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The Great Squeeze: Asset Prices Will Fall, While the Cost of Living Will Rise

Phoenix Capital Research's picture


Graham’s note: this is an excerpt from a recent client note I sent out to subscribers. 


As I predicted the US Federal Reserve disappointed in a big way with its January 25 FOMC meeting. There was no announcement of QE 3. Instead the Fed promised to maintain its Zero Interest Rate policy (ZIRP) until 2014: an innocuous and mainly symbolic gesture.


In truth the Fed is now trapped. Because of political pressure, it cannot announce QE 3 or any other large monetary program without a Crisis first erupting.


However, if the Fed were simply to announce that its view of the economy had worsened and not throw the markets a bone, then we could very well have seen a Crash in multiple asset classes as the entire financial system is trading primarily based on the notion that the Fed and other Central Banks can somehow manage to prop this house of cards up interminably.


As a result of this, we got more of the same with the Fed January FOMC: promises to act if needed, and a symbolic promise of future accommodation in the form of promising to extend ZIRP for years to come.


The reality is that the Fed is stuck in ZIRP and will never be able to leave it. In 2011, the US made $454 BILLION in interest payments. And that’s with interest rates at or near 0%.


Things are only going to get worse. According to the Congressional Budget Office, the estimated interest that will be due on the US’s debt load by 2015 will be $533 billion: an amount equal to 1/3 of all federal income taxes collected that year.


And of course, if interest rates rise in any fashion, the interest payment load will rise as well. This is part of the reason why the Fed cannot raise interest rates in the future… ever.


A second reason the Fed is trapped in ZIRP pertains to corporate leverage levels, which we detailed in an earlier letter. Any rise in interest rates, particularly on the short-end of the curve, will mean that corporations will see a massive increase in interest payments due on the $7.3 trillion in debt they currently owe. That could put a serious dent in the “earnings” side of the P/E valuations sell side analysts are touting to claim stocks are cheap today.


Finally, we need to consider the over the counter derivatives market. Currently 82% of the $248 trillion in derivatives sitting on US commercial bank balance sheets are based on interest rates. If even 2% of these contracts are “at risk” and one quarter of those “at risk” contracts blow up, you’ve wiped out all equity at the five largest US banks.


Suffice to say, the Fed doesn’t want interest rates to rise in any way shape or form.

So the Fed is trapped at a ZIRP rate and will not be raising rates until the market forces it to do so.


This in turn means that inflation, which has already crept into the financial system as a result of QE 1 and QE2, will be gaining further traction in the months to come. As I’ve stated before, inflation and deflation are not mutually exclusive. And while the Fed is focusing on stopping the dreaded debt deflation (a la 2008) hitting the financial system, it’s let the inflation genie out of the bottle resulting in higher costs of living and civil unrest around the globe.


For more of our free daily market commentary, investment strategies, and several FREE reports devoted to help you navigate the coming economic and capital market changes safely swing by www.gainspainscapital.com.


Best Regards,


Graham Summers


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Mon, 02/13/2012 - 19:27 | 2155685 bankruptcylawyer
bankruptcylawyer's picture



Mon, 02/13/2012 - 18:41 | 2155482 Lady Heather...UNCLE
Lady Heather...UNCLE's picture

...arent earnings a pre interest number (ie EBIT)?

Mon, 02/13/2012 - 18:33 | 2155449 Ripped Chunk
Ripped Chunk's picture

Sounds yummy! Can you think and imagine civil disorder? Funny how markets adjust after massive intervention isn't it?

Mon, 02/13/2012 - 18:12 | 2155389 orangedrinkandchips
orangedrinkandchips's picture

THE MOVIE SPEED...is just like this economy....IF the fed issues anything less than 20-30B a month...we explode....JUST LIKE THE BUS KEANAU WAS DRIVING...IF IT GOES UNDER 60MPH....EXPLODE. Period. So where does that put us in 18, 20, 24 months??? In great shape of course! just ask any fuck-wad Govt. official.


No matter what he has relevant points.

Leverage works for Lehman the same way it does for the US.


Mon, 02/13/2012 - 18:34 | 2155455 Jacks Nipple
Jacks Nipple's picture

Keanau wasn't driving the bus, it was that Sandra chick.

Mon, 02/13/2012 - 23:31 | 2156332 the grateful un...
the grateful unemployed's picture

and you know Clooney threw her into the pool at a party and berated her because she wasn't working hard enough, then she got the oscar, but such is life, according to the smart guys Greenspan would never have been fed chief but for a lot of schmoozing and hanging around the WH

Mon, 02/13/2012 - 18:44 | 2155492 orangedrinkandchips
orangedrinkandchips's picture

youre right...Ben isnt driving the bus, but obama is! ha!

