Impact on Depositors
1) During “economic stimulus” depositors in US debt have endured the the largest negative rates of return for the longest period of time in history. These depositors have been stripped of trillions in interest income to save the US Treasury the same amount in debt service costs. According to the Fed this translates into “economic stimulus”.
2) Deposit rates normally trade above the consumer price index in red below, any deposit rate below the red line represent a negative rate of return.
Click here for a current chart and all supporting historical price data
3) If the Fed makes good on their pledge to let rates rise it equates into a 300 billion dollar annual raise for depositors by the end of 2016.
4) 300 billion will provide true economic stimulus to the free market economy rather than “retained” by the US Treasury to reduce debt service costs.
5) The downside for these depositors is they will be impacted adversely once again when dollar devaluation engages as the US monetizes debt in an attempt inflate out of their current debt crisis.
Impact on Banks
Banks never lowered the prime rate it has remained unchanged at 3.25% since 2009.
6) The 60 year average spread between the Prime and Fed funds rate is 2.00%, it has remained unchanged at 3.10% since 2009 or 1.10% above the historical average.
Average credit card rates of 13.00% did not decline during “economic stimulus” allowing banks the largest profit margins on their borrowing costs for the longest period of time in history. The Fed believes banks overcharging borrowers trillions also qualifies as “economic stimulus”,
Below the Fed funds borrowing rate in red, Prime Rate in black. Unless Bankers grown a conscience I believe this 3.10% spread will be the new norm.
7) Click here for the chart and all supporting historical data
Impact on traders
For Traders the first rate hike since 2006 will generate unprecedented trading opportunities.
8) “Economic stimulus” by the numbers was the most costly economic failure in history. The US’s numbers are currently far worse than at the start of “economic stimulus”
US’s numbers in 2015
9) The US currently has the worst debt to tax revenue ratio in US history
Click here for a current chart and supporting historical data
10) The worst debt rating in history.
12 countries now have higher debt ratings than the U.S.
Click here for the complete report
11) The worst debt to personal income ratio in history
Click here for the supporting chart and all supporting historical data
12) The worst debt to the employed population ratio in history
Click here for the supporting chart and all supporting historical data
13) The worst debt to earnings ratio in history
Click here for the supporting chart and all supporting historical data
14) The largest amount of US debt held by non US investors
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Breakdown of who owns US debt
15) The worst debt held by non US investors to dollar index ratio in history
Click here for a current chart and all supporting historical data
16) The largest amount of debt purchased and held by Federal Reserve Banks in history.
The Federal Reserve has had to buy over 4 trillion in Treasuries and bad mortgages with money they created with keypunch entries back by no tangible asset or income flow. The creation of money backed by nothing will be eventually be inflationary.
Click here for a current chart of Fed held debt and all supporting data
17) The worst national debt in history
Average annual budget deficits during “economic stimulus” 2008 to 2014 were 1.4506 trillion
Click here for the supporting chart and all supporting historical data
18) The worst debt service cost in history
During “economic stimulus” the US national debt increased by 93% with tax receipts increasing by only 28%.
2008 national debt = 9.4 trillion
2008 tax receipts = 1.4 trillion
2014 national debt = 18.1 trillion
2014 total US tax receipts = 1.8 trillion
Each 1% increase in rates now consumes over 10% of total US tax receipts
It’s become unsustainable and now irreversible without monetization of US debt
Click here for the report
Click here for the chart and all supporting historical data
19) The worst debt to GDP ratio in history
Click here for the chart and all supporting historical data
20) The worst debt to GDP ratio relative to the world’s second largest economy China in history.
Click here for the chart and all supporting historical data
21) The worst growth ratio relative to the world’s second largest economy in history
Click here for the chart and all supporting historical data
22) The worst US trade deficits in history
Click here for the chart and all supporting historical data
23) The worst negative rates of returns for depositors for the longest period of time in history
Click here for the chart and all supporting historical data
24) The largest profit margins for banks on loans relative to bank borrowing costs in history
Click here for the chart and all supporting historical data
25) The worst mortgage delinquency rates in history. Mortgage delinquency rates currently remain higher than at the start of “economic stimulus” and more than twice the historical average.
