Is Next Week The Crash????
"The two-year's yield has jumped 60 basis points this week, the biggest 5-day jump since November 2001, as futures showed an increasing likelihood the Federal Reserve will increase interest rates later this year because of the risk of inflation accelerating due to record oil and food prices.
If inflation keeps moving higher, it may motivate Fed governors to make the case for hikes," said George Goncalves, chief Treasury and agency debt strategist at Morgan Stanley. "Bonds have suffered such a bloodbath over the last week."
The problem facing America right now is revenues are shrinking. Revenues are shrinking for individuals losing their jobs and/or earning less. Revenues are shrinking for business as consumers cut back. And revenues are shrinking for municipalities as tax receipts decrease.
We see the effects everywhere. Layoffs. Foreclosures. Airlines Cutting Routes. As revenues contract, it creates further contraction.
The BIG problem this time is that we accumulated an unprecedented level of debt going into this contraction. A LEVEL THAT HAS NO HISTORICAL PRECEDENT.
How do you pay off trillions in debt without the income to pay it off?
Without a means to generate income, you default. And right now, there seems to be little on the horizon big enough to generate sufficient income to cover our debt obligations....as a result we are seeing record defaults(foreclosures) and rapidly deteriorating debt coverage ratios.
To compound the declining income problem, for the past six months we have had rapidly rising food and fuel prices. Evidence of the distress is increasing usage of credit cards to pay for food and fuel. At some point, credit card availablity runs out....and then what when the debt must be paid without access to additional credit?
Was this week the final nail in the coffin.....interest rates are now rising very quickly. WTF, the economy is in a recession and interest rates are rising. Not only that, a FED governor is talking about PREEMPTIVE rate increases?
Shrinking revenues, suffocating debt, rising foreclosures, falling real estate values, rising commodity prices, falling wages, rising interest rates....the effects are being felt everywhere.......
Now the question is how far does this go?
I don't think there is an easy answer because we have never been here before. Never has so many of our nations governments faced these kinds of deficits simultaneously. Never have prices risen so fast against stagnant or declining wages. Never has our economy been so dependent on the creation of credit versus production. Never has our banking system held this much debt.....and now the stress is being felt as its customers are defaulting.
With the 10 year at 4.26% as we end the week, stress on our financial system at unprecedented levels, food and fuel prices out of reach for an increasing number of our citizens, many Americans wondering what does the future hold with a negative perspective not seen in three decades, what can Wall Street manufacture next week to keep this rally going....after all it is options expiration week that it has been a generally positive week.......or are we in store for something else?????