A Hard Rain's a-Gonna Fall

Après moi, le déluge

~ King Louis XV of France

A hard rain's a-gonna fall

~ Bob Dylan (the first)

As the Federal Reserve kicked off its second round of quantitative easing in the aftermath of the Great Financial Crisis, hedge fund manager David Tepper predicted that nearly all assets would rise tremendously in response. 

"The Fed just announced: We want economic growth, and we don't care if there's inflation... have they ever said that before?"

He then famously uttered the line "You gotta love a put", referring to the Fed's declared willingness to print $trillions to backstop the economy and financial makets.

Nine years later we see that Tepper was right, likely even more so than he realized at the time.

The other world central banks followed the Fed's lead. Mario Draghi of the ECB declared a similar "whatever it takes" policy and has printed nearly $3.5 trillion in just the past three years alone. The Bank of Japan has intervened so much that it now owns over 40% of its country's entire bond market. And no central bank has printed more than the People's Bank of China.

It has been an unprecedented forcefeeding of stimulus into the global system. And, contrary to what most people realize, it hasn't diminished over the years since the Great Recession. In fact, the most recent wave from 2015-2018 has seen the highest amount of injected 'thin-air' money ever:

In response, equities have long since rocketed past their pre-crisis highs, bonds continued rising as interest rates stayed at historic lows, and many real estate markets are now back in bubble territory. As Tepper predicted, financial and other risk assets have shot the moon.

And everyone learned to love the 'Fed put' and stop worrying.

But as King Louis XV and Bob Dylan both warned us, what's coming next will change everything.

The Deluge Approaches

This halcyon era of ever-higher prices and consequence-free backstopping by the central banks is ending.

The central banks, desperate to give themselves some slack (any slack!) to maneuver when the next recession arrives, have publicly committed to 'tightening monetary policy' and 'unwinding their balance sheets', which is wonk-speak for 'reversing what they've done' over the past decade.

Most general investors today just don't appreciate how gargantuanly significant this is. For the past 9 years, we've become accustomed to a volatily-free one-way trip higher in asset prices. It's been all-glory with no risk while the 'Fed put' has had our backs (along with the 'EBC put', the 'BOJ' put, the 'PBoC put', etc). Anybody going long, buying the (few, minor) dips along the way, has felt like a genius.

That's all over.

Based on current guidance from the central banks, "global QE" is expected to drop precipitously from here:

With just the relatively tiny amount of QE tapering so far, 2018 has already seen more market price volatility than any year since 2009. But we've seen nothing so far compared to the volatility that's coming later this year when QE starts declining in earnest.

In parallel with this tightening, global interest rates are rising after years of flatlining at all-time lows. And it's important to note that our recent 0% (or negative) yields came at the end of a 35-year secular cycle of declining interest rates that began in the early 1980s.

Are we seeing a secular cycle turn now that rates are creeping back up? Will rising interest rates be the norm for the foreseable future?

If so, the world is woefully unprepared for it.

Countries and companies are carrying unprecendented levels of debt, as are many households. Rising interest rates increases the cost of servicing that debt, leaving less behind to invest or to meet basic operating needs.

Simon Black reminds us that, mathematically, rising interest rates result in lower valuations for stocks, bonds and housing. But so far, Wall Street hasn't gotten the message (chart courtesy of Charles Hugh Smith):


So we're presented with a simple question: What happens when the QE that's grossly-inflating markets stops at the same time that interest rates rise?

The answer is simple, too: Prices fall.

They fall commensurate with the distortion within the system. Which is unprecendented at this stage.

But Wait, There's More!

So the situation is dire. But it gets worse.

Our debt that's getting more expensive to service? Well, not only are we (in the US) adding to it at a faster rate with our newly-declared horizon of $1+ trillion annual deficits, but we're increasingly antagonizing the largest buyers of our debt.