Click here for the chart and all supporting historical data
26) The worst debt per US taxpayer in history.
Per capita taxpayer debt has skyrocketed from 67K to over 130K per taxpayer during “Economic Stimulus” This increase represents a debt service cost per US taxpayer when interest rates “normalize” of $6,630 annually or $552.50 monthly.
Click here for a current chart
27) The largest bank bailouts in history, over 7.7 Trillion was undisclosed until the Fed was orderd in court to disclose it plus an additional 700 billion during the Toxic Asset Relief Program (TARP)
28) The worst Fed disclosure in history, below is the Fed Inspector General clueless about 9 trillion
29) The worst BLS.GOV creditability in history. Currently less than 8% of economic analysts believe U.S. inflation, employment and other BLS.GOV economic releases are being reported correctly.
Click here and here for more information
Percent change in price versus the CPI, you don’t have to be a Rhodes Scholar to determine the CPI calculations currently being released are beyond misleading.
Click here to enlarge the table below, click here for the source
30) We can thank Bernanke the architect of the most costly economic policy failure in US history for generating the extreme economic fundamentals which will fuel the major market moves on deck.
31) Bernanke enjoys the worst track record for his calls on the economy of any Fed chair on record before, during and now after being Fed chair.
Click here for the report on Bernanke’s calls on the economy versus what actually occurred.
32) Yet Bernanke’s with his consistently bad calls prior to becoming Fed chair was still appointed to be the head of the World’s largest private and unaudited central bank.
33) Bernanke was given unaudited discretionary authority over trillions of dollars in amounts that rivaled the US’s 18 trillion dollar GDP.
Unsustainable and now irreversible
34) Because of the decisions made by the Fed and administration, the US can no longer service its debt
If interest rates “normalized” over 50% of all tax receipts would be consumed by debt service cost alone.
Yellow current debt service cost
Red debt service cost if interest rates “normalized”
Orange debt service cost if inflation was reported by 1980 BLS.GOV calculations
35) Using the 2008 – 2014 average budget deficit of 1.45 trillion this additional debt service cost could generate record annual U.S. budget deficits of over 2 trillion annually.
Click here for the chart and all supporting historical data
36) Now that reality is engaging the US’s status as “flight to quality” world reserve currency is being questioned with trades beginning to unwind in dollar denominated investments and dollars.
Click here for the chart and all supporting historical data
37) Federal debt currently held by non US investors exceeds 6 trillion, trillions more are in muni’s and corp. debt.
Currency risk for these investors is more in one day than annual yields
Click here for the chart and all supporting historical data
38) Most non US investors already have their finger on the USD sell trigger. The consensus is the risk on the USD and USD debt instruments/shares currently outweighs any potential gains.
Alternatives
39) There are 12 countries that currently have higher debt ratings than the US most have the same or higher interest rates, click here for for a current debt ratings.
40) Positioning in tangible assets metals, energy and real estate make more sense than US Treasuries with the dollar near a 10 year high and debt instruments near all time highs
41) Scores of international investments currently have a higher return on risk versus dollar denominated investments.
China’s impact on the global financial markets.
42) China’s currency is now on deck to become the world’s 5th world reserve currency as early as October 2015 at the latest by the end of 2016.
43) China’s numbers according the the Federal Reserve are superior to the US’s, UK, Euro-zone and Japan
44) By the numbers the IMF is fearful of accepting China’s currency as the 5th world reserve currency
45) The IMF is concerned acceptance as the 5th would reserve currency could ignite sales of debt and shares by the trillions in the US, UK, Euro, Japan and change the global financial markets as we know them today, click here , here and here for more information.
China’s numbers versus the US according to the Fed
46) China’s growth according to the Fed is superior to the US’s
Click here for a current chart and all supporting historical data
47) China’s debt to GDP ratio is 5 times better than the US’s according to the US Federal Reserve.
Click here for the chart and all supporting historical data
48) China’s balance of trade versus the US is far better.
