Latest / Financial Survival Network / Interest Rates Have Peaked? John Rubino #5932

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Interest Rates Have Peaked? John Rubino #5932 · Financial Survival Network

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There really is nothing left. I mean, we basically just have to collapse,
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or you know, the financial system has to have a gigantic crisis and
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then the market has to impose austerity on everybody. In other words, we'll
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just reach a point where there's nothing else we can do, and all of
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a sudden we're living within our means again, and our means are diminished.
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At the same time, you were listening to Carrie Lutz's Financial Survival Network,
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Survival Network now more than ever, And welcome you are listening to and watching
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the Financial Survival Network. I'm your most Carrie Lutz. Well, John Rabino
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is with us now. John, Hey, I'll just skip the niceties other
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than to tell you to go to Rabino dot substack dot com and send any
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emails with questions comments kl at Carrie Lutz dot com. We always want to
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know what you'd think. First story headline and this should be shouted from the
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rooftops it's got to be a plus for the administration's somewhat lackluster economic policy.
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Edge fund leader Bill Ackman sold his t bond shorts called the interest rate tops
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top, and rates fell hard to the point where we're no longer having an
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inverted yield curve. The FED one, hey carry, Well, it was
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a big day in bonds. I think it's it's maybe too soon to say
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there's FED one anything, but it was very interesting because the ten year treasurynoe
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yield, which is the most important interest rate, hit five percent for just
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you know, like fifteen seconds last week, and then it opened there again
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this morning. And you know, when going from a four handle to a
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five handle, that's a big deal because markets like big round numbers. And
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right at the moment that the Treasury note was hitting five percent, Bill Acklin,
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like you said, it's a big hedgepun guy came out and said,
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Okay, we've been short bonds up till now, and we just closed them
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all out. Well, now we're not short balloons anymore. So you combine
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those two things and and the interest rates plunged. You know, the yield
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on the ten year note went from five down to four eighty something, which
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is a big move for a bond like that. So you know, the
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question is is this the end for rising interest rates? You know, have
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we reached the terminal rate, which we you know, kind of thought the
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terminal rate would be lower than this. So we're above what it seemed like
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the terminal rate should be, in other words, to the point where things
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start to break. And so if they start heading back down, now that's
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that's a big deal for the economy. But we've got to figure out why
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it's heading back down. You know, grates are falling because the economy is
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contracting, which I think is the case, and that just means we're heading
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into a recession. You know. On the other hand, if it's falling
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because everybody suddenly has faith in the US government's finances, that's a different thing.
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But I don't think that would have had it. But you know,
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we're going to run a deficit this year that is the highest we did already
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run it were right at the end of this year, so third highest on
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record. In you know, we're not theoretically at war, although we kind
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of are behaving like there, and there's no giant crisis out there or anything
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which is normally, why you run deficits this big excuse me, They get
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a cupan to you asking ask another question. Well, I'm having a preuar
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so so you know, third largest deficit ever, right, yeah, Okay,
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then that's a very big sign that we've just lost control. I mean,
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when government finances are that deeply in the red, and when there's no
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real reason for it. You know, there's no giant crisis here, there's
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no more pandemic, there's not a recession, there's nothing like any of that,
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and yet we're running crisis level deficits, which in part explains why the
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economy hasn't tanked yet, because even the government is creating all this new money
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and dumping it into the system. And it also you know, it also
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implies that we've just basically lost it. You know, we have given up
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any semblance of fiscal control and we're just going to spend whatever we have to
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spend. Yeah, you know, I think historians will look back on,
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well, there's a lot of things for them to look back on that they
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could call a big turning point, but I think the pandemic was one where
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we just let fly, you know, we increased the lines fly by sixty
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percent. We were running massive deficits. We took on what do we take
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on like seven or eight trillion dollars of debt in the last few years,
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please, yeah, yeah, And for no real apparent reason, we just
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did it and we're not stopping, you know. So this is the point
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at which we really lost control, which will destroy us financially at some point
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in your future. You know that that clip was already always out there.
