Hot-Air-Balloon Markets are Falling out of the Dusky Sky

The plans of central banks had their own doomsday device built into them because they rose on the thin, hot air of practically free money, pumped in at large volumes that turned former bubbles into massive balloons. Their failure was always inevitable should the day come, as it certainly would, when they were forced to deflate their inflated economies. What goes up on hot air must come down when the hot air is removed. It’s as simple as that … unless you just don’t want to see it. Then you work out arguments about why that might not be so. Well, we are here, and it is so.

One article in The Daily Doom today requires a membership at Seeking Alpha to read it, but I’ve included it in the headlines that follow anyway for those who have such a membership because I’m going to quote the salient part of it here for all readers. Here is the balloon deflation happening before your eyes (different than price deflation but intended to achieve price deflation):

Bonds that mature in 10 years or more have slumped 46% since peaking in March 2020, according to Bloomberg data, slightly below the 49% plunge seen in U.S. stocks after the dot-com bust.

"The magnitude of the bond selloff has been so stunning that stocks are arguably more expensive than a month ago," said Barclays. "In the short term, we can think of one scenario where bonds rally materially - if risk assets fall sharply in the coming weeks."

It noted that the Federal Reserve may not ease up on quantitative tightening and will remain a net seller of Treasurys, while the increase in bond supply due to rising deficit is also driving up the term premium.

At 46% decline, the bond balloon is “slumping” quickly. So, when you hear talk of no recession in the cards or a “soft landing” based on consumer spending or current GDP, realize that is not the basis for my recession prediction. Never has been. My recession prediction is based, not on current metrics but on exactly what the Fed is doing and its natural effects.

The ongoing plunge of the bond balloon (bubble on steroids) that is as bad as the dot-com bust is going to be accompanied with a second part to the crash of the stock-market balloon that descended badly last year. Joined by the total freeze-over of the current market for existing homes and the rapidly arriving blow-up for contractors in the new-home market that will rapidly deflate the housing balloon, this trio of grim reapers is going to take the US economy to its knees.

That scenario is developing in highly visible ways now that will make the banking bust last spring look like a mere BB hole in the side the overinflated banks that gorged on those low-interest bonds that were abundant under the recovery plan, compared to the tear that is about to come. When that tear opens up, like it did in the Great Recession, the statistics and data points won’t be able to scramble fast enough to catch up to where the overall economy is clearly going as the Everything Bubble that carries it disintegrates. And that can happen just as quickly as the spring banking crisis that emerged from these darkening skies like a black swan out of nowhere or like the Bear did back in 2008.

As one Analyst casually notes about the current period,

“We’re in the middle of a transition from what everybody thinks is a low rate environment, to a kind of more normalized rate environment. These adjustment periods are tough,” said Horizon Investments chief investment officer Scott Ladner.

True, but is he considering when he casually calls it “tough” that the current economy is deeply dependent in the Fed’s more-than-a-decade period of extreme low interest and bond buying? The economy can’t survive coming off of ten years of drugged dependence. This is the kind of extreme withdrawal that kills.

You have to consider that high stock valuations were almost entirely supported with cheap credit that made years of record-breaking stock buybacks easily possible. You have to consider that business plans have been built for years around credit costs that were practically nothing. Funds have loaded up with bonds that are undesirables now that much better bonds are available. Those that are built on stocks pumped up by buybacks are equally vulnerable. On and on one can go about the things in this economy that are dependent on that low interest they were made from — the hot air that filled them.

So, grossly overpriced and stock values and utterly unrealistic expectations for future stock valuations will keep falling in the months ahead as bond yields keep rising, which means bond values plummeting, which means more bank peril, topped with housing prices falling and commercial real-estate getting heavily hammered, all putting more pressure on banks and some more banks failing, plus the ongoing death of zombie corporations that can no longer afford to refinance the debts they cannot pay; and do you think all of that happens without a recession just because some products are still selling well today ahead of all that collapse? Do you really think unemployment is going to rise so quickly, it will save the economy and stocks by stopping the Fed’s tightening without also stopping production and crashing GDP? That’s irrational. If you do think that, then you are just not really thinking the cause and effect of any of this through with any degree of realism.

So, I point to metrics along the way in my articles to show things are closing in, but I am far from looking for the weakening of the consumer through the rise in unemployment to cause the economic collapse that The Daily Doom is trying to help people see coming. Those things are just a report on the development of that collapse. They are not going to be the cause. All the other major deflation events just described assure the collapse. Consumer resilience and employment will simply be caught in their downdraft and come down with them. They are not the causes this time. They are the effects.

Deflation of false hopes

So, today we read that stocks are only tumbling modestly because investors are waiting to see if the Friday jobs report will bring any reprieve to their failing hopes that the Fed will falter on its tightening program because jobs are finally falling off at a level that will assure unemployment rises. Even if that happens, inflation has not been beaten and is even edging back up. So, if the Fed did give up because “job done” now that jobs, themselves, are done, it would only allow inflation to flame back up.

