It’s not that we’ll mistake them for the truth. The real danger is that if we hear enough lies, then we no longer recognize the truth at all… – “Chernobyl” episode 1 opening monologue
I’ve been discussing the significance of the inverted yield curve in the last few of my Short Seller’s Journal. Notwithstanding pleas from the financial media and Wall Street soothsayers to ignore the inversion this time, this chart below illustrates my view that cutting interest rates may not do much (apologies to the source – I do not remember where I found the unedited chart):
The chart shows the spread between the 2yr and 10yr Treasury vs the Fed Funds Rate Target, which is the thin green line, going back to the late 1980’s. I’ve highlighted the periods in which the curve was inverted with the red boxes. Furthermore, I’ve highlighted the spread differential between the 2yr/10yr “index” and the Fed Funds target rate with the yellow shading. I also added the descriptors showing that the yield curve inversion is correlated with the collapse of financial asset bubbles. The bubbles have become systemically endemic since the Greenspan Fed era.
As you can see, during previous crisis/pre-crisis periods, the Fed Funds target rate was substantially higher than the 2yr/10yr index. Back then the Fed had plenty of room to reduce the Fed Funds rate. In 1989 the Fed Funds Rate (FFR) was nearly 10%; in 2000 the FFR was 6.5%; in 2007 the Fed Funds rate was 5.25%. But currently, the FFR is 2.5%.
See the problem? The Fed has very little room to take rates lower relative to previous financial crises. Moreover, each successive serial financial bubble since the junk bond/S&L debacle in 1990 has gotten more severe. I don’t know how much longer the Fed and, for that matter, Central Banks globally can hold off the next asset collapse. But when this bubble pops it will be devastating. You will want to own physical gold and silver plus have a portfolio of shorts and/or puts.
The Fed is walking barefoot on a razor’s edge with its monetary policy. Ultimately it will require more money printing – with around $3.5 trillion of the money printing during the first three rounds of “QE” left in the financial system after the Fed stops reducing its balance sheet in October – to defer an ultimate systemic collapse.
But once the move to ZIRP and more QE commences, the dollar will be flushed down the toilet. This is highly problematic given the enormous amount of Treasuries that will be issued once the debt ceiling is lifted (oh yeah, most have forgotten about the debt ceiling limit). If the Government’s foreign financiers sense the rapid decline in the dollar, they will be loathe to buy more Treasuries.
The yellow dog smells a big problem:
It’s been several years since I’ve seen gold behave like it has since the FOMC circus subsided. To be sure, part of the move has been fueled by hedge fund algos chasing price momentum in the paper market. But for the past 7 years a move like the last three days would be been rejected well before gold moved above $1380, let alone $1400, by the Comex bank price containment squad.
While the financial media and Wall Street “experts” are pleading with market participants to ignore the warning signals transmitted by the various yield curve inversions (Treasury curve, Eurodollar curve, GOFO curve) gold’s movement since mid-August reflects underlying systemic problems bubbling to the surface. The rocket launch this week is a bright warning flare shooting up in the night sky.
…What can we do then? What else is left but to abandon even the hope of truth, and content ourselves instead…with stories. (Ibid)
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