Category Archives: Financial markets

The Return Of The Bond Vigilantes, by Doug Kass

The bond vigilantes can’t prevent governments from borrowing, but they can make it more painful for them. From Doug Kass at Seabreeze Partners via zerohedge.com:

  • With mounting private and public debt, the U.S. economy is poorly positioned to reach consensus economic growth expectations
  • The Bond Vigilantes are saddled up and ready to make a comeback – and it’s market unfriendly

“I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.” 
– James Carville

In “The Great Bond Massacre” from late 1993 to late 1994, the yield on the US ten year note rose from 5.2% to 8.0% as investors grew fearful about the implications of large federal spending increases.

For the first time in years the bond vigilantes, “a self-appointed group of citizens – the bond vigilantes – who undertake law enforcement in their community without legal authority, typically because the legal agencies are thought to be inadequate” have surfaced – with the ten year U.S. note yield now approaching three percent.

This morning the yield on the ten year U.S. note has hit a new four year high of 2.99%.

As I see, though rates still appear low by historic standards – the sizable climb in debt loads (in both the private and public sectors) and the continued fiscal profligacy – will likely exacerbate the impact on the recent rise in yields by providing a governor to economic growth and by stirring a number of other adverse outcomes:

Ballooning Deficits and A Large Supply of Treasuries Loom: A $1.2 trillion 2018 U.S. deficit (and borrowing requirement) coupled with $600 billion of the Fed’s Quantitative Tightening means that there will be, according to David Stockman’s most visual phrase, “the bond pits will be flooded with $1.8 trillion of ‘homeless’ government paper.” Never in the history of modern finance has a near decade old domestic economic recovery faced a financing hurdle that represents almost nine percent of GDP. How large is this hurdle relative to history? At the top of the last U.S. economic expansion, the Federal Deficit was 87% lower (at $160 billion) – which represented only one percent of U.S. GDP at a time that the Fed was still buying Treasuries (in 2007 the Fed purchased $15 billion of Treasuries) and not selling them (or letting them rollover without replacing). So, this time around, the flow of Treasuries will represent supply that is nine times larger (relative to GDP) than was the case in 2007.

To continue reading: The Return Of The Bond Vigilantes

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The Pension Crisis Gets A Catchy Name: “Silver Tsunami”, by John Rubino

Promises, promises. Inadequate contributions, ever-escalating benefits, and an aging baby boomer population are behind a pension crisis that’s becoming more apparent by the day. From John Rubino at dollarcollapse.com:

Pensions really are in crisis, but the story is so full of large numbers, obscure projections, and dry terms like “unfunded liabilities” that not many people are paying attention.

The same is true for a lot of other big trends out there, which is why those sounding the alarm eventually settle on pithy/scary (if not always accurate) terms to get people’s attention. Global warming, for instance, or nuclear winter.

Now the pension crisis may have found its hook:

‘Silver Tsunami’ hits as pension costs devour California school budgets

(San Francisco Chronicle) – What happens when state funding improves, but local school budgets get worse? And how did we get into this situation in the first place?

It’s simple. School systems are getting hammered by the rising costs of pension and health care commitments. Meanwhile, they are being pinched by external factors including declining student enrollment, increased competition and frozen federal funding.

California is not an anomaly. Districts throughout the nation are facing the same squeeze.

So why isn’t anyone paying attention? Three main reasons:

Money is boring: And only boring people like chief financial officers talk about money and use phrases like “unfunded liabilities.” Interesting, cutting-edge people talk about “disruptive innovations” like personalized learning, or anything with the word “maker” in it.

Money is politically messy. Everyone wants funding for their favorite education project. In this zero-sum world, no one wants to talk about making tough choices. Even fewer want to discuss sensitive topics such as pension and health care liabilities.

Education finance has never been part of our nation’s education wars. Most of the opinion makers in education are like the Great Houses of Westeros in the HBO series “Game of Thrones.” They are much happier fighting each other to the death about issues like unions and charter schools than focusing on the more powerful forces that could destroy them all.

In “Game of Thrones,” that force is the White Walkers. In education, it’s the “Silver Tsunami” — the tens of billions of dollars in pension and other post-retirement benefits guaranteed to retirees.

To continue reading: The Pension Crisis Gets A Catchy Name: “Silver Tsunami”

This is Not a Market, by Raúl Ilargi Meijer

A supposed market in which the government intervenes to suppress price discovery is not a market. From Raúl Ilargi Meijer at theautomaticearth.com:


René Magritte La trahison des images 1929“[Price discovery] is the process of determining the price of an asset in the marketplace through the interactions of buyers and sellers”, says Wikipedia. Perhaps not a perfect definition, but it’ll do. They add: “The futures and options market serve all important functions of price discovery.”

