Here’s What the Smart Money’s Thinking

Smart Money vs. Dumb Money [The Daily Reckoning] April 06, 2023 [WEBSITE]( | [UNSUBSCRIBE]( Here’s What the Smart Money’s Thinking - If you want to know where the economy is heading, look to the bond market… - Seismic economic forces are building toward an earthquake… - Then Charles Hugh Smith shows you why interest rates cannot return to zero… [[Urgent] Analyst Issues Rare “All-In” Buy Alert For $3 Stock]( [Click here for more...]( This might be the biggest miracle of modern medicine that you or I will ever witness… Breakthrough new research shows that one $3 company is on the verge of fixing one of the biggest health problems in America today. And no, I’m not talking about cancer, heart disease, Alzheimer’s or anything else you’d expect… The disease I’m talking about affects a staggering 58 million American adults, or about 1 in 4 adults in this country. [Click Here To Learn More About This Urgent Buy Alert]( Annapolis, Maryland [Brian Maher] BRIAN MAHER Dear Reader, The flighty birds of the moment congregate in the stock market. The wise owls nest in the bond market. The bond market is where you will find them. That is: The bond market will let you know where the economy is heading, say the veterans. It will not be so easily foxed by the Federal Reserve’s false fireworks. With knowing eyes it penetrates the magician’s secrets… and exposes the fraud. New York Times economics reporter Neil Irwin: Savvy economic analysts have always known the bond market is the place to look for a real sense of where the economy is going, or at least where the smart money thinks it is going. What economic future does the smart money — the wise owls — presently foresee? Rising longer-dated Treasury yields generally indicate a coming bumper crop. Flush economic times are ahead. In this bountiful time expanding businesses must compete for bank loan capital. The iron laws of supply and demand squeeze interest rates higher as the competition unfolds. Rising yields likewise indicate that the smart money, the wise owls with their magnificent vision, see future inflation. Declining bond yields — meantime — generally indicate the precise opposite. They indicate a lean economic season is approaching… and diminished prospects. They also indicate the absence of future inflation. Bondholders are not demanding a premium to keep them jogging ahead of inflation. They are willing to accept lower yields because they do not believe inflation will reduce their bonds to sawdust. And so we ask: In which direction are bond yields presently running? Here is the answer: The 10-year Treasury yield has fallen into swift retreat. 4.07% in early March, the 10-year yield has plunged to a present 3.28%. Such a mighty plummet in so short a period represents — in Jim Rickards’ telling — “an earthquake in bondland.” The quake’s epicenter was situated where so many earthquakes are… in the Golden State of California. To be precise, at Silicon Valley Bank. The great yield retreat can be linked and traced directly to the bank’s seismic effects. Yet the financial regulators braced the buildings against aftershocks. Yet plunging Treasury yields indicate fears of additional quaking. Why? What does the fright portend? Mr. Graham Summers of Phoenix Capital Research: The bond market is signaling something “BAD” is coming. Bond yields rose throughout late 2021-early 2023 on fears of inflation. But once Silicon Valley Bank imploded, yields dropped rapidly: Historically investors pile into Treasuries as a “safety trade” whenever things get hairy in the financial system. The regional banking crisis in mid-March was no exception with yields collapsing at their fastest rate since the 1987 crash. When this happened, I began to wonder… would yields begin to rise again as things normalized following the regional banking bailouts… or would the economy roll over and yields finally start to plunge as a recession took hold? We now have our answer… [Falling yields] is a signal that something “BAD” is brewing in the economy/financial system. If everything was fine, yields would be rising again based on hopes of growth and fears of inflation. Put simply, the fact yields are falling like this tells us that the bond market fears something far worse than inflation is coming… Just so. Yet what precisely? We have no answer of course. Yet we note that small businesses nationwide are presently filing bankruptcy claims at the fastest gait since the pandemic terrors of 2020. We note further that the technology sector is heaving employees overboard at the greatest rate since the 2001 “dot-com” calamities. Perhaps we are witnessing the early accumulations of fearsome seismic energies… gathering pace… toward a fantastic quake. Again, we do not know. Yet we hazard the Federal Reserve will take to the straightabout later this year and commence cutting interest rates. How far can this damage control team drag rates downward? As Charles Hugh Smith shows you below, not nearly as far as Wall Street would prefer. Why not? Read on for the answers. Regards, [Brian Maher] Brian Maher Managing Editor, The Daily Reckoning [feedback@dailyreckoning.com.](mailto:feedback@dailyreckoning.com) Editor’s note: Gold has surged to over $2,000 lately, but that’s only the beginning. We advise you to get your hands on some if you haven’t already. Where should you get it? We recommend our friends at [Hard Assets Alliance.]( Hard Assets Alliance is built on the secure platform used by the world’s largest wealth managers, with $3+ billion in assets and billions more delivered. 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Today, one man is daring to speak the truth… And revealing the secret to profiting from Biden’s ultimate blunder… [Discover The TRUTH About Biden's “Green New Scam”]( The Daily Reckoning Presents: “All the tricks deployed to restore confidence in 2008-09 have reached such extremes that now systemic risk… is rising dramatically… ****************************** Why Interest Rates Won’t Return to Zero By Charles Hugh Smith [Charles Hugh Smith] CHARLES HUGH SMITH Many observers expect interest rates to fall back to zero as inflation dissipates and central banks rush to stimulate flagging economies. This expectation is reasonable based on the events of the past 15 years (2008–2023), but if we zoom out to a 50-year timeline, we get a different perspective and draw a different conclusion. 