Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Stock Maket Trading Lesson - How to REALLY Trade Markets - 26th Nov 21
SILVER Price Trend Analysis - 26th Nov 21
Federal Reserve Asks Americans to Eat Soy “Meat” for Thanksgiving - 26th Nov 21
Is the S&P 500 Topping or Just Consolidating? - 26th Nov 21
Is a Bigger Drop in Gold Price Just Around the Corner? - 26th Nov 21
Financial Stocks ETF Sector XLF Pullback Sets Up A New $43.60 Upside Target - 26th Nov 21
A Couple of Things to Think About Before Buying Shares - 25th Nov 21
UK Best Fixed Rate Tariff Deal is to NOT FIX Gas and Electric Energy Tariffs During Winter 2021-22 - 25th Nov 21
Stock Market Begins it's Year End Seasonal Santa Rally - 24th Nov 21
How Silver Can Conquer $50+ in 2022 - 24th Nov 21
Stock Market Betting on Hawkish Fed - 24th Nov 21
Stock Market Elliott Wave Trend Forecast - 24th Nov 21
Your once-a-year All-Access Financial Markets Analysis Pass - 24th Nov 21
Did Zillow’s $300 million flop prove me wrong? - 24th Nov 21
Now Malaysian Drivers Renew Their Kurnia Car Insurance Online With Fincrew.my - 24th Nov 21
Gold / Silver Ratio - 23rd Nov 21
Stock Market Sentiment Speaks: Can We Get To 5500SPX In 2022? But 4440SPX Comes First - 23rd Nov 21
A Month-to-month breakdown of how Much Money Individuals are Spending on Stocks - 23rd Nov 21
S&P 500: Rallying Tech Stocks vs. Plummeting Oil Stocks - 23rd Nov 21
Like the Latest Bond Flick, the US Dollar Has No Time to Die - 23rd Nov 21
Why BITCOIN NEW ALL TIME HIGH Changes EVERYTHING! - 22nd Nov 21
Cannabis ETF MJ Basing & Volatility Patterns - 22nd Nov 21
The Most Important Lesson Learned from this COVID Pandemic - 22nd Nov 21
Dow Stock Market Trend Analysis - 22nd Nov 21
UK Covid-19 Booster Jabs Moderna, Pfizer Are They Worth the Risk of Side effects, Illness? - 22nd Nov 21
US Dollar vs Yields vs Stock Market Trends - 20th Nov 21
Inflation Risk: Milton Friedman Would Buy Gold Right Now - 20th Nov 21
How to Determine if It’s Time for You to Outsource Your Packaging Requirements to a Contract Packer - 20th Nov 21
2 easy ways to play Facebook’s Metaverse Spending Spree - 20th Nov 21
Stock Market Margin Debt WARNING! - 19th Nov 21
Gold Mid-Tier Stocks Q3’21 Fundamentals - 19th Nov 21
Protect Your Wealth From PERMANENT Transitory Inflation - 19th Nov 21
Investors Expect High Inflation. Golden Inquisition Ahead? - 19th Nov 21
Will the Senate Confirm a Marxist to Oversee the U.S. Currency System? - 19th Nov 21
When Even Stock Market Bears Act Bullishly (What It May Mean) - 19th Nov 21
Chinese People do NOT Eat Dogs Newspeak - 18th Nov 21
CHINOBLE! Evergrande Reality Exposes China Fiction! - 18th Nov 21
Kondratieff Full-Season Stock Market Sector Rotation - 18th Nov 21
What Stock Market Trends Will Drive Through To 2022? - 18th Nov 21
How to Jump Start Your Motherboard Without a Power Button With Just a Screwdriver - 18th Nov 21
Bitcoin & Ethereum 2021 Trend - 18th Nov 21
FREE TRADE How to Get 2 FREE SHARES Fractional Investing Platform and ISA Specs - 18th Nov 21
Inflation Ain’t Transitory – But the Fed’s Credibility Is - 18th Nov 21
The real reason Facebook just went “all in” on the metaverse - 18th Nov 21
Biden Signs a Bill to Revive Infrastructure… and Gold! - 18th Nov 21
Silver vs US Dollar - 17th Nov 21
Silver Supply and Demand Balance - 17th Nov 21
Sentiment Speaks: This Stock Market Makes Absolutely No Sense - 17th Nov 21
Biden Spending to Build Back Stagflation - 17th Nov 21
Meshing Cryptocurrency Wealth Generation With Global Fiat Money Demise - 17th Nov 21
Dow Stock Market Trend Forecast Into Mid 2022 - 16th Nov 21
Stock Market Minor Cycle Correcting - 16th Nov 21
The INFLATION MEGA-TREND - Ripples of Deflation on an Ocean of Inflation! - 16th Nov 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Watching Paint Dry in the Repo Market