This is most notable with China (the #1 Treasury buyer), whom we've dragged into a trade war and just announced $50 billion in tariffs against. But Japan (the #2 buyer) is also materially reducing its Treasury purchases. And not to be outdone, Russia recenty dumped half of its Treasury holdings, $47 billion worth, in a single fell swoop.

Should this trend lead, understandably, to lower demand for US Treasurys in the future, that only will put further pressure on interest rates to move higher.

And this is all happening at a time when the stability of the rest of the world is fast deteriorating.

Developing (EM) countries are getting destroyed as central bank liquidity flows slow and reverse -- as higher interest rates strengthen the USD against their home currencies, their debts (mostly denominated in USD) become more costly while their revenues (denominated in local currency) lose purchasing power.

Fault lines are fracturing across Europe as protectionist, populist candidates are threatening the long-standing EU power structure. Italy's economy is struggling to remain afloat and could take the entire European banking system down with it. The new tit-for-tat tariffs with the US aren't helping matters.

And China, trade war aside, is seeing its fabled economic momentum slow to multi-decade lows.

All pieces on the chessboard are weakening. 

The Timing Is Becoming Clear

Yes, the financial markets are currently still near all-time highs (or at the high, in the case of the Nasdaq). And yes, expected Q2 US GDP has jumped to a blistering 4.8%.

But the writing is increasingly on the wall that these rosy heights won't last for much longer.

These next three charts from Palisade Research, combined with the above forecast of the drop-off in global QE, paint a stark picture for the rest of 2018 and beyond.

The first shows that as the G-3 central banks have started their initial (and still small) efforts to withdraw QE, the Global Financial Stress Indicator is spiking worrisomely:

Next, one of the best predictors of global corporate earnings now forecasts an imminent collapse. As go earnings, so go stock prices:

And looking at trade flows -- which track the movement of 'real stuff' like air and shipping freights -- we see clear signs that the global economy is slowing down (a trend that will be exacerbated if oil prices rise as geologist Art Berman predicts): 

The end of QE, higher interest rates, trade wars at a time of slowing global trade, China/Europe weakening, EM carnage -- it's like both legs of the ladder you're standing on being sawed off, as well all of the rungs underneath you. 

Conclusion: a major decline in the financial markets is due for the second half of 2018/first half of 2019.

Actions To Take

Gathering clouds deliver a valuable message: Seek shelter before the storm.

Specifically, it's time to:

  • Get liquid. When the rug gets pulled out from under today's asset prices, 'flat' will be the new 'up'. Simply not losing money will make you wealthier on a relative basis -- it's the easiest, least-risky strategy for most investors to prepare for what's coming. "Cash is king" in the aftermath of a deflationary downdraft, when your dry power can be then used to purchase high-quality income-producing assets at excellent value -- fractions of their current prices. And in the interim, the returns on cash are getting better for investors who know where to look. We've recently explained how you can now get 2%+ interest on cash stored in short-term T-bills (that's 30x more than most banks will pay on cash savings). If you're sitting on cash and haven't looked seriously yet at that program, you really should review our report. With more Fed tightening expected in the future, T-bill rates are likely headed even higher.
  • Get your plan for the correction into place now. In addition to your cash, how is the rest of your portfolio positioned? Do you have suitable hedges in place to mitigate your risk? Does your financial advisor even acknowledge the risks detailed in the above article? The last thing you want to do in a market downdraft is make panicked decisions. So if you haven't already put together a contingency plan for a 20-40%+ market drop, consider scheduling a consultation with the firm we endorse (it's completely free).
  • Nibble into commodities. The commodities/equities price ratio is the lowest it has been in 47 years. That ratio has to correct some point soon. Much of that correction will be due to stocks dropping; but the rest will be by commodities holding their own or appreciating. While it's true that commodities could indeed fall as well during a general deflationary rout, that's not a guarantee -- especially given that many commodities are now selling at prices close to -- or in some cases, below -- their marginal cost of production. The easiest commodities to own yourself, the precious metals, are 'dirt cheap' right now (especially silver), as explained in our recent podcast with Ronald Stoeferle. And with today's bloodbath, they just got even cheaper. Here's a helpful free 27-page ebook explaining ways to purchase and store gold & silver in today's markets.
  • Assess and address your biggest vulnerabilities before the next crisis hits. Are you worried about the security of your current job when the next recession hits? Are rising interest rates causing you to struggle in deciding whether to buy or sell a home? Are you trying to come up with a plan for a resilient retirement? Are you assessing the pros and cons of relocating? Do you have homesteading questions? Are you trying to create new streams of income? Chris offers private consultations on these common questions, as well as many others. If you're wrestling with big life decisions like these, scheduling a consultation with him can prove valuable in helping you make the best choice.

