Such data have proven critical in driving momentum toward large rate hikes in previous months, and this result is likely to embolden calls for another large move at the next ECB decision on Oct. 27. Investors this week began pricing in a second straight 75 basis-point increase.
“The next step still has to be big because we are still far away from rates that are consistent with 2% inflation,” ECB Governing Council member Martins Kazaks, said Wednesday in an interview in Vilnius, Lithuania, where price growth was 22.5%. “I would side with 75 basis points.”
No doubt Christine Lagarde, head of the ECB, will raise rates 75bps because, after all, that’s what her Fed counterpart would do (and has done). What worked for the Fed will work for the ECB, right?
Slight problem: so far, the 75bps hikes have not worked for the Fed, either.
"so far, the 75bps hikes have not worked for the Fed, either."
Not surprising; it's too little, too late. They should have slowly increased rates 10 years ago. By 2012, the GFC was already a few years in the rear view mirror and rates should have come back to reasonable, historical norms; a couple of points above the actual rate of inflation. Instead, the Fed (and other central banks) kept them much too low this whole time, thereby enabling the irresponsible deficit spending by governments as well as blowing the biggest asset bubbles the world has ever known.
The irony is that, so long as the inflationary effects of the increased money supply was contained to assets within financial markets, everyone was peachy keen with inflation. It's only once that inflation bleeds over from Wall Street to Main Street that it becomes a problem--and no one has bothered to address the reality that the Fed's tool for dealing with inflation does not discriminate between asset prices and consumer prices.
The Fed cannot through interest rates bring consumer price inflation down without bringing down asset price inflation (and, given the correlation between money supply growth and stock index growth since 2008, that means driving down asset prices themselves).
Of course people were peachy keen with it. Their 401ks full of index funds were up. Their real estate (much of which is owned on margin called a mortgage) was up. This made them feel like they were better off. But some of us understood all along that this wasn't sustainable. I thought the new "everything bubble" was ready to pop in in the fall of 2015, when stocks and real estate were still priced at roughly half the peak levels they reached last year.
Of course, all this is planned destruction of the world's economies in furtherance of the Great Reset. All bankers are in on the destruction, especially central bankers. Anyone who does not see this is not paying attention.
There's a reset coming, but it's not the one described by Klaus Schwab. Rather, it's the one described by John the Revelator.
From Beijing to Berlin to London to Wall Street, governments and central banks alike have lost control over economic events. Their hands are on the wheel but the helm doesn't answer.
Which means we're headed into an economic singularity, and no one can predict or anticipate what lies on the other side.
A pivot is coming sooner than most of us realize because the US Fed and the ECB are shocking the world economy more than it can stand. Something has to give... and it will.
He's right that the Fed is raising rates aggressively. He's wrong that money printing is the sole cause of the inflation. The timing just does not work out.
The problem with the thesis that it takes 9-12 months for a rate hike to work its way through the economy is again--the data doesn't bear that out as a hard and fast rule.
What can happen--as did happen with subprime mortgages in 2005-2007, is that once Bernanke pushed rates past a certain point, the subprime holders of adjustable rate mortgages could no longer roll over their mortgages, pushing defaults through the roof. At the same time, subprime mortgage candidates were essentially priced out of the mortgage market as first time buyers.
Because the ticking time bomb in an ARM is the reset date, not every ARM reset immediately upon Bernanke's rate rises, but so many ARMs had been sold through non-traditional lenders during the housing bubble that there was a rising tide of defaults as the reset dates kicked in.
What turned the subprime mortgage meltdown into a larger financial crisis was the way securitization had taken off through derivative trades. Perversely, and one reason why so little due diligence was performed on mortgages, was that Wall Street was selling tranches of CDOs--basically derivative bets on mortgage bonds--at such a tremendous pace that any mortgage paper written was gobbled up by a Wall Street bank pretty quickly.
What no one calculated--and what no one has yet to calculate--is the effects on the financial system of a huge dark market in derivatives. When subprime defaults began to rise, it began tainting tranches of CDOs, activating in many cases the default covenants of related credit default swaps (essentially, bets going the other way of the CDO). Between defaults and rising margin calls (much like what is happening currently with the UK pension funds), a general liquidity crisis formed: there literally were not enough free dollars in the credit markets to settle the unwinding transactions.
In a dark market, when an asset cannot be sold quickly its market value immediately becomes effectively zero. Thanks to another regulatory change in that era, investment firms were using "mark to market" accounting, which required them to take the loss on unsaleable securities immediately, rather than postponing loss recognition until the time of the actual sale.
That is how you get a liquidity crisis. Too much pressure to sell assets and not enough dollars (or currency generally) to process all the transactions.
So far, the Fed's rate hikes have reduced the money supply but liquidity really hasn't been touched, with over $2 Trillion in the overnight reverse repo market.
The question becomes what breaks first? In the UK, it was pension fund margin calls. In the US, if similar dynamics play out, we're probably looking at a major hedge fund imploding (think replay of 1997-1998 LTCM bailout).
