Why We Don’t Feel Fed Hike Pain Yet

Big companies have “jiu-jitsued” the Fed. [The Rude Awakening] August 31, 2023 [WEBSITE]( | [UNSUBSCRIBE]( Why We Don’t Feel Fed Hike Pain Yet - USG interest expense is approaching $1 trillion. - That’s more than the USG spends on the military. - How come the pain hasn’t trickled down yet? [Critical RED ALERT For Friday At 4:00 PM]( Drop whatever you’re doing… We've just issued a CRITICAL red alert for this Friday at 4:00 PM. [Please click here immediately for details](. [Click Here To Learn More]( [Sean Ring] SEAN RING Good morning from a bright, shiny Northern Italy! One more day to go… I needed a vacation from my vacation, but this weekend should do it. In the meantime, the USG has far bigger problems. Besides Cadaver McConnell freezing again, the interest expense on USG debt is rapidly approaching $1 trillion. We’re in telephone number territory now. $1 trillion. That’s far more than you need to clean up Maui or East Palestine. And yet, that’s money sent to the US’s creditors for money the USG has already pissed up a wall. That’s even more than we’ve wasted in Ukraine. History won’t be kind to the Congresses and citizens of this era. Future generations, who’ll still be paying off this debt, will wonder how previous generations felt fit to pass on the cost of its frippery to them. And yet, where’s the pain? Sure, lower-income households feel the pain. But they always feel pain. Where’s the middle-class and upper-class pain? It’s not here yet. [Zero Hedge]( published a corker yesterday on this. But it’s on their premium service, so I’ll walk you through it. But before I do, let me tell you I’ll be on [Rickards Uncensored]( with Matt Insley tomorrow. We will discuss China and its Schrödinger’s Cat-like economy, US investor sentiment, Tucker and Orbán, and US credit card debt. I hope you join us. [Just click here to sign up!]( The USG Interest Expense It’s just ludicrous when you think about it. The US is supposed to be the wealthiest country in the world. But this generation of politicians has squandered it. “Deficits don’t matter,” said the appropriately named Dick Cheney. [Rude] Credit: [Zero Hedge]( Welp, the national debt is nothing more than accumulated unpaid deficits. They sure look like they matter, Dick. But Corporate Interest Payments Fall Now, here’s where it gets cheeky. Albert Edwards, the famous permabear of Societe Generale, a French bank, noticed that corporate interest payments kept falling as the Fed was hiking rates. That’s not supposed to happen. Here’s the chart: [Rude] Credit: [Zero Hedge]( Edwards explained the above chart thusly: We can see clearly from the Fed’s Z1 (table L103) that the US corporate sector is a massive net borrower. Normally when interest rates rise, so too do net debt payments, squeezing profit margins and slowing the economy. BUT NOT THIS TIME. Corporate net interest payments have instead collapsed (H/T my derivatives colleague, Jitesh Kumar). What on earth is going on? Edwards said he was “so surprised when I saw Jitesh’s chart (above), I assumed it was a mistake and emailed the SG macro-network for help. No, the chart is correct. The data comes from the BEA GDP press release (Table 11, line 9). Raw net interest payments in $bn are shown as the red line below." [Rude] Credit: [Zero Hedge]( On the right-hand side of the chart, corporate net interest payments (red line) sharply declined when the Fed Funds rate went up (blue line). What new financial devilry is this? [Biden’s 2024 Presidential Run Doomed To Fail — Thanks To New Inflation Surge?]( Biden has given America its worst inflation crisis in over 43 years. But if you think the worst of inflation is over, think again… [A deadly new “Second Wave” of inflation is coming – one which could send the price of food, gasoline, housing and more skyrocketing much higher than they are today.]( Will this new crisis mean Biden’s 2024 Presidential run is doomed to fail? [Click here now to see my urgent warning.]( [Click Here To Learn More]( Companies Played the Yield Curve in Reverse A few things have happened recently that have delayed (even more than usual) the effect of Fed rate hikes. First, in the mortgage market, everyone with a house and a brain refinanced a few years ago when mortgage rates were under 3%. So, if you’ve got a 30-year fixed mortgage at 2.75%, you’re set for life and relatively immune to rate hikes. But what big companies did and are doing is positively sublime. Usually, big companies and banks (mainly) will borrow short and lend long. This makes sense with a normal yield curve. [Rude] If the curve inverts, you’d expect the difference to be a loss, as the borrowing rate would be higher than the lending rate. But companies wised up to this and simply reversed their strategy. Since the curve was inverted, they’d borrow long and lend short. [Rude] My goodness. That gives me morning wood in the early afternoon. Succinctly, big companies with access to the debt capital markets took Chairman Pow’s rate hikes and used them to their advantage. They’ve told Jay Powell, as Annette Benning told Warren Beatty in Bugsy, “Why don’t you run outside and jerk yourself a soda.” Large US