On April 20, just as the escalation of the Iran-Israel conflict has caused US inflation expectations to spiral out of control and the market is waiting for how Iran's attack on Israel will respond, the most dovish governor within the Fed, Chicago Fed President Goolsbee, unexpectedly supported the postponement of interest rate cuts, and just a day earlier, Fed Chairman Jerome Powell also said that there was a lack of new progress in reducing inflation at an economic forum event, reiterating the Fed's hawkish tone of "no interest rate cuts without evidence".
Then, the Federal Reserve's latest Financial Stability Report released on April 20 said that high inflation and prolonged high interest rates in the United States are considered major risks to U.S. financial stability, and regional conflicts and the 2024 U.S. election are also considered "potential sources of significant shocks."
These latest news suggest that the Fed may stay on hold for longer than originally planned, which has led to market bets that the Fed will cut interest rates by less than 50 basis points in 2024, causing the S&P 500 and Nasdaq Composite to both move lower and turn lower, and the two-year Treasury yield, which feeds the Fed's short-term interest rate outlook, also briefly exceeded 5% and was sold off violently by the market.
Immediately afterwards, UBS even said that the Federal Reserve may not cut interest rates in 2024, interest rate hikes are the real risk, and U.S. stocks may fall by more than 10%, which indicates that the U.S. stock and bond market may be detonated, and the sell-off will further accelerate At the same time, the new U.S. bonds issued by the U.S. Treasury will also have to pay high interest costs, which will become more certain in the context of the ongoing escalation of the Iran-Israel conflict.
According to the US media CNBC reported on April 20, now the Israeli cabinet of ministers on Iran is caught between restraint and retaliation, and has not yet agreed on a response to Iran, although they have reached an agreement on how Israel decides how to react to Iran and in the context of major differences of opinion to promise to respond to Iran's attack, but the Israeli cabinet meeting did not make a final decision on the response to Iran at the end of the meeting.
Immediately afterwards, Iran also said that it would respond appropriately to any Israeli action, Iran is ready to "use initiatives that have not been used so far", and Iran's deputy minister of oil has already said on the 17th that they will continue to make every effort to ensure the smooth flow of energy exports from the region.
The news added to investors' fears that the ongoing escalation of the conflict between Israel and Iran could detonate U.S. financial markets and inflation, and heightened fears that the conflict in Gaza is spreading further into the Middle East, sending oil, gold and the U.S. dollar soar.
Expectations of a Fed rate cut have weakened recently due to rising inflation data reports in the US and hawkish comments from Fed monetary policymakers, and until last month, the market was expecting up to three rate cuts this year, the first in June.
However, a series of Wall Street institutions have since pushed back the timetable for rate cuts, with Bank of America and Deutsche Bank both saying last week that they now expect only one rate cut in December. Philip Jefferson, the Fed's No. 2 man, said that the United States is "in no hurry" to cut interest rates, the economy and labor market continue to show signs of strength, and inflation remains above the Fed's 2% target.
According to data from CME Group's FedWatch tool, futures pricing currently shows less than a 50% chance of a rate cut starting in July, the interest rate market is at a hawkish tipping point, and market interest rate expectations may be higher than Fed expectations, while former U.S. Treasury Secretary Summers was more aggressive, warning the market to prepare for the Fed not to cut rates this year, and the U.S. bond market seems to be pricing in a prolonged increase in U.S. interest rates, with the benchmark 10-year Treasury yield rising to 4.6% for four consecutive days Around the half-year high, the two-year Treasury yield also hit a six-month high, suggesting that the US Treasury will be very volatile in the next larger bond issuance program in May.
And on April 15, the US credit rating agency Fitch said that the interest burden will continue to increase due to the increase in the US debt burden and the impact of high interest rates, and is causing global investors to worry about the US debt crisis, making investors less willing to hold US long-term bonds. Another U.S. billionaire investor, Bridgewater founder Ray Dario, predicts that 2028 could be the year when the U.S. debt crisis finally erupts.
In this regard, the US media CNBC quoted a report by the head of investment strategy at State Street Bank that if the Federal Reserve does not take interest rate action as soon as possible, a huge debt financing wall will expire at that time, officially detonating the wave of defaults in the United States, and the US economy may fall into a storm in 2025, and the classic monetary policy mechanism in the United States has "collapsed", which means that any changes made by the Fed will now take longer to penetrate into the real economy.
According to a report released by the Congressional Budget Office on April 16, the budget deficit in fiscal year 2024 is expected to exceed $2 trillion, or 123.4% of the country's GDP, and so far this fiscal year, the U.S. federal has borrowed $8.9 billion per working day, and the total federal debt will be close to $38 trillion by 2030.
This has led US Treasury Secretary Janet Yellen to admit in a recent congressional testimony that "34 trillion US debt is a terrible number", and the data shows that at present, US GDP needs $2.5 for every $1 of growth, and the time required for every trillion dollars of new debt has been shortened from six years at the beginning to three months today.
It is clear that the United States is borrowing more and faster than it was a year ago, but the Americans are not really going to pay off these debts, but instead will continue to accumulate more debt, more deficits, until the whole carnival becomes like a house of cards.