Click here for the current chart
49) China’s currency in part pegged to the US dollar has still appreciated by 14.46% during “economic stimulus” moving from 7.26 to the US dollar to 6.21.
Click here for the chart and all supporting historical data
50) International investors now see China as a violable alternative to US, UK, Euro and Japan as they de-peg further from the US dollar.
Some 95 per cent of all global foreign exchange reserves are invested in just four currencies: the US dollar, the euro, the yen and sterling. The central banks of the ‘Big Four’ are all expanding their balance sheets or have been doing so for years with no sign of immediate reversal. They are all trying to convert huge debt problems into inflation problems, and when they succeed their currencies will weaken sharply.
In this currency war, EM central banks risk suffering the most collateral damage. Their reserves – so many of them held in the big four currencies – will be decimated in purchasing power terms. The world will become desperate for alternative currencies to act as replacements for the traditional reserve currencies once their currency debasement efforts really take root.
So far, only one country, China, appears to have spotted the opportunities presented by this situation. Most others merely watch the dollar in fear.
China’s renminbi will become a global reserve currency in the not too distant future. China will benefit enormously from becoming a global reserve currency – not only will its currency become far more stable, but China will also no longer need so many reserves. The excess reserves can then be used for sovereign wealth fund purposes, including the AIIB. Finally, China will be able to increase consumption, because it no longer needs to suppress domestic demand in order to maintain high levels of reserves.
But the world will need more new reserve currencies than just the renminbi. This means that other large EM countries such as Mexico, Brazil, India and others could also benefit from the opportunity that China is now exploiting. With sensible planning and prudent policy implementation, they too can become global reserve currencies.
Technocrats in EM central banks are aware of these issues but face tremendous challenges in convincing their boards of the need to diversify into other currencies. That is why China’s move is so important. The renminbi’s ascent to reserve currency status will demonstrate the huge benefits of diversifying away from the ‘Big Four’ currencies. China will soon have to sell treasuries as its reserves become true ‘excess’ reserves. It is likely to seek to invest the cash in less mainstream currencies. Other EM central banks will ultimately reciprocate by buying renminbi. As each major EM central bank diversifies, not only will it be good for other EM currencies, it will also help all of them to reduce their excess exposures to the ‘Big Four’ QE currencies.
51) China’s short term interest rates are near 5.00% versus the US’s. 0.03%.
Click here for the chart and all historical data
52) China’s credit rating continues to climb while US’s debt rating is having trouble maintaining, Hong Kong which is Special Administrative Region of the People’s Republic of China currently has a higher debt rating than the US at AAA as ranked by US debt ratings agencies.
Click here for ratings
53) Up until the 1880s China had been the World’s largest economy for several hundred years, currently “The Economist” has a online poll as to when China’s GDP will again surpass the US’s the poll’s current estimate is 2021.
Click here for the report and poll
In preparation of the Renminbi becoming a World Reserve Currency the World’s largest dollar volume exchange group has listed Renminbi futures against both the USD and Euro.
54) Offshore Chinese Renminbi Market CME report
Renminbi Versus the USD
55) Chinese Renminbi/USD Futures
56) Chinese Renminbi/USD Quotes
Renminbi Versus the Euro
57) Chinese Renminbi/Euro Futures
58) Chinese Renminbi/Euro quotes
59) The the spread between China’s currency and the US dollar could be nearly as volatile as when Switzerland de-pegged from the Euro unless there is coordinated intervention to contain this volatility.
Click here for the supporting chart
What I see happening over the next 30 months
60) Rates will rise igniting major market moves
Click here for a chart to monitor US rates and the curve forward
US Federal debt will lead the sell off as 6 trillion held by non US investors liquidate
61) Click here for the supporting chart and all supporting historical data
62) Once the sell off fully engages I believe liquidity may be an issue not only in the secondary debt markets but the primary as well.
