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We turn our attention to the financial world…the world of prices.  

Executive Summary: They dance around too.

Forbes:

Oil Prices Plunge As Economic Woes Intensify—Here's Why That Means Gas Prices Could Soon Fall Below $3 Per Gallon

Oil prices plummeted to 10-month lows Monday morning after stark warnings from Chinese officials shed light on the nation's increasingly worrisome Covid outbreak—highlighting the uncertainty shrouding the global economy but also fueling hopes that gas prices may fall below $3 a gallon for the first time in 18 months.

With oil prices tumbling more than 18% this month, the nation's average gas price has fallen in tandem, shedding nearly 12 cents from a week ago to $3.64 per gallon, GasBuddy reported Monday.

What’s going on? What happened to inflation?

Lakes to Louisiana, New England and the Carolinas, the North American Electric Reliability Council said in its seasonal assessment Thursday. Severe weather may stress grids by causing demand to soar while supplies of natural gas, coal and back-up fuel oil are all tight, leaving little room for error, according to the report.

And look at the rockin’ and rollin’ in the used car market. Bloomberg:

Online car dealer Carvana Co.’s shares are careening toward an all-time low as investors grow more concerned about the continuing decline in used-vehicle prices.

The price of the company’s stock fell as much as 14% to $6.90, on pace to close at a record low. Carvana, which was once touted as a disruptor in the used-car dealer industry for its online sales, has seen recession-wary investors flee this year from risky and expensive growth stocks. 

Carvana (CVNA) is down 97% from the top.  

S&P earnings are down 10%, year-to-year.

Too Kind, Too Kind

In housing, too, rising interest rates and falling prices are disrupting the disruptors.Zillow, for example, has been cut in half from its February high. (Joel has more on the Zillow story, below.) The median price of an existing house has dropped 8% since June. And building permits hit a 26-month low in October.

Other price news: Fertilizer is down 40% since March. Cranberries are down 14%. Global freight rates have dropped 73% from their peak. 

But the price we watch most closely is the price of credit. There, it was the Fed who disrupted the normal marketplace by holding rates below zero, in real terms, for more than 10 years. Normally, prices dance to tunes called by the real economy. But in the interest rate market, it goes the other way; the Fed fiddles interest rates, and arms and legs start shaking and shimmying all over the country. 

Fed governors were so happy when they could hold their key rate down…and make everyone at the party happy too. But excess generosity begat excess debt…especially of the junk variety. And now, it’s the Fed that is being disrupted.

The first leaf fell back in the summer of 2020 when the yield on the 10-year treasury hit a bottom below 6/10ths of a percent. Now, a chill wind blows the yield up towards 4%.

At that rate, the federal government gets disrupted, too. The 10-year Treasury is the basic brick of the whole capital structure. And if the entire edifice of federal debt now in private hands – $24 trillion worth – had to be refinanced at 4%, the resulting outlay would be more than the defense budget.

But everything takes time. Debt may be marked to market every business day, but it is only refinanced as it matures. Federal debt has an average maturity of 6 years…so about $12 trillion will have to be rolled over before 2028.  

This, along with trillion-dollar deficits, will most likely force interest rates higher still. As the financing and re-financing continues, yields will keep rising. By 2025, US 10-year Treasuries could easily yield 10% or more…and millions of households and businesses would be bankrupt. Who knows what cranberries will cost then?

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