For the past 15 years, since the Global Financial Crisis, central banks have claimed they could generate demand and economic growth via stimulus. Some $73tn of spending later, it is finally becoming clear to some of them, at least, that they can’t.
Now, we all have to start picking up the pieces of the problems they have created.
investors are hoping Fed Chairman Jay Powell will soon signal a dramatic interest rate cut. And so they are positioning for a ‘Santa Claus’ rally. But most adults know that Santa Claus doesn’t really exist.
US 10-year interest rates are the world’s benchmark “risk-free” market. And as the chart shows, their yield has risen from 3.25% on 4 June to peak at 4.88% on Friday. Prices move inversely to yield. So that means prices have fallen 50% in 4 months.
300+ years of Bank of England data shows that interest rates are typically inflation plus 2.5%. At today’s level, this would imply – US rates would be 3.7% + 2.5% = 6.2%: Japan would be 3.2% + 2.5% = 5.7%: Eurozone rates would be 5.3% + 2.5% = 7.8%; UK rates would be 6.7% + 2.5% = 9.2%
Most Americans can’t qualify for a mortgage today with prices and interest rates at generation-highs. Yet housing starts average a post-2007 record of 1.5m/month. Logic therefore suggests the US housing market could be heading for a repeat of the 2008 crisis
The losses sitting on central bank balance sheets are starting to soar to eye-watering levels. The US Federal Reserve is sitting on a “mark-to-market” loss of $911bn. The UK taxpayer has already handed over £150bn ($192bn) to cover the Bank of England’s losses.
Central banks have spent 15 years telling us that debt and demographics “don’t matter”. They claimed they could always create demand via stimulus. But now the policy has run out of road. Homeowners and stock traders who thought rates would stay low forever, will be the ones to suffer
It seems highly likely that the Rebound rally is ending, and the market Downtrend is about to resume. Time spent on researching the paradigm shifts that will take us into the New Normal will likely prove very profitable for the future
The problem is that most economic models were originally built in the 1960s/70s, when people still died around pension age, and are out-of-date
“You can’t run the most reckless monetary and fiscal experiment in history without the bill eventually coming due. The first invoice arrived as inflation. The second has come as a financial panic, with economic damage that may not end with Silicon Valley Bank.”
