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Markets around the world are convulsing which is definitely different than
anything we have seen in over a year. We also know that interest rates are
going higher all over the world. In fact, if you look at rates going back to
1981, the downtrend line(s) has been broken and thus a very major change.
Generational trades and 37 year trend lines are rare on their own, when they
finally break it means something very big has changed and you must do your
very best at trying to figure out “what” it is.
Let’s take a look at two charts that might help, one of interbank lending
in the U.S. and also at “velocity”. These are both very important and I would
suggest they are both connected by something called “trust”. First, interbank
lending absolutely collapsed out of nowhere at the end of the year. If you
look closely below, interbank lending has dropped back to only $13 billion or
the same level it was all the back to pre 1973-74 recession levels!
You can follow along and see how lending amongst banks generally inflated
all the way up until 2006-2008 until it crashed. This happened because banks
did not “trust” each other. From there, the lending tapered off until the
recent nearly zeroing out of interbank lending. I would suggest since 2009,
the amount of lending steadily decreased and never increased as banks “knew”
other banks did not have strong balance sheets (maybe because they knew the
reality of their own balance sheet?). In any case, there can be only two
reasons for lending to collapse like is has. Either there is no need for
money (credit) OR banks do not trust each other? I would highly suggest it is
the latter.
Next, let’s look at velocity. After eight years or so, it finally looks
like there is a hook forming and velocity may just be turning up? Zerohedge
did an article on this with a good explanation last week
So “what” does velocity turning up mean and why is it important if it is?
This topic could be an entire book and a lot depends on “where” in the credit
cycle it turns up from. Without doubt, we are at the end of both a cyclical
and the secular credit cycle. You see, once debt became too prevalent in
2000, and even worse in 2007, it became over bearing and we hit what I have
termed “credit saturation” levels. Rates had to be lowered (even to negative
levels) to prevent a domino collapse cause by the inability to service.
But then more “medicine” (debt) was applied and velocity turned down again
after only a brief uptick. Velocity turned down again after each of the last
two reflation attempts, only it never really bounced the last time. This is
because the high levels of debt ate up much discretionary earnings and it
felt “tight”. The feeling of tightness (or feeling of lack of money on the
streets) led many to pull in their horns so to speak. If velocity is truly
turning up here (I believe it will go vertical at some point), it will be for
ALL THE WRONG REASONS!
Let’s see how these all tie together and why I bolded the phrase “all the
wrong reasons”? In one word, “inflation”, but let me explain. Oversimplifying,
inflation of say 4% will not allow credit markets to function at rates under
that because no one (except central banks) will lock money up at a lower rate
than the currency is debasing. Thus, higher inflation means higher yields and
lower bond prices. The problem? Debt (bonds) have become the “foundation” to
everything financial …INCLUDING currencies themselves!
This is where velocity comes in… If investors believe inflation and thus
rates are going higher (in an over levered world), fear will set in. Fear of
EVERYTHING financial becoming worth less because they are all “discounted”
versus interest rates. Also, and probably more important, fear of loss via
“bankruptcy” whether by issuer or counterparty. Additionally, higher rates
means no more ability to refinance or to “roll over” debt”. Remember, all
currencies are debt based …so inflation/fear will be exhibited not only in
the sale of bonds (and to a lesser extent equities) but also the currency in
a “hot potato” fashion. In other words, the dollar’s velocity will turn
sharply higher as people finally “spend” them to GET OUT OF THEM!
To finish, I would ask, is inflation what the banks saw coming and decided
to flatten their books with counterparties? Did they see massive U.S.
Treasury borrowing needs and figure out the only player with that kind of
buying power is the Federal Reserve who has claimed they would taper and
actually are to a small extent? Do they see outright monetization necessary
and in the wings? Are the banks front running the Chinese trading for oil
with yuan …and thus knocking some serious demand out from under the dollar?
Folks, the money has already been created and the debt already put in place
which is kindling wood for inflation. In the old days when money was gold, we
would be set up (versus gold backed currencies) for the greatest DEFLATION of
all time. Because gold as “money” has been replaced by manmade debt and
currency, the result will again be a deflation but in difference sorts. The
deflation will be in currency and credit versus gold … it will look and feel
like HYPERINFLATION to those holding the dying debt and currencies. Assets
that have derived their value from investors borrowing to purchase will all
deflate against gold …while very possibly (probably) still inflating versus a
dying dollar and other fiats. Look at it as a totem pole of deflation. Gold
at top and EVERYTHING deflates (resets) against it with the dollar
(currencies at the bottom. Currencies will lose THE most value (along with
fixed income) and are at the bottom of the totem pole …so “real stuff” will
inflate against the currencies.
When all is said and done, we are soon to have the biggest deflation of
all time versus gold …but it will “feel” like hyperinflation to the vast
masses who do not hold gold! Fiscal insanity and monetary lunacy have reached
their limits. They will and are “trying” for one last hurrah www.mcclatchydc.com,
by borrowing their way to another reflation …GOOD LUCK WITH THAT!
Standing the “re set” watch,
Bill Holter
Holter-Sinclair collaboration
www.jsmineset.com
https://www.milesfranklin.com/something-is-de...but-what-is-it/
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