2023 is not 2008, and the difference can be summed up in one phrase: Global risk has been repriced. Interest rates reflect not just inflation expectations and central bank stimulus; interest rates and bond yields also reflect the risk premium on the cost of credit-money, and if the risk profile has changed in fundamental ways, the risk premium and cost of credit-money will reflect that, regardless of inflation and central bank stimulus. The global economy is changing in fundamental ways, and this is repricing everything: the cost of money/credit, the price of assets, the value of hedges and insurance, and so on. The core driver in all this repricing is risk, for it's the reappraisal of risk that forces the repricing of everything. When risk is low and transparent, the risk premium is low and this is reflected in low, stable costs. When risk soars and is difficult to assess, the risk premium rises and this pushes costs higher. In terms of asset valuations, higher risks reprice assets higher or lower based on the risk profile: what happens to the asset if liquidity dries up in a risk-driven crisis? If credit dries up, what happens to demand for the asset? Risk tends to be self-reinforcing. If we look around and see everyone else is confident that risk is theoretical rather than real, we stop buying hedges against bad things happening, and we pay a premium for assets that do well in low-risk eras. But if we see other people getting defensive — selling assets, paying down debt, reducing spending and risk-on investing--then we pull in our horns, too. What changed? The global economy began a cycle in the early 1990s of declining risk throughout the system due to these risk-reducing changes: 1. The dissolution of the USSR and the end of the hyper-expensive, heightened-risk Cold War. 2. The flood of low-cost oil as all the super-giant fields discovered in the 1970s began peak production. 3. China emerged as the low-cost "workshop of the world," enabling 30 years of soaring corporate profits as corporations reduced costs by offshoring production to China. 4. This offshoring boosted profits while deflating the costs of production due to much lower labor costs, lax / non-existent environmental standards and Chinese producers' willingness to accept razor-thin profit margins. 5. The reduction in global risk and the deflationary impact of Globalization (offshoring and opening new markets) enabled central banks to lower interest rates for 30 years without sparking inflation and private-sector banking/lending to expand credit and leverage, effectively globalizing /commoditizing financial instruments that hedged risks (Financialization). 6. After a decade-long lag (the 1980s), the advances in personal computing, software and desktop publishing finally began generating productivity increases. 7. The economic theology of Neoliberalism was embraced globally. Neoliberalism claims "markets solve all problems" and so the universal solution is to turn everything into a market by reducing regulations and state oversight. All of these forces tended to restrain prices of commodities, goods and services and reduce systemic risks while expanding markets, financial "innovations" and profits. This created a global "virtuous cycle" in which each dynamic reinforced the others. This "virtuous cycle" ended in the 2008-09 Global Financial Meltdown, but was papered over for a decade by extreme policies: 1. China launched the largest credit expansion in history (Russell Napier's phrase) to counter the meltdown. 2. The Federal Reserve and other central banks began a policy of financial repression (i.e. centrally managing financial markets rather than let market forces dictate liquidity, price, risk, etc.), leading to Zero Interest Rate Policy (ZIRP) that was effectively negative-rates since inflation continued sputtering along at 1.5% to 2%. Why did the "virtuous cycle" end? The basic answer is diminishing returns: the returns on any new policy or dynamic such as Neoliberalism, globalization or financialization follow an S-Curve (see chart below), where the initial returns are stupendous (the boost phase) and then as the dynamics become ubiquitous, the returns diminish until they stagnate. At that point, the system decays unless new more extreme measures are applied--for example, China's debt to GDP ratio doubling from 140% to 280% and interest rates being suppressed to zero. [image 1] [Man Who Predicted Bitcoin Warns: “Don’t Buy Bitcoin!”]( [Click here for more...]( James Altucher first predicted Bitcoin all the way back in 2013… And ever since, he’s been one of the biggest advocates for it. But now, he’s warning Americans that buying Bitcoin could be a big mistake… [Click Here To See Why]( Another factor is the cannibalization of domestic markets once globalization had skimmed the easy returns. Financialization starts out looking "innovative" by claiming it can hedge all risks at low cost, effectively lowering the risk of playing financial games to zero. As Benoit Mandelbrot and others have explained, this isn't possible for structural/mathematical reasons (markets are fractals, etc.). As the easy gains diminish, financialization takes assets that were once low-risk and commoditizes them into "instruments" that can be sold globally as "low-risk assets." This is what happened to home mortgages, which went from being highly regulated and low-risk to being poorly regulated/fraudulent and packaged into highly deceptive mortgage-backed securities that masked the true risk — high — behind flim-flam claims of low risk. Suppressing the cost of capital/credit to near-zero generated a tsunami wave of private-generated capital, both within the banking sector and the ballooning non-banking (shadow banking) sectors. This