Author Archives: News
The Fed’s 15 minutes: Plan to offload mortgage-backed securities could push interest rates even higher
“The plan is to simply let the securities — bundles of home mortgages purchased from the banks that initially lent the money to homeowners — roll off its balance sheet as they mature. If the bank can’t meet its reduction targets through attrition, however, it may have to resort to selling those securities on the open market, which could nudge mortgage rates up even higher than they already are and put home buying out of reach for more Americans.”
USAGOLD note: Mortgage rates have already gone from 3% to 5.25% since the beginning of the year pushing a good many out of the housing market.
Sources: St. Louis Federal Reserve [FRED], Freddie Mac
“The Fed’s stock of Treasury bonds and mortgage backed securities is projected to decline by roughly $2.5 trillion by mid-2025, to about $5.9 trillion, when the central bank’s run-off of assets is likely to be halted to maintain an adequate level of bank reserves, the New York Fed said on Tuesday.”
USAGOLD note: These numbers appear to be a projection rather than an actual schedule of reductions. The great debate at the moment is whether or not the Fed can stay the course on quantitative tightening or if it will be forced to throw in the towel if and when the economy tightens and financial markets register a negative response. The most interesting revelation comes at the end of the article when Reuters reports that the Fed intends to hold its Treasuries portfolio until maturity. In other words, the Fed will reduce its balance sheet through natural attrition. If that turns out to be the case, it will temper the impact on rates from the sell-side of the equation. The most consequential impact, though, will come from the buy-side of the equation as the Fed withdraws its bond market support as the buyer of last resort.
(Chart note: Some years ago we constructed the interactive chart above at the St. Louis Fed’s FRED portal. You can track it at our Monetary Trends and Indicators page, along with several other charts of interest to precious metals owners.)
“Through that agreement which France, Japan, the UK, US and West Germany agreed to weaken the dollar — a stance taken out of a belief that the dollar’s huge move higher was damaging the global economy.”
USAGOLD note: In 1985 there was general agreement among industrialized nations that the dollar needed to be throttled. If that were not the case, the Plaza Accord never would have gotten off the launch pad. Which nation-states today would be interested in elevating their currencies, as was the case in 1985? Not many, we will venture. That said, a new accord to weaken the dollar, should it happen, would likely stimulate demand for precious metals.
“‘Gold is an important asset for central banks as it is a refuge asset and has no credit risks,’ said Bank of Portugal board member Helder Rosalino on Tuesday during the rare media visit to the facility, guarded by armed police officers.”
USAGOLD note: Portugal’s central bank reserves include 383 tonnes of gold, the fourteenth largest stockpile in the world.
“Appearing in front of MPs this afternoon, Andrew Bailey admitted he’d felt helpless to control soaring prices amid an energy market shock and the war in Ukraine, adding: ‘It’s a very, very difficult place for us to be in.'”
USAGOLD note: Has Andrew Baily just framed the new central bank conundrum? Unlike the Fed, the Bank of England, he says, will not sell government bonds from its asset portfolio in times of turmoil. One might ascertain from that, it would likely even buy more if circumstances necessitated it. The Telegraph article goes on to describe British inflation as “runaway.” We would venture a guess that such thinking stands a very good chance of making its way across the Big Pond before too long.
“Investors have withdrawn more than $7 billion from tether since it briefly dropped from its dollar peg, raising fresh questions about the reserves underpinning the world’s largest stablecoin. Tether’s circulating supply has slipped from about $83 billion a week ago to less than $76 billion on Tuesday, according to data from CoinGecko.”
USAGOLD note: It has been said that if tether goes, so will the whole of the crypto superstructure. Will the buck be broken? Judging from the withdrawals, it looks like it is going to be tested. Per this report tether tokens are backed one to one by a pool of cash ($4.2 billion), Treasuries ($12.3 billion), and commercial paper ($24.2 billion). Last July, the company told CNBC it would produce an audit in a matter of months. It has yet to do so.
Chart courtesy of TradingEconomics.com
“The world economy is increasingly succumbing to the threat of stagflation reminiscent of its 1970s ordeal, a mounting headache for global finance chiefs already navigating the fallout from the war in Ukraine. “
USAGOLD note: We remember distinctly when Alan Greenspan warned of stagflation’s return about two and half years ago to a gigantic yawn on Wall Street. He revisited those concerns October last year writing presciently, “If growth expectations continue to decline and price expectations continue to rise, we may be heading into a stagflationary environment as increased supply-side costs erode consumer purchasing power and, ultimately, final demand.” That’s about as succinct a portrayal of where we now stand as you are going to find. The real question is “how bad is it going to get?” Hopefully, we’ll hear more from Mr. Greenspan on the subject now that the rest of the financial world is catching up with him.
