Royal Bank of Scotland to investors: 'Sell everything'

Higher rates aren't even a part of any non-silly conversation. $7 trillion of sovereign debt in the world now yields less than 0. If I had described the situation to you when Paul Volcker was still relevant, you'd have said something like, "That will never happen. How is that even possible?" The Fed funds rate has been at less than 50 basis points for more than 7 years now. ... below 25 basis points up until a month ago. The fact that higher rates now roughly translates to "everyone shitting their pants over speculation about whether they may or may not raise 25 basis points once or twice more this year," is a mind-boggling conversation. A 25 basis point hike was the kind of thing people didn't even realize happened 30 years ago. ... not until days later. And then everyone went back to their lives. In the fragile world they have created for us, the stock market and junk bond markets they are trying to keep afloat freaked out over ONE 25 basis point hike off of the zero bound! The carry trade buckled over 25 basis points. It's absurd, but it demonstrates just how too far they took it. There is so much fragility out there -- debt on top of debt -- and it isn't magically going away. They can't raise rates without bringing an end to it all. So they are fubared.

I won't say "never," because I have learned not to predict the actions of a bunch of absolutely clueless technocrats who are making up shit day by day. But given what we have seen over the last two decades. ... a one-way street (not attempting to fine tune growth down AND up. ... only down). .. .and seeing how the last few months have finally clued them into the fact that they backed themselves into a corner that there is no way out of. ... I'd say that the probabilities are much greater that we will see QE4 (I can see corporate debt being next up, just as it was for Draghi yesterday) before the overnight rate ever gets up to 100 basis points. If the opposite happens ... at a lousy 100 basis points (which would be a historically miniscule overnight rate), spreads on the worst of the debt out there are going to widen to the point that you have your catalyst for a credit event. It's absurd. But true.

It's axiomatic that central banks aren't "managing" the economy by fine-tuning lending rates like magicians (not that they ever could). They exist soley to monetize an out-of-control debt situation that they created and enabled for far too long. ... and that means suppressing rates all the way down to zero. ... and below, if necessary, as you are seeing in 40 percent of the developed world. We aren't even talking about rate suppression anymore for getting the job done, in reality. That lost its effectiveness several years ago, and they made no bones about it. The Fed, BOJ, ECB. ... stepped in Soviet style to price fix the credit markets -- becoming the biggest buyers of debt to make sure there was liquidity in the credit markets so they could keep it all propped up. The Japanese central bank actually buys ETFs that tracks the Nikkei, skipping the middle man! On top of all the of the debt it has printed money to buy. It's price fixing at its most absurd. It's also going to end like every price fixing scheme does.

Janet Yellen, for her part, is a deer in the headlights. The least of her worries are election year politics. Ben Bernanke got out of there and is writing books about how courageous he was. ... doing the least heroic thing he could have, namely taking a massive problem largely of his making, and frantically doing whatever he had to to kick the can down the road -- setting it up to become a much bigger problem later on. But at least he didn't have to deal with it -- the mark of courage, right? Yellen is the one who is probably going to get saddled with all of the blame. But as clueless as she is compared to Greenspan and Bernanke. ... she signed up for this.

 

Do you know what is going on in the treasury market and MBS markets right now (you know the ones that were hijacked by the Federal Reserve), cran?

I can't imagine them raising even an eyebrow this week (although they are living on Mars, so who knows what nonsense comes out of their silly meeting). It has nothing to do with "global headwinds."

They have completely fucked up the credit markets and are losing control by the month -- finally. Short 10 year treasury is the most crowded trade out there. There isn't enough actual paper to cover all of the shorts! It has creeped into the longer AND shorter ends of the curve too. The failures on delivery in the repo market are at extremely high levels -- the kind of weird behavior you'd only ever see around times of crisis or pending crisis.

Rates are heading higher with or without the Federal Reserve. The only thing that will eventually keep it from playing all the way out is if (when, not if, if their past behavior is the guide) the Fed reengages in the worldwide currency war they are a part of whether they like it or not -- i.e. QE4. Of course they will have to do way more of it this time, and in a more extreme way, because the neighbors they want to beggar don't have anything to give anymore.