Interest-Rates / US Interest Rates Sep 24, 2019 - 08:32 AM GMT

By: Michael_Pento

Interest-Rates

The world of fixed income trading has been extremely volatile lately. Rates have not only spiked in the Treasury market but borrowing costs in money markets have also become extremely disconcerting. The residual effects from Quantitative Tightening, which ended just this past July, are wreaking havoc on the liquidity in bond markets. Ironically, the Fed’s erstwhile rate hikes and its QT program--what Fed Chairs described as running in the background and like watching paint dry—turned out to be the catalyst for a freeze in the junk-bond market in December of 2018 and is now causing major disruption in the Repo market.

This illustrates clearly the tenuous nature of the bond bubble and that it will someday implode like a supernova---sending yields skyrocketing on a long-term basis. However, it most likely does not yet mark the start of the epoch debt bubble debacle that is in store. We will need a surge of inflation expectations, or the credit markets to shut down on a protracted basis for that to occur. We are moving closer to that eventuality every day.


Turning to Treasury market volatility, the perceived end to the trade war escalation and slightly better economic data was just part of the reason for the US 10-year Note yield to recently leap from 1.4%, all the way to 1.9% in a matter of a few trading days. But what was mostly overlooked by the Main Stream Financial Media, and also served to push bond yields higher, was the huge increase of US debt issuance--the pace of which has been surging. The US fiscal deficit for 2019 breached over the $1 trillion mark in August--with one month still left in this fiscal year. The total amount of red ink rose to $1.07 trillion thanks to the $214 billion deficit for August alone.

The deficit for all of last year was just shy of $780 billion. This year's deficit is the largest since 2012 and is far greater than the $415 billion deficit which was posted in 2016. That was the year before Donald Trump took office and promised to pay off the national debt, which is now $22.5 trillion and 13% higher than when he took office. This means we have added over $2.5 trillion to the National debt pile. Not only is that debt not paid off, but the pace we are adding to it is rising fast. It’s not just the government that is amassing debt; Consumers added $23.3 billion in total debt for July alone, and corporations issued a record $150 billion worth of debt since September 1st.

All this debt is putting upward pressure on rates and inflation targeting are adding salt to the wound. Core Consumer Price Index (CPI) is now up 2.4% year over year and is well above the Fed's asinine 2% inflation target. We have debt levels surging in both the public and private sector and yet interest rates are so low that in 1/3 of the developed world it actually costs you money if you want to lend your savings to the government. And, annual deficits in the US have officially eclipsed $1 trillion and are projected to grow even bigger as far as the eye can see. This begs the question: If a 1% Fed Fund Rate (FFR) helped create the housing bubble that brought down the global financial system a decade ago, what could possibly go wrong with having a decade’s worth of ZIRP--and even NIRP--that have now created a triumvirate of record asset bubbles existing concurrently for the first time in history?

Over the past week the European Central Bank (ECB), the Fed, and the Bank of Japan (BOJ) met. What all three central banks have in common, other than being extremely dangerous and incredibly clueless, is they all are cutting interest rates at this time when borrowing costs are already at their lowest in history. This is causing a massive amount of new debt to be taken on and at the same time all three major central banks are in a panic to get inflation higher. Meanwhile, the tenuous and massive asset bubbles they have created are ready to implode.

