trump wants to build the military even bigger. On military we spend more than the next 10 countries combined. Bigger? For what? And as you point out about Social Security, and as his economic policy with tax breaks, they’re going to help the 1% more than anybody else. Again, there are no real policies, but again his popularity is because he’s also coming out against NAFTA, and the trade deals.

And today, in the current times, we still have Obama promising to push through the Trans-Pacific Partnership as soon as the elections are over. So that’s his popularity. There’s really no policies. There’s no policies about making America a self-sustaining economy, which is one of our top 10 trends for 2016. You’re seeing that happening, by the way, in China. China is importing less and less, making more and more, and selling it to their own people rather than even exporting it. That’s the future. But Trump again isn’t talking about that, and Clinton, we heard her… she’s in favor of more open borders, and more globalization. So we know what the stand is. Whoever wins, we feel the American people will ultimately lose.

Mike Gleason: Gerald we’ve been seeing the markets behaving as if a Trump victory is bad news. As Trump has surged in the polls, stocks have been selling off a bit, and precious metals have been catching a bit. What is your take as to what the election might mean for the markets?

Gerald Celente: Short term if anything, it’s just a short term hit. Just go back to Brexit, look what happened. Look at the panic in the markets before and after Brexit, the volatility index. And then after Brexit was over, a couple of months later the Dow hit new highs. So it will only have a temporary effect on the markets, as we see it. Unless something very radical happens, and of course we do believe, however, that if Trump wins it will be bullish for gold, and you could already see the gold spikes that have happened since Hillary Clinton has been declining more in the polls, and Trump’s popularity has been rising. That’s significant to watch, because one of the things that Trump does come out and say is what a fraud the Federal Reserve is, and how a giant bubble is being inflated. And it’s not only the bubble in the United States, it’s the real estate and equity bubbles in many parts of the world. Particularly China, there’s bubble after bubble in industry after industry, and sector after sector.

So that’s where he’s really dead on, on calling it out what it is. Again, this is old news to us. In our Trends Journal, back in 2010 we said the Federal Reserve’s actions weren’t going to bring a recovery, it was just a cover up. And the cover up has been very simple. Again, record merger and acquisition activities that has further instilled the multinational globalization trend, which means it hurts entrepreneurs. And the second one of course is stock buy backs with the cheap money that has boosted equity markets. But look, the last spots 6 quarters, the Fortune 500 companies reported loss of profits, negative profits in 6 quarters. You can see what’s going on.

Then take a look at the global situation. Was global trade down the first half of the year, nearly 1%? Take a look at the big shipping companies, the troubles that they’re in. Take a look at the United States. In the first 9 months of this year, our import and export trade is down nearly 500 billion dollars. You want to talk about globalization? How about saying it’s not working and there’s a global slow down.

So when you put all the pieces together and look at a global-nomic viewpoint, there’s a global recession underway. And now there’s also general recognition that the central banks policies have failed to generate economic growth, and no other better one to look at by the way is then Abe-nomics in Japan. Despite unprecedented negative interest rates and stimulus programs going on for nearly 4 years, the only thing they have to show for it are recessions and negative income, and negative spending.

The same thing in the EU, we’re looking at what? Growth for the last half of the year at 1.4% despite negative interest rates, and 80 billion euros a month of quantitative easing, and corporate, and government bond buy backs. So there’s no recovery.

Mike Gleason: If we do see a economic slowdown or maybe even a crisis like we saw back in 2008, what do you think precious metals, what do you think will happen to precious metals? Obviously they got taken down a little bit with all the financial assets there in 2007, 2008. Do you think we see a repeat of that, or will gold and silver act as true safe havens, and potentially go in the other direction?

