Holy Cow, They’re Naked!

When Will They Be Exposed? [The Daily Reckoning] September 27, 2023 [WEBSITE]( | [UNSUBSCRIBE]( Holy Cow, They’re Naked! - Who’s swimming naked?… - Beware the lag effect… - Leverage, debt and rising rates: a toxic brew… [Urgent Income Demo]( Jim Rickards calls him The Banker. He’s a financial anomaly. He doesn’t target 1,000%... 3,000%... or 5,000% gains. Instead, this former hedge fund manager is all about steady – and fast – income. And he’s among the absolute best in the world at that… [Click Here To Learn His Strategy]( Annapolis, Maryland [Brian Maher] BRIAN MAHER Dear Reader, Mr. Warren Buffett — Omaha’s sage: “A rising tide floats all boats….Only when the tide goes out do you discover who's been swimming naked.” How many presently wade waist-deep without swim trunks? We do not know precisely. Yet we hazard the number is vast. Interest rates have endured a magnificent increase commencing last March. To date, they have worked little economic or financial wreckage. The tides are evidently favorable. The bathers’ nudity is concealed, gleefully. Yet beware the tidal swing. Beware the ebbing tide. Beware the “lag effect.” Mr. Michael Lebowitz of Real Investment Advice: Despite surging interest rates, there are few signs they are impeding economic activity or causing distress amongst borrowers. It may seem strange that higher rates are not proving troublesome for an economy with such a high amount of leverage. Don’t breathe a sigh of relief quite yet. There is often a delay, called the lag effect, between higher interest rates and economic weakness. How great a lag? Expect a 2024 Recession The average duration between the Federal Reserve’s final rate increase and recession’s onset is 11 months. Of course we refer to averages. Recession may menace far sooner — or far later. Yet 11 months is par as history runs. It is moderately expected that the Federal Reserve will elevate rates once more this year. Jim Rickards believes in November. Thus you can conclude — approximately — that recession will enter effect next October. What follows October 2024? The answer is the November 2024 presidential election. And voters are exquisitely attuned to the economic settings. “It’s the economy, stupid,” argued Democratic campaign strategist James Carville against the 1992 presidential election. It remains the economy, stupid. Maybe June If the Federal Reserve does not elevate rates in November… or December… its final increase will have transpired in July. And so the recessionary calendar advances to June 2024. Voters would have four additional months to absorb the recessionary blow — and plot their revenge. “Throw the bums out” is the eternal refrain. Will voters heave the sitting bum out? Will they put a new bum in? We must await our answer. All is guesswork at present. [Secret Gold Back currency RUINING Biden’s plans for a digital dollar?]( There is a secret currency that’s beginning to spread across America. And you only have a limited time to claim one of these “Gold Dollars” for yourself. [Click here for more...]( And since you’ll be getting it as part of an upgrade we want to make to your account… You’ll be receiving one of these “Gold Dollars” as a FREE gift. You just have to watch this short 2 minute video recorded for you and respond by Wednesday at midnight. [Click Here To Watch Now]( Let us then return to this so-called lag effect… and to ungarmented swimmers wading presently unexposed. The abovesaid Lebowitz: “This so-called lag effect is even more pronounced when rates were very low for extended periods before the rate hikes.” The Federal Reserve’s target rate hovered at or near zero for much of the prior decade. It began coming up later in the decade. But it came back down against the 2020 pandemic. Only last year did they begin to jump — from near zero to today’s 5.25–5.50%. Yet a question arises: Have interest rates truly jumped? Get Real In nominal terms rates have jumped, it is true. Yet in real terms? That is, in inflation-adjusted terms? We find that rates remain historically guttered. Observes former colleague David Stockman: During the 186 months through August 2023 the fed funds rate was negative in real terms fully 97% of the time (180 months)... As recently as May, the inflation-adjusted fed funds rate was still -0.48% and turned ever so slightly positive in June and July. Yet [year-over-year inflation] still posted at +4.47% in August, meaning that [last week’s] freeze of the target funds rate at 5.33% yielded a real rate of just +0.48%. A +0.48% real rate is miles and miles from a 5.33% nominal, face-value rate. Perhaps it should not surprise us that the economy has repelled recession thus far. The real rate scarcely exceeds zero — even after a hiking cycle that crowns the ages. And the real rate is… after all… the real rate. It’s All About Leverage We must nonetheless be cognizant of the nominal rate and its lag effect. Let us turn again to Mr. Lebowitz’s economic comments: Each instance of higher [nominal] rates