They wanted to do a couple of little silly 25 basis point hikes to try to convince people they are still all powerful -- they were being questioned and when people lose confidence in the Wizard of Oz, they realize there is nothing really there. It backfired. It forced them to wake up to the fact that they can't even do little window dressing moves (the nonsense you are focused on), because they have created a tinder box.

The repo failures are a great example. ... This was last week: The Treasury Market's Big Short Is in 10-Year Notes, Repos Show

The repo failure rate did reach 3 percent this week. People would rather pay a steep penalty than deliver.

This is today: Failed 10-Year Treasury Trades Soar to `Taper Tantrum' Levels

You think the Fed is controlling rates incrementally? The market is fighting back, cran.

That isn't a market, for what it is worth. It is a casino. A highly-leveraged casino. And it is behaving the way it acts when things are unstable -- when a manipulator, for example, creates severe mispricing . As are a lot of things right now.

The Federal Reserve has little control over small increments in borrowing rates anymore -- at least in terms of the "fine tuning" you think, against all reason, they can effect.

They aren't fine-tuning anything. They are using blunt instruments that go way beyond the silly near-zero overnight rate you are focused on -- that they want you to be focused on (to the extent that most people even have a clue what the Federal Reserve is, which puts you ahead of most people).

All that exists is a giant tangled mess of trillions of dollars of debt. And a market trying to take back control of the risk premia from a very powerful manipulator (that is losing power the longer the manipulation goes on). It is going to happen eventually. The consequences won't be a few speculators that get caught offside. It is trillions of dollars of leverage spread throughout our economy and the consequences that come with very mispriced risk blowing up.

Even if there was the magic you think -- where the Federal Reserve can somehow precisely tweak the economy in 25 basis point increments here or there (which was nonsense even before they spent 7 years completely fuburing the treasury and MBS markets). ... And let's say they were inclined to do a tweak of 25 basis points right now for whatever blah blah reason they made up. ... they simply wouldn't have to. They market is slowly taking back control of actual lending rates with or without the Fed's silliness -- rates are drifting higher on their own (i.e. -- the Fed is not the one in control of the small increments).

Which leaves them with their actual reality. Lending rates actually moving higher --significantly -- is the last thing the Federal Reserve really can afford to see happen. You do get that, right? They were hoping to bullshit everyone into believing they still have control by playing around with a meaningless 25 basis point increment once or twice. Diversion. But they have let it get to the point that they don't even have that much leeway. Which is sad. Beyond the window dressing you are focused on (what they want you to focus on!). ... The fragile junk debt market they created, which is propping up the phony asset bubble economy, can't survive very long UNLESS rates stay artificially low. Junk debt is already buckling, and it has been causing the first rumblings of turmoil. ... simply because they tried to slow down the rate of suppression (not stop it. ... just dial back the suppression measures to a slower rate).

 

Subprime Flashback: Early Defaults Are a Warning Sign for Auto Sales

This essentially lays out what a phony, monetary manipulation economy looks like. And gives a hint of how it ends. It mirrors the story about the high-end real estate market the other day -- the attempted sarcastic "People are really suffering" post. For what it is worth, I was posting about how ludicrous the auto loan market had gotten on here a year ago, two years ago, possibly three years ago. ... no one wanted to even follow or have that conversation, either. It doesn't end with people with meager incomes having been induced to take out a trillion dollars of loans to buy $35,000 cars. The debt mess goes WAY beyond just this area. But this story should be instructive.

I thought this quote from the story summed up our ACTUAL economy : “What’s driving record auto sales is not the economy, but record auto lending,” said Ben Weinger, who runs hedge fund 3-Sigma Value LP in New York and who has bearish bets on some auto lenders.

We have been reduced to a central bank pumping liquidity in by doing everything they can to take the perceived risk out of lending -- the phony economy they created needs more and more debt to stay pumped up (and unlike the early 2000s, for example, pumped up now means SUBPAR growth as they get deeper and deeper into their quagmire).

The debt fuels all kinds of spending -- and creates massive misallocations of money being recklessly spent in ways that an actual demand-driven economy would have never borne. Some government agency then quantifies the spending and sums up the phoniness with a release that says "They economy is doing great!" And there are some people who never stop to question it all-- either having no clue or refusing to see what is right in front of their nose.

