Tag Archives: Bond Market

Hubris, by Sven Henrich

The bull markets in bonds and stocks will not go quietly into that good night. From Sven Henrich at northmantrader.com:

One day this bull market will end and the age of the central banking enabled debt bubble will be exposed for the hubris that it is and all the sins of “potential side effects” that central bankers warn about but never do anything about will come back to haunt all of us. It’ll be the age of the great unwind. Nobody will tell us in the moment when it peaks and I suspect it will not start with a bang, rather a whimper, but only end with a bang.

And this great unwind will not last a month or a year, but many years as all the excesses will have to work themselves through the system and all the systematic buy programs will turn into systematic sell programs that will be just as relentless on the way down as they were on the way up.

They very notion of the permanent can kicking we are witnessing now will reveal itself to have been a fantasy. People forget that 2019 and into 2020 came about because of systemic failure of epic proportions. The single one time central bankers tried to tighten blew up in their faces. And the Fed’s forced re-expansion of their balance sheet has now bestowed this blow-off top that has pushed asset prices the farthest distance above the underlying size of the economy that we’ve ever seen. A perversion of the financial system that has created wealth for the few not seen since the 1920s.

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As the Fiscal Doomsday Machine Powers On – Impeach the Congress, Too! by David Stockman

If bringing one’s country to fiscal ruin were an impeachable offense, you’d have to impeach the entire city of Washington. From David Stockman at lewrockwell.com:

On December 16 the gross Federal debt breached a new level to $23.1 trillion, while the net debt after $401 billion of cash weighed in at $22.71 trillion. The latter monstrous figure is notable because on June 30, 2019 it stood at $21.76 trillion.

So what has happened in the last 167 days is a $948 billion increase in the Uncle Sam’s net debt, which amounts to a gain of $5.7 billionper day – including, as we like to say, weekends, holidays and snow days.

Worse still, not a single dollar of that gain got absorbed in government trust funds. The Treasury float held by the public actually rose by $953 billion.

So why in the world do the knuckleheads on bubblevision not understand where the spiking rates and ructions in the repo market came from?

The law of supply and demand is still operative, and the US Treasury is literally flooding the bond pits with new supply. Even at the bottom of the Great Recession, Uncle Sam did not drain $5.7 billion per day from the bond market.

But nary a soul down in the Imperial City has noticed this borrowing eruption at the tippy-top of the business cycle, which now teeters on borrowed time at a record 127 months of age. Instead, this very day the Congress is busily engaged in what is a fair approximation of abolishing the election process at the heart of American democracy.

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Here’s What I’m Worried About. And It’s Not a Recession, by Wolfe Richter

The bond market is the riskiest market on the planet. When all the greater fools who think they can buy bonds with a negative interest rate and sell it to someone (a central bank) at a still greater negative interest rate discover they can’t and head towards the exits, the market move to the downside will be explosive. From Wolfe Richter at wolfstreet.com:

The locker room at my swim club has become the litmus test. When a complex topic, after years of being absent or ignored, suddenly crops up in conversation, and not just sporadically but all the time, it means that there is some kind of peaking going on. This suddenly hot topic now is a “coming recession.”

Just about everyone is talking about it. This means that fears of a recession or thoughts of a recession have now penetrated into the core of the previously recession-free zone: the swim-club locker room. It means that these recession fears might be peaking.

It makes sense. Recession-fear headlines are popping up everywhere. You cannot escape the drama. It’s not that there is a recession in the United States – far from it. It’s all about a comingrecession.

And another term has penetrated into the musty locker room at my swim club, perhaps for the first time ever in its illustrious 100-plus-year history: “Inverted yield curve.”

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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

BREAKING: Gravity Works, by Robert Gore

Are you ready for the inevitable?

Why did the stock market fall? The usual suspects are finding all sorts of “causes.” How about this one: when everyone is on the same side of the boat, driven by hope and greed or fear and loathing, the boat capsizes, no matter the economic “fundamentals” or political climate.

Since 2009 the world’s central bank’s have blown up their balance sheets and much of that newly created fiat debt found a home in equity and bond markets and cryptocurrencies. With few interruptions, most asset prices have rallied ever since.

Virtually every stock market sentiment and positioning indicator has, like the stock market itself, gone from new extreme to new extreme for months. Numerous commentators, including SLL, have been warning for months, even years. Pick a valuation measure and stocks, even after the last two weeks, are at peak valuations rivaled only by 1929, 2000, and 2007.

The only mystery was when they would give way. If they are now in fact giving way, then there’s no mystery about how bad it’s going to get. Very bad.

