I have said it many times in the past but I’ll say it here again: Stock markets are a trailing indicator of economic health, not a leading indicator. Rising stock prices are not a signal of future economic stability. When stocks fall, it’s usually after years of declines in other sectors of the financial system.
Collapsing stocks are not the “cause” of an economic crisis, they are just the delayed symptom of a crisis that was already there.
Anyone who started investing after the crash of 2008 probably has no understanding of how markets are supposed to behave, and what they represent to the rest of the economy. They’ve never seen markets operating without interference and stock prices moving freely. Central bank meddling, which started as a “last ditch effort” to save the global financial system at any price has now become business-as-usual. Worldwide, stocks surge when investment banks anticipate Federal Reserve easing, the so-called and often-forecast “pivot” from its current monetary-tightening program back to the good old days of endless free money. And stocks plunge every time a member of the Federal Open Market Committee (FOMC) announces that inflation is still too high, and the Fed has to keep fighting it.
Most market participants no longer have any understanding of fundamentals. Robinhood day-traders and Redditors don’t see stocks as a fractional claim on the future profits of a business – they think they’re just buying poker chips in the great Stock Market Casino where everybody always wins.
Interest rates’ spectacular ascent is due a pause, but the long term trend has shifted from the down to up. From Wolf Richter at wolfstreet.com:
So the Fed Gets Ready to Walk Away from the Bond Market, and All Kinds of Stuff Happens.
he price of the iShares 20+ Year Treasury Bond ETF [TLT], which tracks an index of Treasury securities with long maturities, dropped another 1.5% on Friday, after having dropped 2.7% on Thursday. It has plunged 21% year-to-date and 33.7% from the peak in August 2020. In return for this plunge in price, investors get a yield that has risen to 3.0%.
August 2020 marked the peak of the greatest bond-market bubble in US history. It was when the 10-year Treasury yield hit historic lows while our favorite hype mongers predicted that it would drop below zero and become negative. But this bond bubble is blowing up. And this is what the “bond massacre” looks like for investors who’d thought they’d invested in a conservative instrument, when in fact they’d bought a high-risk bet on the continuance of the bond bubble, a bet on long-term interest rates going negative. And WHOOSH went their money:
The U.S. government is functionally bankrupt and the Federal Reserve has no palatable options. From Matthew Piepenburg at goldswitzerland.com:
Below, we look at debt forces alongside supply and demand forces to help investors see (and prepare for) the darker forces within an entirely rigged end game and shifting financial backdrop.
As usual, the end game will boil down to yield curve controls and more money printing, which means more currency debasement and a central bank system that secretly (and historically) favors inflation over truth and markets over Main Street.
2018: A Template for 2023
Throughout the entire year 2018, as the Fed forward-guided rate hikes at 25 bps a pop, I warned investors of a massive year-end correction and to prepare their portfolios accordingly.
This required no tarot cards or market-timing hype.
The bond bear market isn’t coming, it’s arrived, although it’s still early days. Interest rates are going much higher (and bond prices much lower). Buy that house now. From David Stockman at internationalman.com:
If you didn’t think the $70 trillion global bond market was a train-wreck waiting to happen, surely last week’s yield surge was a wake up call. From the 2.15% close one week earlier, the 10-year yield soared to a peak of 2.50% just after mid-day last Friday; and that 36 basis point gain was, in turn, the culmination of a stunning 200 basis point rise from the cyclical low point (0.51%) recorded during July 2020.
Needless to say, an economy staggering under the weight of $87 trillion in debt, representing a record 365% of GDP, can’t take much interest rate increase in any case. But when the Fed is drastically behind the curve and will be forced to hit the brakes hard (and unexpectedly) in coming months, you are talking about a recipe for financial carnage.
The bull market in interest rates (the bear market in bonds) gathers steams. From Wolf Richter at wolfstreet.com:
Yields and rate-hike expectations spike. A rate hike now?
The probability of a 50 basis-point hike at the FOMC meeting on March 16 spiked to 90% this afternoon, based on CME 30-Day Fed Fund futures prices, after this morning’s hair-raising inflation data for January, and after St. Louis Fed President Bullard’s talk on Bloomberg. The spike in inflation is now infesting services and has spread deep and wide into the economy. A 50-basis-point hike would bring the Fed’s target range for the federal funds rate to range between .50% and 0.75% (Fed Rate Hike Monitor via Investing.com):
“There was a time when the Committee would have reacted to something like this [the hair-raising inflation report] with having a meeting right now and doing a 25 basis points right now,” said Bullard, formerly biggest dove in the house. “I think we should be nimble and considering that kind of thing,” he said.
“I don’t think this is shock-and-awe,” Bullard said about the 50-basis point hike, as markets are already pricing it in. “I think it’s a sensible response to a surprise inflationary shock that we got in 2021 that we did not expect,” he said.
It is SLL’s firmly held conviction that bonds are currently the worst investment of a very bad lot. The bond market will have many rough days during what SLL predicts will be a multi-year bear. From Wolf Richter at wolfstreet.com:
Fed’s coming tightening cycle sinks in, amid still brutally negative “real” yields, as bonds’ purchasing power gets eaten up by inflation.
Bond fireworks lit up the sky on Friday, following the release of the jobs report that dashed fervent hopes in the bond market that crummy employment numbers would cause the Fed to back off its rate-hike tango before it even gets started. Over the past few days, reports were bandied about that explained why the jobs number would be anything from dismally low to hugely negative. But the numbers were far better than expected – they were actually pretty good for all kinds of reasons – and instantly yields spiked and mortgage rates shot higher.