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We were always going to walk off the cliff unless we changed something in a
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really positive way, in a really big way. But now we brought the
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cliff a lot closer. You know, if we're at what thirty four trillion
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dollars of debt and in an interest radio, how high can it go while
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we're having to borrow another trillion dollars on top of everything else to pay the
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interest on that debt, which means we got to have higher debt with higher
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interests going forward. We're in that kind of deep doom loop now, and
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it doesn't seem like there's any way out of it. You know, We're
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just there until you up. Is there any anyway? No? Obviously,
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because if you try to cut spending, you throw us into a really deep
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recession because that kind of austerity, you know, to get from one point
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seven trillion dollar deficit to a balanced budget means we have to live on one
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hundred or one point seventy trillion dollars less every year, which is a big
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thing to ask when already stressed out porpois. So that won't happen. So
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and that's the only way you can do it. I mean, you can't.
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You know, we could try to grow our way out of it,
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but we're already running massive deficits. What else can we do to grow and
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maybe get rid of some some high tech states. I don't know, like
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basically fire the government. Is there any way of doing this? I don't
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see how we could ever get back to fiscal sanity, Although what do you
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think physical sanity is at this point? Would it be just running a five
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hundred billion dollar deficit? When we used to think that was a lot,
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John, Yeah, we thought that was crisis level at one time, at
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the not too distant future. Now there's not really anything you can do when
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you're at this point, because okay, hear your options. You could immediately
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go to a gold standard just shut down, you know, which basically shuts
7:19
down government deficits and devalues the dollar really aggressively, but that impoverishes all the
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people who trusted the government don't go they'll go nuts. You know, you
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can't have that, and you can't stop the government from being able to borrow
7:34
money and create new currency because that means they have to cut all that spending.
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They'd have to be a phase out or something. You can't phase your
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way into a gold standard because everybody front runs it, so you have to
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announce it by surprise. That's the only way you can do a monetary reset.
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So that can't be done, and we can go to old style austerity,
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which people tried in the last twenty years and it totally blew up in
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everybody's face because the people who were being hurt by austerity, which is basically
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everybody that depends on the government for anything, voted out the people in charge
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and voted back, you know, voted in people who promise to do away
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with austerity. They say, you can't do that in a democracy. So
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there really is nothing left. I mean, we basically just have to collapse
8:24
or the you know, the financial system has to have a gigantic crisis and
8:26
then the market has to impose austerity on everybody. In other words, we'll
8:31
just reach a point where there's nothing else we can do, and all of
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a sudden, we're living within our means again, and our means are diminished
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at the same time. So that has to happen. And then once the
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alternatives are all horrendous and going back to some kind of sound money is the
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least bad option, then they do it. But it won't happen to You're
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right, I think you are correct about that. That it's it has to
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be the worst option except for all the rest, right, That's what it
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will be, right, Yeah, Yeah, it's when they look around they
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think, okay, in this one option, I'm this generation's for recouver and
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they'll know my name one hundred years for now for bad reasons, and they'll
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kick me out of office right now and maybe hang me. And then the
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other option will have three percent higher inflation next year. Well, you know
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they're gonna They're gonna choose the inflation every single and so each year the inflation
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rate that they have to choose goes up and up until the financial system just
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spins out of control because everybody starts running inflation in other words, they dump
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their dollars, they buy real stuff. The price of real stuff goes through
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the roof, which is to say, the value of the dollar versus real
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names plunges, and then you know, then you're there. And so that's
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you know, those are our options, an immediate depression or a five year
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cycle of hyperinflation, and neither one of those sounds great. But if you're
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a politician, you will take a hyper inflation every day. Yeah, Well,
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because you could just blame it on animal spirits or something, right,
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John, You blame it on an external enemy. Just look at it.
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This time, the cludent inflation. Yeah, you know, the Russian gas
10:22
increases. You know, we'll just find somebody to blame. Probably next time
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around it will be China, you know, so it'll be the you know
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Cha's inflation. Yeah, it'll be in China for sure. Yeah. And
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then so so then we can play war, you know. Yeah. Yeah.
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War justifies unlimited deficits, and it justifies capital controls and price controls and
10:46
and so that way, you blame it on somebody else, and that's your
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excuse to go authoritarian. And of course from there it's still a huge disaster
10:56
waiting to happen, but it buys you as the politician who becomes the dictator.
