Submitted by QTR's Fringe Finance
Almost as if all of us Austrian Economists (read: any carbon based life form using common sense when it comes to finance) live in an echo chamber together, a third expert I respect came out over the last few days and has warned that 5% on the 10 year treasury would be the breaking point for markets and the economy.
If my calculations are correct, when this thing hits 5%…you’re going to see some serious sh*t.
Peter Schiff now argues that the Federal Reserve and US Treasury are being forced to confront the reality that inflation is persistent, which has led to an increase in yields, recently reaching 4.7% on the 10 year, the highest since November.
The thought process, for financial neophytes, is that bond traders will continue to sell bonds, driving yields up, in order to make it difficult for the Fed to cut rates — and essentially forcing the Fed to fight inflation head-on instead of capitulating to the economy and markets (should they crash).
This follows Jack Boroudjian’s analysis from last week, stating that rates will keep drifting higher and that 5% to 5.5% is the danger zone: Yields To Trigger "Serious Earthquakes" Across Economy: Jack Boroudjian
It also follows Harris Kupperman’s similar take: Bond Market About To Have An "Aneurism": Harris Kupperman
Put simply, the Fed faces a dilemma: it needs to raise rates to combat inflation and make Treasuries more appealing, but higher rates would exacerbate the already burdensome debt servicing costs and threaten industries reliant on borrowing. Or, to use the parlance of my recent interview with Matt Taibbi, higher rates simply serve up another day of “sh*t burgers” to the economy, whereas lower rates act as rocket fuel for economic activity (and market confidence).
Schiff warned last week that once the 10-year Treasury yield surpasses 5%, it enters perilous territory for debt-dependent sectors like automotive and commercial real estate. He writes:
The only way the Fed can possibly tame inflation is with interest rates so high that everything collapses. Jamie Dimon himself sees 8% interest rates being needed to tame America’s Fed-fueled inflation beast — but with an economy addicted to a low cost of borrowing, this would make loans unaffordable for entire sectors of the economy that can’t do without.
A serious implosion in commercial real estate would certainly bleed into the banking sector, beginning a chain reaction. Meanwhile, with no chance of the US reigning in spending and getting its fiscal house in order, interest on the US debt can already only be paid with even more borrowed money.
And that chain reaction may already be in the works, as yet another bank failed last week when state regulators shut down Republic First Bank in Philadelphia on Friday evening, transferring its assets to the Federal Deposit Insurance Corp. (FDIC):
As of January 31, 2024, Republic Bank had approximately $6 billion in total assets and $4 billion in total deposits. The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) related to the failure of Republic Bank will be $667 million. The FDIC determined that compared to other alternatives, Fulton Bank’s acquisition of Republic Bank is the least costly resolution for the DIF, an insurance fund created by Congress in 1933 and managed by the FDIC to protect the deposits at the nation’s banks. Republic Bank is the first U.S. bank failure this year; the last failure was Citizens Bank, Sac City, Iowa on November 3, 2023.
Even more concerning is that some of the usual suspects who defend the Fed or the Keynesian line — like Art Laffer, who claimed in 2006 that the impending housing crisis was going to be nothing more than a "nice slow down” — also agrees.
Laffer, president of Laffer Tengler Investments and usually a foil to Schiff’s analysis, told Reuters last week: "Inflation is not coming down like the Fed thought it was. You're not getting paid to take risk in the bond market right now."
What’s next — Paul “CPI ex-everything you can possible buy doesn’t look too bad and we should claim victory over inflation” Krugman having a reality check, too?
I won’t hold my breath.
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"The fiscal conditions of the U.S. are starting to matter, and it can put tremendous pressure on yields and push down on equity valuations in a very short period of time if the market starts to worry more," said another analyst, Bryant VanCronkhite, who put a little Wall Street jargon lipstick on the pig of his broader point: markets could fucking crash.
I think Schiff is dead on — with limited options and banks now failing, the Fed may even try to resort to rate cuts or quantitative easing to avert a bond market collapse and stimulate borrowing while rates are high. If this happens, and the Fed prioritizes short-term stability over long-term consequences, it would be like dousing the pilot light of inflation with a 55 gallon barrel of naphtha — which is, to say the least, an explosion. The price of everything that isn’t bolted to the ground will soar: the good (financial assets, gold, etc.), the bad (everyday consumer items), and the ugly (costs of running a business, which will lop on more pressure to raise wages).
“This is especially true now, as the Fed doesn’t want to anger the incumbent during an election year,” Schiff writes, “giving it further impetus to make the economy look as rosy as possible, at least until the start of the next presidential cycle.”
And I’m inclined to side with the Austrians on this one — without gold or other hard assets and sound money in this situation, you risk becoming a case study in what inflation can do to purchasing power in the worst type of way. Personally, I’m partial to gold miners and the GDX still, but hey — read the below disclaimer carefully.
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