Investors still muse their way through surreal dreams of a soft landing as all artificial life support gets sucked out of the Fed’s forged economy. They refuse to realize the old Fed-dependent economy cannot survive even at the modest levels interest has risen to now, and they ignore the fact that the Fed still plans to keep sucking its hot-air, fiat money out of the economy via QT even after it stops raising rates

Overinflated government

Our bloated government debt costs will continue to expand for years, even if the Fed stops raising rates, because the Fed will still be dumping US Treasuries until more things break, forcing the government to higher interest to find other buyers. The Federal government has years ahead of refinancing old, ultra-low interest bonds to rates that are market driven to three or more times higher than the rates of the Fed “recovery” years.

There is no hope of refinancing any of that without taking on even more debt unless disjoined members of congress massively cut government spending because interest alone consumes over 30% of tax revenue. If we cannot run current government without 1.5-trillion-dollar deficits on the 70% of tax revenue that remains after interest on the debt is paid, how are we going to run it without three-trillion-dollar annual deficits when enough of the debt rolls over to today’s interest (forget about tomorrow’s higher interest) to where the interest alone is consuming 60% of the tax revenue. Subtract from that the revenue that will be lost if unemployment does rise more, as the market hopes, and the picture gets worse.

Our balloons are being drawn into a huge vortex already, and if the government cuts all spending in HALF to get somewhat back in line with revenue so that it doesn’t keep making its problem worse, that cut will force huge government layoffs and huge project cuts that will lay the economy even lower. Massive government cuts just turn the burners off on what hot air remains inside the balloons.

So, the idea that the Fed’s tightening is not taking us down into that downdraft vortex is absurd. We can FEEL how it is all sliding into a hole in the sky more quickly now. The Fed trapped itself (and all of us with it) years ago with its choice to move to a path of continuous debt expansion through lower and lower interest rates that would certainly suck people and corporations and governments into deeper debt under the enticement of those low rates. It was all doable so long as you could keep those rates low, but inflation was always the ticking time-bomb that would crash the party.

Eventually, inflation would demand the loose monetary policies cease. If they didn’t cease, then inflation would eat us all alive. If they did cease, then — just like in 2007 — when you end the low interest that Fed the bubble and sustained the bubble and, this time, created a lot more bubbles, then the bubbles will collapse. Well, the inflation arrived and forced the Fed to terminate the recovery plan, but it didn’t arrive until the bubbles had become enormous hot-air balloons. We’re not collapsing “bubbles” this time. By comparison to the last time, we are collapsing balloons, and more of them.

The center of the vortex that is sucking everything down like a drain hole in the sky

So, in another article today, titled “Why borrowing costs for nearly everything are surging, and what it means for you,”

Violent moves in the bond market this week have hammered investors and renewed fears of a recession, as well as concerns about housing, banks and even the fiscal sustainability of the U.S. government.

I hope I’ve put in perspective for you what those simple words really mean. Housing, banks and even the sustainability of the US government are imperiled by the busting of the bond balloon.

At the center of the storm is the 10-year Treasury yield, one of the most influential numbers in finance. The yield, which represents borrowing costs for issuers of bonds, has climbed steadily in recent weeks and reached 4.8% on Tuesday, a level last seen just before the 2008 financial crisis.

The relentless rise in borrowing costs has blown past forecasters’ predictions and has Wall Street casting about for explanations.

It is not hard to explain. It is, in fact, so simple to explain (see above cause-and-effect explanation) that the only thing here that is beyond explaining is how on earth they missed seeing it coming. I would venture to guess they dismissed the “what goes up, must come down” cause-and-effect of inflating and deflating bubbles by inflating and deflating money supply as too simple. It was so easy to explain that it was entirely predictable; but they missed it.

The Fed can no longer sustain the artificial life support that made the passing economy continue to work, so it will not continue. It will die. Inflation forced the Fed to stop. That was also easily predictable because it forced the Fed to end easy money. Inflation, itself, became easily predictable when that huge inflation of money supply came up against supply shortages. Yet, the Fed denied it with arguments that it was “transitory.”

Only denial made the certainty of inflation starting in 2020 and its obvious ramifications for an economy built on easy money seem like any of today’s outcome was even debatable, as if it was an untested argument. It wasn’t. We saw the whole series of events before back in 2007-2010 on a smaller (single-bubble) scale. We’ve seen it after other long periods of easy Fed money, and this was the longest and easiest period ever! So, how could anyone think it would end better? That’s why I started predicting back in 2020 we’d get into this situation.

That denial looked exactly like this and was endlessly pointed out here:

While the Federal Reserve has been raising its benchmark rate for 18 months, that hasn’t impacted longer-dated Treasurys like the 10-year until recently as investors believed rate cuts were likely coming in the near term.

