Why Higher Rates Matter

More on the jobs market... The laggiest of indicators... More about Treasury yields... Why higher rates matter... Podcast: Jim Rickards on the BRICS nations... Mailbag: 'There was nothing our money could buy'...

Picking up on our talk yesterday about jobs...

Yesterday's latest U.S. government report on job openings showed an increase in August... The number of openings rose to 9.61 million from July's 8.92 million, mostly coming from white-collar job postings.

This would suggest that the jobs market – which, as we discussed in yesterday's edition, is a critical area to follow as investors weigh their outlooks today – isn't substantially weakening quite yet. Hiring saw a slight uptick, while layoffs remained low in August.

Yet as our Stansberry NewsWire editor Kevin Sanford reported this morning, this latest update from the Bureau of Labor Statistics was something of a mixed bag. As he wrote...

However, most Americans are still holding onto their jobs as the "quits rate" stayed at a three-year low of 2.3%. The low rate suggests American workers aren't so optimistic about finding another job in the current market.

A declining "quits rate" tells you about sentiment among people these days.

Gone are the stories of people quitting jobs to go on a long post-pandemic vacation... because they think they'll have their pick of better-paid jobs when they get back.

Other employment stats, including an update from payroll company ADP, have shown wage growth continuing to slow in the economy for about a year. So, at least that part of the pandemic-era stimulus warp appears to be over...

A lot of the rest is still up in the air, though...

Pressure is mounting on the supposed "resilient" U.S. consumer. Real estate activity might be grinding to a halt as we speak, with the average standard 30-year fixed mortgage rate recently moving close to 8%. That's the highest level since the year 2000, and it's roughly triple the cost of financing a standard home loan at the early 2021 lows.

And, as Kevin wrote, the Federal Reserve will continue to closely monitor labor data as the central bank mulls over an additional increase to its bank lending rate, which eventually filters through the economy.

According to the Bureau of Labor Statistics, there were 1.51 unemployed people for every available job opening in August. That's a slight decline (if you look out to a hundredth of a percentage point) from 1.53 in July.

And as you may have picked up on, we're talking about August jobs numbers because they're the most recent ones available in this particular report... Jobs market data in general is the laggiest of lagging indicators – and frequently gets revised higher or lower later anyway.

Still, this Friday's "nonfarm payrolls" number for September, which will include an updated national unemployment rate, is a big deal for the markets. It will likely be more scrutinized by any investors weighing the prospects of further Fed policy, along with the odds of growth or recession ahead.

All roads lead to the open question of how much higher interest rates will go...

The consensus view is the economy is at or near a "cycle" peak in rates. Any shift in expectations could extend the volatility we've seen in the last two months. In addition to the labor market, inflation can still be a factor... New consumer price index ("CPI") data will be out next week.

On the other hand, any confirmation of the status quo – the labor market weakening somewhat and inflation coming down – could temper the losses in stocks that have already happened. That's because it would suggest we shouldn't expect additional rate hikes from the Fed.

As Ten Stock Trader editor Greg Diamond wrote to his subscribers today...

If there is the slightest downtick in inflation combined with a strong jobs picture – that will be a positive catalyst for stocks and bonds.

Why rates matter...

If any Stansberry Alliance members or existing Portfolio Solutions subscribers are interested in the role of shifting interest rates in the markets today, you should check out the latest edition of Portfolio Solutions, published last night.

Stansberry Research senior analyst Alan Gula, Director of Research Matt Weinschenk, and our team put together a great education. They also went more in-depth on a few ideas that you may have read here, like what's going on with interest rates and the yield curve...

As Matt covered in a section of the issue titled "An Orderly Market Decline," long-term interest rates have been rising lately while shorter-term rates have remained flatter, like we mentioned on Monday when discussing the 10-year/2-year Treasury spread.

In financial jargon, the behavior we're seeing now – and a reversion in the yield curve – is called a "bear steepener." As Matt detailed...

As you can see, 10-year rates are climbing while short-term rates remain relatively flat...