Mon, 02/13/2012 - 19:23 | 2155668 Kayman
Kayman's picture

Wrong !  Nobody's driving the bus. Ben and Barry are in the back seat smoking/eating crack.

Mon, 02/13/2012 - 17:57 | 2155331 MrBoompi
MrBoompi's picture

"This in turn means that inflation, which has already crept into the financial system as a result of QE 1 and QE2, will be gaining further traction in the months to come."

Which, of course, explains why the price of silver is pounded down almost every day....not.

Why on god's green earth would we ever let people create over $200 trillion in credit derivatives?  Wouldn't it have been easier just to hand over everthing we own?

Mon, 02/13/2012 - 17:37 | 2155241 WFO
WFO's picture

FED's not trapped, the American people are trapped. The FED has a kill switch on the economy - when they want to bring us to our knees, they raise interest rates, kaboom! Then, after withering in pain, the American people (and the world) will beg for the remedy. Global currency, global taxes, global police, and global military - that's Banksters wet dream.

Mon, 02/13/2012 - 20:45 | 2155941 LongBalls
LongBalls's picture

Nice summary WFO. Nice....I mean horrible....well, your correct is what I mean. AAAAAAGgGGGHHHHHHHHHH......... This is going to SUCK!!!!!!! Look to God. He is the only one who can and ever could save us anyway.

Mon, 02/13/2012 - 17:00 | 2155069 SheepDog-One
SheepDog-One's picture

Nah, I call BS on this theory that 'everyone was surprised by the FOMC announcement of 'no QE3'....hell if I could plainly see it, then these guys on Wall St certainly knew it. There was no surprise here at all.

Mon, 02/13/2012 - 16:58 | 2155061 SheepDog-One
SheepDog-One's picture

'Never be leaving ZIRP'? Oh, we WILL be leaving ZIRP, make no mistake about that...just that no one will tell any of us before hand and everyone will be suddenly raped overnite.

Mon, 02/13/2012 - 16:55 | 2155045 Uchtdorf
Uchtdorf's picture

Mamas don't let your babies grow up to be bankers!



Mon, 02/13/2012 - 16:47 | 2155008 BlackVoid
BlackVoid's picture

The market will never force the FED to raise rates. There is no market.

Mon, 02/13/2012 - 19:02 | 2155566 Theosebes Goodfellow
Theosebes Goodfellow's picture

What, algos don't count? /sarc off

Mon, 02/13/2012 - 16:46 | 2155004 engineertheeconomy
engineertheeconomy's picture

It is no easier to pay off $100 in debt than it is to pay off $100,000,000,000 in debt - if the interest is never printed. Since a bank only prints the principle and never does print the interest, it is therefore NEVER possible to pay off any amout of interest-earning debt. That right there is the key. There's not a government in the world that doesn't want it's population to be in perpetual servitude for eternity. If that was ever to change, then the bankers and politicians would actually have to work like the rest of us. We can't let THAT happen, now can we? After all, they are GODS aren't they?

Mon, 02/13/2012 - 19:09 | 2155617 Implicit simplicit
Implicit simplicit's picture

Good point, but interst rates may be rolled over to create a  new loan with a new higher principle and a  new rate. Like Greece

Mon, 02/13/2012 - 17:35 | 2155235 fourchan
fourchan's picture

i applaud your crystal clear view of the problem.

Mon, 02/13/2012 - 16:02 | 2154795 Eric L. Prentis
Eric L. Prentis's picture

Greedy Wall Street banksters and their puppet Congressional politicians have killed the USA. RIP.

Mon, 02/13/2012 - 15:29 | 2154634 jimmyjames
jimmyjames's picture

Things are only going to get worse. According to the Congressional Budget Office, the estimated interest that will be due on the US’s debt load by 2015 will be $533 billion: an amount equal to 1/3 of all federal income taxes collected that year


I don't know how you can forward project tax revenues-especially that far out and especially since they're contracting even as tax rates increase-

With unemployment rising and affordability declining government tax revenues will continue to decrease-



Mon, 02/13/2012 - 15:27 | 2154620 the grateful un...
the grateful unemployed's picture

good points all around. we look forward to a good dose of consumer inflation, relative to asset prices. the fed mandate is to keep inflation above short term yields, and keep both nominally low. land gets cheaper and food gets more expensive, the farmer sees his assets losing value faster then his profits go up. same for rental property. rents go up while property value goes down. new owners buy in to the building and raise the rent. 

the average guy with no money in the bank and credit card debt is screwed of course, especially if he needs the money he spends on rent food and cable TV do business. the REFI magic Atm disappears forever. if you own your own farm and your own apartment building you should do okay, but who is that?

