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If the Federal Reserve were hell-bent on quashing inflation, it would have raised their target range for federal funds by another 25 basis points at last Wednesday's FOMC meeting.
They didn't. Instead, they opted for "hawkish" sounding rhetoric about keeping rates higher for longer, maybe a lot longer.
Even with the economy going gangbusters, the labor market strong and set to get stronger as the UAW (United Auto Workers) leads the way to higher wages, benefits, and a shorter workweek, with oil prices approaching triple digits and gasoline prices rising nationwide -not to mention headline inflation close to twice the Fed's 2% target - higher-for-longer, tough-sounding rhetoric replaced raising rates another quarter of one percent.
Because the Fed knows it can't raise rates anymore, on account of things starting to break, but they still have to appear like steadfast firefighters trying to douse inflation.
What the Fed can't admit, which scares the heck out of them, is that about $1.2 trillion of leveraged debt on commercial real estate in America is in deep trouble.
Banks that hold huge amounts of that debt and CMBS (Commercial Mortgage-Backed Securities) are facing liquidity and potentially solvency issues. Many of those same banks have been covering up holes in their balance sheets by buying deposits in the brokered deposits market and taking huge "advances" from their regional Federal Home Loan Banks.
Business bankruptcy filings rose 23.3% in the year ending June 20, 2023, and non-business bankruptcy filings rose 9.5%. The interest cost to taxpayers on the national debt was $352 billion in 2021; in 2022, it was $475 billion, and in 2023, it's projected to be $640 billion. The Treasury has to issue more debt at higher rates to keep paying that interest and to fund every other government program.
The stock market is starting to stumble. In other words, things are starting to break.
Meanwhile, inflation isn't coming down to anywhere near 2%, unless we fall into a very steep and deep recession. If we don't - and lately the Fed has been predicting that won't happen - we'll see a "soft landing" where economic growth stalls or falters but catches itself as inflation abates and Goldilocks emerges as the face of the economy. Then, more growth will lead to more production and consumption, more credit expansion, higher wages, higher input costs, more inflation, and higher interest rates.
But not if stuff is starting to break, as I've been saying.
And since we're on the verge of some serious cracks spreading, the Fed opted for "higher for longer" over another hike because "higher for longer" is just rhetoric.
Meanwhile, the bond market just "puked." The yield on the 10-year Treasury hit 4.5% earlier today; that's the highest it's been since 2007. Now, with investors - bond investors, in particular - believing the Fed will keep rates higher for longer and possibly having "penciled in" another hike before the end of the year, why would anyone rush to buy bonds now when they might get better-yielding investments later?
So, investors will wait for higher yields. On top of that, speculators have been shorting bonds, driving prices down and yields up, betting they can cover their shorts by year-end at lower prices and then lock in higher yields as they "go long" on fixed-income assets.
That's a great plan. Except for the fact that things are breaking.
If things get scary with any hard selling of bank stocks potentially leading to more bank runs, or any big defaults, or the stock market tanking, there'll be a quick flight to quality - a rush of money into Treasuries. And it's not just because they're safe assets; now, you get great yields on Treasuries all across the yield curve.
A flight to quality in Treasuries would elevate bond prices and force shorts to cover, lifting prices even higher.
So, if you think stuff is starting to break and you want to ride a quick flight-to-safety bond market rally, buy some beaten-up Treasury bond ETFs like the iShares 20+ Year Treasury Bond ETF (TLT), or, on the cheap, buy some call option spreads and position yourself for a quick gain when the stuff hits the fan.
Or, even better, check out my full briefing on where to find the biggest profit potential when the bill comes due on all that commercial real estate debt I mentioned earlier. Savvy Wall Street investors have always made the most money on real estate when a crash happens, and this time will be no different - except this time, you have a chance to join them. Everything you need is at this link.
The post Why the Fed's "Higher for Longer" Message on Interest Rates is Bogus appeared first on Total Wealth.
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.