by Bob Rinear, The International Forecaster:
The bulk of this past week was truly boring. Yes we had stock market volatility and the almost “now-normal” gigantic swings, but overall there wasn’t a lot new.
But then Friday happened and things became very interesting very quickly. So, what was it? All week the yield on the ten year had been flirting with 4%. It might do 4.1, then fade to 3.96, back to 4.00 etc. But Thursday night it really got moving again, and I think I saw 4.33 overnight. This is not supposed to be folks. Bonds are supposed to be stable. A place to park money and feel safe. Instead, the debt market has felt like it was on the verge of literally breaking.
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So, Friday morning the futures were grumpy and we opened red. But then, out of the blue, we started racing higher. Obviously something was said or done somewhere, but where? Then “it” hit. The Wall Street Journal supposedly “leaked” from a source that the Fed’s would indeed do 75 basis points in November, but then might only do 50 or even 25 in December. Thus, all those looking for the fed “pivot” were dancing like they were on Happy days.
Then we started to get some confirmation by no less than fed head Daly:
FED’S DALY: WE WILL PERFORM A STEP-DOWN, BUT NOT A PAUSE, TO 50 OR 25 BPS INCREMENTS.
Now what’s terribly interesting about all this, is that this WSJ “leak” and then confirmation from Daly… comes on the very same day the Bank of Japan had to intervene with 50 billion in their yen currency, as things were horrifically unstable Consider this:
FED’S DALY: WE NEED TO CONSIDER GLOBAL FACTORS.
In other words, things were breaking and they had no choice but to try and settle things down.
You all know what’s happening. The debt market has ballooned into some form of leviathan monster. It’s not just the hundreds of trillions in debt loads, it’s the derivatives written against that debt that is in the Quadrillions. When the world was at least “fairly” stable, pre 2020, the central bankers could shuck and move and put their fingers in the dikes and keep the process from imploding.
But a lot has happened in the past 2 years. It wasn’t just the bioweapon and lockdowns. It wasn’t just the enormous spending bills. It wasn’t just the crashing of supply chains. It was that and a hundred other things. But make no mistake, since the Russian military operation kicked off in the beginning of the year, all manner of newfangled problems have arisen.
Think about it in really simple terms. Let’s say you’re a manufacturer in Germany and you make widgets. You’ve borrowed millions to open the factory to make your widgets. But when Europe went stupid and decided to join all the Russian Sanctions, and you couldn’t get Russian gas any more to power your factory, you had to idle that factory and lay off your workers. Okay, sounds tame, right? Well what about those millions you borrowed? Some bank is on the hook for that debt. Do they just write that debt off? No, they want their money. But you can’t pay because you can’t run your plant.
That right there is ONE tiny little example of the types of things that are blowing up the liquidity in the debt market. Multiply a scenario like that a thousand times. Then expand that to where those very banks that are no longer getting paid on their debts, might have sold off some of those notes to other investors, investors that might be connected to pension plans, or insurance plans. The ripple effect is enormous.
Now, it is true that I’m on record saying that the fed doesn’t care if it grinds economies into the ground. They don’t care about the stock market beating up your 401K plan. It’s my opinion that the entire narrative has changed and erasing what’s left of the middle class is now part of their job description. BUT and this is important… they don’t want a full on, all out, crash. An out of control crash, doesn’t serve their agenda any more than it would yours.
They need to engineer a controlled, longer term demolition. “Slowly” taking the equities market down. Slowly raising rates that slowly destroys the demand side of the ledger. But here’s the question… Can they pull it off?
I don’t know. I’ve mentioned many times that the world is a tinder box, a powder keg. Greece and Turkey are inches from war. China’s moved from a manufacturing economy, to a war production economy. Every day they’re locking up MILLIONS in covid quarantine camps, supposedly to make sure Covid doesn’t spread through their population. Baloney, they’re taking people that used to work making widgets, and turned that factory into war production, and had to get rid of a lot of people they don’t want on the job. So, locking them down in a barbed wire fenced camp keeps them from prying eyes.
The US along with their lackey’s in Europe, continue to say they don’t want peace with Russia, they want every inch of Ukraine land back and they’ll do what they have to do, to get it. Russia as you might guess, is not going to let that happen. Now, does that mean a peace deal can’t be made? I think that a peace deal can be made. But it will not see the Donbas region going back to Ukraine.
I could easily see increased escalation, that results in a small tactical nuke going off, where the world gasps, and cries for a settlement before it turns into nuclear WWIII. But in the here and now, the bulk of Europe is in major league trouble. Their banks are in trouble, their manufacturing is in trouble, and yes that’s all compounding the global debt markets issues.
Nothing right now is easy. Trying to figure out the next steps on the global chessboard is not easy. Do the Chinese make a move on Taiwan, as they know the US is being weakened by sending so much arms to Ukraine? Does Russia finally say “enough being nice guys, we’re just going to flatten Ukraine?” Can they keep the debt market from imploding? Can they keep the credit markets greased enough that they don’t freeze up? Can the US get through the recession we’re in that’s going to deepen? Can the Bank of Japan keep their financial situation from going over the cliff? All of this is connected.
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