If rates “normalized” over 50% of all US tax receipts would be consumed by debt service cost alone. Us deficits would be equal too or higher than at the height of the “great recession”
If the CPI was calculated using BLS.GOV 1980 inflation calculation methods over 90% of all tax receipts would be consumed by debt service cost. During “economic stimulus” the US national debt went up by 93% while tax receipts only increased by 28% https://research.stlouisfed.org/fred2/graph/?graph_id=239672&category_id=
1) The Fed will raise rates in 2015 by 0.15% on the first hike expanding the top end of the Fed funds target range from 0.25% to 0.40%.
2) Each additional hike will be 0.10% as I believe 0.25% is far too aggressive from current levels.
3) When the impact of higher rates finally engages I believe we’ll see a hard short term sell off in stocks and US Treasuries.
4) The Fed then will have the justification they need for more QE (creating trillions with keypunch entries backed by no tangible asset or income flow) to further their objective to monetize US debt
5) Dollar devaluation against tangible assets engages (true inflation) that will not be able to be contained by BLS.GOV “hedonic quality adjustments” or “substitution” revisions or omission that that are “too volatile to include” in the released CPI.
6) As the prices of goods and services rise tax revenue rises with it. There is a direct correlation between M1 (money supply or the creation of money) and tax receipts see this Fed chart https://research.stlouisfed.org/fred2/graph/?graph_id=239787
7) The majority of US debt is now fixed in 10+ year Treasuries (debt service /national debt) see this US Treasury page http://www.treasury.gov/about/budget-performance/budget-in-brief/Documents
8) National debt https://research.stlouisfed.org/fred2/graph/?graph_id=239780
9) Average yield 2.52%, indicates and average duration of 10+ years http://www.bloomberg.com/markets/rates-bonds/government-bonds/us
10) End result debt service cost will remain constant over the next 10+ years on the current 18+ trillion in debt with more tax receipts generated by inflation to service the FIXED debt service cost.
Treasury objective to close the the gap between debt and tax receipts see https://research.stlouisfed.org/fred2/graph/?graph_id=239672&category_id=
11) Further deterioration of US debt credibility will engage, more US debt downgrades are in sight resulting in higher rates that the Fed will not be able to control by creating more QE trillions backed by nothing with keypunch entries.
12) 12 countries now have higher debt ratings than the US, most have the same or higher rates, liquidity is respectable and most have better currency appreciation potential see https://en.wikipedia.org/wiki/List_of_countries_by_credit_rating
13) Currently currency & instrument risk for a non US investor holding a US Treasury is more in one day than annual yields. Below US debt held by non US investors. https://research.stlouisfed.org/fred2/graph/?graph_id=239766&category_id=
14) As the US dollar comes off its 10 year high. https://research.stlouisfed.org/fred2/graph/?graph_id=240375&category_id=
15) Foreign liquidation of 6+ trillion in US debt/US dollars owned by non US investors will aggressively engage https://www.nationalpriorities.org/campaigns/us-federal-debt-who/
16) The Fed will create more money using the QE printing press to contain the hemorrhage. https://research.stlouisfed.org/fred2/graph/?graph_id=249277
17) The Fed and Treasury will have achieved their objective
18) Debt service cost on the current 18.1 trillion will remain fixed for 10+ years at 2.57%.
19) Tax receipts could potentially double from true inflation and dollar devaluation. https://research.stlouisfed.org/fred2/graph/?graph_id=239779&updated=1372
20) It has to spark some thought for the true motivation behind QE (creating trillions of dollars with keypunch entries) and the “maturity extension program” (the Federal Reserve buying trillions of long term debt to force rates to artificial and historic despite the lowest credit rating and worst economic fundamentals in our lifetimes)
21) Reliable US interest rate guidance from either the US Treasury or Federal Reserve is hard to find. The US Treasury doesn’t feel the need, the Fed is an unaudited private bank and doesn’t have to, any guidance from the Fed should be considered a “gift” according to Fed officials.