led to a crisis. The crisis sometimes involved an individual bank, company or even a county or country. Other crises were systemic, spreading through an industry, economic sector or financial market. What do these assorted crises share in common? The answer is leverage: The reason these occur with clockwork-like accuracy is leverage… leverage significantly increases the odds of a default for the borrower and, potentially, the lending institution. Businesses borrowed immensely when rates dangled near zero. And why not? Interest payments were a burden so light they scarcely represented a burden whatsoever. Yet at today’s rates interest is a millstone heavily upon their necks. Or in today’s analogy, leverage is the rascally hand seizing bathers by their trunks… and yanking the things off. [New AI 62 Times Smarter Than Einstein?]( [Click here for more...]( AI is already 100,000 times faster than humans are… And by 2025, Elon Musk predicts AI will also be “vastly smarter” than any human. Masayoshi Son, the CEO of SoftBank goes as far as to predict that, over time, AI could reach an IQ of 10,000… That would make AI more than 62 times smarter than Einstein’s IQ of 160. Can you imagine the possibilities of an AI supercomputer which is 100,000 times faster than any human and has an IQ of 10,000? Over time, AI could be used to cure cancer, enable a new age of space travel, and much, much more. That’s why AI is set to change the world in ways almost nobody can imagine today. And anyone who invests now – while this new technology is still in its infancy – could see the chance at making generational profits. [Click Here To Learn More]( When the tide transitions… when flood tide yields to ebb tide… their embarrassed status will be exposed. They will be nude. Lebowitz: High tide is starting to ebb. When the lag effects catch up with the economy and asset prices decline, today’s high interest rates will allow us to see who has been swimming naked… U.S. debt levels and its ratio to GDP are significantly higher than when Fed Chair Paul Volcker was taming inflation with double-digit interest rates 40 years ago. Total debt is double what it was in 2008. That crisis almost bankrupted the entire banking system. Simply put, there are plenty of naked swimmers in our financial system. Debt Has Doubled! Debt levels were already handsome in 2008. And today they are double. Double! Yet today’s interest rates exceed 2008’s rates. It is a potentially lethal mixture. Consider it from the governmental dimension alone. Between 2022 and 2024… interest payments on the nation’s debt… will increase more than in the prior 50 years. Thus 50 years compresses into two years. Impossible — but there you have it. What about the corporate sector of the economy? This Lebowitz fellow claims that a “wall of maturing debt” rapidly approaches. $525 billion of corporate debt comes due this year. $790 billion comes due next year? And in 2025 — the year after next? Over $1 trillion corporate debts come due. Thus we hazard many swim trunks will come down across the following two years. Will rates come down… and keep swimming trunks up? It is possible. And reduced rates ease the debt burden. Higher Rates Forever? Yet as we recently wrote, the future may be a future of “forever” elevated rates. We cited The Wall Street Journal: In their projections and commentary, some [Federal Reserve] officials hint that rates might be higher not just for longer, but forever… This matters to any investor, business or household whose plans depend on interest rates over a decade or longer. Thus they may confront a decade — or longer — of ebbing tides. Again we ask: How many bathers… whose nudity is presently concealed… will be exposed as the tide rolls out? Also again, we do not know. Yet we do know that tides run to regular cycles. We likewise know that economic high tide has been an extended cycle. Trunkless bathers beware: Ebb tide is due… Regards, [Brian Maher] Brian Maher Managing Editor, The Daily Reckoning [feedback@dailyreckoning.com.](mailto:feedback@dailyreckoning.com) Editor’s note: Every day, 10,000 people reach retirement age in America. But according to statistics, only 12% of these people actually have enough money to retire. That means 8,800 people leave their retirement dreams behind — every single day. And considering the state of our economy — this problem is only getting worse. Consumer prices are high… markets are unstable… and the U.S. dollar is losing favor. But according to Jim Rickards, you aren’t hopeless… [Jim believes there is ONE thing you can do — right now — to maintain a financial edge.]( And if you do not already have three or four powerful income streams… then we urge you to watch Jim’s most recent presentation. Nearly nine out of 10 Americans do not have enough income right now. Are you one of them? If you are, [this]( may be one way to change that. [Go here for details.]( 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. 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