Hey There Income Hunter,
Early yesterday morning, British prime minister Liz Truss announced she would not reverse her decision to cut taxes to stimulate the economy while the Bank of England (BOE) deploys QE to buy the debt that must be issued to pay for the tax cuts.
Truss really doesn’t have any choice, and either will Europe or the US.
The answer we have been looking for as to what is breaking in the financial system is clear now, and perfectly illustrated in the Financial Times …
A major debt crisis will send the global economy into a deep recession as debt around the world will swallow up the financial system ….
Dun Dun… Dun Dun… Dun Dun Dun… Dunnnnnnn!
Today, we will look at what comes next as the Fed will be forced to provide liquidity to the UK and EU or they will sell trillions in US Treasuries to support their collapsing currencies.
The UK Pivot
Yesterday, Bethany Payne, bond portfolio manager at Janus Henderson Investors, said: “The Bank of England is generously offering to buy long-dated gilts starting today. That’s a complete flip on their announcement on Thursday last week where they confirmed sales of gilts would go ahead, starting Monday, Oct. 3.”
That, Income Traders,is what you call a central Bank pivot …
With these contradictions undermining the credibility of UK economic policy, the big question is what comes next?
The BoE’s deeper problem is that by bailing out their pension fund industry, which is getting crushed by higher interest rates, the central bank has revealed their willingness to print money to finance the government debt … ,
This was something it had previously pledged never to do because of how inflationary it is.
Print or Die a Slow Death: Which Would You Choose?
They described the process as “fiscal dominance” because the Treasury would be calling the shots and the BOE would print the money needed … with the result that inflation could turn into hyperinflation.
For the UK, it is either printing more British pounds or selling some of its $660 billion in US Treasuries and using the proceeds.
Other than the Fed, EVERY central bank must SELL dollars (Treasuries) to prop up their currencies and their sovereign debt.
Hence the JAWs of Debt is Unleashed on the Global Financial System
Two sectors to watch closely …
– A breakout in the US 10-year above 4%, where it has bounced off the first time up.
– The ICE BBB corporate bond credit spread, which is simply the BBB 10-year bonds minus the US 10-year Treasury bond
The BBB spread made a new high for the year yesterday, and now I will be watching the 10-year Treasury bond as it approaches the 4% level.
A break of both may just be the trigger for a Fed pause in tightening. followed by a relief rally in the weeks ahead …
Bring It Home
The great reset that comes at the end of an 80-100 year debt cycle has begun.
Once economies are exposed by the size of their massive debt burden, foreigners and private investors want out of their bonds for fear of only receiving cents on the dollar.
This is called currency and debt debasement. Indebted economies’ only way out of a debt crisis is to keep printing more currency to pay off a fixed amount of debt …
The holders of debt and the currency (cash) get hurt the most, while the governments get a do-over …
The other choice is the Jaws of debt sending your economy into a decade long depression, and we know politicians will always choose to print and spend their way out instead.
I added to Gold miner positions and also bought some silver this week. Precious metals will be the greatest beneficiaries of the print-and-spend policies that are headed our way.
Stay tuned as October and earnings season kicks off next week, and as always …
Live and Trade With Passion My Friend,
Griff