We're lurching through the final steps of familiar territory as the status quo we've known for the past near-decade is ending.

The mind-bogglingly massive central bank stimulus supporting asset prices are disappearing. Interest rates are rising. It's hard to overemphasize how seismic these changes will be to world markets and the global economy.

The coming months are going to be completely different than what society is conditioned for. Time is running short to get prepared.

Our recent report, The Breaking Point Is Upon Us, details how signs of collapse are now quickly accelerating around the world. The currency and bond markets of five major countries are now in the danger zone, as many more teeter on the edge. If you haven't already read this report, we recommend doing so now. It drives home how important the recommended steps above are.

Because when today's Everything Bubble bursts, the effect will be nothing short of catastrophic as 50 years of excessive debt accumulation suddenly deflates.

A hard rain indeed is gonna fall.

Click here to read The Breaking Point Is Upon Us  (free executive summary, enrollment required for full access)

This is a companion discussion topic for the original entry at https://peakprosperity.com/a-hard-rains-a-gonna-fall/

I didn’t have room in the above article for this chart, but it’s one that has stuck with me since I saw it when first published in 2015.
Very few professionals left on Wall Street have any meaningful experience with rising interest rates:

That’s what 35 years of secular decline does to you. When the cycle reverses, no one is left who knows how to operate in the new environment.
Remember, most trading is done now by algorithms. Who programs the algos? The “quants”. Who are the quants? Largely, folks hired into Wall Street after 2007 (i.e., zero experience with rising rates).
Hey, what could go wrong?

And I'd be remiss not to include this, too:

Let’s see, Italy is in trouble, so is Spain, so is the UK, so is Greece which has been off the radar. The EU is in trouble, China is experiencing lower than expected energy demands which usually means a slowing economy, Japan has papered over their economy for decades. The US is essentially bankrupt without saying it.
I think it’s time to get out the umbrella, no telling when that downpour will start.

Talk about experience with rising rates! My wife and I bought our first house about April 1981. When our offer was accepted, the interest rate was 13.5% (!) but it was not locked in. The owner dragged his feet on the sale and by the time we closed the rate had gone up to 15.5%!! This month we’re applying for a construction loan for our last home and we’re nervously watching the interest rate moving up from 4.5% on its way to 5.0%, while watching our current home’s value continuing to climb into bubble territory. We don’t really care about the interest rate now as long we can sell in March 2019 somewhere near where we are today. We’ll have change leftover after we pay off our construction loan. (That first house is now located in a depressed market in Rochester, NY and its current value has fallen all the way back down to the same price we sold it for in 1988, while our current house has appreciated by 650% since 1988.) We’re just hoping there’s not a housing crisis here before March, though that is what we’re expecting to at least get started by then. We may move up the date we list it if we see prices starting to trend downward instead of creeping ever higher.

thc0655 wrote:
We don't really care about the interest rate now as long we can sell in March 2019 somewhere near where we are today. We're just hoping there's not a housing crisis here before March, though that is what we're expecting to at least get started by then. We may move up the date we list it if we see prices starting to trend downward instead of creeping ever higher.
I'm not sure where you are but here in a "entry level" Bay Area market things are starting to soften...homes are reducing their (ridiculous) prices and homes are staying on the market longer, especially ones that are at the top of the price range, unless they are extremely special in some way. I have been watching several markets for 2+ years in California, Oregon, Idaho and Washington where we hope to move next year and see softening in several of them. Not crash territory but lots of price reductions. I'd watch carefully.