low-cost credit was then unleashed into global markets to chase any high-yield investment, which of course means gambling on risky assets while supposedly hedging the bets against losses. All this financial engineering — ZIRP, cheap, abundant credit, the chase for yield — ultimately depends on liquidity, i.e. the presence of buyers in size to create a market for anyone who seeks to sell an asset. If liquidity dries up for whatever reason — a bank crisis, a market panic, etc. — then sellers run out of buyers and the market reprices the asset at lower and lower levels until buyers emerge. In a bidless/zero-liquidity market, there are no buyers at all until the price approaches zero. The potential wipeout of bubble-generated "wealth" would bring down the entire global financial system, for all those assets are collateral for the world's immense mountain of credit/debt. [image 2] What changed around 2007-09? Globalization and Financialization moved from "virtuous cycle" to stagnation/decline, policies became more extreme to mask rising systemic risks, and the addition of a billion new workers aspiring to all the commodity-consuming luxuries of the middle class lifestyle soaked up excess production of oil and other commodities. With surpluses gone, prices had to start rising. Post-Covid lockdown and recovery, China's policies changed from "open to the world" and "peaceful rise" to aggressive militarization and the restriction of Chinese society's access to the outside world. All of these factors exposed the risks that had been successfully masked: the risks that global supply chains can break down or be disrupted by geopolitics; the risk that financialization games can blow up; the risks that soaring debt outpaces expansion of the real-world economy, generating debt crises, and the risks of extreme policies generating unintended consequences (moral hazard, extreme risk-taking, etc.) and blowback (re-industrialization, trade wars, etc.). The policy extremes of ZIRP, moral hazard, credit expansion and the chasing of yields has inflated The Everything Bubble which has put the price of housing and vehicles out of reach of the bottom 60% (or in many regions, the bottom 80%) of households. The top 5% have garnered the vast majority of the gains in asset appreciation, capital gains and profits. This generates a background of rising risk of social disorder. [image 3] [image 4] On top of all this, 30 years of moderate inflation have reversed into an era of sustained inflation, which despite the hopes of many commentators, will not be transitory. This era of inflation is driven by: 1. Excessive debt levels that can only be managed by inflating the debt down to manageable levels. 2. Scarcities of essentials which push prices above what consumers can afford while not being high enough to fund massive new investments needed to increase supply. 3. The cost of capital must rise to reflect the rising risk premium globally. All the tricks deployed to restore confidence in 2008-09 have reached such extremes that now systemic risk — of default, conflicts, broken supply chains, geopolitical blackmail, scarcities of essential commodities and perhaps the least understood risk, the evaporation of liquidity as credit and buyers of risk-on assets become scarce — is rising dramatically. These risks are difficult to assess or hedge completely, and the inter-dependence of the global economy and financial system — a tightly bound system — means risk in one area quickly spreads to the rest of the system. It's clear the global risk premium has increased dramatically and is increasing in an unpredictable arc. This structural trend of higher risks will reprice everything — including bond yields and interest rates. Regards, Charles Hugh Smith for The Daily Reckoning [feedback@dailyreckoning.com.](mailto:feedback@dailyreckoning.com) Ed. note: Gold has surged to over $2,000 lately, but that’s only the beginning. We advise you to get your hands on some if you haven’t already. Where should you get it? We recommend our friends at [Hard Assets Alliance.]( Hard Assets Alliance is built on the secure platform used by the world’s largest wealth managers, with $3+ billion in assets and billions more delivered. You get institutional-grade access to physical precious metals markets. You can choose U.S. or overseas vault locations: Salt Lake City, New York, London, Zurich, or Singapore. Your vaulted metals are guarded round-the-clock by the best names in security: Brinks, Loomis, and Malca-Amit. But maybe you want your metals at home? They’ll send them to you. It’s that easy. Join the 100,000 savvy investors who have entrusted [Hard Assets Alliance]( with over $3 billion of their precious assets. Open your account today. [Go here now to open your account.]( --------------------------------------------------------------- Thank you for reading The Daily Reckoning! We greatly value your questions and comments. Please send all feedback to [feedback@dailyreckoning.com.](mailto:feedback@dailyreckoning.com) [Brian Maher] [Brian Maher]( is the Daily Reckoning's Managing Editor. Before signing on to Agora Financial, he was an independent researcher and writer who covered economics, politics and international affairs. His work has appeared in the Asia Times and other news outlets around the world. He holds a Master's degree in Defense & Strategic Studies. --------------------------------------------------------------- [Charles Hugh Smith] [Charles Hugh Smith]( is an American writer and blogger, and serves as the chief writer for the blog "Of Two Minds". Started in 2005, this site has been listed No. 7 in CNBC's top alternative financial sites, and his commentary is featured on a number of sites including Zerohedge.com, The American Conservative, and Peak Prosperity. [Paradigm]( ☰ ⊗ [ARCHIVE]( [ABOUT]( [Contact Us]( © 2023 Paradigm Press, LLC. 808 Saint Paul Street, Baltimore MD 21202. By submitting your email address, you consent to Paradigm Press, LLC. delivering daily email issues and advertisements. 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