Where Kyle Bass is really missing the mark is that he's focusing solely on money supply and total debt issuance, and not looking at the total dynamics of global financial systems. That's where the really scary truth of the Fed's situation is found.
As I've opined before, the Fed can't stop raising rates without sacrificing the dollar's strength globally.
Right now, no central bank has even a smidgen of the control over inflation or currency that they claim to have. Their hands are on the wheel, but the autopilot is stuck and there's absolutely no control.
The pivot may happen soon, but pivot or no pivot I doubt it will change much: the system is spinning out of control and no one can do a damn thing until it jumps the rails of its own accord. If the dollar survives (which, amazingly enough, is a distinct possibility), then the Fed may be able to reassert control then, but not before.
Peter -- wondering, not familiar w finances and markets like you, what is the significance of this news, in re to Fed policy of fighting inflation (or the Luongo-led view of Fed fighting against the WEF/Davos crowd by shrinking the money supply so their eurodollar/shadow banking system crumbles)
JUST IN - U.S. Fed reverse repo facility use spikes to $2.426 trillion — a new record high.
Probably the simplest way to look at this is through contagion effect.
One reason the ECB was pressured to begin raising rates was because Jay Powell and the Fed moved first, raising rates which, among other things, triggered the dollar to appreciate against the euro. For the ECB, it is quite likely that raising rates was not merely a question of fighting inflation, but also defending the euro against a strengthening dollar.
(Which, incidentally, is why I suspect this time around the Fed will be extremely reluctant to pivot back to QE any time soon).
However, many of the drivers of inflation in the eurozone are the same drivers of inflation here in the US. Soaring energy prices driven by imbalances between supply and demand were one--and energy price inflation is still outpacing overall and even "core" inflation both in the US and in the Eurozone. Food price inflation remains rampant both in the US and in Europe (and, for that matter, just about everywhere else.) These supply side shocks are not amenable to interest rate therapy, which targets the demand side of the monetarist equation.
Which means that the Fed for certain is aiming at the wrong target with interest rates. The ECB is most likely aiming at the wrong target for the same reasons.
However, just as the BoE gilt-buying intervention the other day pushed yields down on US treasuries in the American markets, how the ECB responds to inflation will drive inflation responses here in the US..
"so far, the 75bps hikes have not worked for the Fed, either."
Not surprising; it's too little, too late. They should have slowly increased rates 10 years ago. By 2012, the GFC was already a few years in the rear view mirror and rates should have come back to reasonable, historical norms; a couple of points above the actual rate of inflation. Instead, the Fed (and other central banks) kept them much too low this whole time, thereby enabling the irresponsible deficit spending by governments as well as blowing the biggest asset bubbles the world has ever known.
The irony is that, so long as the inflationary effects of the increased money supply was contained to assets within financial markets, everyone was peachy keen with inflation. It's only once that inflation bleeds over from Wall Street to Main Street that it becomes a problem--and no one has bothered to address the reality that the Fed's tool for dealing with inflation does not discriminate between asset prices and consumer prices.
The Fed cannot through interest rates bring consumer price inflation down without bringing down asset price inflation (and, given the correlation between money supply growth and stock index growth since 2008, that means driving down asset prices themselves).
Of course people were peachy keen with it. Their 401ks full of index funds were up. Their real estate (much of which is owned on margin called a mortgage) was up. This made them feel like they were better off. But some of us understood all along that this wasn't sustainable. I thought the new "everything bubble" was ready to pop in in the fall of 2015, when stocks and real estate were still priced at roughly half the peak levels they reached last year.
Yes, asset prices need to come down. A lot.
Of course, all this is planned destruction of the world's economies in furtherance of the Great Reset. All bankers are in on the destruction, especially central bankers. Anyone who does not see this is not paying attention.
There's a reset coming, but it's not the one described by Klaus Schwab. Rather, it's the one described by John the Revelator.
From Beijing to Berlin to London to Wall Street, governments and central banks alike have lost control over economic events. Their hands are on the wheel but the helm doesn't answer.
Which means we're headed into an economic singularity, and no one can predict or anticipate what lies on the other side.
I recommend watching this: https://www.youtube.com/watch?v=ERDqyxTHZiU
and discussing.
A pivot is coming sooner than most of us realize because the US Fed and the ECB are shocking the world economy more than it can stand. Something has to give... and it will.
Kyle Bass is both right and wrong.
He's right that the Fed is raising rates aggressively. He's wrong that money printing is the sole cause of the inflation. The timing just does not work out.
The problem with the thesis that it takes 9-12 months for a rate hike to work its way through the economy is again--the data doesn't bear that out as a hard and fast rule.
https://fred.stlouisfed.org/graph/?g=UkO2
What can happen--as did happen with subprime mortgages in 2005-2007, is that once Bernanke pushed rates past a certain point, the subprime holders of adjustable rate mortgages could no longer roll over their mortgages, pushing defaults through the roof. At the same time, subprime mortgage candidates were essentially priced out of the mortgage market as first time buyers.