Probably, not. However, the rug is certainly being slowly pulled out from under us. Trump’s protectionist strategies are only going to impinge on the world’s ability to trade. The first sector to feel it will be agricultural with manufacturing following close behind. The recent “comfortable” Trump induced cuts to income taxes to corporations was, in most cases, a wonderful windfall for major and minor corporations to punt unproductive assets and invest in new plants and automation. Coupled with “sweet” incentives from lower cost jurisdictions, many companies have taken advantage of this reinvesting and laying off higher priced labour (see Electrolux, Harley Davidson, et.al.). As for agriculture, the massive government subsides to the ag. sector have only contributed to more over production and lower ag. commodity prices. Not a positive message to those midwest farmers that voted for Trump.
The beauty(or danger) of this GOP plan is that it will urge companies to use surplus cash to invest in productive assets rather than seeking “cheap money” from the FED cartel. Indebted farmers and workers won’t be so fortunate, however. Unfortunately, it will still rely on the most important factor and that is markets. Trade barriers only limit commerce and reduce complexity. And, as history has shown, reduced complexity = collapse. I have to agree with Adam, that protecting your assets is paramount. But, investing in productive assets(whether people or things) makes better sense/cents. Watch your step! It could get slippery out there.

If the markets start to tank, what would stop the Fed from printing more $$ and propping up the markets for another 10 years?

This song came out in the aftermath of the last finicial crisis. It has since been one of my favorites, not only for the beauty of the music, but for the poignant content of the lyrics.

I see contract drawings, including land boring logs. One thing I find incredibly interesting, is the understructure in the Eastern US, in conjunction with the Carolina Bays. Google-images link below, which will bring you up to speed as fast as anything.
Some people claim the Carolina bays were caused by Aeolean winds. I heavily disagree.

As far as I can tell, there is evidence that an asteroid struck the thumb of Michigan’s Bay, when there was a glacier there, 12000 years ago. It extinguished the Clovis Point culture, the American horses, the short faced bear, the four-tusked elephant Gompothere, a Galapagos-sized American tortoise (of which I found one). It also launched a bolus of water to Odessa (notice how the great circle from Saginaw to Odessa, is exactly aligned with the bay?), where it flash-froze a mamoth (and coincidentally, when and where my Y-chromosome has a genetic bottleneck at that time). So that was the main direction of the strike – but there tends to be side-splash, too.
Most interesting, whereever there wasn’t glacier, in the side-splash areas, there formed these carolina bays. The major axis of these dimples (20’ x 50’, up to 3 miles by 5 miles) all point at Saginaw Bay. If you assume that the ice broke out at 45 degrees, then it went up 700 miles, out 700 miles, and back down, landing at about 55 degrees… which corresponds to the major-to-minor axis where it landed (in the area of Virginia). I find that significant, because although the Carolina bays are many sizes, they are all of the same aspect ratio, in a given area… and the angle of radius of the earth from Saginaw, corresponds to the ratio of sizes here in Virginia.
More importantly, 5-million-year-old Yorktown Layer clay has been piled up at the Southeast corner of each of these bays, dug or shocked out of the middle of the bay. So I don’t think it was Aeolean winds. Clay doesn’t blow that easily.
But if that’s the case, the rain drops – hypersonic speeds, up to 3 miles in diameter – would qualify as a hard rain.
If you look at the Burkle Crater, and read the Epic of Gilgamesh’ story of the flood, and find where in the Persian Gulf you have seven feet of river mud all dating to about 5000 years ago, and look at the Chevrons along the southern coast, where there are seafloor shells welded to asteroid-proportion metals… I’d say that one too qualifies as a hard rain.
I’m going to say “hard rain” coincides with asteroid strike.
Neither comes close to what I think happened at the end of the Permian, when there was a single continent Pangea. If you look at the Scotia Plate, and compare it to the location, size, and shape of the African Karoo (meaning “dry land”), they are coincident there. Stretching out from that, are Kimberlite rocks. Looking Northeastward, like a shallow bullet-into-glass pattern, coming from Venezuela, through central Africa, down to the Karoo, back out, through what is now Northern India, around through Western Australia, and down into Antarctica, are these kimberlites. A kimberlite volcano brings lava out fast enough that diamonds do not dissolve; and fast enough to throw lava into orbit. At the same time, there is another coincdence between the Hudson Bay and the Carribean plate; and diamond bearing kimberlites in a perfect 850-mile-radius circle around it. I think an asteroid hit in the first, and hit a Ca-Uranium berg in the lower mantle, sending it past critical – and the shock wave triggered another such explosion below the Hudson; and the tensile forces between them caused the initial split of the Atlantic ocean.
Coincidentally, shortly after that, there is evidence from self-sorting sands that we had two moons – a small one – that astronaut sample rocks indicate was mostly earth mantle – and a big one. The small one splashed over the face of the big one. So that disaster, which extinguished 95% of sea life species, was a BIG hard rain.
Now you’ve got to think about what made the big moon.