Gerald Celente: We see gold and silver as the ultimate safe haven, there’s no question about it in our mind. Again, the only thing that they’re doing is talking down gold by saying that the dollar is going to increase in value, which means of course gold is based on dollar value. The stronger the dollar gets, if people are feeling they’re getting higher interest rate returns on a dollar they’d rather hold dollars rather than gold. But the dollar in all of the currencies are going to be under severe pressure in an economic down turn. And what it will mean is that central banks will come up with more schemes. By the way, the new scheme that they’re all talking about now – that (point to the fact that) the central banks have failed – is government stimulus. By the way, that’s what they’re doing in China. Do you know what, China’s debt to GDP ratio is going to be hitting 260% this year? 260%. It’s a whole sham. It’s one big bubble.

So yes – and we don’t give financial advice, we’re trend forecasters, but only speaking for myself, I’m very bullish on it. Well, we’re bullish on gold in terms of our forecast. Again, all you have are cheap digital currencies backed by nothing, and printed on nothing. So why would you want to own those? Again, look at what’s going on around the world. Whether it’s Venezuela with their what? Nearly 600% inflation rate. Look at the problems in Argentina, despite the new government (leader, President) Macri. People are protesting already, inflation’s skyrocketing. Take a trip to Brazil, what are you looking at? You’re looking at the worst recession in 100 years. And then you look at all these oil rich countries that are suffering, and resource rich countries.

So this is only going to prove more painful. If in fact they raise interest rates, the dollar becomes more valuable and all these countries, particularly their emerging markets have to pay off their debt in dollars as their currencies decline. By the way, that’s one of the big fears the Fed has. They talk about it very infrequently, but that’s really the big issue. It’s the global debt bubble. So if the dollar becomes more valuable, and these emerging markets and corporations that have borrowed so much have to pay it back with more expensive dollars as their economies declining, you have a crisis of proportions we’ve never seen before in the history of the world.

Mike Gleason: Yeah, certainly seems like an untenable situation there, and obviously a stronger dollar is going to hurt all that like that you mentioned. Now as we begin to wrap up here, this has been a very contentious campaign season, probably more divisive than we’ve ever seen in this country. Now you’ve always been on the leading edge of predicting political and social unrest, what are your thoughts on the potential fallout in the months following this election here Gerald.

Gerald Celente: Well first of all one of our top trends I can tell you (about) – and we’re going to have a conference here in December, in Colonial Kingston New York, we own three of the buildings on the most historic four corners – one of the trends we’re looking at is a great populous movement. This is basically the end of the Republican party. There’s nobody there, that’s why Trump was able to win. Look at the people, you got a little bunch of nobody’s going no place. Whether it’s McCain, Jed Bush, Paul Ryan, there’s nothing, it’s empty. Lindsay Graham, McConnell, all running on zero. You’re going to see the end of the conservative movement, and a big push towards populism. I’m saying that also because should Hillary Clinton win, there will be a huge populous movement that will be very, very much anti-Clinton, and anti-Democratic party. And there’s going to be a very long period of socio-economic and political unrest in the United States following this election, particularly if Clinton wins.

And as Trump said, and again, I’m not voting for either of them, neither of them represent my values. I want to make that very clear, they do not represent my values, I don’t vote for the lesser of two evils. So having said that, Trump is particularly on trend when he says that considering the FBI actions being taken against Clinton, if she wins, that administration is going to be under a lot of legal turmoil for quite a long time. So it will be a very divisive campaign. On the other hand, if Trump wins the Democrats and the liberals, they’re not much of fighters. They fold really quickly. For example, you have liberals that pretend to be pro peace, you know, quiche eating liberals. They talk out of both sides of their mouth. So they claim to be peaceniks and peace loving, and here they’re voting in a woman with more blood on her hands than just about anybody out there that’s running for office.

I say that cause she was responsible for the overthrow of Gaddafi in Libya, and anybody could go to Google, put in, “Hillary Clinton, CBS News, Gaddafi,” and you can hear her say when she was asked by the CBS News reporter, “How did you feel when you found out Muammar Gaddafi was killed?” And not only was he killed, he was sodomized with a sword on video, and cut up to pieces, and just killed in just a grotesque manner. She straightens up and she said, “We came, we saw, he died. Hee-hee, hee-hee” They should have taken her out of there in a strait jacket. And then you look at what Gaddafi has to go, Assad has to go, she wants a no fly zone in Syria.

