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Real Rates At Levels Associated With “Panics, Wars, & Depression”… And What Comes Next Could Be Devastating

Real Rates At Levels Associated With "Panics, Wars, & Depression"… And What Comes Next Could Be Devastating

For the past two years,…

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This article was originally published by Zero Hedge

Real Rates At Levels Associated With “Panics, Wars, & Depression”… And What Comes Next Could Be Devastating

For the past two years, Citi’s Matt King proved why he is one of the best strategists on Wall Street because while others were focusing on various B-grade fundamental and technical catalysts which came and went with little impact on markets, the Citi strategist steadfastly said that the only thing that matters was real rates… and he was right – as long as real interest rates were deeply negative – an outcome the Fed was clearly targeting with its monetary policy – the bid for all other risk assets (as well as commodities, gold, crypto and so on) would always be present.

In recent weeks others picked up on this theme, with Deutsche Bank’s FX strategist George Saravelos saying two weeks ago that “The Most Important Question For The Market Is Identifying The Driver Behind Record Low Negative Real Rates“, while One River CIO Eric Peters saying that according to the market, “A Scenario Of Sharply Rising Real Rates Is Untenable.”

Today, it’s the turn of one of our other favorite sellsider analysts, BofA CIO Michael Hartnett to grab the negative real rates torch, and write in his latest Flow Show that while the deeply negative real rates may be just what stock market bulls ordered, 10-year real rates are now at -4.6%, “a level which in the past 200 years that has been associated with panics, inflations, wars & depression, and a level today increasingly responsible for froth in crypto, commodities, and US stocks.”

Another sellside strategist who recently expounded on the unprecedented collapse in real interest rates, was DB’s Jim Reid, who earlier this week wrote that while regular readers know his view “that inflation will be structurally higher going forward and that for the rest of my career real yields will likely stay negative even if nominal yields climb… nothing could have prepared hims for 2021.”

But while real rates are indeed at levels that typically presage or coincide with historical calamities and crises, this time may indeed be different because although inflation is soaring – and on pace to match what we saw in the 1970s – and will likely be structurally higher going forward, Reid writes that because debt is so high, “history suggests that heavy financial repression will be necessary to manage this.”

In other words, any time real rates start moving higher, the Fed will have no choice but to intervene as the alternative would be a terminal crash across all risk assets.

Here, Jim Reid chimes in and says that another reason why real yields will stay negative “for the rest of my career” is because this has been the pattern whenever debt has spiked through history, as the smoothed series in Figure 1 shows.

And while that chart highlights the US here, it’s been the case for other developed countries over the last two centuries, or as Reid puts it, “somehow financial repression has ruled.” In the US, debt previously spiked after the Civil War, WWI and WWII. This latest climb had been steadier (but substantial) until Covid, which may explain why real yields have steadily but consistently declined. However, the economic response to Covid has been more akin to a war time response, with debt and spot real yields both spiking in opposite directions just like that seen around and after the wars discussed above.

Figure 2 shows that each of these previous debt spikes have coincided with spot inflation hitting around or above 20%, which puts the current 6.2% print into some perspective.

There is a reason why inflation has to spike to short circuit this process: traditionally it helps debt peak out and support a deleveraging trend. As Reid adds, in the future, “a big problem will occur if inflation normalizes as there will be a limit to how far negative real yields can go to help erode the debt burden unless real GDP growth explodes higher (unlikely) or if nominal yields go consistently negative in the US (very seemingly unwelcome).”

So, for example, if inflation quickly and consistently goes back to 2% then we will probably see 10 year US yields around or below 1% to maintain financial repression. This is unlikely to help the deleveraging process though but it will ease the rise in debt.

Those who have followed Reid’s work in recent years, are aware that his template to how all this plays, is to expect structurally high inflation in the decade(s) ahead, with nominal yields being higher, but not climbing as much as inflation, thus allowing real yields to stay negative, indeed unlike previous episodes when real rates collapsed in a sharp but brief correction. 

Indeed, 2021 has been an extremely aggressive form of this but nowhere near as aggressive as what was seen in the previous debt spikes seem in the next two charts.

