Shock waves have been rumbling through the global bond market in the last few days. On April 17 the yield on the 10-year German bund pierced through the 5bps level, but yesterday it tagged 100bps. That amounted to a 20X move in 39 trading days.
It also amounted to total annihilation if you were front running Mario Draghi’s bond buying campaign on 95% repo leverage and didn’t hit the sell button fast enough. And there were a lot of sell buttons to hit. The Italian 10-year yield has soared from a low of 1.03% in late March to 2.21% last night, and the yield on the Spanish bond has doubled in a similar manner.
Needless to say, this is not by way of a lamentation in behalf of the euro-bond speculators who have had their heads handed to them in recent days. After harvesting hundreds of billions of windfall gains since Draghi’s mid-2012 “whatever it takes ukase” they were overdue to get slapped around good and hard.
Instead, what we have here is just one more striking demonstration that financial markets are utterly broken. The notion of honest price discovery might as well be relegated to the museum of financial history.
The exact catalyst for yesterday’s panicked global bond sell-off, apparently, was Draghi’s public confession that although the ECB would stay the course on its $1.3 trillion QE program, it cannot prevent short-run “volatility” in the trading pits.
Why that should be a surprise to anyone is hard to fathom, but it does crystalize the “look ma, no hands” essence of today’s markets. The trading herd goes in the direction enabled by the central banks until a few dare devils finally fall off their bikes, causing an unexpected pile-up and inducing the pack to temporarily reverse direction.
Thus, it is not surprising that a few traders got caught flat-footed in recent days. In the case of the insanely over-valued Italian 10 year bond, for instance, the price went straight up (and the yield straight down) for nearly 33 months.
What was happening during that interval, of course, had nothing to due with the fundamentals. Italy’s real GDP was actually 3% lower in Q1 than it had been at the time of Draghi’s 2012 pronouncement.
Likewise, during the interim its political system has lapsed into complete paralysis, and its public debt ratio to GDP has continued to rise. Among major DM economies its crushing debt burden is exceeded only by that of Greece and Japan.
The Italian job engineered by Draghi, however, merely illustrates the universal global condition. Namely, financial systems have been transformed into central bank managed gambling dens where prices have been massively falsified by ZIRP and QE, and where short-term trading movements are entirely capricious wavelets that bear no rhyme or reason or any relationship to real world economic conditions.
Accordingly, the financial casinos are the most dangerous, unstable and destructive institutions on plant earth. Anyone who values their accumulated wealth would be well advised to get out of harm’s way, and the sooner the better.
After all, there is nothing unique about the euro bond market. The carnage visited upon it in the last few days can strike anywhere; it amounted to nothing more than a momentary stampede of the trading herd that was triggered by the loose phraseology of a clueless central banker who had previously incited a monumental bubble in the euro bond markets.
In that regard, the US treasury market is every bit as vulnerable to pancaking in response to a central bank mis-step. As it was, the spillover from Europe result in an upward lurch of the 10-year treasury note from a yield of 2.09% five days ago to 2.43% yesterday. Self-evidently that whipsaw had absolutely nothing to do with developments on the US fiscal front or American economy.
Indeed, the US treasury market — the single most important securities market in the world — has been untethered from the fundamentals for years now. That’s partly owing to the Fed’s massive direct purchases under QE ($3.5 trillion of treasuries and GSEs since September 2008), and also its complimentary enablement of carry trade speculators who piled into the belly of the curve every time Bernanke hinted that more QE was hovering just ahead.
And why not. ZIRP is the mother’s milk of rampant speculation and the mis-pricing of securities carried on zero cost repo money. On the fiscal front, there has been zero improvement in the present value of the nation’s dismal long-run fiscal outlook since the fall of 2008. Uncle Sam’s acknowledged balance sheet debt has soared from $9 trillion to $18 trillion and the $100 trillion of unfunded entitlement liabilities have accreted by even more.
Likewise, there is nothing in the macro-economic firmament — GDP, jobs or the so-called full-employment gap —– that explains the downward direction of the 10-year yield or the undulating wavelets along the way. This is central bank intrusion and suffocation of the debt markets pure and simple.
But here’s the thing. The dozen or so people running the worlds central banks and related institutions have no idea what they are doing, and for the most part are academics and apparatchiks who are completely ignorant about markets, to boot.
If you didn’t hear the latest emission of tommyrot from the head of the IMF, here it is. Seeing no goods and services “inflation” in a world that is drowning in excess capacity —– funded by years of central bank financial repression —— Christine Lagarde now opines that ZIRP should be extended well into 2016. That is, into its 90th month running.
There you have it. The world’s markets are on fire with financial asset inflation, but the recycled French political hack running the IMF, who apparently learned economics from the Wikipedia page on Keynes, does not even understand an obvious truth. Namely, that the single most important price in all of capitalism is the money market interest rate because its the cost of gambling stakes in the casino.
Needless to say, when you tempt gamblers with free money — and then you keep it flowing for 90 months running — you are nurturing the financial furies. Indeed, the global financial system is literally booby-trapped with freakish speculations that will erupt any day now in a manner that will make the German bund carnage look like a sunday school picnic.
According to the latest authoritative reckoning of the pre-IPO venture capital start-up pipeline, the top 20 deals — ranging from Uber, Snapchat, Pinterest, Airbnb and Dropbox through Pure Storage —– have a current valuation of $100 billion. That compares to funded cash equity of $25 billion —– almost all of which has been supplied within the last two or three years.
That’s right. The Silicon Valley punters have marked-up their own investments by 4X in anticipation of dumping them on the greater fools who have been lured into the IPO market for the third slaughter of this century. Meanwhile, the torrent of “burn rate” cash pouring into the San Francisco housing market means that slumlords are now getting rents from a bed and bath for 20 persons at $2,000 per month each.
This will end in a fiery immolation, but not just along the northern reaches of the San Andreas Fault. The systematic falsification of financial markets by the central banks have literally herded trillions worth of investable funds into the most risky precincts of the bond market in a desperate scramble for yield.
As Jeff Snider pointed out yesterday, that has resulted in the issuance of $2.8 trillion of new junk bonds, leveraged loans and CLOs (collaterized loan obligations) in just the last three years. All of these securities are drastically overvalued, and none of them are traded in markets that have even a modicum of real liquidity.
When the subprime mortgage market began to slouch towards its monumental melt-down in March 2007, outstandings totaled just $1.3 trillion. But just in this precinct of the US high yield market there is now upwards of $3 trillion of financial time-bombs ready to blow.
The fact is, the world’s financial system is saturated with financial speculations fostered by nearly two-decades of central bank credit inflation. Just since 2006, the footings of central bank balance sheets have expanded from $6 trillion to upwards of $22 trillion.
That’s all combustible monetary fuel that cannot be recalled; it can only be liquidated in the course of a monumental meltdown in the casino.
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