They can certainly print more and probably will. The question is will people have faith in the currency when they do. Fiat currencies are based on faith. They have value because people believe they have value. Ordinarily the massive printing on the part of the Fed would be expected to destroy faith in the dollar but with so many other currencies in even worse shape the USD may just be the best horse in the glue factory.

On my daily walk I seen two dragonflys, it is the frist time that I had seen any insect life at all in lake, in along time. Maybe ther is a little hope yet!

More likely the colluders of the FED/ECB/BOJ/BOE are attempting to ween the world from QE. And as always while people predict imminent collapse it seems certain the central banks will rush to the rescue with promises of free money if the global economy begins to really tank.
It seems more realistic to assume that we are heading into a “semi-controlled” recession but that the spigots will open to keep big companies afloat. The people governing our world are stupid but they aren’t blind. We’re not yet at the point where the global economy can’t be saved with shady monetary policy.
The ultimate point of no return is when the people-on-the-street lose confidence in the financial system, or lose their jobs and can’t afford to feed their families. When that happens, it’s time to find a bunker and hide. Meanwhile no-one wants the economy to fail and everyone will bend over for any central bank intervention that perpetuates the train wreck for even 12 more months.
Currencies have collapsed before but they don’t do so quickly. Economies are milked for as long as people accept it. The real message about modern economics therefore, is that for all of our rule-of-law, humanitariansm, full suffrage and democracy our empire is falling. Society isn’t perfect but without a natually self-balancing government, even modern civilisation is subject to eventual fracture. Clearly our best political systems need some improvement. It’s time for people to realise that, to really open their minds and try on some new ideas.

I posted this in another thread, but it seems more timely/appropriate for this one.
The question of why the FED is raising interest rates is not answered by most commentaries that I’ve read.
I’ve only seen answers to this like “we need to be able to lower interest rates if we have another recession”. Or “our economy is overheating”. These make no sense to me. Raising interest rates causes recessions (and stock market corrections). The inflation and employment numbers are completely made up, so therefore the fact that we are seeing “reported” increases in both, is most likely a justification for raising interest rates.
Brandon Smith’s (http://www.alt-market.com/) view makes the most sense to me. i.e. the USA’s Central Bank is merely a subsidiary of a larger entity - a global “elite”. Therefore crashing the US stock market is a step in instituting a global currency to replace the $US as the world’s reserve currency. A crashing stock market, and a falling dollar would (will) be a perfect opportunity for bail-outs and resetting to use an International Monetary Fund currency (Special Drawing Rights), followed by a global crypto-currency.
This is the only scenario that I can see which could best explain why the FED’s are raising interest rates (and reducing their balance sheet) to crash the US stock market. To set the stage for a global currency reset. Following that, the US (under the new IMF SDR currency) would become analogous to Greece under the Euro. Laden with debt, and reduced to a state of extreme austerity. Similarly the nations like China, with productive economies would become analogous to Germany under the Euro.