In this regard, well-known economist Daniel Lacalle warned that the dominance of the dollar is under threat, and unsustainable fiscal policy is destined to be blamed, as the BWC Chinese International Financial Research Team has emphasized many times on different occasions, the real mission of the Fed is to serve US federal spending and debt financing and support interest groups such as Wall Street elites, including the Fed's own interests, and inflation and unemployment are derivatives of its main tasks.
All of the above suggests that under the pressure of the U.S. budget deficit and soaring interest payments, the U.S. Treasury may run out of cash to avoid debt default sooner than expected, and the U.S. Treasury's cash to delay debt default payments may be depleted as soon as June this year, earlier than the U.S. Treasury Secretary and Congress expected。
Immediately afterwards, the Bank of America once again warned the Federal Reserve in a report published on April 20 that the Federal Reserve was about to detonate U.S. bonds, and even, the U.S. financial website ZeroHedge also said that recently, there have been cities in the United States due to debt and inflation crises that have suddenly erupted thousands of billionaire migration events, and the real American version of Exodus has been staged.
According to a report by the U.S. financial website Zero Hedge on April 20, there have been large-scale exodus of American billionaires in U.S. cities due to debt crises, high fiscal deficits, inflation crises and expectations of higher taxes on the rich, etc., and the real American version of "Exodus" is staged, because most cities in the United States have huge and unsustainable debt deficit burdens and the reason why the U.S. authorities propose higher taxes on the rich in the 2024 fiscal year budget plan.
According to a financial report released by Truth in Accounting, a think tank in the U.S. accounting industry, the U.S. federal financial situation has further deteriorated by more than $20 trillion in fiscal year 2024. Most of the federal debt can be attributed to $68 trillion in Medicare commitments and $48 trillion in Social Security, but U.S. authorities have not allocated any funds to fund those commitments.
In particular, the report notes that 50 of the 75 largest U.S. cities, including major cities such as New York, Washington, D.C., San Francisco and California, are currently running large deficits and drowning in debt. For example, if the City were to distribute these deficits to all taxpayers, that would add $56,000 to each New Yorker's debt.
The US media said that in recent months, thousands of millionaires have fled Chicago, the largest city in Illinois, and these rich people have basically flocked to Florida, Arizona and other states to evacuate some states or cities in the United States that may have debt bankruptcy, including even large cities such as New York, Washington D.C., San Francisco and California.
In addition to Illinois and New York, California, Massachusetts and New Jersey are the four states that have lost the most wealthy people in the United States, according to data released by the IRS on April 19. For example, thousands of billionaires have fled the United States in New York and Chicago, the largest city in Illinois, since the banking crisis in March last year, many of them disappointed with what is happening in the American economy.
In this regard, Stanley Druckenmiller, a legendary investor known as "Soros's comrade-in-arms", continued to sing short on the U.S. economy in a report published on April 17, warning that the current financial crisis facing the United States is worse than imagined, and the actual debt burden of the United States may be close to $200 trillion.
Immediately afterwards, Ernst & Young Chief Economist Gregory Daco said that in the past two weeks, as investors, including global central banks, sell off and possibly permanently reduce their holdings of U.S. Treasuries, the value of U.S. Treasuries will fall, and U.S. overdue payments will disrupt trillions of dollars in global short-term dollar debt flows, causing the 10-year U.S. Treasury yield to soar above 5%, thus once again hitting the U.S. bond market and the balance sheets of more than 700 U.S. banks that have already incurred huge losses.
This is a reminder to U.S. bond holders that U.S. Treasuries are becoming increasingly volatile, boosting investors' confidence to stay away from U.S. Treasuries, which the U.S. Treasury Department held in April at a record dismal auction of $135 billion in Treasury bonds in April.
In this regard, Goldman Sachs analyst Zach Pandel further believes in a report published on April 17 that the status of U.S. Treasury bonds as an anchor of global asset prices relative to gold in the next few years may continue to decline, as the United States uses the dominance of the U.S. dollar to implement some financial sanctions will weaken the channel function of the U.S. dollar, but also prompted the world's major U.S. debt creditors, including U.S. economic allies, to begin the process of liquidating U.S. bonds。
The latest report on international capital flows released by the U.S. Treasury Department on April 18 also shows that as of February this year, although private funds are pouring into the U.S. Treasury market, overseas official funds have sold a record amount of U.S. securities and bond assets in the past 12 months, amounting to $357.1 billion, and the withdrawal rate has reached the record of the financial tsunami in the United States in the third quarter of 2018。
In the 16 months to March, Israel, a traditional ally of the United States, sold $26.8 billion of U.S. bonds to defend its currency and financial markets, unexpectedly and by 39% compared to its peak of $69.1 billion in 2021, the data showed As early as April last year, the Bank of Israel had begun to de-dollarize the foreign reserves, and for the first time included the RMB in the country's foreign reserve assets, and the increased share of RMB reserves was exchanged for selling dollars.
In this regard, the Bank of Israel said that under the strong dollar cycle, the country will be ready to sell up to $30 billion of foreign exchange reserves in the open market to maintain the stability of the local currency, which shows that Israel is speeding up to adapt to the new changes in the global de-dollarization process, and has also begun to join the ranks of accelerating the sale of US bonds to further defend the country's financial security. (ENDS)