7 Reasons The Fed Will Print Trillions...Again
Submitted by QTR's Fringe Finance
Friend of Fringe Finance Lawrence Lepard released his most recent investor letter this week.
I believe Larry to truly be one of the muted voices that the investing community would be better off considering. He gets little coverage in the mainstream media, which, in my opinion, makes him someone worth listening to twice as closely.
Larry was kind enough to allow me to share his thoughts heading into Q4 2023. The letter has been edited ever-so-slightly for formatting, grammar and visuals.
This is part 2 of his letter, part 1 was published yesterday.
TOP SIGNS OF RIVETS POPPING
In the spirit of David Letterman, below we highlight the Top “7” signs of further fissures in the economy that will ultimately force the Fed’s hand to re-stimulate. Or said another way, we think we are heading toward a Sovereign Credit Event. That is, the bond market is telling us “NO MAS” and will not absorb these debts at today’s rates. Rates will have to be much higher to attract bids.
(1) 10 Year UST
The yield on the 10 year US Treasury bond continues to spike out – going from 3.5% in June to over 4.99% in mid-October. Note the increase since the Fed tightening cycle began. The US 10 Year has not been at this level since 2007. Over 16 years ago and right before the GFC.
(2) Gasoline
US average retail gas prices are down from its Summer 2022 highs, but it is beginning to spike again.
It’s also stunning to see some of the sticker shock prices again – like these in Santa Monica, CA in early October
The strategic petroleum reserve has been severely drawn down [QTR Note: my latest on the SPR is here], US shale oil production appears to have peaked, and Russia and the Saudi’s realize that oil prices are a US vulnerability. We would not be surprised to see much higher oil prices in the years ahead. The bond market is not going to like the inflation implications of higher oil prices.
(3) Bank Losses
Banks have had large unrealized losses as rates increased. Those unrealized losses are increasingly getting worse given recent reacceleration in 10yr UST rates. The Federal Reserve data shows that U.S. banks’ unrealized losses on investment securities were $558.0 billion as of June 30th, 2023, when interest rates were 75 basis points lower than September 30th, 2023. Just this week, Bank of America on its Q3 earnings call announced $130 billion in unrealized losses on securities compared to their book value of equity of $259 billion – or 50% of book!
2024 will be even more challenging for banks as...(READ THIS FULL LETTER AND PART ONE OF THIS LETTER HERE).