So the liberals are hypocrites. Because they claim on one hand that they love peace and love, and they are voting for a woman who has more blood on her hands than almost equivalent to her husband, who of course was bombing Iraq on a daily basis, four times a week basically when he was president. Put on sanctions on Iraq, they killed over 500,000 people. Again, you could go to YouTube, Madelyn Albright, Leslie Stall, when they ask secretary Albright who was Secretary of State under Clinton how she felt was the price of the 500,000 young kids under 5 years old, worth the price of the sanctions. That was according to a UN number, and she said, “Yes it was.” Of course Bill Clinton’s Yugoslav war. Hillary Clinton’s pro Afghan and pro Iraq war. They’re war criminals. Nothing more, nothing less.

So what I’m saying is that you will not get it back because they’re such cowards on the liberal end, they won’t fight a Trump presidency. They’ll fold. They’re not fighters. On the other hand if Clinton wins you’re going to see a lot more outrage about her being in office, considering the amount of WikiLeaks coming out that are adding great questions to the legitimacy of her campaign, and the ethics of the Clinton Foundation. That’s not going to go away.

Mike Gleason: Well we’ll leave it there Mr. Celente. Thank you so much for joining us again, we always love having you on. And I appreciate your candid insights as usual. Now before we let you go, as we always ask you to do, please let folks know more about how they can get their hands on the tremendous information you put out, both online and with the Trends Journal Magazine, as well as anything else that’s going on there at the Trends Research Institute.

Gerald Celente: They could go to TrendsResearch.com and they could subscribe to the Trends Journal. Of course we do a Trends in the News Broadcast each weekday night, a Trend Alert each week, a Trends Monthly. We have conferences, we have one coming up here in December 2nd on the top trends of 2017. Also, for people that can’t afford it, there’s a discount request page. It’s only $ 99 anyway. But if you can’t afford it, we know people are having difficult times, we try to make it available to everyone. It’s the only place we believe you’re going to find history before it happens. That’s not an empty slogan. Look what’s going on in the media just as we speak. Reuter’s announced a 4% cutback of their staff. New York Time’s, major layoffs. Wall Street Journal, major layoffs. Gannett News Service, major layoffs. You’re not getting news anymore, you’re getting sound-bytes, you’re getting Facebooked, you’re getting tweeted, and you’re getting Google Newsed.

If you want real news to prepare for the future, avoid the dangers and benefit from the opportunities. I truly suggest you consider the Trends Journal.

Mike Gleason: Certainly a strong advocate for it here. We get a copy of the Trends Journal Magazine in the office here every month. It’s truly fantastic stuff, and definitely urge people to check that out. You will not be disappointed, it really is fantastic information and very well put together as well I might add.

Well excellent stuff, I hope we can catch up with you again real soon as we sift through the post-election fall out. I hope you have a great weekend, and thanks for being so generous with your time Mr. Celente.

Gerald Celente: Thank you so much for having me on, and thank you for all that you do.

Mike Gleason: Well that will do it for this week. Our sincere thanks to Gerald Celente, publisher of the renowned Trends Journal. For more information the website again is TrendsResearch.com. Be sure to check that out.

And check back here next Friday for our next Weekly Market Wrap Podcast. Until than this has been Mike Gleason with Money Metals Exchange. Thanks for listening, and have a great weekend everybody.

Precious Metals News & Analysis – Gold News, Silver News




Raising interest rates is not that simple, Lord Hague

The present period of very low interest rates is widely assumed to be temporary, a consequence of the 2008 financial crisis and subsequent central bank action. Because of this, as the financial crisis fades into the mists of time, there is growing political pressure for “normalisation” of interest rates. Here, for example, is William Hague warning that central banks must start to raise rates or face losing their independence:

The only way out is for the US Fed to summon the courage to lead the way to higher interest rates, and others to follow slowly but surely. If they fail to do so, the era of their much-vaunted independence will come, possibly quite dramatically, to its end. 

