{"id":1135765,"date":"2023-02-05T15:12:08","date_gmt":"2023-02-05T20:12:08","guid":{"rendered":"https:\/\/bugaluu.com\/news\/mission-accomplished\/1135765\/"},"modified":"2023-02-05T15:12:08","modified_gmt":"2023-02-05T20:12:08","slug":"mission-accomplished","status":"publish","type":"post","link":"https:\/\/bugaluu.com\/news\/mission-accomplished\/1135765\/","title":{"rendered":"Mission Accomplished!"},"content":{"rendered":"
\"\"<\/a><\/div>\n

Mission Accomplished!<\/span><\/p>\n

\n

Authored by MN Gordon via EconomicPrism.com,<\/em><\/a><\/p>\n

About the time the most trusted man in America, Walter Cronkite, signed off from the CBS Evening News for the last time, something momentous happened in the U.S. credit market.\u00a0 Few people, apart from Bill Gross and A. Gary Shilling, understood what was going on.<\/p>\n

Hindsight is always 20\/20.\u00a0 And looking at a chart of U.S. interest rates several decades later it all seems so obvious.\u00a0 Specifically, that the rising part of the interest rate cycle peaked out in 1981.<\/strong><\/p>\n<\/p>\n

This one thing, in essence, changed everything.\u00a0 <\/strong>Over the next 39 years interest rates fell as mega-asset bubbles were puffed up and floated across the land.<\/p>\n

The relationship between interest rates and asset prices isn\u2019t complicated.\u00a0 Tight credit generally produces lower asset prices.\u00a0 Loose credit generally produces higher asset prices.<\/p>\n

When credit is cheap and plentiful, individuals and businesses increase their borrowing to buy assets they otherwise couldn\u2019t afford.\u00a0 As cheap credit flows into various assets, it balloons their prices in kind.<\/strong><\/p>\n

For example, individuals may use cheap credit to take on massive jumbo loans.\u00a0 This allows them to bid up house prices.\u00a0 Businesses, flush with a seemingly endless supply of cheap credit, may borrow money and use it to buy back shares of company stock.\u00a0 This has the effect of inflating share prices, and the value of executive stock options.<\/p>\n

When credit is tight, the opposite happens.\u00a0<\/strong> Borrowing is reserved for activities that promise a high rate of return; one that exceeds the high rate of interest.\u00a0 This has the effect of deflating the price of financial assets.<\/p>\n

More Pain to Come<\/strong><\/h2>\n

In 1981, following a great wave of Federal Reserve manufactured inflation, credit was expensive. \u00a0At the same time, stocks, bonds, and real estate were cheap.<\/strong>\u00a0 For example, in 1981, the interest rate on a 30-year fixed mortgage reached the unimaginable high of\u00a018.45 percent<\/a>.\u00a0 That year, the\u00a0median sales price for a U.S. house<\/a>\u00a0was about $70,000.<\/p>\n

By comparison, in December 2020, the 30-year fixed mortgage rate dropped to a historical low of 2.68 percent.\u00a0 Rates remained below 3 percent for most of 2021.\u00a0 This allowed many borrowers to refinance or buy houses at extreme low rates.<\/p>\n

Thus, the median sales price for a U.S. house peaked at $468,000 in Q3 2022.\u00a0 Along the Country\u2019s east and west coasts prices inflated much higher.<\/p>\n

In 2022, as the Fed commenced hiking the federal funds rate in an attempt to contain the raging consumer price inflation of its making, the 30-year fixed rate mortgage spiked up to over 6.5 percent.\u00a0 Consequently, U.S. house prices are now deflating and likely have much further to fall to complete this boom-and-bust cycle.<\/strong><\/p>\n

Similarly, the Dow Jones Industrial Average (DJIA) was roughly 900 points in 1981.\u00a0 Then, on January 4, 2022, the DJIA hit its all-time closing high of 36,799.\u00a0 That comes to over a 3,988 percent increase.\u00a0 Since then, however, as interest rates have increased, the DJIA has started deflating to its recent close of 34,053.\u00a0 Like house prices, we believe the DJIA also has much further to fall.<\/p>\n

Without question, the 39-year run of cheaper and cheaper credit had something to do with ballooning stock and real estate prices.\u00a0 Asset prices and other financialized costs, like college tuition, have been grossly distorted and deformed by nearly four decades of falling interest rates.<\/p>\n

The gap between high asset prices and low borrowing costs have positioned the world for a great reckoning.\u00a0 Certainly, 2022 was a difficult year for stock and bond investors.\u00a0 Nonetheless, there is plenty more pain to come.<\/p>\n

Only 37 More Years to Go<\/strong><\/h2>\n

The Fed has strong influence over credit markets through its open market operations.\u00a0 But it is not the credit market\u2019s ultimate master.\u00a0 The fact is, Fed credit market intervention plays second fiddle to the overall rise and fall of the interest rate cycle.<\/p>\n

From a historical perspective, today\u2019s 10-Year Treasury note yield of 3.39 is still extraordinarily low.\u00a0 But if you consider just the last two years, it\u2019s extraordinarily high.<\/strong><\/p>\n

The yield on the 10-Year Treasury note bottomed out around just 0.62 percent in July 2020.\u00a0 At 3.39 percent today, the yield his increased dramatically.\u00a0 In fact, the yield on the 10-Year Treasury note has increased over 446 percent over the last 31 months.\u00a0 Quite frankly, it\u2019s amazing there hasn\u2019t been a major blow up of a major investment fund \u2013\u00a0yet<\/em>.<\/p>\n

The last time the interest rate cycle bottomed out was during the early-1940s.\u00a0 The low inflection point for the 10-Year Treasury note at that time was a yield somewhere around 2 percent.\u00a0 After that, interest rates generally rose for the next 40 years.<\/strong><\/p>\n