63) 10 Year Notes, each point = $1,000 (Short)
Click here for quotes
64) 5 Year Notes, each point = $1,000 (Short)
Click here for quotes
65) 2 Year Notes, each point = $2,000 (Short)
Click here for quotes
66) 3 month USD deposits outside the Treasury system each point = $2,500 (Short)
This contract is the most liquid contract on the board with an open interest of over 28,000,000 million contracts representing a face value of over 28 trillion, an amount that exceeds the combined GDP’s of the US and China.
Click here for quotes
67) Fed funds, each point = $4,166.67 (Short)
Click here for quotes
Where the market is pricing rates and when
68) Fed funds futures will give you excellent indication of what market expectations are for the Fed Funds rate to the 0.01% monthly through August 2018 click here for current quotes.
69) To convert the contract price into the rate it represents take 100.00 subtract the contract price = the rate.
Example; December 2017 is currently trading at 98.3250, 100.0000 – 98.3250 = 1.6750%
To calculate contract value multiply the rate by $4,166.67, in this case 1.6750 X 4,166.67 = a contract value of $6,979.17
70) Click here for current quotes, here for the complete report and example trades
Where the fed is pricing the rate they set and when
71) The Fed’s view as to where they expect the Fed funds rate by Dec 2017 is entirely different; the last guidance from the Fed was 3.2500% by the end of 2017|
72) Click here for the full report.
What the difference between Market and Fed expectations is worth
73) If the Fed is right about the rate they set the contract price will fall from the current 98.3250, representing a rate of 1.6750% and contract value of $6,979.17 to 96.7500 representing a rate of 3.2500% and contract value $13,541.68 for an increase in contract value of $6,562.50 or +100%.
74) Click here for the complete report
75) Click here to enlarge the valuation table below
US equities will sell off
76) Volatility will be high and liquidity will be questionable when the move fully engages I’ll be using trades that define risk on the trade but for the duration of the trading period.
77) Click here for an example trade explaining how this is done
78) Click here for current S&P quotes
79) Non US investor selling will engage more aggressively further pressuring US debt and share to the downside as trillions in US dollar denominated investments and US dollars unwind.
Click here for the supporting chart and all supporting historical data
Non US investors will liquidate dollars aggressively
80) With dollar sale proceeds non US investors will shift assets to any of the 12 countries that currently have higher debt rating than the US, and/or countries with expanding economies, higher rates and trade surpluses with better governmental fiscal numbers.
Click here for the Fed USD index chart and all supporting historical data
The Fed now has achieved their goal for justifying more “Quantitative Easing”
81) More “Qualitative Easing” will engage in an attempt to cauterize the US financial hemorrhage with the Fed once again bailing out Banks first then the U.S. Treasury at the expense of depositors and borrowers consistent with past QE and their long term plan of monetizing the US national debt.
82) Click here and monitor this chart Fed chart as QE re-engages I believe the cumulative total before this is all over will exceed 9 trillion.
83) True Inflation will aggressively engage but won’t be reflected accurately in the BLS.GOV CPI numbers in order the Fed/Administration to justify keeping rates at artificial lows to save the Treasury trillions and all other increases that are tied to inflation such as debt service cost, wages and benefits.
84) When looking at the chart below you don’t have to be a Rhodes scholar to question the creditability of the BLS.GOV CPI numbers in orange as 92% of economic analysts already do.
Click here for the current Fed chart and supporting historical data on the Fed’s site….
Rally in tangible assets
85) True inflation will be much higher than reported inflation pressuring tangible assets like Metals, Energy and most Commodities prices higher,
I believe we’ll see a new record high in gold by 2017 with volatility high, my call for the bottom $831, high $2610 by Dec 2017.
Click here for gold quotes each $1.00 move = $100 per contract,
86) As true inflation more aggressively engages from the Fed’s trillions more in QE money supply (M1) will increase by an even greater amount than 2008-2015.
87) An increase in money supply decreases the buying power of the USD and Inflates prices, higher prices will generate higher tax receipts as it has done during every monetization cycle since the US went off the gold standard and became a “Fiat currency”
88) Click here for the current Fed chart and all supporting historical data
Impact on the US Treasury
89) The majority of US debt is currently fixed in 10 plus year Treasury durations.