With the world more indebted than it’s ever been on both an absolute basis and relative to the world’s productive capacity, economies and markets are extremely sensitive to interest rates. The Treasury debt market has been the dark cloud on the horizon since short-term bill rates made their low in mid-2015. The Fed followed, as it almost always does, raising the federal funds rate target (from zero) for the first time in seven years December 2015.

That markets lead, not follow the Fed, is an inconvenient truth for the legions of commentators and analysts who routinely assert the Fed controls interest rates. It shoots a hole in a lot of theories and models. (For substantiation that the Fed follows the market, see The Socionomic Theory of Finance, Chapter 3, Robert Prechter.)

The ten-year note made its high in July 2016 and has been trending irregularly lower—and interest rates irregularly higher—since. Higher interest rates raise the cost of leveraged speculation, production, and consumption. Yet, leveraged speculators in the stock market only seem to have noticed rising yields the past couple of weeks.

Given that the government will be borrowing close to $1 trillion this year, yields are still absurdly low. Markets have been conditioned by interest rate suppression, negative yields, governmental debt monetization, QEs, central bank puts, and central banker public pronouncements to think absurdly low yields are forever. A competing hypothesis is that it’s not nice to fool Mother Nature or markets, and after nine years of this nonsense, when they blow they’re really going to blow. SLL endorses the competing hypothesis.

Small coteries of central banking bureaucrats can’t regulate or control multi-trillion dollar, yen, yuan, and euro economies and financial markets. Super-volcanic financial eruptions will expose other truths as well. Watch as rising interest rates and crashing equity markets and economies reveal central, core truths: governments are bereft of real resources, are desperate to acquire same, and will be inconceivably—by today’s standards—rapacious in doing so. That’s quite a statement, because even today they’re pretty damn larcenous.

A generalized crash will also clarify the central conflict of our time: government and it’s string-pullers, minions, beneficiaries, and cheerleaders versus everybody else. Such a characterization suggests a deepening of today’s polarization. Unfortunately, as order breaks down, it will be everybody else versus everybody else, too. Good-bye polarization, hello atomization.

And order will break down. Government always and everywhere rule by force, fraud, and intimidation, but force, fraud, and intimidation need to be paid, preferably in something that can be exchanged for groceries or shoes for the kids. History suggests that the government and central bank will depreciate (speaking of fraud) their fiat debt instruments—Federal Reserve Notes, US Treasury debt, and central bank credit balances—to their marginal cost of production, or zero.

When governments are bankrupt, their praetorians forage—a nice word for theft and extortion. They’ll be competing with hordes of foraging civilians, many of whom will be armed. In such a scenario, one identifiable group has a fighting chance, and it will involve fighting and lots of it. That, of course, is the group who have either been preparing for such a scenario for years or have the skill set and mental fortitude necessary to adapt to it. Much scorned, this group may get the last laugh, but it will be a grim one.

They overwhelmingly supported Trump. It will be a disappointment, but not a surprise, that one man is unable to reverse a collapse long in the making. However, their support for Trump indicates ideological cohesion, which will be absent from the rest of the population.

Take away the undeserved from the undeserving and you get a tantrum. Steal the earned from those who earned it and you get righteous rage. One’s a firecracker, the other a volcano. The game has been to impress upon the useful a moral obligation to support the useless, but the volcano’s about to blow, burying that obscene morality in lava and ash. Given the staggering levels of accumulated debt and promises, the useful know their talents, skills, hard work, productivity and futures have been mortgaged for the useless. This is the salient and intractable social division. No reconciliation is possible between the useful and those who believe themselves entitled to their enslavement.

The Useful and the Useless,” SLL, 3/23/17

When the government implodes, those on the receiving end of its largess are going to be united by only two things: their outrage and their inability to do anything about it. They’ll have all the solidarity of cannibals trying to eat one another.

Against that backdrop will be the group who wants to provide for itself…and knows how to do so. Individualism, self-sufficiency, and a love of freedom and inviolable liberties are not dead in America, but those who support them have been driven underground. They’ll stay underground come the collapse—advertising abilities and provisions will be an invitation to brutalization, robbery and murder—but they’ll fend off the rampaging hordes, survive, and reemerge.

Do they have to reemerge, can’t they just emerge to set things right without all the collapse and carnage? Unfortunately not. For those pinning their hopes on political education and action, what are the chances of convincing the half of the country that’s riding the government gravy train to hop off to prevent insolvency and ruin? The question answers itself. They’ll have to be pushed off.