“Fingers are being pointed. Conspiracy theories are being floated. Some victims are said to be suicidal, and a chief executive is reportedly under police protection in Korea. There are also lessons that, if history is any indication, would be largely forgotten by the time the next mania comes along.”
USAGOLD note: What’s frightening is how quickly it happened. Luna-Terra investors lost millions in a matter of days and the whole crypto sector continues to wobble dangerously.
“The soaring dollar is propelling the global economy deeper into a synchronized slowdown by driving up borrowing costs and stoking financial-market volatility — and there’s little respite on the horizon.”
USAGOLD note: Our currency your problem…….. Until the stagflationary quagmire bubbles to the surface at the corner of Wall Street and Main, USA.
“Another stormy week has left investors groping when it comes to the direction of stocks and bonds. Expecting to be led out of the darkness by Wall Street’s best and brightest may be asking too much, given their performance so far this year. As usually happens in twisting markets, it is proving a brutal year to forecast for the securities industry.”
USAGOLD note: Why are people surprised by this? In Saturday’s Financial Times, Gillian Tett quotes a parody on economists by Swedish economist Axel Leijonhufvud written in 1973. “The status of the adult male [of the Econ tribe],” wrote Leijonhufvud, “is determined by his skill at making the ‘modl’ of his ‘field,’ The fact… that most of these ‘modls’ seem to be of little or no practical use, probably accounts for the backwardness and abject cultural poverty of the tribe.” Gold ownership makes sense for the more humble among us precisely because the Cassandras of the economic tribe can’t seem to get it right so much of the time. “These failings,” writes Tett, “were one reason why so few foresaw that 2008 crisis.” It is also why, according to Tett, the Fed stuck to its transitory inflation mantra when a quick foray into “the weeds of the financial system” might have told them otherwise.
“The public views inflation as the top problem facing the United States – and no other concern comes close. Seven-in-ten Americans view inflation as a very big problem for the country, followed by the affordability of health care (55%) and violent crime (54%).”
USAGOLD note: Pew Research Center confirms with this poll the generally accepted thesis that inflation concerns will play an essential role in the upcoming Congressional elections. What is so disturbing to the American public, we would think, is how quickly it surfaced, how swiftly it advanced to near double-digit levels, and how persistent it has become.
Table courtesy of Pew Research Center
“The deterioration in consumer sentiment reverses the improvement registered in April, which came after three consecutive months of drops as inflation has weighed on moods over the last year. U.S. consumer sentiment remains at its lowest reading since 2011, and well below prepandemic levels.”
USAGOLD note: As the Fed tightens into a slowing economy, we take no pleasure in pointing out that the University of Michigan’s Consumer Sentiment Index has been a reliable leading indicator of recession since the 1950s:
Sources: St. Louis Federal Reserve [FRED], University of Michigan
“The reversal marks a seismic shift underway in global markets as soaring inflation forces central banks to end quantitative easing and raise interest rates. That has led to a selloff in markets with growth stocks, led by the technology sector, falling further in a setback for equity-focused hedge funds.”
USAGOLD note: More fallout from what Goldman’s Peter Oppenheimer calls the postmodern age of investment. “They don’t ring a bell,” he says, “when the rules of the game are changing.” The sudden influx of money into the bond market over the past few days could be an early sign of a general flight to safety. Blackrock’s Alister Hibbert (the aforementioned $100 million London trader), in this respect, might be ahead of the crowd.
The Fed says wild swings in commodities markets are ramping up the risk of ‘contagion’ that could hit global banks hard
“It said clearinghouses, key middlemen institutions in financial trading, have sharply increased so-called margin calls in key markets such as oil futures, adding to the pressure on major buyers and sellers. A margin call is a demand to cough up more cash to cover potential losses. The central bank also said liquidity conditions have worsened notably elsewhere, meaning traders of key global assets are finding it harder to buy and sell without moving the market.”
