The Economy Is Starting To Crash – There Will Be No Rate Hike In September

“Dave I got your emails – it’s over” – Good friend in NYC who called this morning, has worked on Wall Street for over two decades

All of the meaningful, least manipulated economic indicators are now collapsing at the rate at which they collapsed in 2008/2009.  For instance this morning’s Empire State Fed manufacturing index:

UntitledThe index itself is back to where it was in 2009. The new orders index – the best indicator for current wholesale demand – plunged to a level last seen in 2010, when the Fed was in the early stages of pumping nearly $4 trillion in fresh printed money into the financial system.

The collapse in commodity prices has been widely acknowledged, but the most important commodity barometer of economic activity is oil.  The price of oil began to collapse in the middle of 2014, which is when I have suggested the U.S. economy started to hit a wall.  After a dead-cat bounce, the collapse has resumed:


The big Wall Street banks have huge incentive to try and keep the price of oil propped up. Why? Because they are sitting $100’s of millions of unsold bank debt issued by rapidly collapsing U.S. oil shale companies. Sure, paltry fines levied by the SEC and CFTC for breaking the law and engaging in fraudulent activities is written off as the cost of doing business. But the prospect of losing $100’s of millions on senior “secured” bank debt is looked upon a “blood money.”

If the big Wall Street firms, with the help of Central Banks, can’t keep the price of oil propped up, it means there’s a big problem in the global economy, including and especially the United States – the world’s largest source of demand for oil.

Finally, perhaps the best overall indicator that the end to the insanity that has gripped the markets is over is the degree to which the Fed’s intervention in the markets has become so painfully obvious.  Everytime the S&P 500 is on the verge of falling off a cliff – like today, for instance – a big bid miraculously appears – a big bid that the hedge fund HFT-driven algos embrace and front-run, driving the stock market away from the edge of that cliff.  I know a lot of people who are still highly irritated by this.  But I would be more shocked if Yellen and Company didn’t intervene in the stock market on a daily basis.

Even worse is the intervention in the Treasury market.  Interest rates are on virtual “lock-down.”  In fact, I would argue that, on a de facto basis, the Treasury market for all intents and purposes has been “shut down.”  The Fed has become the largest holder by far and, via its network of Wall Street primary dealers and the Bank of Japan, has ensured that a meaningful supply from sellers will never hit the market.  To refresh everyone’s memory, recall that the Bank of Japan is buying JGBs from Japan pension funds using printed yen and replacing them with U.S. Treasuries.   Indirectly Japan has become the Fed’s warehouse for loose Treasuries – “loose” as in Treasuries being unloaded by Russia and China.

Do not mistake the money that has been “created” by the insane rise of a stock market that has been pushed to its highest valuation level in history.  This is not “wealth” – it’s shifting the deck chairs around on the Titanic.  The revenues of the S&P 500 companies have been declining for several quarters in a row now.  If we were to use the accounting standards that were enforced in 2000 – instead of the highly misleading accounting rules in place now –  the p/e ratio, forward p/e ratio and the dubious “Shiller p/e ratio” would show their highest levels ever.

Perhaps the biggest issue I’m grappling with now is what will happen when the Fed loses control?  Rather than watch helplessly as the stock market collapse, I am beginning to wonder if they’ll just shut the markets down…

NYSE circuit breaker

12 thoughts on “The Economy Is Starting To Crash – There Will Be No Rate Hike In September

  1. I always maintained that the whole world could unload its treasuries and it wouldn’t blow up interest rates since the Fed can buy them all. The only thing that will blow it up is when the rest of the world refuses to accept dollars for settlement of trade and they finally officially reject the US trade deficit. Or in other words, when they are no longer afraid of being blown to hell by the US military.

  2. I’m hoping for a bear market, not a crash. But when a crash comes the FED et al will not hesitate a microsecond to take any measures they can. Shutting down the markets is in the cards. No question!

    These central bankers have a fascist attitude. It would be high time that the public woke up. But they always wake up when it’s already too late.

    The FED can push hedge funds and all sorts of investors in a certain direction for some time. But when the tide turns they are absolutely powerless.

    And it’s all over!!!

  3. How about we trade you our military bill for protecting (insert country of choice) for the equivalent barrels of oil delivered to America?

  4. I’ll take the other side of that bet. Why? Because the fed and their media lackeys have spun (via mind numbing Orwellian doublespeak) virtually every crummy economic report as positive evidence to support a rate hike.

    And I sort of disagree that the economy is starting to crash. Its BEEN crashing, really since the late 90s (truthfully maybe even back into the 70s). The current fraud bubble is becoming highly unstable, I will agree to that. But the master planners want another crash. Why? Look how much money the scum got – govt, industry, you name it, in bailouts last time. Don’t think they won’t go to that playbook again?

    1. I think Schiff is right. What he is asserting is one part – a major part albeit – of “bracing for impact.” “Impact” being a global economic depresssion, financial system reset and the collapse of the dollar. I had not considered explicitly what he is discussing, but there’s no doubt that implied in what Schiff asserts is that idea that the dollar is increasingly becoming less significant as a reserve currency and China needs to help adjust the value of the yuan in relation to more than just the dollar.

      Thanks for linking that – I might not have read it otherwise. We are interviewing Schiff on the Shadow of Truth on August 25th.

      1. WOW! Peter Schiff on the Shadow of Truth! It’s like seeing my favorite superheroes join forces! Looking forward to it, Dave! I certainly hope you bring up PM manipulation with him.


        I highly recommend this article, explaining the broader dynamics of the “USD carry trade” unwind (the bundle of dynamite), the huge EM debt/GDP runup (the nitroglycerine) and the desperate Yuan devalue (the fuse).

        Dave …….. please comment, and it’s more possible ideas than Schiff discussed. And he’s been selling Asian/China investment funds for years so it’s an opportunity to call him to task.

  5. They can’t raise interest rates without causing interest rates on US Treasuries to go up, and with $18 trillion ,$19 trillion, pick a number $ trillion that the US owes on treasuries, an increase on interest on the debt will lead to a situation where the US Budget will have to go to exclusively servicing the debt and Nothing, and I mean NOTHING else.

    This is the reason rates are trapped where they are, an increase in interest rates will blow a hole in the budget big enough for an aircraft carrier battle group to go through!

    Another detail to consider, all of these $100 millions of unsold bank debt are probably part of a derivatives deal (practically everything else is contaminated by derivatives deals, why not this bank debt too?) Since everything is so interconnected, the slightest breeze will send the whole house of cards crashing down.

    Things are crashing down around our eyes, things are not getting better in spite of the political propaganda. Good luck to us all!

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