Higher for Longer Spells Trouble

Loan rollovers at higher rates prove fatal for some companies

Stocks and commodities with oil taking the lead were up this week. Long dated U.S. Treasuries fell as rates rose even though the unemployment rate rose much more than expected. Investors took a bit of weakness in the economy as meaning QE is right around the corner.

But, in an excellent interview Stephanie Pomboy did on Wealthion toward the end of this week, she documented many good reasons to think the economy is just beginning now to feel some pain that will get much, much worse. She believes equities are destined to fall by 40% to 50%. She says that investors are still betting that a soft landing or no landing is in the cards. But they are overlooking the enormous impact that higher rates are yet to have on companies that will be forced to roll over loans with very low interest rats to loans with rates several times the level they were being charged. As Danielle DiMartino Booth pointed out the prior week, bankruptcies are just now starting to take place at an accelerated pace. But that is happening as the schedule of debt rollovers totalling $1.3 trillion between now and 2025 is just now beginning. Note the following chart compliments of Boomberg and Goldman Sachs.

When money was free, corporations, investors, and common folk borrowed enormous amounts of money, not thinking rates would rise dramatically as they have. But no worries because as was established by Alan Greenspan, investors “know” that if stocks begin to tank in any meaningful measure, the Fed will always come to the rescue.

But that is exactly the thought process that Chairman Powell is trying to break. So, the higher for longer interest rate policy is likely to continue for quite a while longer, even as economic pain intensifies beyond anything we have wittnessed in recent years. Stephanie thinks there will be far more pain than the market is anticipating before the Fed begins some form of QE. She thinks the Fed is likely to address liquidity concerns resulting from rising bankruptcies by enlarging its balance sheet for a protracted period of time before it begins to lower interest rates.

With bankruptcies likey to stare rising dramatcally, especially among the non-investment grade debtors, that will mean an increase in unemployment—which, as we saw from the much higher than expected unemployment data reported on September 1, 2023 is now underway. Not only was the most recent unemployment number consideraby higher than expected but every month of this year payrolls were revised dramatically lower! Investors are clearly partying on the deck of the Titanic as it begins to sink.  But hey! Why Worry? Won’t the “Fed Put” always be there when the market begins any serious decline?

Given Stephanie’s view that the Fed will keep interest rates hgher for longer, she anticipates considerable deflation in the financial markets. But at the same time, she is in agreement with Luke Groman, who was also interviewed last week on Adam Taggart’s Wealthion this past week that there are two troubling events taking place that will also cause trouble for the U.S. economy. Both Luke and Stephanie have highlighted a continuing higher oil price as well as the BOJ losing control of long-dated Japanese treasury markets in Japan.

Rising US dollar prices for oil will present a huge head wind for the U.S. consumers leading to reduced consumption that will reduce revenues of American companes even as they roll more and more of their loans over to much higher interest rates. Higher U.S. dollar oil prices are are exacerbated by insane anti carbon policies of the Biden Administration. At the same time, the BRICS and their rapidly growng list of friendlly nations are exiting the dollar and cornering the oil markets. This past week, the BRICS added Argentina, Iran, Saudi Arabia, Egypt, Ehiopia and the Emerates to the BRICS club. This is a new anti American, anti dollar group of countries that once were buyers of U.S. Treasuries. They won’t be any longer. And imagine the power of a group of oil producers that incudes Russia, Iran, Saudia Arabia and the Emerites.

A changing world order caused to a great extent by the U.S. weaponizing the dollar, combined with idiotic climate change policies ensures rising oil prices. That is why I am turning very bullish on oil and gas and hope to add some producers back on my list, including two that I own personally—ExxonMobil and Tenaz Energy Corp.

Regarding the BOJ losing control of Yen interest rates, that is a huge headwind for the global economy because it has for years been a source of cheap money for global players in the Yen carry trade. As long as the BOJ was able to cap yen interest rates it meant that foreign borrowers could borrow yen in very low interest rats and use the proceeds to buy U.S. Treasuries for example that would yield interest rates seeral times higher than they paid for borrowed yen.

Luke Groman’s view on the U.S. dollar is dismal. He points out that so far this year, IRS revenues have fallen short, even of the amount of interest expense on the Federal debt. Luke may agree with Stephanie in the short term that financial assets will deflate, but he also thinks we will continue to have growing inflationary problems largely because of rising oil prices as America tries to reindustralize America, after allowing wealth producing industries leave our shores for Mexico and way beyond. Some of you older readers may remeber Ross Perot who talked about that “giant sucking sound” of American industry moving to Mexico and beyond?

I think Luke’s longer term view is right. However, Stephanie’s financial deflation ideas combined with my belief that the Fed will continue to hold interest rates higher for longer caused me to personally build cash this past week. After bad timing in buying Eloro Resoruces at the open Friday morning, I lightened up a bit on Brixton, Irving, Lahontan, Palisades, and Timberline. I sold all of Hannan Metals and Cerro de Pasco. Earlier in the week I unfortunately sold Newmont and OUNZ to finance my purchase of Eloro.

If Stephanie’s views are right, experience tells me at times like these, liquidity is of paramount importance. On the other hand its also possible that the equity markets in the U.S. will continue to defy the force of grafity much longer than I expect. Its hard for me to believe however, that equites can avoid a severe bear market between now and the end of 2024.

Regarding the markets reaction to Eloro Resources resource announcement this past week that announced more than 1 billion silver equivilent ounces at its Iska Iska project in Bolivia, be sure to watch Quinton Hennigh’s comments on this week’s Crescat Gets Active YouTube video.