Once Upon a Time in Flagstaff

Posted on November 3, 2023 by MN Gordon

During the great bond bull market from September 1981 to July 2020 the yield on the 10-Year Treasury note fell from 15.32 percent to 0.62 percent.  Since then, the yield has spiked up to where it currently sits at about 4.66 percent.

The rapid interest rate flux has been unpleasant for bankers, borrowers, and businesses.  By our estimation the unpleasantness has only just begun.

After nearly 40 years of ever forgiving credit markets, where debts could be refinanced at lower and lower rates, there’s an abundance of rottenness to be purged from the system.  The great asset price liquidation is still forthcoming.  That’s our expectation, should central planner’s stay out of it.

But what if the pain has already come and gone?

Could the worst bond bear market in the 247-year history of the United States be coming to an end?  Is now a good time for stock market investors to buy shares of their favorite businesses? Continue reading →

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Death to Savers

Posted on October 27, 2023 by MN Gordon

The Federal Reserve artificially suppressed interest rates from roughly 2008 to 2022.  It did so by creating $8 trillion of credit out of thin air to buy Treasuries and mortgage-backed securities.

This pushed stock, bond, and real estate markets well beyond what the underlying economy could support.  Falsified interest rates also birthed wild objects of speculation.

Speculative manias always gain momentum through the expansion of credit.  A look back at past manias tells a familiar story.

For example, the mania for tulips in Holland in 1636 and 1637 was intensified by personal credit.  At the peak, sellers had no bulbs.  Yet buyers, lacking cash, made down payments with personal possessions.

John Law’s Mississippi Bubble from 1718 to 1720 was puffed up by paper notes issued by his Banque Générale, later the Banque Royale.  The mania for residential real estate from 2003 to 2007, was made possible by low interest rates and the expansion of credit through mortgage-backed securities. Continue reading →

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Everything’s Spooktacular

Posted on October 20, 2023 by MN Gordon

October wouldn’t be complete without a thrilling spooktacular surprise.  The October 7 sneak attack by Hamas on Israel and Israel’s subsequent official declaration of war certainly fits the bill.  But what else?

As we see it, the performance of the U.S. economy and financial markets over the next 6 months will be a function of consumer price inflation, interest rates, and oil prices.  A new war in the Middle East has the potential to dramatically influence these central economic components.

To be clear, the rampant money printing from 2020-2022 never really ended.  Yes, the Federal Reserve has hiked the federal funds rate 5.25 percent and has made incremental reductions to its balance sheet – drawing down from $8.9 trillion to $7.9 trillion.

But the federal government continues to borrow and spend like drunken sailors.  The U.S. 2023 fiscal year deficit came in at $1.7 trillion.  That amounts to over $4.6 billion of borrowing and spending per day. Continue reading →

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How the Dianne Feinstein Effect Wrecked the Future

Posted on October 13, 2023 by MN Gordon

“As interest costs go up in the United States, you get in this vicious circle, where higher interest rates cause higher funding costs, cause higher debt issuance, which cause further bond liquidation, which cause higher rates, which puts us in an untenable fiscal position.”

– Paul Tudor Jones, October 10, 2023

Feeling the Pinch

The difficulties that an overindebted economy will encounter from rising interest rates range far and wide.  Though they shouldn’t come as a surprise.

Quite frankly, it’s real simple.  As interest rates rise, borrowing money becomes more expensive.

Car payments are an obvious example of the effects of rising interest rates.  The average new car loan today has a monthly payment over $750, with an interest rate of 9.5 percent.  What’s more, the monthly payment for roughly 17 percent – or about 1 in 6 – of new vehicle loans is over $1,000.

Financing a house purchase has also become grossly expensive.  The average 30-year fixed rate mortgage is around 7.65 percent.  Several years ago, it was below 2.65 percent. Continue reading →

Posted in MN Gordon, Politics | Tagged , , , , | 18 Comments