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It buys you some time. Is totally screwed here, totally totally totally
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screwed. Yeah, we are, We really are. You know. The
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best scenario here is that Sunday night announcement that we're back on the gold standard.
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Yeah, and it could be that that there's like three far sighted people
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in the government and they somehow gained control of the financial or the monetary system,
11:35
and that they do that preemptively. That's crazy. Yeah, but that's
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that's the only way it happens. And even that's not pain free. I
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mean, if you bankrupt everybody who has a bank savings account or a bond
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mutual fund, they're not going to be happy, no hit the streets.
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So you still have to put up with nobody is going to be of scale.
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Yeah, so when you do that, you probably have to declare some
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kind of martial law, even after just the basic currency reset of this for
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a while. So yeah, it's well, when you go into a certain
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level of debt, all your options sound crazy like this, and that's just
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where we are. Oh my god. Yeah, yeah, it really does
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sound crazy. But but what else do we do, right, what else
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can we do? Nothing? There there's no way out of this. I
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mean for the government, there's no way out of this. Of course,
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as individuals we have all kinds of choices. We can read. Yeah,
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lots of people get rich during crises, so we could, in theory,
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you know, be the next batch of guys from the big short you know,
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where we get it exactly right and that we make life. But waiting
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a long time for that, ha. Indeed, Yeah, it's been it's
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been well. You know that that thesis really applied to before the last housing
12:54
bust, So that was the thing that made a lot of sense in yeah
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two that two thousand and three, you know, And it's just it's become
13:03
more and more likely going forward. But I really thought but that we were
13:07
done when the housing bubble burst here, but it has had to be bailed
13:11
out. I didn't think we could make it ask that, but we did
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barely. I mean we were pretty close to you know, they say,
13:20
like the food trucks, you know, the trucks that bring the food to
13:26
your supermarket because the banks they no longer trusted letters of credit. Right,
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People don't realize how serious it was we were three days away from from like
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the food not arriving at the supermarkets, right, That's what then stepped in
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and back dropped all those letters of credit and then we were like, oh,
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okay, everything's fine now, right. Well, the big banks told
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Bush that that we were three days away from martial law, and that's how
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they got him to bail out all the big banks. But you know what,
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it still would have been worth it. We would still be in so
14:13
much better shape today if we'd said, listen, you guys got yourselves into
14:18
this mess. You guys get yourselves out if you If Goldman Sachs needs to
14:20
go bankrupt, so be it. That's just a change of ownership. That's
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still all the computers are still there, all the office space is still there.
14:28
So let it happen. And so JP Morgan, Chase, Berkshire,
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Hathaway, AIG, Bank of America. They all would have ceased to exist,
14:39
and the world would be vastly healthier. The world would be a better
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placed. Oh, it would be so much better because we would have learned
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a lesson. You know, we would have learned that, yes you can,
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indeed I agree with you, but you're cracking me up because it's so
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and true. You think Carrie, you think you too. Allows somebody to
15:03
say that, yeah, that's okay, good economic implosion, you know,
15:09
hey, end of the world, post apocalyptic, dystopian future. They like
15:16
that stuff. You get extra play for that. But when you do tell
15:22
the truth about certain matters, then you're virtually guaranteed that you are going to
15:28
be obliterated from the from the platform. Now, I've only been partially digitally
15:37
re educated, and they've upped the ability to attract more subscribers a little bit,
15:43
and I'm just how do I get them to believe that I love Big
15:48
Brother? I don't know how to do it here. Should I send them
15:52
an email? Or should I just go to the headquarters and say I love
15:56
Big Brother? I don't know what to do. Ye don't know what either,
16:00
because you know you you haven't proven yourself to be a good team player
16:04
in the past, and so what to do? I think it just takes
16:07
time. When you betray the trust somebody who has power over you, then
16:14
it takes a long time to regain that trust. So carey, you're just
16:17
gonna have to grovel. You just grovel and censor your your interview subjects as
16:22
much as you can, and and eventually they'll let you back in the club.