Companies Are Safe With that said, the big US companies are inoculated from rate hikes. That is, their net interest expense won’t be the cause of their demise. [Rude] Credit: [Zero Hedge]( To be clear, we’re talking about the top 150 of the SPX 1,500. However, companies that don’t have access to the deep reservoir of the debt capital markets may be in trouble. That’s the rest of the SPX 1,500. Large companies' interest cover (earnings before interest and taxes divided by interest expense) is fine. Better than fine, actually. Exquisite. [Rude] Credit: [Zero Hedge]( For the overall Russell 2,000 companies, it’s far worse. Usually, a 1.5x interest cover is the minimal acceptable level, though that varies by industry. In short, many small and unquoted companies are in trouble. Watch the Small Companies From [Zero Hedge]( The real issue, Edwards writes, is that although large- and mega-caps may have come to increasingly dominate indices such as the S&P 500, smaller companies (say with less than 100 employees) are still the lifeblood of the US economy, accounting for some two-thirds of recent jobs growth – see BLS table below and link (and not just recent jobs growth but for the last 25 years – [link]( [RUDE] In fact, contrary to what the mega-cap valuations suggest, smaller companies remain the beating heart of the US economy – maybe, the SocGen bear notes snarkily if correctly, "the mega-caps are more like vampires sucking the lifeblood out of other companies." To summarize, while the top 10% of companies are benefiting from higher rates in the form of cash interest income greater than debt interest expense, at the same time, the lights are going out all over the US smaller-cap corporate sector. Unlike their far bigger peers, "they weren’t able to lock into long-term loans at almost zero interest rates and pile it high in the money markets at variable rates." Ultimately, Edwards concludes, "the pain for US small- and mid-cap companies will trigger the recession most economists are now giving up on, and hey, guess what? I think we’ll soon find out that even the large- and mega-cap stocks might not be immune to the indirect recessionary impact of higher interest rates after all." So watch the IWM ETF (Russell 2,000) to see early signs of trouble. As of yet, it looks fine. I’ll follow up on that in tomorrow’s monthly asset class report. [RUDE] Wrap Up The SPX 150 biggest companies have performed a jiu-jitsu-like move on the Fed, playing the yield curve in reverse. This, along with homeowners smartly refinancing their houses in the past few years, has staved off the worst effects of the quick Fed rate hikes. The key now is to see when the IWM and other unquoted companies start to get near bankruptcy because of their excessive debt payments. Have a great day! All the best, [Sean Ring] Sean Ring Editor, Rude Awakening X (formerly Twitter): [@seaniechaos]( In Case You Missed It… ☎️ Orbán on Tucker: Call Back Trump. [Sean Ring] SEAN RING Good morning from brisk, sunny Il Piemonte. Tucker Carlson continues to kick Fox News in the gooey bag with his speeches and interviews. Of course, he interviewed former President Trump during the Republican debate, obviating any need for it. Now, he’s in Hungary and taking no prisoners. First, Carlson gave a speech [apologizing for US Ambassador David Pressman’s behavior](. I'm not in the habit of apologizing for the United States. In fact, I don't think I ever have, but the behavior of the American ambassador to Hungary makes me want to apologize," said Carlson. "It's disgusting and inexcusable. It's also so far from the norms of diplomacy in my country that it's hard for me to believe that David Pressman is actually doing what he's doing. And so for a creep like David Pressman, who is not a diplomat - who's a political activist and Biden donor - to show up in your country and lecture you about your culture, and threaten you because you do things differently from the way they do things where he lives... hurts the United States and is a grave embarrassment to me as an American, and an outrage to me as someone who pays his salary. It's disgusting. My goodness, that’s downright glorious! Now, [Tucker has interviewed Hungarian Prime Minister Viktor Orbán](. I’ve always had a soft spot for Hungary. I visited there often because one of my past girlfriends is Hungarian. London, 2004 I was “out on the lash” (British English for “getting drunk”) with my late, great friend Malcolm. Malcolm was an Aussie who looked suspiciously like Oasis’s Liam Gallagher, haircut and all. I used to love our drunken nights out. I still miss him terribly. One night, we were out in Piccadilly Circus and got into a club called Anon Anon. It’s no longer there, but at the time, it was one of those places that everyone drained into after 11 p.m. when the pubs used to close. Across the dance floor stood a raven-haired beauty who was - how shall I put it - well-proportioned. At the time, I was The World’s Greatest Wingman™, so I just walked over. But to my delight and surprise, the beauty was interested in me and not Malcolm! We introduced ourselves and had a wonderful time. Every time she leaned forward to sip her drink, I