Hague gives ten reasons why low interest rates are a bad idea. His points can be summarised thus:

  • “reach for yield” by savers who want higher returns drives up the price of assets
  • higher asset prices increase wealth inequality, fuelling popular anger
  • pension funds are struggling, forcing businesses to put more money into them
  • banks are struggling to make a profit
  • people are struggling to save enough for their retirements
  • companies would rather buy back shares than invest productively
  • low interest rates support zombie companies
  • pumping up asset prices could result in an almighty crash
  • “emergency measures” shouldn’t still be in place after nearly a decade anyway

Few would disagree that these are the adverse effects of very low interest rates. But unfortunately none of them necessarily mean that interest rates should rise. If interest rates were naturally very low, rather than being artificially depressed by central banks as Hague implies, these effects would still occur. As Larry Summers has pointed out (pdf), asset price bubbles are a feature of “secular stagnation”, where the economy becomes stuck in a low-growth, low-inflation, low-interest rate equilibrium:

Let us imagine, as a hypothesis, that this decline in the equilibrium real rate of interest has taken place. What would one expect to see? One would expect increasing difficulty, particularly in the down phase of the cycle, in achieving full employment and strong growth because of the constraints associated with the zero lower bound on interest rates. One would expect that, as a normal matter, real interest rates would be lower. With very low real interest rates and with low inflation, this also means very low nominal interest rates, so one would expect increasing risk-seeking by investors. As such, one would expect greater reliance on Ponzi finance and increased financial instability.

Raising interest rates above their natural rate is ultimately unsustainable, since it means that the productive sector is slowly drained to provide rents to the unproductive sector. The problem therefore is identifying what the “natural” rate is. Is this just a blue funk by central banks, as Hague thinks – or are there other reasons why interest rates are still so low?

There is a growing body of research that suggests that not only are very low interest rates the “new normal”, they have further to fall. And the reasons have little to do with the financial crisis.

In an important new paper (pdf), Federal Reserve researchers blame demographic factors not only for the falling equilibrium real interest rate, r*, but also for declining GDP growth:

We find that demographic factors alone can account for a 1.25 –percentage-point decline in the equilibrium real interest rate in the model since 1980—much, if not all, of the permanent decline in real interest rates over that period according to some recent time-series estimates, such as Johannsen and Mertens (2016b) and Holston et al. (2016). The model is also consistent with demographics having lowered real GDP growth 1.25 percentage points since 1980, primarily through lower growth in the labor supply; this decline is in line with changes in estimates of the trend of GDP growth over that period. 

And they add that the apparent correlation between the financial crisis and low interest rates is an illusion:

Interestingly, the model also implies that these declines have been most pronounced since the early 2000s, so that downward pressures on interest rates and GDP growth due to demographics could be easily misinterpreted as persistent but ultimately temporary influences of the global financial crisis.

Gavyn Davies identifies three reasons why r* will remain low:

  • falling labour supply growth rate
  • rising dependency ratio
  • rising longevity

Together, these add up to an environment in which there is a growing propensity to save, a rising capital share and sustained downwards pressure on interest rates. Admittedly, as the US baby boomers retire, their propensity to save should diminish. But the rising dependency ratio will force working-age people to save a larger percentage of their incomes in order to support the growing number of elderly. This is the case regardless of the method of saving, as John Eatwell pointed out

Just how severe the demographic pressures will be in future is evident from these “beehive” charts produced by researchers at Cambridge University:

The researchers identify the introduction of the contraceptive pill in 1967 in Western countries as the principal cause of this striking demographic change. I would probably add to that liberalization of abortion services at around the same time. The effects are particularly pronounced in Germany:

…..the fertility rate fell from 2.5 in 1967 to 1.4 in 1970. In the long run, this will lead to a decline of the steady state population growth from 1.5% to -0.5% per year. However, during the transition to the new steady state, the age composition of the population will deviate strongly from its steady state structure. The fall in fertility led to substantially smaller cohorts born just after the introduction of the pill, with an echo-effect when the first, smaller, post-pill cohort of women starts giving birth themselves. The last cohorts born before the introduction of the pill are therefore much larger than the cohorts born before and after. For Germany, the cohort born in 1995 is just half the size of that born in 1968.