The question is, why are 10-year rates rising? It starts with inflation.

Since the Fed began raising rates in March 2022, it has promised to keep rates high until inflation subsides. So far, markets have ignored them, betting that rates would fall soon.

But when the Fed released its latest Summary of Economic Projections in September, investors finally began to take notice.

Looking out to 2024, the Fed revised its expectations to reflect better growth and a better job market. This new outlook is a major change from what it expected back in June. At that time, it estimated the federal-funds rate would drop to 4.6% in 2024. Now, it says it will keep that rate above 5%...

As we reported a few weeks ago, we started to see this shifting behavior after the latest Fed meeting and speech – helmed and delivered by the esteemed astrologer Jerome Powell.

Here is the key point to understand why rising interest rates matter. As Matt said...

With confirmation that interest rates will hover above 5% for the foreseeable future, investors are finally realizing it makes no sense to hold a 10-year Treasury bond that yields just 4.1% (as it did a month ago).

At the same time, the Treasury Department is unloading a lot of new bonds into the market to finance Uncle Sam's ballooning debt... And the Fed has been reducing its Treasury holdings as part of its effort to slow the pace of inflation.

(On that second point, by the way, the Fed has shed 14% of its Treasury holdings since a peak in the summer of 2022, yet still holds nearly $5 trillion. In context, this again displays the scope of the pandemic stimulus effort we've seen... and its lingering effects. Before the pandemic response, the Fed's entire balance sheet – which, notably, also includes trillions of mortgage-backed securities – was still lower than its Treasury holdings alone right now after a year-plus of "trimming.")

These big-time factors, a greater supply of Treasurys along with shifting market expectations and lower demand, are pushing yields higher (and prices lower) because not enough investors are as interested in longer-term bonds today as they were before.

Be sure to check out the entire Portfolio Solutions issue for more...

It also includes a conversation about when and why stock prices move in relation to changing interest rates... Alan's analysis of how companies can create real shareholder value in this environment... and updates on our various model portfolios.

Alan also talked about the impact of rising interest rates, the state of the credit markets, and how the rising cost of capital these days threatens to curtail future investment in an environment where U.S. corporate bankruptcies are already piling up. As Alan noted...

Through August, the number of U.S. corporate bankruptcies totaled 459, more than each of the prior two full years (with four months left of reporting this year). Rising bankruptcies reflect the "credit crunch" I warned about in April.

Clearly, a higher cost of capital and less credit and investment bodes poorly for the economy.

Even though investment bank Goldman Sachs recently cut its chances of a U.S. recession in the next year from 20% to 15% – and a "soft landing" has become the market consensus – the likelihood of a recession has increased, not decreased.

As always, Alliance members and Portfolio Solutions subscribers can find the latest issues of a particular strategy – Capital, Defensive, Income, Forever, Total, and Quant – at these links or under the "Portfolio Solutions" heading of our Stansberry Research website.

New 52-week highs (as of 10/3/23): CBOE Global Markets (CBOE) and Structure Therapeutics (GPCR).

In today's mailbag, a subscriber gets at a deeper meaning of theft, which we started a conversation about last week... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"Is there a difference between government giveaways and government inaction in the face of blatant theft?

"It all comes down to redistribution of wealth in multiple forms. It's silly to think that the government can anticipate the specific wants of everyone who wants. Much easier to let 'em decide on their own what to steal.

"We are not the first to encounter redistribution of wealth:

In the Carboniferous Epoch we were promised abundance for all,
By robbing selected Peter to pay for collective Paul;
But, though we had plenty of money, there was nothing our money could buy,
And the Gods of the Copybook Headings said: 'If you don't work you die.'

"From Rudyard Kipling, 'The Gods of the Copybook Headings' 1919." – Subscriber Jim W.

Corey McLaughlin comment: Jim, thanks for sharing. This poem reminds me of something a friend of mine said just this past weekend, as he spoke about the high price of homes in a particular area: "It feels like money means nothing anymore."

All the best,

Corey McLaughlin
Baltimore, Maryland
October 4, 2023