central banks
by
Nomi Prins
by
Brian Pretti
Executive Summary
- Expect a bond market bloodbath as rates rise
- Municipal, corporate and sovereign defaults will soon follow
- Liquidity suffers as necessary goods prices rise, but securities prices fall
- The new, nuclear risk of a derivatives market collapse
If you have not yet read Part 1: The Global Credit Market Is Now A Lit Powderkeg available free to all readers, please click here to read it first.
You may remember that what caused then Fed Chairman Paul Volcker to drive interest rates up in the late 1970’s was embedded inflationary expectations on the part of investors and the public at large. Volcker needed to break that inflationary mindset. Once inflationary expectations take hold in any system, they are very hard to reverse.
A huge advantage for Central Bankers being able to “print money” in very large magnitude in the current cycle has been that inflationary expectations have remained subdued. In fact, consumer prices as measured by government statistics (CPI) have been very low in recent years.
When Central Bankers started to print money, many were worried this currency debasement would lead to rampant inflation. Again, that has not happened for a very specific reason. For the heightened levels of inflation to sustainably take hold, wage inflation must be present. I've studied historical inflationary cycles and have not been surprised at outcomes in the current cycle in the least, as in the current cycle, continued labor market pressures have resulted in the lowest wage growth of any cycle in recent memory. But is this about to change at the margin?
The chart below shows us…
What Awaits Us In The Future Of Higher Interest Rates
PREVIEW by Brian PrettiExecutive Summary
- Expect a bond market bloodbath as rates rise
- Municipal, corporate and sovereign defaults will soon follow
- Liquidity suffers as necessary goods prices rise, but securities prices fall
- The new, nuclear risk of a derivatives market collapse
If you have not yet read Part 1: The Global Credit Market Is Now A Lit Powderkeg available free to all readers, please click here to read it first.
You may remember that what caused then Fed Chairman Paul Volcker to drive interest rates up in the late 1970’s was embedded inflationary expectations on the part of investors and the public at large. Volcker needed to break that inflationary mindset. Once inflationary expectations take hold in any system, they are very hard to reverse.
A huge advantage for Central Bankers being able to “print money” in very large magnitude in the current cycle has been that inflationary expectations have remained subdued. In fact, consumer prices as measured by government statistics (CPI) have been very low in recent years.
When Central Bankers started to print money, many were worried this currency debasement would lead to rampant inflation. Again, that has not happened for a very specific reason. For the heightened levels of inflation to sustainably take hold, wage inflation must be present. I've studied historical inflationary cycles and have not been surprised at outcomes in the current cycle in the least, as in the current cycle, continued labor market pressures have resulted in the lowest wage growth of any cycle in recent memory. But is this about to change at the margin?
The chart below shows us…
by
Brian Pretti
by
Brian Pretti
Executive Summary
- What the NACM Index and the Atlanta GDPNow are telling us about the odds of returning to recession
- Bond market volatility is picking up
- Are central banks are losing their control?
- Why monitoring credit markets will be our best indicator of the next downturn
If you have not yet read Part 1: As Goes The Credit Market, So Goes The World available free to all readers, please click here to read it first.
That indicator is the current level of the National Association of Credit Managers Index. Although not wildly well known, the National Association of Credit Managers Index is an indicator deserving of attention and monitoring immediately ahead.
As per the National Association of Credit Management (NACM), the Credit Managers Index is a monthly survey of responses from US credit and collections professionals rating factors such as sales, credit availability, new credit applications, accounts placed on collection, etc. The NACM tells us that numeric response levels above 50 represent an economy in expansionary mode, which means readings below 50 connote economic contraction. For now, the index rests in territory connoting economic expansion, but the index is also sitting quite near a 6 year low. We’ve been here before in the current cycle as the economy has moved in fits and starts in terms of the character of growth:
In a prior discussion, I mentioned the slowing in the US economy in the first quarter of 2015. I highlighted the Atlanta Fed GDPNow model that turned out to be very correct in its assessment of Q1 US GDP. While the Atlanta Fed was predicting a 0.1% Q1 GDP growth rate number, the Blue Chip Economists were expecting 1.4% growth. When the 0.2% number was reported, it turns out the Atlanta Fed GDPNow model was virtually right on the mark. As of now, the Atlanta Fed GDPNow model is predicting a…
The Central Banks Are Losing Control Of The System
PREVIEW by Brian PrettiExecutive Summary
- What the NACM Index and the Atlanta GDPNow are telling us about the odds of returning to recession
- Bond market volatility is picking up
- Are central banks are losing their control?
- Why monitoring credit markets will be our best indicator of the next downturn
If you have not yet read Part 1: As Goes The Credit Market, So Goes The World available free to all readers, please click here to read it first.
That indicator is the current level of the National Association of Credit Managers Index. Although not wildly well known, the National Association of Credit Managers Index is an indicator deserving of attention and monitoring immediately ahead.
As per the National Association of Credit Management (NACM), the Credit Managers Index is a monthly survey of responses from US credit and collections professionals rating factors such as sales, credit availability, new credit applications, accounts placed on collection, etc. The NACM tells us that numeric response levels above 50 represent an economy in expansionary mode, which means readings below 50 connote economic contraction. For now, the index rests in territory connoting economic expansion, but the index is also sitting quite near a 6 year low. We’ve been here before in the current cycle as the economy has moved in fits and starts in terms of the character of growth:
In a prior discussion, I mentioned the slowing in the US economy in the first quarter of 2015. I highlighted the Atlanta Fed GDPNow model that turned out to be very correct in its assessment of Q1 US GDP. While the Atlanta Fed was predicting a 0.1% Q1 GDP growth rate number, the Blue Chip Economists were expecting 1.4% growth. When the 0.2% number was reported, it turns out the Atlanta Fed GDPNow model was virtually right on the mark. As of now, the Atlanta Fed GDPNow model is predicting a…
by
Nomi Prins
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