In China, where the fertility shift lags the others, the cause was undoubtedly the one-child policy. Interestingly, the US does not show such a dramatic fall in cohort sizes: the researchers don’t discuss the reasons for this, but I suspect it is due to immigration. But even in the US, increasing longevity will mean a rising dependency ratio. 
The researchers go on to discuss the effect on saving and spending patterns of this demographic shift:

People initially borrow to finance their education; next they enter the labour force and begin saving, at first to repay this loan and then to save for retirement; finally they deplete these savings during retirement. For this reason, the desired stock of assets is at its maximum just before retirement. The current demographic profile, with large cohorts approaching retirement, means that the population is disproportionately biased towards saving.  As the large cohort desires to hold a large stock of savings, there is a surplus of savings. At the same time, the absorbers of savings – the young cohorts who borrow to finance their education – are in short supply. This implies that the real interest rate will be low, in fact even negative.

The researchers omit to note that in many Western countries the young borrow to buy property, not just to finance their education. In theory, demand for housing should help to support the interest rate. But most people buy houses with mortgage loans. As property price rises outstrip wage rises,  reality, mortgage demand pushes up the price of property, putting additional downward pressure on interest rates. Rising property prices mean the young must take on ever larger mortgages, and rising mortgage debt relative to household income is unsustainable unless interest rates fall. When the acquisition of assets is generally financed by debt, asset price bubbles provide only short-term relief to the problem of falling interest rates. Over the longer term, they make the problem worse. 


This striking chart shows the sharp decline in the real interest rate since the 1980 peak:

Worryingly, this chart shows that the real interest rate still has further to fall. By 2035, if the researchers are correct, the real interest rate will have fallen to minus 1.5%, purely due to demographic factors. I suppose we should be relieved that it will gradually rise after that, eventually stabilising at minus 0.5% by the end of this century. But unless something changes, it will never be positive again.

Permanently negative real interest rates have huge implications for the structure of finance.  Firstly, banking as we know it will become impossible, since credit intermediation reverses when rates are negative. Secondly, maturity transformation would become unprofitable: although in theory yield curves could still be positively sloped when rates are permanently negative, they would be very flat. There would have to be a major rethink of the way in which financial intermediaries whose job is maturity transformation (banks, pension funds, insurance companies) work. 


More importantly, permanently negative real interest rates fundamentally affect the ordering of society. They do not support debtors at the expense of savers, as is popularly believed: rather, they favour those who own assets (mainly the old) at the expense of those who do not (mainly the young). This potentially sets up a highly damaging intergenerational conflict. The older people who expected higher returns on their savings than they will receive are already angry, and their anger is likely to increase. The younger people who see their hopes of owning their own home receding into the distance are also angry, and their anger is likely to increase too. And when younger people face confiscation of growing amounts of income, either in the form of taxes (even if disguised as social security contributions) and/or compulsory saving (auto-enrolment springs to mind – there are already calls for the percentage contribution to be increased), in order to support a rising number of elderly, they will become even angrier. 

So what is the solution? Sorry, Lord Hague, it certainly isn’t raising interest rates. That would simply transfer still more from young to old, and it would put financial stability at risk. When the supply of savings exceeds the demand for them, the returns on them must fall. However angry the baby boomers are, they have to accept that the high interest rates of their youth are gone forever, and their future is consequently poorer than they expected. This is not because they have been robbed by governments or screwed by central banks: it is largely because of their own failure to produce enough of the next generation to support them in their old age. 