USAGOLD note: Commodities markets are only one area where a high degree of leverage creates vulnerabilities. The bond market also comes to mind. The margin debt on stocks is at an all-time high. We recall Jeff Gundlach’s warning at the beginning of the year: “My suspicion is that they’re going to keep raising rates until something breaks, which is always the case.” In short, there are a lot of places where something could break, and the commodities market is just one of them.
“The overarching and justified concern is that this first major confidence crisis sends a shiver through smaller investor sentiment as margin calls of any ilk tend to do, Retail investors have traditionally played the role of the canary in market selloffs. Because crypto is where so many smaller investors have placed their bets, the losses sustained could become a driver of a broader risk-off move in the stock market.” – Danielle DiMartino Booth, Quill Intelligence
USAGOLD note: It is interesting to note that Treasury Secretary Yellen found it necessary to offer a few words of assurance on the crypto meltdown in testimony before Congress last week. “I wouldn’t characterize it at this scale as a real threat to financial stability,” she said, “but they’re growing very rapidly and they present the same kind of risks that we have known for centuries in connection with bank runs.” In the case of Terra’s crash, there was no time for a run on the bank. It took roughly a week for it to go from $87 a token to zero. The problem with contagion is that once it surfaces, no one can be certain what might be affected next and how widespread the damage can become. The black swan often travels in the dark.
Terra Luna cryptocurrency
Chart courtesy of TradingView.com
“A sharp increase in interest rates to tame fresh inflation shocks would pose a risk to the American economy, the Federal Reserve said on Monday as it reported a ‘higher than normal’ chance that trading conditions in US financial markets will suddenly deteriorate.”
USAGOLD note: Odd warning in that ironically one of the biggest sellers of U.S. Treasuries might very well be the Fed in the near future – a liquidation likely to push up yields and encourage copy-cat selling from other players. The stability report itself, as quoted at the link above, is an attempt to warn the markets that financial contagion is possible. It’s almost as if the right hand does not want to acknowledge what the left hand is doing.
JPMorgan bank says bull run in commodities has legs as inflation, China lockdowns whipsaw stock investors
‘Investors should buy commodities as a hedge against inflation and geopolitical risks, with a composite basket of raw materials likely to help protect their capital as stocks and bonds failed to offer sufficient diversification benefits, according to JPMorgan Private Bank. An index tracking 23 commodities from gold to crude, copper and soybeans across six different sectors tracked by Bloomberg could jump by 10 to 15 percent over the next 12 months, it predicts.”
USAGOLD note: Looks like JP Morgan has decided to join Goldman Sachs on the commodities bandwagon. It points to a number of concerns pushing the trend saying they will keep the “emotional premium in gold alive.”
“Diebold Nixdorf’s $400mn bond maturing in 2024, which carries a low rating of triple C, cratered after the company reported weak earnings, slumping to just above 40 cents on the dollar — territory investors consider to be distressed. It had traded above 90 cents on the dollar as recently as two weeks ago.”
USAGOLD note: it is disconcerting how quickly we have gone from stability to inflation and inflation to general systemic risks – the corporate bond market being one of the latter. Even more disconcerting when one takes into account that we aren’t even to first base on the Fed’s monetary tightening program. A bond dropping 65% in value over a two-week period is a sure sign of general market stress. There’s is always the fallback position of holding it to maturity which works until the issuer finds itself unable to meet its obligations, or worse, ends up in bankruptcy proceedings. Most investors are acutely aware of the impact a weakening economy has on stocks, but few take into account the effect it has on the corporate bond market. This article connects the dots.
“In preparing its latest report, the New York Fed solicited views from a range of contacts on Wall Street. According to the survey, 41% of participants cited concern of foreign disinvestment. In the prior survey, released in November, the concern wasn’t even mentioned.”
USAGOLD note: The fear of foreign divestment, as it turns out, is one of several cited by survey participants and not even the most mentioned. That distinction goes to the war in Ukraine (75% of those polled). Participants also worry about Fed over-tightening, market liquidity, and contagion from commodity markets.
“It was the worst first four months of the year for the stock market since the 1970s! No, the 1930s! Can’t we just say it was a really bad start to the year? ‘Bad’ might not do it justice. After dropping 3.3% this past week, the S&P 500 index has fallen 13% during the first four months of the year, its worst start since 1939.”
USAGOLD note: Much of it driven by inflation on the economic front, war on the political front, and a pandemic on the societal front. (Other than that everything seems to be moving along nicely.)