As we kick off the third week of trading in December, today James Turk told King World News that central banks are finally losing control of global markets.
Central Banks Are Losing Control
James Turk: “Everybody needs to be focusing on what is happening with interest rates, Eric. The yield on the 10-year Treasury Note is flirting with 2.50%. The last time we saw a yield that high was over two years ago. But rising yields are not just happening in the US. Yields are rising in Europe and Asia too. The upward pressure on interest rates is global, and more to the point, central banks are losing control…
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For several years the financial repression foisted by central banks on savers around the world has kept interest rates artificially low. In most countries interest rates are below the true inflation rate, so savers have been badly hurt. The currency they saved lost more purchasing power than the interest income they earned. While central banks are powerful, they are inevitably overpowered when the distortions in markets and asset prices caused by their actions eventually become too great.
It looks like Mr Trump’s victory is becoming the trigger that is going to force an end to central banks’ zero interest rate policy. So here is the question that we need to be asking: Will the lower taxes and less regulation promised by Mr Trump really revitalize the US economy enough to offset the impact of higher interest rates?
Rising Interest Rates And The $100 Trillion Problem
There is about $100 trillion of debt in the US carried by governments and private sector borrowers. Much of this debt has been borrowed at fixed interest rates, so the borrowers who have locked-in fixed interest rates may not be affected. But borrowers with adjustable rates will of course eventually feel the brunt of higher interest rates. So too will the institutions that own the bonds and other fixed rate instruments purchased in the recent past, like fixed rate mortgages.
1973 – 1974 Bear Market Collapse In Stocks
As interest rates rise, the market value of fixed-rate paper declines. It is worrying that much of that paper is owned by banks, many of which are already over-leveraged and stuffed with non-performing loans, particularly the European banks. Yet the stock market seems to be saying there are blue skies ahead, just like – I would like to emphasize – the post-election euphoria after the December 1972 presidential election. But during 1973 – 1974, the Dow Jones Industrials had lost nearly 50% of its value, the dollar tanked, and gold soared to what was then a new record high.
Will history repeat? As Mark Twain warned, this time it might just rhyme, rather than repeat. After all, in 1972 the US was the largest creditor nation in the world, and now it is the planet’s biggest debtor. Last time around the dollar was eventually saved by Fed chairman Paul Volcker and sky-high real interest rates. But given the huge debt load, this time rising interest rates are the problem, not the solution.
The bottom line, Eric, is that rising interest rates mean higher inflation. But they are not the only sign that inflation is going to worsen. Look at base metal prices. Oil is back above $54, a new high for this year. Gold is up 10% this year while more-sensitive and less-manipulated silver has soared 23%. And then there is the stock market, and these always go parabolic when hyperinflation is about to hit. There is no doubt, Eric, that inflation is back. And it is going to get worse in 2017.
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