Rather, we need to find ways of raising the real interest rate. The risks associated with NOT doing so are simply too great. So, since the real problem here is a structural imbalance between the supply of safe assets for retirement saving and the demand for them, the obvious thing to do is to improve the supply of safe assets. The Cambridge researchers point out that sovereign bonds, state pension schemes and asset price bubbles are logically equivalent:

In an economy with perfect foresight, bubbles, PAYG, and sovereign debt are perfect substitutes for trade in bubbly assets. Whether resources are transferred from the young to the old by the trade of bubbles, by a government enforced PAYG pension scheme, or by a government that sells bonds to the young to repay the last period’s bonds held by the old, the outcome is the same in all three cases.

Asset price bubbles put financial stability at risk, and government enforced PAYG pension savings sufficient to provide pensions for all those elderly are likely to worsen intergenerational conflict. So the solution is sovereign debt. Lots of it. Enough to meet the saving needs of the entire population. Or, if you prefer, government savings schemes – safe high-interest savings accounts such as those provided by NS&I. Lots of them.

And, at the other side of the government savings bank, investment of those savings in productive enterprises. After all, the structural imbalance is not just a problem of supply but also of demand. It is not central banks that are in a blue funk, but the whole world. Everyone is terrified of loss, no-one wants to take any risk, and the productive enterprises of the future are being starved of investment at the same time as savers are being deprived of returns. The effect of this will be to depress wage growth and productivity far into the future. If investment doesn’t improve, the future for both young AND old is an impoverished one.

As I have pointed out many times before, the primary purpose of sovereign debt is not to finance government, but to enable people to save. And when the private sector is too scared to invest, government must step in. In a world of ageing populations, growing need for saving and fear of loss, the political obsession with reducing sovereign debt/GDP must end. 

Related reading:

Rethinking government debt
Bond yields and helicopters
Keynes and the Quantity Theory of Money
The Great Yield Divergence
The safe asset scarcity problem, 2050 edition
Weird is Normal – Pieria
The broken contract – Pieria

Coppola Comment




Negative rates and bank profitability

Banks are complaining. “Negative interest rates hurt our margins,” they moan. Here’s Commerzbank, for example, in its recent results announcement (my emphasis):

Mittelstandsbank attained a solid result in a challenging market environment. The operating profit declined in the 2015 financial year to EUR 1,062 million (2014: EUR 1,224 million), yet remains at a high level. The fourth quarter accounted for EUR 212 million (Q4 2014: EUR 251 million). The full year revenues before loan loss provisions declined to EUR 2.7 billion (2014: EUR 2.9 billion). This development is due in particular to the downturn in deposit transactions, which was driven by the negative level of interest rates on the marketas well as the depreciation of a shareholding.

 And here is Danske Bank’s CFO Heinrik Ramlau-Hansen, quoted in Bloomberg:

“There are considerable costs associated with negative rates. In 2015 alone, narrowing deposit margins resulted in a cost of more than 2 billion kroner ($ 302 million)”.

Many will not be sympathetic to this. “If they don’t want to pay negative rates on deposits at the central bank”, goes the popular thinking, “they should lend the money out”.

Indeed, individual banks can avoid paying negative rates on excess reserves. They can discourage customers from making deposits; they can choose to hold reserves in the form of physical cash; or they can increase new lending (not refinancing), since the balance sheet result of new lending is replacement of reserves with loan assets.*

But of course the reserves do not disappear from the system. They simply move to another bank, which then incurs the tax. The banking system AS A WHOLE cannot avoid negative rates on reserves. The reserves are in the system, so someone has to pay the negative rate. If banks increase lending to avoid the negative rate, the velocity of reserves increases. It’s rather like a game of pass-the-parcel.

Now of course it is not quite that simple. In monetary systems that have required reserves calculated as a proportion of eligible deposits, increasing lending increases the proportion of total reserves that are “required”, and thus reduces the proportion of total reserves on which the negative rate is payable. This is true in both the US and the Eurozone. So in these systems, increasing lending IS a way of reducing the impact of negative rates. The ECB says that since negative deposit rates were introduced there has been some increase in lending. Is this due to negative rates, or due to QE, or due to general improvement in loan demand as the economy improves, or due to restored banks loosening credit criteria? We do not know. Perhaps it is all of them.

