Price Discovery, RIP, by David Stockman

Once again proving that the world’s economic and financial systems are Rotten to the Core, markets have rebounded quickly from the Brexit vote that was supposed to be the end of the world, fueled by, what else, more sugar from the world’s central banks. From David Stockman at

That was quick. With nearly 85% of the Brexit loss recovered in three days and the market now up for the quarter and the year, what’s not to like?

After all, the central banks are purportedly at the ready, and, in the case of the ECB and BOE, are already swinging into action according to their shills in the MSM. MarketWatch thus noted,

Markets were boosted by reports indicating the European Central Bank is weighing changes to its bond-buying program, while “the Bank of England also said they are all in,” said Joe Saluzzi, co-head of equity trading at Themis Trading.

The European Central Bank is considering changing the rules regarding the types of bonds it can buy as part of its stimulus package to amid concerns it could run out of securities to buy under current stipulations, according to Bloomberg News. The report followed comments from Bank of England Gov. Mark Carney, who indicated the central bank is poised to further ease monetary policy to combat

Well now, by the sound of it you would think that the madman Draghi is fixing to uncork the mother of all QEs if there is a danger that the ECB will “run out of securities to buy”.

Who would have thought that the debt engorged governments of the eurozone couldn’t manufacture enough IOUs to satisfy Mario’s “buy” button? In fact, with public debt at 91% of GDP you would think that the $12.5 trillion outstanding would be enough to go around.

It turns out, however, that the operative phrase is “under current stipulations”. In a fit of apparent prudence, the ECB determined that in buying $90 billion of government bonds and other securities per month, it would only purchase securities with a yield higher than its negative 0.4% deposit rate.

That’s right. Stumbling around in their monetary puzzle palace, the geniuses at the ECB determined that subzero rates are just fine with one condition. Namely, so long as they don’t have to pay more to own German bonds, for example, than German banks are paying to deposit excess funds at the ECB.

Stated differently, the ECB apparently determined it will not go broke in subzero land even if it is driving insurance companies, pension funds, banks and plain old savers in exactly that direction.

But then comes the catch-22. The more bonds Draghi promises to buy, the more the casino front-runners scarf-up those same bonds on 95% repo leverage—-knowing that Mario will gift them with a big fat gain on their tiny sliver of capital at risk.

That drives bond prices ever higher and yields lower, of course. At length, the stampede to buy today what Mario is buying tomorrow has driven yields below the negative 0.4% cutoff point for an increasing share of the German yield curve.

To continue reading: Price Discovery, RIP

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