The salient questions are whether their cuts will be done quickly enough to turn the economy around and if there is enough room to cut rates no matter how fast they come? The base case scenario is that central banks will fail to stem the gravitational forces of deflation until they resort to some form of helicopter money. Think Universal Basic Income (UBI) and Modern Monetary Theory (MMT). But how will we know if this is correct? The Pento Portfolio Strategies’ Inflation/Deflation and Economic Cycle Model is not only designed to predict these outcomes by measuring changes in fiscal and monetary policies but also verifies these assumptions by monitoring the 20 model components that include yield curve dynamics, credit spreads and other market-based metrics. This includes the liquidity of money markets.

And speaking of money markets, the Repo market is not functioning normally at this time. People should be concerned about this because it is an early warning signal for a liquidity crisis; just like the signal, it sent back in 2007. The Repo market consists of overnight secured lending between banks. This rate is influenced by the Fed Funds Rate (FFR). The Fed's target rate is now 1.75%--2.00%; yet the Effective Fed Funds Rate (the actual rate banks exchange their assets for cash) spiked above the high-end of the Feds target. The spiking Repo rate for collateralized lending helped push the FFR up, which is unsecured borrowing between banks. This means there are certain financial organizations out there that are seriously hurting for cash. Otherwise, they would never need to pay 8% over the current borrowing rates targeted by the Fed.



The spike in the EFFR caused the fed to print nearly $300 billion to date and inject that liquidity it into the money markets to bring down rates. As of this writing they have decided to continue these Repo operations thru October 10th. Overnight injections are temporary fixes, and the fed might soon realize that it needs to inject a form of more sustainable liquidity. In other words, the Fed may return to QE and permanently start to increase its balance sheet once again, Jerome Powell even hinted at returning to QE in his September press conference. This is true despite the fact that it just ended the draining of its balance sheet in August. You remember the QT program; the one that was supposed to be on autopilot and would be like watching paint dry?

Despite the claims from virtually everyone on Wall Street, and their lackeys in the media, the spike in Repo and Fed Funds borrowing costs clearly shows that banks do not at all have the liquidity cushion that has been advertised. If banks are short of cash now, which caused Repo funding costs to spike to about 10%, just imagine what is going to happen when the $5.4 trillion junk bond, BBB and Collateralized Loan Obligation (CLO) market becomes distressed! As mentioned already, the last time this happened was in 2007 and it coincided with the top of the stock market and presaged the collapse of the entire global financial system one year later.

Whether or not this follows the same pattern as the Great Recession is unknown at this point. But our model is built to map this cycle correctly and protect and profit from whatever occurs. Having a tested model is a far better strategy for investors than to be fully invested in a passively and blindly managed basket of stocks and bonds no matter what.

Michael Pento produces the weekly podcast “The Mid-week Reality Check”, is the President and Founder of Pento Portfolio Strategies and Author of the book “The Coming Bond Market Collapse.”

Respectfully,

Michael Pento

President

Pento Portfolio Strategies
www.pentoport.com
mpento@pentoport.com

Twitter@ michaelpento1
(O) 732-203-1333
(M) 732- 213-1295

Michael Pento is the President and Founder of Pento Portfolio Strategies (PPS). PPS is a Registered Investment Advisory Firm that provides money management services and research for individual and institutional clients.

Michael is a well-established specialist in markets and economics and a regular guest on CNBC, CNN, Bloomberg, FOX Business News and other international media outlets. His market analysis can also be read in most major financial publications, including the Wall Street Journal. He also acts as a Financial Columnist for Forbes, Contributor to thestreet.com and is a blogger at the Huffington Post.               

Prior to starting PPS, Michael served as a senior economist and vice president of the managed products division of Euro Pacific Capital. There, he also led an external sales division that marketed their managed products to outside broker-dealers and registered investment advisors. 

Additionally, Michael has worked at an investment advisory firm where he helped create ETFs and UITs that were sold throughout Wall Street.  Earlier in his career he spent two years on the floor of the New York Stock Exchange.  He has carried series 7, 63, 65, 55 and Life and Health Insurance www.earthoflight.caLicenses. Michael Pento graduated from Rowan University in 1991.

© 2019 Copyright Michael Pento - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Michael Pento Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in