22) The US Treasury provides little to no guidance see http://search.treasury.gov/search?utf8=%E2%9C%93&sc=0&query=rate+hikes&m=&affiliate=treasury&commit=Search
23) Last and lowest rate guidance from the Fed on where the Fed sees rates and when https://peterknightadvisor.wordpress.com/2015/04/01/in-10-minutes-learn-how-to-capture-the-first-leg-higher-in-rates/
24) Fed policy, meeting schedule, statements and press conference videos http://www.federalreserve.gov/monetarypolicy/fomccalendars.htm
25) You can also monitor where the CME futures market sees the Fed funds rate and when through September 2018 http://www.cmegroup.com/trading/interest-rates/stir/30-day-federal-fund_quotes_globex.html
26) To convert the contract price into the rate is represents take 100.00 – the contract price = the rate
Example 100.00 – the December 2017 delivery price of 98.66 = a market expected rate of 1.34%
Trading this rate higher requires a short position each 0.01 change in price = $41.67
Current market expectations for December 2017 1.3450% contact value $5,604
Fed expectations for December 2017 3.25% contract value $13,541
The difference from where the market is pricing the Fed funds rate versus where the Fed is pricing the Fed funds rate per contact is currently $7,904
In other words if the Fed is right about the rate they set it represents an increase in contract value of +141.63%
27) Using the December 2016 delivery http://www.cmegroup.com/trading/interest-rates/stir/30-day-federal-fund_quotes_globex.html
28) Current position short December 2016 delivery (no hedge) if you are a client contact me for the hedge strategies with the highest return on risk.
29) Click here to enlarge the December 2016 rate, price valuation chart below.
30) Instructions on how to experiment with any potential outcome for this trade.
31) Click here to open the December 2016 delivery risk/reward spreadsheet
32) Instructions on how to experiment with any potential outcome for this trade.
Quotes are linked in cell B-1,
Enter any price for the Fed funds rate in cell B-2
The rate the price represents will show in cell C-2
Net profit or loss will show in cell E-2
Investment amount can be changed in cell D-2
Deposit per contract in cell G-3
33) For Fed confirmation on this trade as to where the Fed sees the rate they set and when
For additional information see https://peterknightadvisor.wordpress.com/2015/09/04/26927/
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RISK DISCLOSURE STATEMENT
PROGRAM AVAILABILITY IS DEPENDENT ON YOUR COUNTRY OF RESIDENCY AND FINANCIAL STATUS
PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. EXAMPLES OF HISTORIC PRICE MOVES OR EXTREME MARKET CONDITIONS ARE NOT MEANT TO IMPLY THAT SUCH MOVES OR CONDITIONS ARE COMMON OCCURRENCES OR ARE LIKELY TO OCCUR.
HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT.
IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADE PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF THE HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.
BID/ASK SPREADS, BROKERAGE COMMISSION, CLEARING, EXCHANGE AND REGULATORY FEES WILL HAVE AN ADVERSE IMPACT ON THE NET OVERALL PERFORMANCE OF YOUR ACCOUNT. PRIOR TO MAKING A DECISION TO PARTICIPATE IN ANY INVESTMENT MAKE SURE YOU FULLY UNDERSTAND THE FEES ASSOCIATED WITH TRADING.
THE INFORMATION PROVIDED IN THIS REPORT CONTAINS RESEARCH, MARKET COMMENTARY AND TRADE RECOMMENDATIONS. YOU MAY BE SOLICITED FOR AN ACCOUNT BY ONE OF OUR REPRESENTATIVES OR EMPLOYEES. IT SHOULD BE KNOWN THAT THE REPRESENTATIVES OF OUR FIRM MAY TRADE FUTURES AND OPTIONS FOR THEIR OWN ACCOUNTS OR THOSE OF OTHERS. DUE TO VARIOUS FACTORS (SUCH AS MARGIN REQUIREMENTS, RISK FACTORS, TRADING OBJECTIVES, TRADING INSTRUCTIONS, TRADING STRATEGIES, AND OTHER FACTORS) SUCH TRADING MAY RESULT IN THE LIQUIDATION OR INITIATION OF FUTURES OR OPTIONS POSITIONS THAT DIFFER FROM THE OPINIONS AND RECOMMENDATIONS FOUND IN THIS REPORT.
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE. THE RISK OF LOSS IN TRADING FUTURES CONTRACTS OR COMMODITY OPTIONS CAN BE SUBSTANTIAL, AND THEREFORE INVESTORS SHOULD UNDERSTAND THE RISKS INVOLVED IN TAKING LEVERAGED POSITIONS AND MUST ASSUME RESPONSIBILITY FOR THE RISKS ASSOCIATED WITH SUCH INVESTMENTS AND FOR THEIR RESULTS.
YOU SHOULD CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR CIRCUMSTANCES AND FINANCIAL RESOURCES.