What follows from this is that markets need price discovery as much as price discovery needs markets. They are two sides of the same coin. Markets are the mechanism that makes price discovery possible, and vice versa. Functioning markets, that is.

Given the interdependence between the two, we must conclude that when there is no price discovery, there are no functioning markets. And a market that doesn’t function is not a market at all. Also, if you don’t have functioning markets, you have no investors. Who’s going to spend money purchasing things they can’t determine the value of? (I know: oh, wait..)

Ergo: we must wonder why everyone in the financial world, and the media, is still talking about ‘the markets’ (stocks, bonds et al) as if they still existed. Is it because they think there still is price discovery? Or do they think that even without price discovery, you can still have functioning markets? Or is their idea that a market is still a market even if it doesn’t function?

Or is it because they once started out as ‘investors’ or finance journalists, bankers or politicians, and wouldn’t know what to call themselves now, or simply can’t be bothered to think about such trivial matters?

Doesn’t a little warning voice pop up, somewhere in the back of their minds, in the middle of a sweaty sleepless night, that says perhaps they shouldn’t get this one wrong? Because if you think about, and treat, a ‘thing’, as something that it’s not at all, don’t you run the risk of getting it awfully wrong?

To continue reading: This is Not a Market

Winter is Coming (Part Two), Jim Quinn

Part Two of Jim Quinn’s series on the arrival of the Fourth Turning. From Quinn at theburningplatform.com:

“Don’t think you can escape the Fourth Turning the way you might today distance yourself from news, national politics, or even taxes you don’t feel like paying. History warns that a Crisis will reshape the basic social and economic environment that you now take for granted. The Fourth Turning necessitates the death and rebirth of the social order. It is the ultimate rite of passage for an entire people, requiring a luminal state of sheer chaos whose nature and duration no one can predict in advance.” – Strauss & Howe – The Fourth Turning

In Part One of this article I laid out the reasons for Gray Champions arising to meet challenges during crisis periods in history. We are ten years into this Crisis and I have been pondering where we go from here. The plot line of the Game of Thrones has opened my eyes to the fact there isn’t just one Gray Champion during a Fourth Turning. During the Civil War, Jefferson Davis and Robert E. Lee were Transcendental prophet generation representatives of the Confederacy. Abraham Lincoln and William Tecumseh Sherman were Gray Champions of the Union.

These were men who would do anything to further their cause, from ordering thousands of men to their deaths on Cemetery Ridge, to burning down cities, to suspending the writ of Habeas Corpus, and seceding from the Union. They were destined to brandish their terrible swift swords in achieving total indisputable victory. But, we know only one side could win.

During the World War II/Great Depression crisis FDR is known as the Gray Champion who took drastic measures on the economic front with his New Deal and sent 16 million young men into battle on a scale never seen in history. Douglass MacArthur commanded many of those men in battles to the death across the Pacific. What is less discussed is the fact Winston Churchill and Joseph Stalin were also members of the Missionary prophet generation and were the Gray Champions of their nations.

To continue reading: Winter is Coming (Part Two)

China’s History of Financial Warfare and The 4 Options They Can Use To Win, by Adem Tumerkan

Wars can be fought on many fronts, including the financial front. Does China have a financial war strategy? From Adem Tumerkan at palisade-research.com:

Last Friday I published an article highlighting the emerging Trade War between China and the United States. As I wrote then, you have the opportunity to position yourself correctly and benefit from their fighting.

But first, I think it’s necessary to take a deeper look at China and understand their strategy. I don’t think many realize what they’ve been up to for the last 20 years while preparing for any potential trade wars.

Also, I list the four things China could do in retaliation of a trade war. All four options would be devastating to the U.S. and global markets.

Let’s look at some history. . .

It started in the late 1990’s.

China realized that modern warfare wouldn’t follow the same path as traditional wars –  swarming troops and tanks and planes into other countries and shooting at one another in attempt to occupy their land.

There’s this little known book that was published two decades ago and explains all the pieces in China’s strategy. . .

The book is called Unrestricted Warfare by Qio Liang and Wang Xiangsui. Both men were Colonels in the air Force for the Chinese military.

In the book, they write about the collapse of Asian economies in 1997 – what’s known as the ‘Asian Contagion Crisis’ – when U.S. hedge funds “attacked” the currencies of Southeast Asia.

This to them was an example of the new generation of warfare. . .

What we call Financial Weapons of Mass Destruction (F.W.M.D).

We’ve seen the U.S. engage in Financial Warfare by using sanctions on countries that don’t play ball with us. An example of this type of warfare are the economic sanctions imposed against Iraq, Iran, Russia, and North Korea.