They believed something ridiculous in naiveté about inflation. Rate cuts end before inflation ends? What a pipe dream! And, if the dream were realized, it would only mean things rapidly would become far worse because rate cuts would heat up a new rise in inflation, and that rise would be even harder to fight down without creating panic and depression over the fact that we had gone right back to where we started and had to do the inflation battle all over again, forcing the Fed to hike rates even above whatever point where they stopped and eventually started cutting.

We’ve seen that show. We know how it goes. So, the market was banking its hopes today on the dream of making things quickly worse to come. I.e., it was hoping the Fed would return to fueling even higher inflation now that it sees a slouch in the job market.

Insanity.

Greed.

Put it all down to greed. Many people want the easy money so badly, they ignore the obvious reality of how it will play out.

That [the denial] began to change in July with signs of economic strength defying expectations for a slowdown. It gained speed in recent weeks as Fed officials remained steadfast that interest rates will remain elevated. Some on Wall Street believe that part of the move is technical in nature, sparked by selling from a country or large institutions. Others are fixated on the spiraling U.S. deficit and political dysfunction. Still others are convinced that the Fed has intentionally caused the surge in yields to slow down a too-hot U.S. economy.

It is not one of those things. It is ALL of those things and many more that are all coming down now.

CNBC’s article refers to the 10-year yield, which I’ve been tracking here more than any other rate through the months past, as “the everything rate.” Well, as the “everything rate” goes, so goes the “Everything Bubble.”

While shorter-duration Treasurys are more directly moved by Fed policy, the 10-year is influenced by the market and reflects expectations for growth and inflation. It’s the rate that matters most to consumers, corporations and governments, influencing trillions of dollars in home and auto loans, corporate and municipal bonds, commercial paper, and currencies.

And it just hit barn-burner levels. It would be a normal level for a normal economy, but not for an economy LONG dependent upon the ultra-low interest rates upon which the entire economy has been built.

When interest rates get real, markets get real. That’s why I said yesterday this is a regime change. The Fed has taken us back to reality because inflation forced it to.

“When the 10-year moves, it affects everything; it’s the most watched benchmark for rates,” said Ben Emons, head of fixed income at NewEdge Wealth. “It impacts anything that’s financing for corporates or people.”

Everything gets real.

And, when everything gets real all at once, after years of living in Wonderland with all of its delusions about economics, that becomes, as I said yesterday, chaotic.

“You have equities falling like it’s a recession, rates climbing like growth has no bounds, gold selling off like inflation is dead,” said Benjamin Dunn, a former hedge fund chief risk officer who now runs consultancy Alpha Theory Advisors. “None of it makes sense.”

Chaos is like that. It doesn’t make sense. Things come down in a very disorderly manner when they all slide together. It’s what the collapse of an “everything bubble” should be expected to look like. It happens in pieces and sectors but sometimes they all move at once:

Companies that can only issue debt in the high-yield market, which includes many retail employers, will confront sharply higher borrowing costs. Higher rates squeeze the housing industry and push commercial real estate closer to default….

“For anyone with debt coming due, this is a rate shock,” said Peter Boockvar of Bleakley Financial Group. “Any real estate person who has a loan coming due, any business whose floating rate loan is due, this is tough….”

“We are now 100 basis points higher in yield” than in March, Rosner said. “So if banks haven’t fixed their issues since then, the problem is only worse, because rates are only higher.”

According to Barclays in another one of the articles below, only a stock crash can rescue the bond market now.

Comforting, I’m sure.

But that’s where we are. You are better off knowing, and I try to help you see it coming.

And then remember, this is happening all over the world as numerous central banks follow Plan Fed for years and are now withdrawing their meds from their fake-recovery economies, too. (“Fake” in that, if you cannot live after life support is removed, you clearly did not every really recover.)

Says Rabobank, summing the current state of affairs globally:

In short, all kinds of things started to break yesterday in a global financial architecture fit for breaking…. The scale of the market volatility being seen already rivals some of the worst in recent years. The scale of the losses in ‘safe’ long bonds was, until yesterday, rivalling the worst in stocks during the dotcom bust. And the scale of the problems still ahead of us regardless of what we do now is so large that most refuse to try to grasp it.

Therein lies the problem all along. No one wants to see it, so they pretended for years there was an end-game for central banks, should inflation eventually hit, that would not collapse everything the CBs cheap money pumped up. How? This was always a Fed-dependent economy because the recovery from the Great Recession was built by massively expanding debt under even lower interest than the levels that created the bubble that popped in the Great Recession.

That was clearly destined to completely repeat the debt cycle we had just been through with the Great Recession by just repeating the same kind of stimulus that caused its housing bubble at much higher levels and piling up much higher piles of debt. That is why I wrote my little book, DOWNTIME: Why We Fail to Recover from Rinse and Repeat Recession Cycles where I argued from the beginning of the Fed’s recovery plan that doing the same thing on steroids would just create a massively larger collapse further down the road. The detonator for all of that was inflation because that, I said in my subsequent writings, would force the Fed to finally abandon its recovery plan.