AGXIIK is back with a Warning:
If you don’t like the smell in the debt elevator you’d best exit quickly before it begins its race downward to Hell…
By SD Contributor AGXIIK:
In reality the only thing that precipitates crashes in the stock and bond market, blowing over over to the housing market IS the rise in interest rates.
I lived in the world of loans, rates, borrower qualifications and the consequences of same since 1975. Since 1970 I’ve been through half a dozen major crashes including the 1970 stagflation malaise, the 1980-3 rocket rise interest rates, 1987 market crash, 1989-93 S&L/ bank and real estate crash, 2001 tech wreck and the 2007-2009 mother all collapses that smashed real estate prices, the stock market and hundreds of major and minor banks.
That crash was one order of magnitude worse than anything of the last 20 years. As an aside, I recall Nixon’s 1981 Wage and Price and Price Freeze, his 10% income tax surcharge to pay for his and Johnson’s Guns and Butter idiocy, Ford’s in-execrable WIN Buttons (Whip Inflation Now–it should have said BOHICA), then 4 years of Jimmy Carter, POTUS Malaise, the Grim Creeper in a middy sweater, telling us how we all must accept a new era of mediocrity.
Rising interest rates were part of, OR, the entire set of events that precipitated these crashes. They either caused a crash or were the knock-on effect that created major failures in other currency, bond, loan, stock or real estate markets.
The bond and commercial loan markets are now an order of magnitude larger than the stock markets. Rates drive nearly everything in the world that affects us. When rates rise slowly, the cost factors grind relentlessly on all borrowers. Debt of this sort keeps people and countries poor for decades; even centuries. Sharp increases in rates can collapse entire bond markets and the countries to which the bonds are attached.
In almost all circumstances and situations, rising rates start the inevitable cycle of economic pressures that beget even further rate increases. We are so far under the historically normal 210 year rate of 5% on 10 year US Treasuries that a rate rise will probably shoot last the mean as the inevitable Reversion to the Mean races upwards, quite likely hitting 7-8% before its momentum is expended.
If a central bank decides to get involved or bond risk skyrockets, rates could go to double digits. I lived there for nearly 15 years before rates dropped below 10%. If you hate the gold and silver price malaise, trying living in double digit interest rates for a decade and a half.
There’s an old Fed saying ‘Three jumps and a stumble.’ If the Fed raises rates 3 times, this almost always precipitates a crash in bonds, stocks or housing.
Or D–all of the above.
When the Fed raises rates on December 14 or thereabouts, that’ll be rate increase #2; the first took place December 2015. That was the first since 2007. My belief that the Fed will increase rates 2-3 times in 2017 is shared by almost all banks with whom I converse. They’re pricing in rate increases, factoring in rate increases to their loan decisions. Some told me rates are up 50-75 BPS since November 2016.
They’re also relentlessly and remorselessly turning down residential and commercial loans due to the 75 BPS jump of the last 45 days. Debt service coverage ratios are being blown to heck. Unlike central banks, regular banks look forward to increasing rates, reactive to these events. It augers badly for borrowers going into 2017.
Unlike ‘normal’ banks, central banks are backward-looking as part of their predictive tool chest. Rates rise as they use very inaccurate and even fraudulent economic indicators like sub 2% inflation, rising GDP and an asinine 4.6% unemployment rate. After poring over the stat driven chicken guts, they make decisions to increase rates in order to prevent overheating or some other catch phrase at sounds good to the MSM and masses who suck up this drivel like it’s gospel.
They’ve been wrong virtually time in the last 80-90 years. Some years the damage was minimal; some years the damage was cataclysmic, but Central Banks are uniquely unqualified to be the driving agents of rates and economic well being. We have the benefit of 20/20 hind sight to aid us in our analysis of Central bank idiocy. The Central Banks use 20/20 hind sight as a predictive tool, looking in the rear view mirror to see how they’re doing.
Ahead is a cliff. ‘Meep Meep’ Mr. Coyote. You gonna die!
In my opinion this is the real Black Swan that we face.
These unexpected rate increases, unexpected as most borrowers don’t expect the increases because they’re drunk on low cost money and low rates, thinking the punch bowl will never run empty. This catches the drunken borrowers at the worst possible time—right when their borrowing and spending is at the highest rate.
Global debt is somewhere between $150 and $300 trillion, depending on which central bank you enter and exit and how you measure the levels of globally held debt. Interest costs never ever ends, even in a paradigm of NIRP and ZIRP. Debt has increased something on the order of 150-300% in the last 15 years. The bubbles of the past were never actually blown. They were just transferred to another bag holder and then reinflated.
By the way, if you wonder who’s the final bag holder, look in the mirror. We, the people have the banker’s ratty fingers around our ‘bag’ and soon enough they’ll begin to squeeze.
The semblance of free money that we’ve seen for half a decade is a complete farce and falsity. Debt is never free. It always has costs. It always has hooks. And when rates rise, as they inevitably do, the debt burden smashes everything. Those hooks sink ever deeper. There is no such thing as Free Debt, anymore than there’ll be Free Beer Tomorrow.
In raw dollars we are at the end of the greatest bond/debt bubble in world history. Starting in 1981, it’s lasted 35 years. Of all bond bubbles of the last 500 years none lastest no more than 36 years; some lasted a decade less. Then the crash. If my maff is correct I reckon we are in the 36th year of the latest bond bubble Can you spell Bond Bubble Crash? It’s here; knocking at the front door.
The whole world relies on NIRP and ZIRP, a ludicrous, insane manifestation of ivory tower dwelling, glue sniffing Keynesian lunatics who think that every bodily excrescence is meaningful.
‘I fart therefore I am’ is not an adequate or sustainable economic predictive model.
Knowing this, whatcha gonna do?
If you don’t like the smell in the debt elevator you’d best exit quickly before it begins its race downward to Hell.