Because the ticking time bomb in an ARM is the reset date, not every ARM reset immediately upon Bernanke's rate rises, but so many ARMs had been sold through non-traditional lenders during the housing bubble that there was a rising tide of defaults as the reset dates kicked in.
What turned the subprime mortgage meltdown into a larger financial crisis was the way securitization had taken off through derivative trades. Perversely, and one reason why so little due diligence was performed on mortgages, was that Wall Street was selling tranches of CDOs--basically derivative bets on mortgage bonds--at such a tremendous pace that any mortgage paper written was gobbled up by a Wall Street bank pretty quickly.
What no one calculated--and what no one has yet to calculate--is the effects on the financial system of a huge dark market in derivatives. When subprime defaults began to rise, it began tainting tranches of CDOs, activating in many cases the default covenants of related credit default swaps (essentially, bets going the other way of the CDO). Between defaults and rising margin calls (much like what is happening currently with the UK pension funds), a general liquidity crisis formed: there literally were not enough free dollars in the credit markets to settle the unwinding transactions.
In a dark market, when an asset cannot be sold quickly its market value immediately becomes effectively zero. Thanks to another regulatory change in that era, investment firms were using "mark to market" accounting, which required them to take the loss on unsaleable securities immediately, rather than postponing loss recognition until the time of the actual sale.
That is how you get a liquidity crisis. Too much pressure to sell assets and not enough dollars (or currency generally) to process all the transactions.
So far, the Fed's rate hikes have reduced the money supply but liquidity really hasn't been touched, with over $2 Trillion in the overnight reverse repo market.
https://fred.stlouisfed.org/graph/?g=Uk6q
The question becomes what breaks first? In the UK, it was pension fund margin calls. In the US, if similar dynamics play out, we're probably looking at a major hedge fund imploding (think replay of 1997-1998 LTCM bailout).
Where Kyle Bass is really missing the mark is that he's focusing solely on money supply and total debt issuance, and not looking at the total dynamics of global financial systems. That's where the really scary truth of the Fed's situation is found.
As I've opined before, the Fed can't stop raising rates without sacrificing the dollar's strength globally.
https://newsletter.allfactsmatter.us/p/this-is-why-the-fed-cant-stop-hiking
However, that does not mean that the Fed's rate hikes are working against inflation--they aren't.
https://newsletter.allfactsmatter.us/p/feckless-fed-is-destroying-demand
The result is an inflationary crisis that the Fed cannot control
https://newsletter.allfactsmatter.us/p/august-inflation-proves-powell-has
Which means that the Fed is locked onto a course that will force them to raise rates high enough to eventually trigger a liquidity crisis.
https://newsletter.allfactsmatter.us/p/powells-paradox-curing-inflation
Right now, no central bank has even a smidgen of the control over inflation or currency that they claim to have. Their hands are on the wheel, but the autopilot is stuck and there's absolutely no control.
The pivot may happen soon, but pivot or no pivot I doubt it will change much: the system is spinning out of control and no one can do a damn thing until it jumps the rails of its own accord. If the dollar survives (which, amazingly enough, is a distinct possibility), then the Fed may be able to reassert control then, but not before.
Peter -- wondering, not familiar w finances and markets like you, what is the significance of this news, in re to Fed policy of fighting inflation (or the Luongo-led view of Fed fighting against the WEF/Davos crowd by shrinking the money supply so their eurodollar/shadow banking system crumbles)
JUST IN - U.S. Fed reverse repo facility use spikes to $2.426 trillion — a new record high.
@disclosetv
Probably the simplest way to look at this is through contagion effect.
One reason the ECB was pressured to begin raising rates was because Jay Powell and the Fed moved first, raising rates which, among other things, triggered the dollar to appreciate against the euro. For the ECB, it is quite likely that raising rates was not merely a question of fighting inflation, but also defending the euro against a strengthening dollar.
(Which, incidentally, is why I suspect this time around the Fed will be extremely reluctant to pivot back to QE any time soon).
https://newsletter.allfactsmatter.us/p/this-is-why-the-fed-cant-stop-hiking
However, many of the drivers of inflation in the eurozone are the same drivers of inflation here in the US. Soaring energy prices driven by imbalances between supply and demand were one--and energy price inflation is still outpacing overall and even "core" inflation both in the US and in the Eurozone. Food price inflation remains rampant both in the US and in Europe (and, for that matter, just about everywhere else.) These supply side shocks are not amenable to interest rate therapy, which targets the demand side of the monetarist equation.
Which means that the Fed for certain is aiming at the wrong target with interest rates. The ECB is most likely aiming at the wrong target for the same reasons.
However, just as the BoE gilt-buying intervention the other day pushed yields down on US treasuries in the American markets, how the ECB responds to inflation will drive inflation responses here in the US..