The two-year Treasury yield spiked 13 basispoints to 1.32%, the biggest one-day jump since the turmoil on March 10, 2020, and the highest since February 21, 2020:
The one-year yield spiked 11 basis points to 0.89%. This is up from near-0% in September last year. Over those five months, the world has changed.
The one-year yield and the two-year yield are particularly sensitive to the market’s outlook for monetary policy changes by the Fed – namely the dreaded rate hikes this year and next year, as CPI inflation has hit 7.0%.
When you’re losing money after inflation with the highest yields available in the bond market—junk bond yields—you know the bond market is seriously distorted by central banks. From David Stockman at internationalman.com:
Among all the financial market distortions and misallocations that result from the Fed’s money-pumping policies, we are hard pressed to think of something stupider and more counterproductive than negative real yields on junk bonds.
The historic yield spread over inflation of riskiest US company securities has ranged between 500 and 1,000 basis points (5–10%) or more. And for the good reason that in combination, inflation and defaults always eat deeply into the coupons so as to remind investors why it is called “junk.”
As it happened, the junk bond yield on the eve of the dotcom crash in the spring of 2000 was 12.48%, reflecting an 875basis point spread over the CPI of 3.73%.
By the eve of the Great Recession in November 2007, the junk yield had fallen to 9.15% but that still represented a healthy spread of 478basis points over the CPI, which had increased to 4.37% during the prior 12 months.
But those spreads self-evidently were not enough when the economy plunged into the tank during 2008–2009.
The reason the spread went nearly parabolic during the Great Recession is that the price of junk bonds collapsed by 26% as investors and speculators dumped them in the face of soaring losses and issuer bankruptcies that topped all previous cyclical highs (dotted line).
Needless to say, the Fed was not about to let Mr. Market have its way, nor honest price discovery to win out in the bond pits.
The Federal Reserve has its multi-trillion pound thumb on the scale. From Peter Schiff at SchiffGold.com via zerohedge.com:
You may have noticed that the financial media has started talking about inflation. But by and large, it’s not a warning. It’s reassurance. Many analysts are dismissive of any concerns raised about inflationary pressure. They often claim the bond market isn’t signaling inflation. But as Peter Schiff points out in a clip from a recent podcast, the bond market is rigged.
The narrative is that the bond markets aren’t signaling much concern about inflation. Treasury yields have risen in recent weeks with the 10-year rate now above 1%. As Peter pointed out in a more recent podcast, the upward trend does indicate some investors are starting to get nervous about inflation, and at some point, we could see “an explosive move up in interest rates.” But so far, the broader market hasn’t caught on. Even though the trend is up, yields remain historically low and they don’t exactly scream “inflation problem.”
After all, if investors were concerned about inflation, why would they be willing to loan money to the US government for 10 years at 1%?”
Typically, inflation is a major concern for lenders. If you plan to lend somebody money for 10 years, you have to consider what that amount of money will buy when you get it back. In effect, you’re giving up the opportunity to buy something with your money today in order to lend it to somebody else. You’re willing to do this because the borrower is paying you for the service of loaning him that money. But if inflation is going to eat away your purchasing power over time, you will want to charge a higher rate of interest to compensate for that loss.
The bond market may well be the canary in the coal mine for the impending financial collapse. From Wolf Richter at wolfstreet.com
Seems, inflation prospects jangled some nerves today.
The 10-year Treasury yield jumped 8 basis points today and settled at 1.04%, the highest since the wild panic days in mid-March 2020. As the yield rises, the price of that bond falls. This yield has now exactly doubled from the historic low of 0.52% on August 4, when folks were still betting that the 10-year Treasury yield drop below zero:
The 30-year yield jumped 11 basis points today to 1.81%, the highest since February 26. On March 3, as all heck was breaking loose, the yield had briefly plunged below 1% for the first time ever, and days later it was back at nearly 1.8%, in some wild and volatile panic trading. But this time, the upward trend started on August 4 and has been systematic:
The last thing that the world’s many underfunded pensions need is bear markets in either stocks or bonds. Can central banks save their bacon? From Tyler Durden at zerohedge.com:
The Organization for Economic Co-operation and Development (OECD) recently published a report showing how pension funds in OECD countries recorded a massive loss of approximately $2.5 trillion during the stock market meltdown in February through late March. Shortly, after that, central banks intervened with monetary cannons to rescue stock markets and other financial assets to avoid pension returns from going negative.
The spread of COVID-19 worldwide and its knock-on effects on financial markets during the first quarter of 2020 are likely to have reversed some of these gains. Early estimates suggest that pension fund assets at the end of Q1 2020 could have dropped to USD 29.8 trillion, down 8% compared to end-2019 [or about a $2.5 trillion loss].
The drop in pension fund assets is forecast to stem from the decline in equity markets in the first quarter of 2020. Returns, inclusive of dividends and price appreciation, were negative on the MSCI World Index in the first quarter of 2020 (-20%), and between -11% and -24% on the MSCI Index for Australia, Canada, Japan, the Netherlands, Switzerland, the United Kingdom, the United States.
An increase in the price of government bonds that pension funds own could partly offset some of the losses that pension funds experienced on equity markets in Q1 2020. Some Central Banks, such as the Federal Reserve in the United States, cut interest rates in 2020 to support the economy. The fall in interest rates may lead to an increase in the price of government bonds in the portfolios of pension funds as the yields of newly issued bonds decline. – OECD
Bloomberg’s Lisa Abramowicz pointed out in a tweet, “this report [referring to the OECD report] shows the massiveness of pension assets & points to why central banks are tethered to bailing out markets: social infrastructures depend on their not going down too much.”
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