The next chart shows nominal yields minus nominal GDP growth. Ultimately this has a bigger impact on how debt/GDP evolves as it adds the denominator to the equation. We’re still in a covid state of flux but clearly on a spot basis the US is running at -8% on this measure at the moment, which is around the lowest since the early 1950s. So good news for debt management.

Finally, the last chart shows the real Fed Funds rate back to 1921 using 3-month T-bills before 1954. No surprise here either that on this basis we have the most  accommodative policy since the1950s. Indeed the only time it’s been lower is in the decade around the start of WWII.

So US real yields are currently very low at the front and back end, although they’ve been lower still when debt suddenly increased before. However that was with 20% inflation. Meanwhile, without financial repression – i.e., without the Fed manipulating rates to be artificially depressed through constant backstops – real yields would likely be consistently positive given the weight of debt supply.

But given the record global debt pile, that would strongly increase the probability of debt crises across the world. So while the baseline is continued indefinite financial repression, the risk is that something happens in the years ahead that prevents the authorities using financial repression.

If this occurs then, as Jim Reid warns, “the global financial crisis may look  like a dress rehearsal for a much bigger event.”

All the reports mentioned here are available for professional subscribers in the usual place.

Tyler Durden
Fri, 11/19/2021 – 14:00









Author: Tyler Durden

Economics

Exxon’s Planned Pay Raises This Year Won’t Even Keep Up With Inflation

Exxon’s Planned Pay Raises This Year Won’t Even Keep Up With Inflation

Despite the company’s good year so far, Exxon’s coming pay raises for…

Exxon’s Planned Pay Raises This Year Won’t Even Keep Up With Inflation

Despite the company’s good year so far, Exxon’s coming pay raises for employees will come in below inflation, new reports suggest. 

Salaries are going to rise about 3.6% for employees who deserve the merit-based raises, reporting from the Seattle Times and Bloomberg says. The largest increases are going to be going to those working in the company’s upstream division that drills for oil and natural gas, the report says. 

Exxon spokesperson Casey Norton said: “Total compensation is highly competitive relative to other companies with whom we compete, both in the marketplace and for talent. Inflation is one of many variables we assess.”

The increases will apply to Exxon’s U.S. office employees and not union contract workers, many of whom already have earned promotions and will get a 5% boost on top of their regular raises. 

Bloomberg writes that the below-inflation increases are a sign of how many white-collar Americans aren’t in line for the kind of salary raises seen for other cohorts such as truck drivers and factory workers amid labor shortages and a spike in inflation”. ‘

Recall, just two days ago, we reported that Exxon said it was on track to meet its 2025 emissions goals four years early. 

In Exxon’s full new corporate plan, which can be found on its website here, the company said it “plans to increase spending to $15 billion on greenhouse gas emission-reduction projects over the next six years while maintaining disciplined capital investments.”

The oil supermajor also said it plans on maintaining capital investments between $20 to $25 billion, per year, through 2027. The company said it has repaid $11 billion in debt, to date, in 2021. Exxon says it’ll be “comfortably” in its range of targeted debt-to-capital ratio by year end.

These plans, of course, follow our reporting in October that the company was considering abandoning some of its oil and gas projects to appease environmental advocates.

The company’s board, we noted in October, which includes three directors nominated by activist investors, had “expressed concerns about certain projects, including a $30 billion liquefied natural gas development in Mozambique and another multibillion-dollar gas project in Vietnam.”

The change in strategic direction comes as Exxon’s board is facing growing pressure from investors to restrain its fossil fuel investments and limit its carbon footprint. The board is also considering the carbon footprint of the new projects, and how they would affect the company’s ability to meet environmental promises it has made. 

Back in September we reported that as part of appeasement of the ESG lobby, the oil giant planned on implementing disclosures of shale emissions. The company announced it would start measuring its methane emissions from production of natural gas at a facility it owns in New Mexico. Exxon joins other shale gas producers, like EQT, who already provide similar data. 

