Liquidating Civilization, Report 22 Apr 2018

By Keith Weiner

Further to our ongoing theme of capital destruction, let’s look at a topic which is currently out of favor in the present market correction. Keynes called for pushing the interest rate down near to zero, as a way of killing the savers, whom be believed are functionless parasites. The interest rate has been falling since 1981.

It did not merely fall near to zero. Nor even to zero. It has gone beyond zero, into negativeland. This alone ought to wipe out the mainstream notions of how interest rates are set in our very model of a modern monetary system. You know, the rubbish about bond vigilantes, inflation expectations, real interest rates, risk, etc. Might as well add unicorns, dragons, and leprechauns!

Instead of this rubbish, the world needs a non-linear theory of interest and prices in irredeemable currency.

In recent years, rates have plunged below zero in Switzerland, Germany, Japan, and other countries. Despite the current global uptick in rates, all Swiss government bonds out to 8-year maturity have a negative yield. Hey, at least that’s a recovery from when the 20-year had a negative yield. In Germany, bunds out to 5 years are negative, as they are in Japan.

This is pathological (in fact, due to negative long bond yields in Switzerland, Keith wrote a paper arguing that the Swiss franc will collapse).

As an aside, we note that when people hear our arguments, they go through a process akin to the well-known stages of grief. These include denial, anger, bargaining, and then finally acceptance and hope. It is much easier to think about rising quantity of dollars, and the presumed linear effect of rising consumer prices. And more pleasant, too.

Continue reading Liquidating Civilization, Report 22 Apr 2018

How Do Changes in Real Interest Rates Affect Gold?

By Charlie Bilello

We often hear that Gold prices are driven by real interest rates. Rising real interest rates are said to be bad for Gold because it increases the opportunity cost of holding the yellow metal. This makes sense intuitively as Gold pays no interest or dividend, and will therefore be less attractive as compared to risk-free bonds when real interest rates are higher.

But Gold is a complex animal, influenced by a multitude of factors, only one of which is real interest rates. How much do changes in real interest rates alone impact the the price of Gold? And is it only the change in real interest rates that’s important or the absolute level as well? Let’s take a look…

Since 1975 (when Gold futures began trading), there has been an inverse relationship between Gold and real interest rates. Gold has generated positive returns during periods of falling real interest rates and negative returns during periods of rising real interest rates.  This is true whether we look at monthly changes (+13.9%/-3.9% during falling/rising periods) in real interest rates or year-over-year changes (+11.0%/-0.3% during falling/rising periods).

Continue reading How Do Changes in Real Interest Rates Affect Gold?

Jim Grant On The Bond Bear Market, Jerome Powell And Much More

By Heisenberg

Well, everyone wants to talk about rates these days and it’s no mystery why.

The Fed is under new leadership at a pivotal juncture. Balance sheet rundown has commenced and the Trump administration has embarked on what multiple sellside desks (see here, here, and here for a few takes) have described as an ill-advised quest to try and supercharge an already hot economy with late-cycle expansionary fiscal policy.

And so, the supply/demand dynamic in the Treasury market has shifted. Financing the tax cuts and increased spending means more supply and with the Fed out of the market, it’s left to price sensitive private investors to provide the bid. This comes as the global reserve diversification debate heats up and as second-order effects of increased bill supply could further sap foreign demand for U.S. debt (see here). To be sure, the market will clear – the question is, at what price?

That gets to the heart of the debate about where yields go from here and the concern is that between everything said above and the suspicion that between fiscal stimulus and now tariffs, price pressures could build quickly, the Fed will be forced to take a hawkish turn that’s not yet priced in by markets. All of these concerns helped fuel the bond rout that conspired with the February 5 vol. shock to send global equities careening into correction territory last month.

Well, one person you might be interested in hearing from on all of this is Jim Grant, and  happily, Erik Townsend welcomed him to the MacroVoices podcast this week.

You can listen to the interview in full below, but here are a couple of excerpts that touch on the questions everyone wants answered.

