by Pater Tenebrarum, Acting Man:

… Something Wicked this Way Comes

Last week the price of gold went up $18, and that of silver 6 cents. Looking at the ongoing stock market drop, someone asked us if this is “it”. So far in Q4, the stock market (S&P 500) has now lost more points than in any quarter during the great financial crisis (though so far less as a percentage). Is this it, will gold hit $10,000?

There is certainly something more serious happening than at any time post-2009. We mean: after all this time of falling rates and zero (short-term) rates, the Fed presumes to hike rates. They are trying to head something off which is not occurring. Commodity prices aren’t rising (witness the big drop in oil, again).

Consumer prices, especially in some urban markets may be rising. Taxes, regulations, zoning, permitting, compliance, inspections, user fees, environmental impact studies, labor law, and litigation can push up retail prices. However, they are not a monetary phenomenon. The Fed cannot do anything about them, and should not try.

Meanwhile, everyone focuses on the effect of rising rates on the US government. They should instead look to the marginal debtor. The US government is not the marginal debtor. For a good list of candidates, one could start with all the firms that the Bank for International Settlements identified as zombies in 2015.

A zombie is a corporation whose profits < interest expense. 2015 is before the Grand Interest Hike Gambit. If they were unable to service their debts even then (without borrowing more), just imagine what the change in 6-month LIBOR from 0.38% to 2.9% has done to them. Just think what it’s done to the firms that weren’t zombies then at 0.38%, but are now at 2.9%.

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