Tyler Durden
Sun, 12/05/2021 – 09:55

Author: Tyler Durden

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Economics

DAX index forecast after new measures for the unvaccinated

Germany’s DAX index has weakened on a weekly basis and closed the week at 15,169 points. The Omicron variant of the coronavirus continues to keep investors…

Germany’s DAX index has weakened on a weekly basis and closed the week at 15,169 points. The Omicron variant of the coronavirus continues to keep investors in a negative mood, and according to Germany’s Health Minister Jens Spahn, Germany is also not ruling out a new lockdown.

Financial markets are reacting negatively because it is still unknown to what degree the vaccines will be effective against the new strain and would it slow economic progress.

Robert Koch Institute (RKI), a disease and control center in Germany, reported that more than 102,000 people in Germany have died as a result of coronavirus and the country continues to see a record-breaking number of cases.

Germany has introduced new measures last week, and only vaccinated or recently recovered from Covid will be allowed to go to cinemas, leisure facilities, restaurants, and shops.

It is also important to mention that unvaccinated people can only meet two people from another household, and Germany will limit the number of people at large events.

Germany’s fourth wave of Covid is the most severe so far, and Angela Merkel warned that hospitals were stretched to the point of patients being moved to different areas for treatment. Acting Chancellor Angela Merkel added:

We have understood that the situation is very serious and that we want to take further measures in addition to those already taken. A nationwide vaccination mandate could come into effect from February 2022, after it is debated in parliament and following guidance from Germany’s Ethics Council.

The new strain also complicates the outlook for how aggressively the European Central Bank would normalize monetary policy to fight inflation.

The degree of ECB’s concern about the economic situation will significantly influence stock markets in the near term, and for now, everything indicates that growth forecasts will likely be downwardly revised.

According to preliminary estimates, the German Consumer Price Index reached a record of 6% YoY in November, which confirms that inflation had spread more than previously expected and that the risk of persistent inflation has risen.

Germany’s GDP grew by 1.8% in the third quarter, but the rising inflation, covid pandemic, and the world’s supply chains crisis represent a serious issue for economic stability.

DAX remains under pressure

Data source: tradingview.com

DAX index weakened last trading week, but it continues to trade above the 15,000 points. Further turmoils should not be discounted, and if the price falls below 14,800 support level, the next target could be around 14,500 or even 14,000.

Summary

Germany announced a nationwide lockdown for the unvaccinated, and according to new measures, only vaccinated or recently recovered from Covid will be allowed to go to cinemas, leisure facilities, restaurants, and shops. The Omicron variant of the coronavirus continues to keep investors in a negative mood, and further turmoils for the Dax index should not be discounted.

The post DAX index forecast after new measures for the unvaccinated appeared first on Invezz.






Author: Stanko Iliev

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Economics

Berkshire’s Charlie Munger: Market “Even Crazier” Now Than During DotCom Boom

The Australian Financial Review reports that Munger said Friday that he believes the markets are wildly overvalued in places and that the current environment…

…[The Australian Financial Review reports that Munger said Friday that he believes the] markets are wildly overvalued in places and that the current environment is “even crazier” than the dotcom boom of the late 1990s that subsequently led to a bust. He is not wrong.

This post by Lorimer Wilson, Managing Editor of munKNEE.com, is an edited ([ ]) and abridged (…) excerpt from an article from zerohedge.com for the sake of clarity and brevity to provide you with a fast and easy read. Please note that this complete paragraph must be included in any re-posting to avoid copyright infringement.

1. Investor demand for U.S. technology stocks amid the pandemic has taken the Nasdaq 100 to a relative record against the Dow Jones Industrial Average…exceeding the peak set during the dot-com bubble.

2. On an absolute basis, US stocks have never been more expensive relative to sales.and never been more expensive relative to the nation’s GDP.

4. …Munger wishes cryptocurrencies had “never been invented,” and thinks the Chinesemade the correct decision, which was to simply ban them. In my country, English-speaking civilization has made the wrong decision, I just can’t stand participating in these insane booms, one way or another.”…

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The post Berkshire’s Charlie Munger: Market “Even Crazier” Now Than During DotCom Boom appeared first on munKNEE.com.




Author: Lorimer Wilson

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