That’s pretty much how I see it, too.
From a Central Banker’s perspective their institutions must remain relevant or they have no justification for existing. Given that their major tool is interest manipulation, well then, interest rate manipulation is what they’ll do - both up and down.
As the returns on energy extraction diminish in relation to their inputs I can only see further centralised interventions on the horizon. Operating under the assumption that ‘the lights must stay on’ the political class will defer to the economic and technocratic class for guidance - just as they deferred to the Central Banks in 2008.
One thing I worry about (amongst many others) is how social cohesion will be retained in a decaying empire - especially those with a diverse set of citizens and values.
All the best,

Great post pgp. New ideas are definitely in order for the current economic malaise. However, on their own, the pale in the light of history. I would urge you to to take a look at, Late Victorian Holocausts: El Nino Famines and the Making of the Third World, by Mike Davis. Hardly a “cheery” reminder of the natural plight of mankind in a finite world, but essential reading, if we are to face the coming reality. “Good stuff goes to them"s that can afford it” will continue to rule for the elite. Local economies, for the most part, worked fine until environmental and population pressures tipped the balance and the “four horsemen” were waiting to adjust things accordingly. PP’s message has remained the same. “Think globally and act locally” is probably the safest course of action in the trying times ahead. On that note, Happy Father’s Day!

I agreee with cestin. There is no way Japan is just deciding on its own to buy less treasuries, leaving the US stranded. Japan is the Fed’s lap dog, as well as … India and … umm, come to think of it most of the rest of the world too except it seems for China, Russia and Iran.
This is all completely controlled; they know exactly what they are doing and they will do it as long as the system stays together and they can no longer print money and inject it where needed to keep the system afloat; or as pgp says, when people just can’t get by in the system anymore and take to the streets.
How would we know they aren’t just injecting trillions more into the system but lying about it and telling us they are tightening?
How many years have we been hearing: “well they can’t just print more money because such and such prevents it”, only to have the manipulators change the system so that “such and such” isn’t a factor anymore. As long as there is room for debt and money printing to grow, it will.
Unless… the world runs out of gold with the large supply / demand deficit. My bet is on this triggering the final catastrophe. When that will happen, who knows. But the elites in charge know the status of this situation better than anyone else so you can bet they are planning for it.
Basically, how I see it is the world is divided into the western banking cartel centered in London / New York / Israel headed up by the Rothschilds; and China who seems to be independent but is going along with this scam; and Russia who seems to do its own thing.
I can’t help but think Trump has been directed by those at the top to purposely provoke and create controversy, to provide cover and distraction for when things really go downhill. If the elites didn’t want him in power and acting the way he does, one way or another he wouldn’t be.

Yes, Mark_BC
Either Trump was a planned event or it was an acceident. Either way, he works out to be the perfect skapegoat for the coming stock market crash. He’s been a proponent of Jerome, a self-proclaimed hawk, and Jerome is doing the dirty work of raising interest rates - but Trump gets the blame. Trump’s trade wars are probably not going to be ‘causal’ in creating a crash, but they give a grate excuse for placing blame on Trump. The fact that he is such a character with his tweets and deals - a reality show celebrity, just makes the whole scapegoat story more believable. Maybe Trump was given the offer to serve the role of Hoover before the elections… My personal belief. Just as Obama was given the role previously, because of the role that he served to ‘give hope’.

They may not want to help out Trump!