Average yield on US debt is 2.37%, 1954-2015 Average 5.10%
90) Current debt service cost at a percent of tax receipts pre monetization
Yellow = current treasury rate with debt service consuming -23.41% of total tax receipts
Red = 1954-2015 average Treasury rate with debt service consuming -50.28% of tax receipts
Orange what rates would be using BLS.GOV calculations from 1980, -92.88% of tax receipts
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As US’s creditability dissipates the yield curve will invert
91) Not to the extent of 1980 when the US national debt was 40% of GDP and approaching 1 trillion due to accurate CPI reporting.
92) Rates and the curve inversion will be contained by the BLS.GOV “revised” inflation calculation methods in place since 1978,
93) Inflation versus rates since BLS.GOV inflation calculation “revisions”
A) The curve inverts with short term rates exceeding long term rates in 1979
B) “Revised” BLS.GOV inflation calculations engage 1978-1980
C) Gullibility and greed engage with the market giving the “revised” BS.GOV inflation calculations creditability curing the inverted curve from 1981 until 2015
94) Click here for more information on how inflation revisions have impacted the CPI calculations.
95) Click here for the chart and all supporting historical data
96) Money supply will escalate dramatically, true inflation will engage with a vengeance which will not be accurately reported by BS.GOV reporting but will show in tangible assets like gold, energy, commodities and real estate.
97) Below CPI numbers reported by BS.GOV in red relative to gold and real estate
98) Click here to monitor this chart once the next round of “Qualitative Easing” engages.
99) As U.S. Treasury debt is currently fixed in an average duration exceeding 10 years at 2.37% the impact on debt service for the US Treasury be minimal.
100) Debt should monetized (devalued) before these Treasuries mature.
101) Debt service cost table post debt monetization
Yellow = current treasury rate with debt service consuming -11.71% of tax receipts
Red = 1954-2015 average Treasury rate with debt service consuming -25.14% of tax receipts
Orange what rates would be using BLS.GOV calculations from 1980, -46.44% of tax receipts
102) Bernanke explains monetization in this speech prior to becoming Fed chair Deflation Making Sure “It” doesn’t Happen Here which earned him the nickname “Helicopter Ben”
103) Monetization is nothing new countries have been doing it since the first fiat currency was introduced in 1000 AD.
The Chart below clearly shows the direct correlation between M1 in black and tax receipts in green
104) Click here for a current chart and all historical data
105) Monetizing the US debt lower is currently the only option left for the US.
The main reasons why it may not work this time round is the size of the US national debt and the ability of US politicians and citizens to outspend the tax receipt increases generated by dollar devaluation.
Click here for a current chart
106) What the Fed didn’t take into consideration trying to inflate out of this mess is the trillions in borrowed money wasn’t spent in the US generating higher tax receipts, the money left and continues to leave the US though record trade deficits.
Click here for the current chart
107) One conclusion I’m very confident in making had the trillions lost to trade deficits over the past 30 years in chart 102 above remained in the United States the chart below would look entirely different today.
Click here for a current chart
The upside
108) Greenspan, Bernanke and Yellen’s Incompetence, arrogance coupled with the lack of political leadership has cumulatively generated the best trading opportunities I’ve seen in my 25+ year career and we still have choices in 2015
109) We can all sit around and wonder how incompetent political ass kisses like Greenspan, Bernanke and Yellen could have been appointed to run the world’s largest, private and unaudited central bank or
We can protect our portfolios and expend our time and energy on capturing the major market moves that will generated by their incompetence.
110) We can all wonder how Greenspan, Bernanke and Yellen were all given full discretion over undisclosed trillions dollars and granted the ability to make unaudited and vaguely explained decisions that have adversely impacted 100’s of millions of Americans, their children and the global economy or
We can protect our portfolios and expend our time and energy on capturing the major market moves that will generated by their incompetence.
111) I for one are going to be positioned using defined risk trades to capture the major market moves. If you’d like to talk long term hedge or speculative trading strategies for any of the 400 major markets that will be impacted contact me.
Regards,
Peter Knight Advisor
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