When Interest Rates Rise…

They were careless people, Tom and Daisy—they smashed up things and creatures and then retreated back into their money or their vast carelessness, or whatever it was that kept them together, and let other people clean up the mess they had made. —F. Scott Fitzgerald, The Great Gatsby

When interest rates rise…….after The Fed, the European Central Bank, the Bank of Japan, and the Bank of England together have injected an average of $1.2 trillion United States dollars ($1.7 trillion Australian dollars) each year into the global financial system since 2009, distorting the credit and equity markets, as Ambrose Evans-Pritchard reports. 

When interest rates rise…….Says Harvard University debt expert Professor Ken Rogoff, “Though you are safe if you borrow in your own currency, you can get into trouble easily in the eurozone, even if you are fundamentally solvent.”

Propping up the economy. Did it all remind you of the movie “Weekend At Bernie’s”? The peak occurred in 2016, during a presidential election year at $1.7 trillion United States dollars. Bernie did not get the Democratic nomination either. That real worry is that WHEN INTEREST RISE — and it will happen — rising short-term rates over the life of a loan will eat away the banks’ profits, IF a bank made the loan in the first place.

The real story of the decade was the ongoing off-budget black holes in the budgets. In some parts of the world, the pigeons are coming back to roost. In 2018, there has been a rapid drop in the change over from quantitative easing to quantitative tightening. It is like having a winter wardrobe in Canada. In 2019, a fall to minus $500 billion United States dollars is projected as The Fed along with the European Central Bank halt the bond purchases. The announcement if you missed it is for The Fed t cut- its portfolio by $US 50 billion United States dollars a month.

Concerning Climate Change, managing director of the International Monetary Fund, “Christine Lagarde, said global debt had risen 60 per cent to $US 182 trillion since the last financial crisis and this is likely to be tested. Surging yields were a ‘wake-up call’ for over-leveraged companies and countries that depend on a constant inflow of foreign funds,” writes Ambrose Evans-Pritchard.

Ambrose Evans-Pritchard quotes the chief economist from Fitch Ratings Service who states that Wall Street has yet to understand the meaning of four more rate rises by the end of 2019. Fed Chairman Powell said the US economy was firing on all cylinders and issued fire-breathing comments on interest rates, suggesting that “Fed officials fear they may be falling behind the curve and will have to step up the pace of tightening. The Institute for Supply Management services index [using information collected from surveys from over 400 non-manufacturing companies] rose to an all-time high of 61.6 in September,” writes Ambrose Evans-Pritchard. Any score over 50 indicates that industry is expanding.

Firing on all cylinders.

THE mirrors at the FUN House: Accumulating cash and highly liquid securities protects banks from the volatility of credit markets and prepares the bankers for stricter liquidity requirements expected from regulators, the chief executive of Wells Fargo noted during a conference call with brokers eight years ago. Whereas those banks had the rationale to hold back, in Italy they apparently never did. The real worry is that WHEN INTEREST RISE, what is going to happen in Italy after all the distortions in the credit and equity markets.