Trump’s election was a cry of protest, and he’s ruffled some feathers. However, eight years of around-the-clock, 24/7 presidential effort couldn’t undo decades of ruinous policies, many of which Trump has actually embraced: out of control spending, deficits, debt, and empire.  Trump will be battling falling equity markets, rising interest rates, and swamp vermin.

Things have to get much worse before they can get better, but just as nothing goes up forever, nothing goes down forever. Collapse’s silver lining may be that it offers a chance for freedom and inviolable liberties to finally emerge from underground.

In the meantime, Doug “Uncola” Lynn’s recent article on The Burning Platform, “BABY STEPS: You’ve Been Woke. Now Exit the Matrix.” is an excellent wake up call and has a lot of useful information and links to other sources about preparing for the inevitable. Nobody is going to be 100 percent prepared, but there’s no excuse for being 0 percent prepared.

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Unleash The Debt: Why The Senate Budget Deal Is Sending Yields Surging, by Tyler Durden

It’s no mystery why yields are surging: supply and demand. There’s going to be a lot of government debt, and the central bank is now a seller of said debt. From Tyler Durden at zerohedge.com:

When we commented last night on the Senate’s proposed bipartisan “deficit-busting” spending deal – one which will raise spending caps by $300bn over the next two years and incorporate a suspension of the debt limit until March 2019 – we observed that “the agreement will achieve one thing – lead to a surge in US debt issuance, and – by implication – even higher yields, leading to an even steeper drop in the market, not to mention more frequent VIX-flaring episodes.

With yields jumping and stocks sliding, so far this prediction appears on target.

As a reminder, one month ago Goldman predicted that  US debt issuance would more than double, rising from $488bn in 2017 to $1,030 billion in 2018.

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Of course, now that the spending caps have been raised by $300 billion, this implications is that the US deficit will surge, and net Treasury debt supply – needed to fund the deficit – in 2018 will get even bigger, something which is duly reflected in today’s surging 10Y yield.

But how much will the proposed deal spike the US deficit by? In a note from BofA’s chief rates strategist, Mark Cabana, we find the answer:

Assuming the bill becomes law, our deficit and Treasury supply estimates will be marked higher.

Yesterday’s bipartisan Senate agreement included a deal to fund the government beyond 8 February and boost spending levels for defense and non-defense programs over the next two years. The $300bn increase over the next two years is modestly larger than we expected and caused us to raise our deficit forecasts by $35bn and $20bn to $825bn and $1,070bn, respectively, assuming the law passage (Table 1).

Not all of the cap increase will translate into direct spending in each fiscal year given actual outlays can be spread over several years. Moreover, some of the increase in the spending caps came from budget gimmicks that just shifted funding toward domestic nondefense spending from other budget provisions; this is why our deficit estimates boost is below the total cap increase. The increase in disaster relief spending was generally in line with our estimates, which did not result in any revisions.

To continue reading: Unleash The Debt: Why The Senate Budget Deal Is Sending Yields Surging

Death Star Headed for the U.S. Economy, by Bill Bonner

Unlike the one in Star Wars, there’s no way to blow up this Death Star. It will, in fact, blow up the global economy. From Bill Bonner at bonnerandpartners.com:

PARIS – “Keep your eye on Friday,” the old-timers used to say.

When the pros are worried, they sell on Friday so they can spend the weekend without sweating.

When they are confident, they buy on Friday so they don’t miss out on weekend gains (when traders engage in electronic “after-hours” trading).

Last Friday, selling pressure left the Dow 666 points lower by the closing bell. And this morning, stock markets everywhere from Tokyo to London are sliding.

Markets go up and down. This market will go down, no doubt about it. If not now, later. That would be nothing new. Hardly worth mentioning.

But there’s more to the story: In addition to plunges for stocks and bonds, the entire financial system is headed for a long, painful destruction.

So far, hardly anyone notices.

Today’s New York Times makes no mention of the Death Star headed for the U.S. economy. Instead, all we find is the typical public nonsense.

Trump did this… Russia did that… Nunes… Mueller… Israel… Poland… blah-blah. If we’re right about what is coming, none of this will matter.

But that’s the way it works.

The old-timers also say that a bear market will always try to take as many investors down with it as possible.

It would not be unusual for stocks to recover… so that investors think the danger is over. And then – whack! – a real crash.

As always, we wait to find out. We will do our best to enjoy it… trying always to understand it.

We watch. We wonder. The dots come together – slowly, slowly… then all of a sudden.

To continue reading: Death Star Headed for the U.S. Economy