16:27
Maybe you know, it's all a big club and we're not in a
16:32
job. We might be though, you know, you know, but I
16:37
don't want to be. The gold bugs are the next capital allocators when the
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time yes, so it could be it could be us calling the shots.
16:45
You'll have a bank, you'll be basically, your stack will become a new
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bank. You will charter banks with your stacks. By so stock buy back
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blackout here, Please explain what the heck that is because I missed that story.
17:03
I'm middle there. There's stretches when corporations are allowed to buy back their
17:07
stock and stretches when they're not. Usually I think it has something to do
17:10
with earning season, right, So after they've announced their earnings, and after
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enough companies have announced earnings, the blackout is lifted and companies can go back
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to buying their stock back, which is a big driver of share prices.
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You know, when you've got big corporations borrowing billions of dollars and just turning
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around and buying stock with it, right, that's a lot of accumulation,
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of course, and so people are thinking it will happen again, and it's
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a it's a reason to own equity is going forward. But what company in
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its right mind is buying back its own stock in this market? You know?
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I guess I could see if you're like a precious metals royalty company,
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okay, and you're cheap, You're this is the best part of the cycle
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for you. You usually come roaring out of bear markets for junior mining equities,
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you know, so I can see them buying back their stocks. But
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if you're just a regular company and your stock has been growing up for the
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past ten years, and interest rates are now really high, and the economy
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could easily tip over into a recession, how do you justify to your board
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of directors borrowing a bunch of money and buying back your stock at near its
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all time high heading into a recession. You know, you'd think that would
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be a tough sell for CEO, But we'll see. You know, maybe
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corporations are that dumb, And actually, what am I saying? They are
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definitely that dumb, you know, so it could just be that they display
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their stupidity one more time before everything blows up on them. Well, you
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know, let's not forget. It's not a question of whether their stock is
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a good buyer or not. It's a question of can they buy enough of
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their stock to reduce the supply enough to raise the price to the point where
18:51
it triggers their bonus provision. That's what stock buybacks are about, right,
18:55
Well, yeah, that it is what it is. And don't forget there
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a lot of them own a lot of their own company stock, so they
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make money directly when they funneled stops pay their money. Yeah. Oh yeah.
19:07
They have options that have a certain strike price and a certain expiration date,
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so that kind of colors their perception. But which is kind of a
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shocking thing when you think about it. It used to be. It used
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to think that for CEOs to always stock in their company, that's good because
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if it aligns their incentives with shareholders. But when you've got these option grunts
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and everything, and they're they're borrowing money, which is basically using shareholder money
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to buy back stock that allows them to catch their options out of big profits,
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then you're not really that aligned with shareholders anymore in the long term,
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right You're going for short term profits using shareholder money that the company has to
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pay back in the future, which means it comes out of shareholder profits and
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you will be retired at that point when the debts come due. So yeah,
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they basically CEOs and the regulators that they own have figured out a way
20:07
around the whole aligning shareholder and CEO interests being you know now that they don't
20:15
have to do that anymore. Amazing, huh, And nothing is really surprising
20:21
anymore in this world. But John, when we grew up and you and
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I took economics one oh one, they said that the principal purpose of the
20:30
public securities markets was to raise and allocate capital to worthy companies seeking to expand.
20:41
Right, what the heck happened? Well, they've redefined expansion to raising
20:49
their dividends and buying back stock. You know, those are now investment activities
20:56
for a company. So it basically said, yeah, you basically just funneled
21:00
money. Well yeah you should. I mean you should be able to buy
21:03
back stock because there are times when that's a great idea. For instance,
21:07
I have a lot of beaten down miners that should be buying back their stock.
21:11
Right, they would buy it back and then they'll sell it again at
21:14
five times. I was one hundred times a price, right, yeah,
21:18
But but buying back you know, borrowing money and then using that money to
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buy back stock that that yeah, that you that you as a CEO are
21:29
not obligated to own for the life of the bond offering. Okay, Like
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if you had to own the stock until the bonds mature and are paid off,
21:37
not be one thing. But if you can just borrow money, boost
21:41
your stock options, cash those options out, and then let the bonds run
21:45
for another five years before they have to be paid, before they mature and
21:51
have to be back, then that's not a good thing. You know,
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it doesn't seem like that that is flowing in your interest correctly. So I
22:00
see. So I'm going to share with you a book that I once read,
22:04
and I don't remember the exact title, but it was basically called How
22:08
Companies Manipulate their Financial Statements. That was the effect of the name, and
22:15
it talked about all these different ways that they hid losses and inflated profits that
22:23
were legal under then accounting rules. I know it's changed at books twenty plus
22:30
years old, all right, but this is what it's all about here.