It seems reasonable to suppose that negative interest rates might increase loan demand. Negative interest rates on reserves put downwards pressure on benchmark rates and thus on bank lending rates, attracting those who would otherwise be priced out of borrowing. But typically those are riskier borrowers. We have just spent eight years forcing banks to reduce their balance sheet risk. Do we really want to force banks to lend to riskier borrowers? Of course, tight underwriting standards could be used to deny those people or businesses loans: but doesn’t that rather defeat the purpose of negative rates? It’s something of a double bind.

It’s also worth remembering that risky assets tie up bank capital. It is not clear that the return from lending to riskier borrowers in a very low-rate environment outweighs the cost of capital required to support them. If it does not, then banks will choose to bear the negative rate rather than increase lending. They might even raise interest rates to borrowers to cover the cost, or pass the negative rate on to certain groups of depositors.

That said, there is a wider market effect of negative policy rates that could benefit banks. Negative policy rates (deposit and funding) depress the short end of the money market yield curve. All short-term rates respond to this, so we would expect most demand deposits to carry a negative rate, along with short-term risk-free securities. The steepening of the curve should improve the margins of all financial institutions that make money from maturity transformation. For banks this is an encouragement to lend longer-term, offsetting the margin squeeze at the short end of the curve. And when the central bank is actively depressing longer-term rates with QE, negative rates could actually protect bank margins by preventing the curve from flattening.

There is a second protective effect for banks, too, pointed out by Bloomberg in the piece cited above:

Fewer customers default on their loans when borrowing costs sink, and that means banks suffer fewer impairments. After writing down 853 million kroner in the fourth quarter of 2014, Danske wrote back 139 million kroner in the final three months of 2015. For all of last year, impairments were just 57 million kroner, compared with 2.79 billion kroner in 2014.

Downwards pressure on interest rates acts as a form of forbearance. But again, we have to consider whether this is what we really want. Do we want banks lending to high-risk borrowers at artificially low interest rates, and reducing provisioning against existing risky loans? What would happen when we raise interest rates again?

But the banks insist that despite all this, their margins are squeezed. And the reason appears to be their own reluctance to pass on negative rates to depositors. Indeed, the Bloomberg piece headlines with “Negative rates costing billions won’t hurt clients, says Danske”. And it finishes with this:

“Negative rates clearly create a pressure on net interest income for the banking sector, and Swedish banks are not an exception,” according to Uldis Cerps, the agency’s executive director for banks. 

That said, Swedish banks are “better positioned” because of their “good profitability,” Cerps said. That “increases their capacity to absorb further NII reduction.”

So at present, the expectation is that banks will absorb the cost of negative rates. There really is a margin squeeze. Clearly, only stronger, better-capitalised banks will be able to afford this, and they will offer more attractive rates both to depositors and borrowers. For customers, this margin squeeze looks attractive. But for banks, it looks like a cut-throat competitive spiral in which only the strongest – or those with the strongest government backing – will survive.

It also raises serious questions about the relationship of banks to the wider economy. Negative rates are effectively a tax on deposits, and as such are intrinsically contractionary. They are a form of financial repression. As long as banks choose to absorb that tax themselves, those who pay that tax will effectively be bank shareholders and employees. But if banks choose to pass that tax on, it will be savers and borrowers who pay the tax. Would the increased economic activity that negative interest rates may generate be sufficient to offset the effect of this tax?

Alternatively, if we think of negative rates as a monetary operation rather than a tax, we can say that the central bank drains back a small proportion of the reserves it adds to the system through QE. This is monetary tightening. Again, would the increased economic activity generated by negative rates be sufficient to offset this effect?

I do not know. And I do not think anyone else does either. But one thing seems clear. How negative rates would work in practice is no clearer than how QE works in practice. They are experimental, and their effects are complex. Hydraulic monetarist arguments (“if you can get rates low enough the economy will rebound”) are simplistic.