Cutting them off from world trade, the SWIFT interbank money transfer systems, and curbing their debt markets are some of the weapons used in financial warfare.

After witnessing the Asian Contagion Crisis, China’s military was one of the first to adopt a financial war strategy – years before the U.S. did.

 

To continue reading: China’s History of Financial Warfare and The 4 Options They Can Use To Win

Hot War and Cold Markets, by Raúl Ilargi Meijer

There’s something incongruous about the prospect of a full-fledged war in the Middle East and lofty asset prices. From Raúl Ilargi Meijer at theautomaticearth.com:

This is turning into a comedy. A black comedy, for sure, but still. As both the Skripal novichok ‘poisoning’ case in Britain and the ‘chemical attack’ in Douma, Syria fall flat on their faces on a total and absolute lack of evidence, it’s becoming clear that western ‘authorities’ are not at all planning to let go of the privilege that in times gone by allowed them to claim whatever they wanted and demand to be believed.

And despite the insane amounts of spying that underlies their business models and will lead to their demise(s), here is where social media do play a decisive role. See, if you’re an ‘authority’, there’s nothing you would rather do than to close down those social media that let people spread news that contradicts and/or doubts what you just said, and undermines that privilege. But that also would mean you can’t spy on them anymore through social media. A toss-up?!

Whatever the outcome will be, it’s obvious that Donald Trump is having war talks with his military and closest advisers. And they can basically tell him anything, he’s not a military man. Which is fine, Lincoln wasn’t either. But it does mean he’s vulnerable to narratives and briefings that are simply not true. Lincoln went to great lengths to surround himself with people who could trust.

What about Trump? Does he know that, as Paul Craig Roberts said on Twitter yesterday ..

The Russians know that they can, at will within a few minutes, sink the entire US fleet, destroy every US airplane & ship in the ME & within range of the ME, completely destroy all of Israel’s military capability & wipe out the military of the two-bit punk state of Saudi Arabia.

.. or do they keep that from him? Because if he did know, why have this entire circus going on? Why did the King of Twitter yesterday threaten with his new and shiny toys and then today switch to:

Never said when an attack on Syria would take place. Could be very soon or not so soon at all! In any event, the United States, under my Administration, has done a great job of ridding the region of ISIS. Where is our “Thank you America?”

To continue reading: Hot War and Cold Markets

The Deep State Closes In On The Donald, Part 1, by David Stockman

Has the Deep State taken Trump hostage. David Stockman thinks so. From Stockman at davidstockmanscontracorner.com:

Perhaps we have missed something: Like the possibility that the canyons of Wall Street are actually located on another planet several light years from earth!

Otherwise, how can you explain the equipoise of a stock market sitting at the tippy-top of a nine-year bubble expansion and confronted with the potential outbreak of World War Three?

Folks, like some alien abductors, the Deep State has taken the Donald hostage, and with ball-and-chain finality. Whatever pre-election predilection he had to challenge the Warfare State has apparently been completely liquidated.

Trump’s early AM tweet today, in fact, embodies the words of a man who had more than a few screws loose when he took the oath, but under the relentless pounding of the Imperial City’s investigators, partisans, apparatchiks and lynch-mob media has now gone stark raving mad. To wit:

“….Russia vows to shoot down any and all missiles fired at Syria. Get ready Russia, because they will be coming, nice and new and “smart!” You shouldn’t be partners with a Gas Killing Animal who kills his people and enjoys it!

Yes, maybe Wall Street has figured out that the Donald is more bluster than bite. Yet when you consider the broader context and what the Russian side is now saying, it is just plain idiotic to own the S&P 500 at 24X. After all, earnings that have been going nowhere for the past three years (earnings per share have inched-up from $106 in September 2014 to $109 in December 2017), and now could be ambushed by a hot war accident in Syria that would rapidly escalate.

Indeed, did the robo-machines and boys and girls down in the casino not ponder the meaning of this message from the Kremlin? It does not leave much to the imagination:

#Russian ambassador in beirut : “If there is a strike by the Americans on #Syria , then… the missiles will be downed and even the sources from which the missiles were fired,” Zasypkin told Hezbollah’s al-Manar TV, speaking in Arabic.

Sure, the odds are quite high that the clever folks in the Pentagon will figure out how to keep the pending attack reasonably antiseptic. That is, they will bomb a whole bunch of places in Syria where the Russians and Iranians are not (after being warned); and also deploy stand-off submarine platforms to launch cruise missiles and high-flying stealth aircraft to drop smart bombs, thereby keeping American pilots and ships out of harm’s way.

To continue reading: The Deep State Closes In On The Donald, Part 1