Continue reading Jim Grant On The Bond Bear Market, Jerome Powell And Much More

The Rising Interest-Rate Trend

By Steve Saville

The rising interest-rate trend in the US isn’t new and isn’t related to the Fed’s so-called “policy normalisation” program. However, it has only just started to matter.

That the rising interest-rate trend isn’t new and isn’t related to the Fed’s rate-hiking efforts is clearly illustrated by the following chart. This chart shows that the US 2-year T-Note yield began trending upward in 2011 — more than 6 years ago and more than 4 years prior to the Fed’s first rate hike.

UST2Y_050318

As we go further out in duration we find later beginnings to the rising-yield trend. This is evidenced by the following three charts, the first of which shows that the 5-year yield bottomed in mid-2012, the second of which shows that the 10-year yield double-bottomed in mid-2012 and mid-2016, and the third of which shows that the 30-year yield continued to make lower lows until mid-2016. But even in the case of the 30-year yield the rising trend is now more than 18 months old.

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Mortgage Refinancing Applications Tank 11.11% From Previous Week As Fed-or Mortis Sets In

By Anthony B. Sanders

Fed Futures Forecast 3 Rate Increase This Year

Yes, The Fed’s version of Rigor Mortis (aka, Fed-or Mortis) is setting in.

Mortgage applications increased 2.7 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending February 23, 2018. This week’s results include an adjustment for the Washington’s Birthday (Presidents’ Day) holiday.

mbastats022818

The seasonally adjusted Purchase Index increased 6 percent from one week earlier. The unadjusted Purchase Index decreased 1 percent compared with the previous week and was 3 percent higher than the same week one year ago. The Refinance Index decreased 11 percent from the previous week.

mbaprefiraes

Continue reading Mortgage Refinancing Applications Tank 11.11% From Previous Week As Fed-or Mortis Sets In

Bonds and Related Market Indicators

By Notes From the Rabbit Hole

The following is an excerpt from this week’s edition of Notes From the Rabbit Hole, NFTRH 488. For NFTRH bonds are not just an asset class ‘throw-in’ but instead are a key indicator set to the entire modern macro. Insofar as it may be time to use them for portfolio balance (I am currently long SHV, SHY, IEI & IEF), so much the better. Many could not wait to buy bonds during US ZIRP global NIRP operations, but today they pay better interest and have a contrarian edge with the entire herd bracing for a bear market.

We claimed appropriately bearish on bonds on December 4th, so you know this is not perma-book talking when we go the other way as yields hit our targets.

Bonds and Related Market Indicators

A subscriber asks for comment on sentiment in 1-3 year bonds and what it would take for me to “issue an all out buy signal” on them. He is a new subscriber and has not been through the agony and torment of my frequent disclaimers on the subject of how I am just a lowly participant who would not issue all out buys, sells or anything else for others. :-(

What I would do however, is tell you what I am doing and last week to my recent buys in IEF (7-10yr) and IEI (3-7yr) I added SHY (1-3yr). The old saying goes “real men trade the long bond” and I guess I am not a real man because I don’t want to touch that far end (20+ years) of the curve at this time.

Continue reading Bonds and Related Market Indicators

My Kuroda! 10Y T-Note Yield Declines After Approaching 3% Barrier…

By Anthony B. Sanders

My Kuroda! 10Y T-Note Yield Declines After Approaching 3% Barrier (Same For Germany And Japan)

The US Treasury 10Y yield appears to have bounced off a reflecting barrier — the 3% yield barrier.

1oycashin.png

For the German Bund, it is reflecting off of the 75 basis point barrier.

Continue reading My Kuroda! 10Y T-Note Yield Declines After Approaching 3% Barrier…

Volatility and Interest Rates

By Tom McClellan

VIX Index versus 3-month T-Bill yield
February 23, 2018

Why is the VIX spiking now?  Because now is when it is supposed to do that.

Volatility and interest rates have an interesting relationship, going back many years.  Higher interest rates pull money away from the stock market, and thus make it so that prices have to travel farther to find liquidity, after a positive or negative stimulus.

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