Mon, 02/13/2012 - 15:05 | 2154526 j0nx
j0nx's picture

File this one under duh. I had this figured out 4 years ago when the housing market took a shit nap. It's the reason why I could care less that I am stuck in an underwater ARM loan. My rate now is lower than it would be for a fixed loan and won't be rising any time soon unless or until bondzilla shows up which apparently is never going to happen since we buy our own debt now as it is. There is no longer any need for outsiders to enforce the laws of economy on us. If we ever leave ZIRP we die on multiple fronts. It really is that simple.

Mon, 02/13/2012 - 20:54 | 2155960 LongBalls
LongBalls's picture

It is working for now. But sooner or later we will be attacked in the bond market just like everyone else. And it will be allowed as the bankers raise rates to call in their assets they loaned you toilet paper for. All in exchange for your hard work. It's what they are really after anyway. Paper means crap to them.......they have a printing press for God's sake. They want the true wealth of the world. YOUR LIFE, YOUR WORK, YOUR FREEDOM, YOUR SOUL.

Mon, 02/13/2012 - 15:09 | 2154525 eddiebe
eddiebe's picture

I was under the impression that the banksters love to extract their pound of flesh via interest charged. Since the Fed ( I would think ) could be called the very definition of a bunch of banksters, I wonder how they are skimming their unjust rewards from the economy. Any ideas? Anyone??

 Zirp obviously is practically a necessity for the forseeable future to keep the ship of state heading in the direction they want to head, but since when do banksters give a crap about what anyone wants? It would seem to me that zirp is clearly not in their best interest unless...???

Granted they operate the worlds greatest money machine ever, but I doubt that they feel like paying for even one drop of ink themselves unless they get something for it. What is it in the short term and in the long term. We need to know!

Mon, 02/13/2012 - 19:05 | 2155594 Kayman
Kayman's picture

"I wonder how they are skimming their unjust rewards from the economy. Any ideas? Anyone??"

The Fed is robbing you, your children, and your grandchildren by killing the purchasing power of FRNs. They are supporting their tribe by using the full faith and credit of the nation to enrich and engorge the banksters.

When pallets of currency are "lost" in Iraq, it is not an accident.

Mon, 02/13/2012 - 17:02 | 2155076 Boxed Merlot
Boxed Merlot's picture

I wonder how they are skimming their unjust rewards from the economy. Any ideas? Anyone??...


It's being done by perpetuating the belief by most people in the US that the fed is actually a legitimate government entity.  ZIRP gives the appearance that the US is actually printing our own currency, when in reality, private sector originated frns have always been and will continue to be used to purchase interest bearing US government treasury bills. 

Any interest, including previously purchased tbill paper will continue to be paid to the fed which is their way of perpetuating the involuntary servitude of the people of the US to them.


End the fed already!

Mon, 02/13/2012 - 19:53 | 2155773 Absinthe Minded
Absinthe Minded's picture

Skimming a little interest from a shit load of money is still shit load of money.

Mon, 02/13/2012 - 17:03 | 2155060 Boxed Merlot
Boxed Merlot's picture

Double post. My apologies.

Mon, 02/13/2012 - 14:58 | 2154498 eddiebe
eddiebe's picture

Graham, you get a lot of gaff about using this forum to peddle your product. I would like to say that I generally enjoy your articles. For sure the headers almost always capture my attention and the text itself is usually spot on. So thank you and I surely won't fault you for trying to snag a buck this way. Kudos

Mon, 02/13/2012 - 15:59 | 2154785 pupton
pupton's picture

Graham, has the sky fallen yet?  We heard all last year about how the wheels were going to fall off and the S would HTF.  Still waiting.  That's the problem with being a chicken little...sooner or later the sky better fall or your credibility suffers.  But at least you sell some newsletters along the way.

Mon, 02/13/2012 - 14:40 | 2154423 Zero Govt
Zero Govt's picture

"The Great Squeeze: Asset Prices Will Fall, While the Cost of Living Will Rise"

So easy: Short assets, Long food stuffs yes Graham?

When you say it'll be a "squeeze" you mean for Joe Public, not us as we'll be profiting all the way to the bank yes?

..so what's the best plays for the squeeze Graham ?


Mon, 02/13/2012 - 14:32 | 2154387 digitlman
digitlman's picture

This smells like somebody doing their homework 5 minutes before it is due.  Gotta write something, right GS?

Mon, 02/13/2012 - 14:23 | 2154342 Stuck on Zero
Stuck on Zero's picture

Treasuries will eventually draw zero interest ...  if you get my gist.