22:34
So the number one way to manipulate your share price is to have less shares,
22:41
so the you know, the denominator is less, so you're or the
22:49
nuerrator is less, I guess, so your per share profits get inflated,
22:56
and then the share price gets inflated. Right because in theory, your share
23:02
price is trading at a multiple of earnings. Right. It used to be
23:04
ten times earnings. That was average average company. We're way past that now
23:11
thirty forty fifty tesla. Who the heck knows. So that book is like
23:15
must reading, but it needs to be updated, I'll tell you that,
23:21
because there's like nothing real about these markets anymore. They're all it's all fake,
23:26
John, it's all fake. Well, yeah, companies have always tried
23:30
to manipulate earnings that they report. You know, you want to lower your
23:34
earnings when you're talking to the irs, and you want to raise your earnings
23:40
when you're talking to banks and shareholders, right, So there's lots of accounting
23:44
ways to do that, and they keep two sets of books. Yes,
23:47
real life, every publicly traded company keeps one set for the shareholders and one
23:52
for the government. And that's all illegal, and it gets reconciled on the
23:56
balance sheet as deferred income tax Okay, that's how you know. Well,
24:02
you know, the funny thing is that Trump is indicted and he's he's in
24:07
court, he's being tried for exactly that for you know, presenting different numbers
24:12
to different people. So you know, the whole rest of corporate America is
24:15
watching this and going, whoa wait a minute in their pants, Yeah,
24:22
Jesus, isn't that exactly what we do? You know, call it into
24:25
their accountants and going, hey, waity, we do exactly this thing,
24:26
right? And I thought that was legal? Yeah, it was legal.
24:30
What the heck is going on? Out of accounting? You told me I
24:33
could do that? And I'm going to roll on you in court if yeah?
24:37
That like, what's the world coming to here? Huh? Yeah?
24:40
But anyhow, with with share buybacks, that is exactly what they do.
24:44
They they take stock off the market and retire it so that erning's per share
24:51
go up. But if you if you're using corporate cash flow to do that,
24:59
yeah, and that's defensible because it's you know, it's the company's money.
25:03
The company earned the money, and if they think their shares are undervalued,
25:07
so be it. But if you're using borrowed money that your future shareholders
25:11
have to pay back. That's that's kind of a different thing, we think,
25:15
and that that's where the trouble starts. And that's what's happening a lot
25:18
of companies, you know, especially when interest rates were effectively zero for big
25:22
companies, they could borrow it basically zero, buy back their stock and then
25:26
not have to pay the three percent dividend on that stock. So it was
25:30
a cash flow positive financial engineering operation. I love it, and that's yeah,
25:37
yeah, but I love it. And what's wrong with that? Hey?
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Everyone does it? Right? But everyone does it? Yeah, yeah,
25:45
everyone everyone, everybody except Trump now because he's he's going to jail for
25:49
it. Yeah, it's just good business, right, yep, it is,
25:53
it is all right. Well, I think we're done for today.
25:59
We'll be back in two weeks again. I urge you go to John's site.
26:03
It's rabino dot substack dot com. You're gonna find material you're not gonna
26:07
find anywhere else on the web. Our site, of course, Financial Survival
26:12
Network dot com. Email address, contact us k l at Carrie LUTs dot
26:18
com. And hey, if you've got a good question, I will we
26:22
will go over it and give you attribution, you know, to your first
26:27
name and see what we think about it. All right, John, two
26:32
weeks. We'll see you then, care Thanks for listening to Carrie Letz's Financial
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Survival Network, your solution to today's trying times. For the latest, go
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to Financial Survivalnetwork dot com. Financial Survival Network now more than ever,