Forget the inevitable crisis when the defaults get out of control somewhere. We are giving away years in which people are NOT doing well financially. ... by allowing this nonsense to continue. And all we get for that is the inevitable defaults at some point, and the inevitable crisis (which deepens the longer it goes on, because the debt levels just increase) that comes with it. ... And we still have to face the reality that you can't spend endlessly, and in the case of what we actually became, keeping the spending going beyond the natural limit by monetizing all of the debt.

 

In 2005 and 2006, there was "demand" for homes that people couldn't really afford. ... without skewed lending markets that created massive risk misallocations, too.

The issue isn't whether people want or need cars, or whether car manufacturers will gladly supply as many cars as people can borrow to buy.

The issue is the debt that has been created to feed that phoniness. ... a fifth of it going into subprime lending now -- people who I wouldn't lend a nickel to, and few others with a brain would, if the Federal Reserve hadn't been putting its thumb on the scale of finance to force people to engage in riskier and riskier behavior to earn even meager income.

What the Federal Reserve wants was those auto sales. They cratered our economy by suppressing rates (to create phony economic growth throughout the late 1990s and early 2000s) . ... caused a breakdown. ... and then dug in even deeper. Rather than letting it fix itself (with the necessary consequences), they doubled down. They consider those car sales "economic growth." But that is phony economic activity, because it only exists on the back of more and more debt creation.

What we really need is for our economy to heal -- a period of washing out all of the toxic debt they have spent several decades now creating. It either happens voluntarily (and we suffer). Or it will happen in a very disorderly way (and we suffer) at some point not of our choosing. We should have had it in 2008. Instead we got more of what they had done to cause the problem in the first place -- except doing it on steroids this time (monetizing debt is like shooting heroin. ... you need bigger and bigger fixes as time goes on). With this nonsensical narrative of them staving off "economic collapse," rather than doing what they really did: kick the can down the road on a prayer that it will implode later rather than sooner. As I said in an earlier post, it was the arsonist driving in on the fire truck to save the day.

In an actual demand-driven economy, your ability to buy all the things you want is limited by how much money you actually can earn and save. Our real economy (anemic growth, a real unemployment rate in double digits, etc.) -- which they cratered -- is not supporting those car sales. Reckless debt creation is.

What we have is a phony, manipulated economy that largely relies not only on more and more debt, but worse, the manipulation of rates to keep the debt creation going on beyond its natural limit (which already passed). And they are now in a rabbit hole.

They have forced lending into riskier and riskier areas -- including the subprime auto market; which really is a drop in the bucket when it comes to the mess they created. The (eventual) bad debt they have made possible (fucking savers in the process, for what it is worth, who lose), goes way beyond that. And the possible credit events (whatever is going to be the catalyst, a la, CDOs in 2007) are manifold now. You have sovereigns all over the world that are in over their heads and running up more debt, even past the point of their natural limits. You have corporate issuance at record levels (much of it feeding stock buybacks, which are about the least productive use of capital), and much of it in mispriced junk that has gone into some insane endeavors. That junk market is showing the first signs of cracks.

Even with how tight credit got toward consumers after 2008, their debt levels have gotten worse. What I posted about subprime auto loans was just one story I saw the other morning while I was reading and was on the board. There is another trillion dollars of student loan debt that is going to end with high default rates. Payday loans at ridiculous rates of interest are thriving. And consumer credit levels, in general, are at crazy levels and increasing.

These stories are popping up almost daily -- I can post them if you want. This was the rundown on credit card debt levels last week (nearing a trillion dollars outstanding and levels that can not be sustainable): U.S. credit card holders are partying like it's 2008 -- and at their own peril

I know it isn't on your radar screen. It will be when there is an inevitable credit event at some point -- I actually would guess that a consumer debt-related event won't be the catalyst, even though that debt creation comes to an end when there is a catalyst, and the inevitable defaults will follow.

In 2006 or 2007, I could kind of get having been blind to the mess that was well along in its creation. But not this time, with the central banking insanity -- well beyond what preceded it -- that we have seen for 7 years now.