wondered if her d-cups would runneth over. Oh, happy days! I wound up dating her for two years. She was from - get ready - Kiskunfélegyháza, Hungary. Don’t even try to pronounce it. It took me about twenty minutes to get it right. [Crypto Legend Reveals: “The Next Bitcoin]( He called Bitcoin at $61. Now he says this next crypto will be even bigger. In fact, he’s targeting 25X gains over the next year alone. [>>Click here now for the details]( [Click Here To Learn More]( Hungary, Back Then… Hungary was admitted into the EU in 2004, along with Cyprus, the Czech Republic (now Czechia), Estonia, Latvia, Lithuania, Malta, Poland, Slovakia, and Slovenia. These were the “A10” countries and the fifth enlargement of the union. I remember visiting Budapest, which is Hungary’s remarkable capital. Then it was a backwater. Now, it’s a place where digital nomads gather. I was last there in 2019 with Pam and Micah. The city continues to thrive. N - as I’ll call her - also took me to her hometown unpronounceable, which is out in the boonies. It was great to meet her family and enjoy a tankerful of palinka, the traditional fruit spirit of the Carpathian Mountains and surrounding regions. I recall Unicum also flowing like water. Our last trip to Hungary was to Eger, in the Northeast wine-producing region. It was wonderful. Hungarian wine is severely underrated, from what I remember. But Hungary is Hungary. Proud, Catholic, and no-nonsense. Hungary, Now. Those traits are reflected in their leader, Viktor Orbán. The Hungarians love him, though effete Western liberals hate him. They hate Orbán for the same reason they hate Putin. Hungarians want Hungary to stay Hungary, just like Russians want Russia to stay Russia. Again, digital nomads abound. This isn’t about immigration per se. It’s about mass immigration and erasing borders overwhelming a country’s culture. You know, like how the non-existent US southern border is terraforming Texas and has already destroyed California. The Hungarians don’t want to be terraformed. And they don’t mind depending on Russia for energy. It’s interesting to note that the occupying Russians imprisoned Orbán for trying to free his country from Russia’s grip. Talk about not holding grudges! Unlike American politicians, Hungary’s politicians are delivering what their people want. So, it’s essential to hear what men like Orbán are saying. Regarding Ukraine “winning” the war, Orbán says: “It is not just a misunderstanding; it is a lie.” Regarding NATO’s stance on the Russia-Ukraine war: "This is a bad strategy, we have to stop it," adding that "we cannot beat [the Russians], we will not kill their leader, they will never give it up, they will invest more." "What finally will count is boots on the ground, and the Russians are far stronger." About Russia: "To understand the Russians, it's a difficult thing, especially if you have an ocean between you and Russia." "Don't misunderstand the Russians. So, they're not going to get sick of Putin and throw him out. Come on, it's a joke." Carlson asked Orbán, "Are you worried about being crushed by the US?" "It's dangerous. I am not the favorite politician of the liberals, but nobody's perfect." [Editor’s Note: HA!] "There are certain things that are more important than me, than my ego: family, nation, god." “To be Hungarian is to be very proud of it. We love the nation, we love the country, and we are proud of it. It’s not very much mainstream thinking or political thinking of a Western society. But in Hungary, we are still very patriotic and Christian and committed to those values. Not from an ideological level, but on the streets every day.” And for the piece de resistance, Orbán asks for President Trump to return: Call back Trump. That’s the only way out. Call back Trump. Because you know, you can criticize him for many reasons. I understand all the discussion. But the best foreign policy of the recent several decades belonged to him. He did not initiate any new war. He treated nicely the North Koreans and Russia, even the Chinese. You know, he delivered a policy that was the best one for the Middle East, the Abraham Accords. So he had a very good foreign policy. He’s criticized because he’s not educated enough to understand foreign policy. This is not the case. Facts count, and his foreign policy was the best form for the world in the last several decades I have seen. And if he would have been the president at the moment the Russian invasion started, no, it would not be possible to do that by the Russians. So Trump is the man to save the world and probably the human beings in the world as well. Wow! That’s some endorsement. Wrap Up The Hungarian PM wants to skip the red phone and pick up the orange one. I don’t blame him. Since Joke Biden took over, the world has gone to pot. Let’s hope the voting machines reflect the levers pulled this time. [You can watch the entire Tucker/Orbán interview here.]( Have a great day! All the best, [Sean Ring] Sean Ring Editor, Rude Awakening X (formerly Twitter): [@seaniechaos]( P.S. Just to remind you, [you can read Gave’s original research here](. It’s absolutely worth your time. 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