Rising Rates to Crash the Over-Leveraged Economy
The comments below are an edited and abridged synopsis of an article by Michael Pento
The effective overnight interbank lending rate is now 3.08%; it was just 0% a little over six months ago. The Fed Funds Rate (FFR) is heading to at least 4% by the end of the year, and perhaps to 4.5-5% by early 2023. Rising rates have already caused stocks, bonds, gold, crypto and just about everything else to plunge. Virtually nothing has worked on the long side except for cash and the US dollar. But the carnage isn’t over, and the pace of decline will intensify.
Pento discusses the FFR; US Treasury yields; the level of borrowing costs it takes to break the economy; and debt burdens, asset price levels and GDP growth then and now.
“Higher interest rates offered by US Treasuries are providing a great alternative for stocks. And higher corporate borrowing costs are also destroying margins and revenues for these businesses. Sharply declining consumer demand from a faltering economy is adding to the pressure. Throw in a skyrocketing USD, and odds are corporate earnings are not only going to fall well short of the 8% growth forecasted by Wall Street for 2023; but will instead end up posting a negative number.”
“Ironically, the economic data has been mostly unalarming—at least for now. With the exception of GDP, which Wall Street claims is only a temporary quirk in the data. Just ask any perma-bull and they will tell you that job market, consumers and corporate earnings are still very strong and can withstand this hawkish Fed. Nevertheless, the truth is the economy and markets have never been more fragile. Therefore, the upcoming economic and earnings recession should be profoundly acute.”