Mon, 02/13/2012 - 19:51 | 2155768 Absinthe Minded
Absinthe Minded's picture

The Fed will always be "interested" so to speak.

Mon, 02/13/2012 - 14:17 | 2154310 MachoMan
MachoMan's picture

Goddamnit...  why the shit is it so hard to just say that DEFLATION AND INFLATION ARE MUTUALLY EXCLUSIVE.  Either the money supply grows or it doesn't...  the fact that prices rise and fall contemporaneously is irrelevant.

Mon, 02/13/2012 - 18:51 | 2155518 spinone
spinone's picture

what you have will go down in value, what you need will go up in cost.

Mon, 02/13/2012 - 15:43 | 2154712 RockyRacoon
RockyRacoon's picture

You want inflation/deflation on your terms and definitions.   There can't be a debate until all the parties agree on what inflation/deflation entail.   Agreement upon definitions is critical for the argument to go forward.   Just sayin'.   Not that you are right or wrong.   All parties can be right!  ...per their own definitions.   This is true of so many of the political/social/economic issues currently in the public discourse.   Define the terms, agree upon them -- then start the debate.

Mon, 02/13/2012 - 17:04 | 2155088 MachoMan
MachoMan's picture

what kind of fucking dude response is this?  The donkeys alleging a different definition have been proven wrong again and again and again, despite still being at the helm...

you have to like balance out the deflating and inflating assets at the same time n stuff man.  jfc.

Mon, 02/13/2012 - 17:35 | 2155231 RockyRacoon
RockyRacoon's picture

I reckon that all depends -- on how you define the terms, eh?

Mon, 02/13/2012 - 18:36 | 2155463 MachoMan
MachoMan's picture

or in this case, how you bastardize the terms and then ensure mindless education consumers never learn anything different...  by, among other things, creating a monopoly on academia funding/publishing.

Mon, 02/13/2012 - 18:58 | 2155548 Kayman
Kayman's picture


Since nominal pricing is no longer calculated by any government  in the classic fashion, rather by some cobbled together "utility" calculation, you can have inflation and deflation simultaneously.

Your best yardstick is to take your paycheck and buy the same bag of groceries, month over month. Oh, and don't forget the constant cheating on package sizes.

Tue, 02/14/2012 - 11:31 | 2157380 MachoMan
MachoMan's picture

Eh no...  until the money supply can both shrink and grow at the same time, inflation and deflation are mutually exclusive...  this has nothing to do with government metrics and everything to do with failed religions and a refusal to embrace paradigm shift.

We can talk about the effects all you want...  we can even talk about delayed effects...  but I will not entertain the notion of the tail wagging the dog.

Mon, 02/13/2012 - 15:38 | 2154695 jimmyjames
jimmyjames's picture

Goddamnit...  why the shit is it so hard to just say that DEFLATION AND INFLATION ARE MUTUALLY EXCLUSIVE.  Either the money supply grows or it doesn't...  the fact that prices rise and fall contemporaneously is irrelevant.


Prices are what the Fed/government wants everyone to focus on-so they can say "Inflation " targets are being met-which is why i cannot understand so many ZH posters--do exactly that-

Mon, 02/13/2012 - 15:31 | 2154654 Citxmech
Citxmech's picture

Because prices related to different segments of the economy behave differently, ie see "biflation."

Mon, 02/13/2012 - 17:06 | 2155095 MachoMan
MachoMan's picture

No shit prices behave differently...  what the fuck does that have to do with the money supply?  What is the money supply doing?  We're busy discussing the effect as though it were the cause.

Mon, 02/13/2012 - 15:55 | 2154768 jimmyjames
jimmyjames's picture

Because prices related to different segments of the economy behave differently, ie see "biflation.


Some asset prices go up while others go down-

Personal money supply in household equity has fallen 8 trillion dollars but the price of eggs has gone up 50 cents/dozen = biflation


Mon, 02/13/2012 - 13:59 | 2154196 Obiwan
Obiwan's picture

Mr. Summers,

I am not sure the scenerio of inflation (as you predict) and low long term rates are possible. Inflation of any kind drives up long term rates as investors need a higher return to protect themselves against a depreciating dollar.


Mon, 02/13/2012 - 14:50 | 2154469 Racer
Racer's picture

Already happening... put money in a bank and you are paying them to hold it because it is falling in value.

Why put it there in the first place and use cash instead to pay for things, get rid of direct debits and online banking...



Mon, 02/13/2012 - 17:01 | 2155074 Lucius Corneliu...
Lucius Cornelius Sulla's picture

It can be argued that your cash is a lot safer stuffed in a mattress.  At least you won't be impacted by bank holidays, ATM failures and withdrawl limits.

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