Baltic Dry Index. 580 unch. Brent Crude 57.87
LIR Gold Target in 2019: $30,000. Revised due to QE programs.
There can be few
fields of human endeavour in which history counts for so little as in the world
of finance. Past experience, to the extent that it is part of memory at all, is
dismissed as the primitive refuge of those who do not have the insight to
appreciate the incredible wonders of the present.
J. K. Galbraith.
No words needed from a dinosaur amateur like me. Mr Stockman covers the Great
Bond Bubble beat all too well. We all know how it ends, just not when or why. But
we have a pretty good idea of the consequences. Stay long fully paid up
physical gold and silver as insurance against the dreadful bust to come. All
malinvestment ends badly. But malinvestment on this unprecedented scale will
end the Great Nixonian Error of fiat money.
None Dare Call It Fraud—–Its Just A “Savings Glut”
by David Stockman •
They were jawing again this
morning about the low “natural rate” of interest on bubble vision,
implying that the workers of the world have succumbed to an atavistic fit
of wild-eyed thrift. Gosh, the world is so inundated in
a savings glut, averred Wall Street economist Ed
McKeon, that the interest rate would be near zero—–even without the
concerted action of the central banks.
Hogwash! Since the turn of the
century the major central banks have purchased upwards of $15 trillion
worth of government bonds and other fixed income assets. Yes, these reckless
money printers have suspended common sense, but they have not repealed
the law of supply and demand, nor even suspended its relentless operation for a
nanosecond.
So in adding massively to
“demand” for something that sells at a price (the interest rate), the big fat
bid of the central banks has caused fixed income markets to
clear at much higher prices (lower yields) than would
otherwise be the case. That’s just economics 101.
By contrast,
were the market dependent solely upon the savings
of America’s hand-to-mouth middle class, Europe’s legions of
socialist pensioners, Japan’s mushrooming retirement colony or the millions of
former peasant girls who labor for comparatively meager in Foxcon’s sweatshops,
one thing would be certain: There would not be trillions of
government bonds trading at negative nominal interest rates this very
moment, or tens of trillions trading close to the zero bound and therefore at
negative rates after inflation and taxes.
----Secondly, by driving the front-end of the yield curve to zero and pegging it there for upwards of 80 months now, the central banks conjured a second wave of bond demand from financial nothingness. To wit, zero cost repo credit and related forms of carry trade funding.
When the fast money speculators
decide to buy today what the central banks promise they will be buying for
months or years to come under QE, they don’t exactly dig into their idle cash
balances to fund the purchases. Actually, they buy the bonds first and then
post them as collateral for a 95 cents on the dollar advance at less than 10bps
of interest.
In other words, ZIRP in the
front-end money markets generates new credit-financed demand at the middle
and back-end of the bond curve, thereby further goosing the price of these
securities. And where did the repo lender get the cash to advance to the bond
speculator? Well, more often than not by re-hypothecating
the stocks and bonds in their customers trading accounts, which securities
had undoubtedly been purchased on prime broker margin in the first place.
Yes, there is tiny slice
of “equity” way back there somewhere in the daisy chain of securities
based credit, but its thin gruel and exceedingly difficult to nail down.
And why not? The central banks have eliminated interest rate risk
from the repo market entirely by promising to keep money market rates
pinned to the zero bound indefinitely. And, in the event that they should
ever permit overnight rates to rise by even a smidgeon, they have
effectively eliminated even that risk via “forward guidance”.
The latter is a device of
such astounding stupidity that it could have only been invented by Keynesian
academics and apparatchiks. By telling the casino that rates will not even move
by 25 bps without months of advance warning—-they have turned the repo
market into a venue of legalized larceny. If the cost of carry can’t go up
except upon published schedule, then prices of the carried assets
are not likely to go down because there is no risk that leveraged gamblers
will have to suddenly liquidate their positions.
Folks, that’s why the world bond
market is the mother of all bubbles. Bond prices are literally being levitated
by a daisy chain of securities credit that could not possibly exist in an
honest free market. If money market rates could gyrate by hundreds or even tens
of basis point daily, as they did prior to the age of Keynesian central
banking, no one would carry massive asset positions on 25:1 leverage. Nor
would money market lenders accept collateral at these extreme advance rates if
bond prices were at risk of massive position dumping in response to rate
changes in the money market.
In short, the planet’s monumental
bond bubble is the bastard off-spring of ZIRP and QE; it is the inevitable
byproduct of the complete annihilation of honest price discovery by the
central banks. Is there any wonder, then, that the central bankers of
the world are petrified to get off the zero bound?
---- But the real dope is surely Mario Draghi. Since the day of his “whatever it takes” ukase 32 months ago, European government bond prices have climbed straight up without respite. Indeed, in the past week, quasi-bankrupt Spain issued two-year notes with negative yields and punters fleeing Draghi’s destruction of the Euro brought 10-year Swiss government debt that is guaranteed to cause investors losses if held to term.
In that context, the path of
the Italian 10-year bond shown below would be considered forensic evidence
in a fraud trial. The relentless bid of the front-runners and repo
gamblers is written all over the graph because there was not a single fiscal or
economic fact from the real world that could have caused the Italian bond
to soar in this manner.
Indeed, the
Italian economy remains mired in no growth stagnation, its public debt ratio
continues soar and for all practical purpose its government has
ceased functioning. Nevertheless, there has been a frenzy of Italian
bond-buying during the last 30 months because Mario has promised to prop-up the
market with his own massive bid during the next 20 months.
So the question recurs. Where is
the savings glut in all this? Yes, the economy of Europe has been stagnant for
7 years but not because there has been an outbreak of thrift. In
virtually every Eurozone country the household savings rate has
actually fallen since the 2008 crisis. In the case of Italy, for example,
it has plunged from 8.5% in 2008 to 4.6% last year, according to OECD data.
Likewise, the savings rate in
Spain has dropped from 11.5% before the crisis to 4.3% last year; in Belgium it
has fallen from 11.5% to 6.1% over the same period; and even in
Germany the household savings rate is down from 11.5% to 9.2% during the
last six years.
No, there isn’t a savings glut in
the world; there is an outbreak of destructive central bank bond buying and
money market price pegging that is virtually destroying the world’s bond
market.
More
“It is difficult not to marvel at the imagination which was implicit in this gargantuan insanity. If there must be madness something may be said for having it on a heroic scale."
J. K. Galbraith. The Great Crash: 1929.
At the Comex silver
depositories Friday final figures were: Registered 63.24 Moz, Eligible 111.83
Moz, Total 175.07 Moz.
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