I suspect that the principal effect of negative interest rates (especially in combination with QE) will not be to increase bank lending but to depress the exchange rate. And when everyone is depressing the exchange rate, there is an unpleasant race to the bottom and global trade grinds to a halt. We have played this scene before. It did not end well last time. Why do we think this time is different?

Related reading

The strange world of negative interest rates
The liquidity trap heralds fundamental change
Bank profits, negative rates and evidence – FT Alphaville
It was the financial crisis that stopped banks lending, not interest on excess reserves – Forbes
(and see the exchange of comments with Dr. George Selgin
Banks don’t lend out reserves – Forbes

Image from Getty Images. 

* Yes, I know banks create deposits when they lend. But for the purposes of this post I have conflated the two steps of lending, which are loan & deposit creation followed by loan drawdown. After step 1, there is indeed a new deposit which balances a new loan asset. But after step 2, the new deposit has disappeared along with an equivalent amount of reserves (asset), leaving only the loan asset.
Coppola Comment




Can the Fed Drop Interest Rates Below 0%?

For the financial markets, the biggest event of the week starts tomorrow: On Wednesday and Thursday (Feb. 10-11) Fed chair Janet Yellen will appear before Congress to deliver her semi-annual Monetary Policy Report.

“It’s huge.” That’s how one strategist put it this morning, in a CNBC interview about the importance of Yellen’s testimony.

Why are all eyes on Yellen? Maybe because by now, almost everyone has forgotten how powerless the Fed appeared in 2007-2009, when none of its measures could stop the financial crisis. Despite the recent market chaos, six years of rising stock prices reaffirmed the notion that the Fed can move mountains. “As the Fed goes, so do the markets” is the current mantra — so, on Wednesday and Thursday, analysts will be listening carefully: Will Yellen mention the ongoing market turmoil?

If not, then the Fed is focusing on “the positives” like the U.S. jobs and GDP numbers, which makes another interest rates hike likely in March. If Yellen does mention the “turmoil,” then the Fed is worried about the markets, making a March hike unlikely.

Basically, it comes down to “rate hike now” — or “rate hike later.” But there is the third option.

A rate cut. And not just any cut, but a rate cut below zero.

Crazy? Look at Europe and Japan, where negative interest rates are already in place. As our December Financial Forecast wrote,

“…yields on more than one-third of all euro-area government bonds…are now below zero.

“A buyer of these bonds at par who holds them to maturity is guaranteed to lose money.”

Can this happen here? Yes, says Bloomberg:

“Fed Chair Janet Yellen said in September that negative rates weren’t a main policy option, but that officials would evaluate the approach if needed.”

Translation: “Fed officials have said negative rates are possible, though not probable any time soon.”

What could push the Fed to make a move like that? Our new, February Financial Forecast explains:

“Successive rounds of quantitative easing by central banks along with various other monetary tricks were all designed to spark inflation; all they utterly failed.

[That’s hard to argue with: Europe is officially in a deflation, and the Fed has been unable to push inflation up to its goal of 2% for several years. — Ed.]

“The latest gambit to grab the fancy of central bankers is negative interest rates. Japan [has just joined] the European Central Bank, Sweden, Denmark and Switzerland in charging depositors to hold their money.

“These actions confirm that deflationary forces are intensifying, consistent with our long-standing forecast. It may seem outlandish to think so at the moment in light of the U.S. Federal Reserve’s recent decision to raise short-term interest rates, but deepening deflation will eventually force the U.S. central bank to go down this path, too.”

If the Fed indeed is forced to reverse course and drop interest rates below zero, what investment will be a “safe place”?

Read our new report, Risk ON? Risk OFF? Find Out Where Your Money Lies. The editors of our Financial Forecast Service, Steve Hochberg and Pete Kendall, have been tracking a “steady global shift to greater financial conservatism over the last 18 months.” They have just published this new report detailing all of their findings. Read Their Complete Report >>

This article was syndicated by Elliott Wave International and was originally published under the headline Can the Fed Drop Interest Rates Below 0%?. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.