No one can predict the future.\u00a0 But looking to past interest rate cycles for guidance provides a startling realization.\u00a0 We may be less than three years into a 40-year period of rising interest rates.\u00a0 In other words, everything the world has come to know and love about financial markets since 1981 has been stood on its head.<\/p>\n

Between 1981 and 2020, each time the economy went cold, the Fed cut interest rates to juice financial markets.\u00a0 In this disinflationary environment, asset prices increased while incomes stagnated.\u00a0 Moreover, aided by an abundance of cheaply made goods from China, increases to consumer prices over this period were moderate.<\/p>\n

The Fed, while conflating apparent success with luck, thought it had somehow tamed the business cycle.\u00a0 Congress also discovered it could spend printing press money without consequences.\u00a0 These takeaways couldn\u2019t be further from the truth.<\/strong><\/p>\n

Your Broker Has No Clue<\/strong><\/h2>\n

Not many people are still alive who remember how drastically different the effects of the Fed\u2019s policy adjustments are during the rising part of the interest rate cycle than during the falling part of the interest rate cycle.<\/p>\n

During the rising part of the interest rate cycle, as demonstrated in the 1970s, after the U.S. defaulted on the Bretton Woods Agreement, Fed interest rate policy became increasingly damaging.\u00a0 Fed policy makers demonstrated they are politically incapable of staying out in front of rising consumer prices.\u00a0 Their efforts to hold the federal funds rate artificially low, to boost the economy, no longer had the desired effect.<\/p>\n

In this scenario, monetary inflation brought about consumer price inflation.\u00a0 Fed policies were policies of disaster.<\/p>\n

In July 2020, roughly 39 years after it last peaked, the credit market finally bottomed out. Yields are rising again.\u00a0 In truth, they may rise for the next three to four decades.<\/p>\n

This means the price of credit will increasingly become more and more expensive well into the mid-21st century.\u00a0 Hence, the world of perpetually falling interest rates \u2013 the world we\u2019ve known since the early days of the Reagan administration \u2013 is over.<\/p>\n

This is something most politicians, consumers, and investors have little comprehension of.\u00a0 Your broker also likely has no clue what has happened.<\/p>\n

Many investors, having little experience beyond two decades, let alone four decades, are enamored with the vaunted salvation of a forthcoming Fed pivot.\u00a0 This limited focus will compel them into strategic mistakes. \u00a0They may unwittingly put their hard-earned savings and wealth in a place of great danger.<\/p>\n

Mission Accomplished?<\/strong><\/h2>\n

Fed Chair Jay Powell has studied the on again off again inflation of the 1970s.\u00a0 He knows how quickly consumer price inflation can flare-up if the Fed does not fully snuff it out.\u00a0 He recognizes the dangers of taking his foot off the break too soon.\u00a0 He doesn\u2019t want a repeat of another decade of high consumer price inflation.<\/strong><\/p>\n

Still, Powell is human just like you.\u00a0 He\u2019s subject to influence.\u00a0 Specifically, political influence.<\/p>\n

<\/a><\/p>\n

After this week\u2019s\u00a025 basis points rate hike<\/a>, the federal funds rate is now at a range of 4.5 percent to 4.75 percent.\u00a0 Another 25-basis point rate hike in March will take the top end of the federal funds rate to 5 percent for the first time in 17-years.<\/p>\n

Will that be the end of it?\u00a0 Will it be mission accomplished?\u00a0 Will the Fed then pause?\u00a0 Will it then pivot?<\/strong><\/p>\n

Investors, the foolish ones, seem to think so.\u00a0 This week, following the Fed\u2019s rate hike and subsequent press conference, investors went all in on a variety of companies.\u00a0 On Thursday, Grainger jumped over 30 percent, followed by Align Technology (up over 27 percent), Coinbase (up nearly 24 percent), and Meta (up over 23 percent).<\/p>\n

What gives?<\/p>\n

The U.S. economy appears to be slipping and sliding into a recession.\u00a0 Consumers are tapped out.\u00a0 They\u2019ve maxed out their credit cards.\u00a0 Technology workers are getting massively RIFed.\u00a0 The depth and intensity of the economic contraction will test the Fed\u2019s courage to act.<\/strong><\/p>\n

The political pressure applied to Powell may become too much to resist.\u00a0 The Fed may, in fact, cut rates later this year.\u00a0 This is what the fools are banking on.\u00a0 Though the result may not be what they expect.<\/p>\n

Because the Fed will be cutting the federal funds rate in an environment of rising interest rates.\u00a0 The last time the Fed tried this, in the 1970s, the results were disastrous.<\/p>\n

Certainly, yields on Treasury notes may periodically fall during periods of recession.\u00a0 For example, they could fall over the coming months.\u00a0 However, the long-term trend is up.<\/p>\n

The experience of 2022 will repeat several times per decade until the cycle has concluded.\u00a0 By our estimation, that will be sometime around 2060 \u2013 give or take a few years.<\/strong><\/p>\n

Investment decisions should be made accordingly.<\/p>\n

*\u00a0 *\u00a0 *<\/p>\n

Hoping for a Fed pivot to bailout your retirement is a fool\u2019s strategy.\u00a0 At this point in the credit cycle, the deck\u2019s stacked against you.\u00a0 But are things you can do.\u00a0 If you\u2019re interested in discovering several ideas, take a look at my\u00a0Financial First Aid Kit<\/a>.\u00a0 Inside, you\u2019ll find everything you need to know to prosper and protect your privacy as the global economy slips into a worldwide depression.<\/em><\/p>\n<\/div>\n

Tyler Durden<\/a><\/span>
\nSun, 02\/05\/2023 – 19:00<\/span><\/p>\n

From:Zerohedge<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

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