Sovereign Debt

Fearing the size of Mario Draghi's bazooka (so to speak), Sweden's Riksbank has just expanded QE by SEK65 billion, marking the fourth expansion in nine months and serving notice that the beggar-thy-neighbor, monetary madness gripping DM central banks isn't likely to dissipate anytime soon.

Sweden’s Financial Supervisory Authority wants banks to reconsider the notion that all sovereign debt is risk-free. That said, there's nothing to worry about if the sovereign debt in question is issued by Sweden. And that's a relief if you're the Swedish central bank, because you've been buying a whole lot of Swedish government bonds.

When corrupt politicians do as they are told by their keepers on Wall Street and in the boardrooms of S&P 500 mega-corps....

How governments all around the world resort to absurd marketing to finance largesse

The previous Bubble was of the Fed’s making, and our central bank lost control. It became a Hobson’s Choice issue in the eyes of the Fed, and they fully accommodated the Bubble. These days, the Fed and global central bankers face a similar but much more precarious Bubble Dynamic: The Fed specifically targeted higher securities market prices as its prevailing post-mortgage finance Bubble (“helicopter money”) reflationary mechanism. This ensured that the Fed would again be unwilling to impose any monetary restraint before it would then become too risky to remove accommodation (Einstein’s definition of insanity?). In concert, global central bankers now aggressively accommodate financial Bubbles.

The uncertainties are awkward, but we’re all trapped in a gigantic mess not of our own making. As Voltaire is believed to have said, doubt may be uncomfortable, but certainty is absurd. Almost as absurd as believing that a tiny group of unelected bankers can read the runes of the global economy and manage the price of money accordingly.

Despite the intense pain they are suffering in the low price Crudedome, both the Russian and Saudi governments profess for public consumption that they are committed to their volume and market share policies. This observer believes the two countries cannot long withstand the pain they have brought upon themselves - and this article only scratches the surface of the negative impact of low crude prices on their economies. They have, in effect, turned no pain no gain into intense pain no gain and set in motion the possibility neither will exit the low price Crudedome under its own power.

It is more evident than ever that the world economy is heading into a deflationary conflagration, but today’s generation of house trained bulls wouldn’t recognize a warning if it slapped them upside their horns. They refused once again last week to exit the casino because they got another signal from Hilsenramp that the Fed is on “hold” until at least next March. Call it Ostrich Economics. But do it quick. Those side-effects are coming to the casino some day real soon.

Way back in June we documented the “curious” case of Sweden’s broken QE and when we used the term “broken”, we didn’t just mean that inflation expectations weren’t moving higher. We meant that bond yields were rising as the adverse impact from the illiquidity "premium" surpassed the price appreciation benefit from frontrun central bank buying. Fast forward three months and Sweden looks set to “solve” the broken QE problem and by extension ensure it can stay in the currency war games by expanding the list of eligible assets to muni bonds.

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So what's left in the toolbag of central banks and states to stimulate recessionary economies if QE has been discredited? The answer: Helicopter Money.

"Central banks alone cannot be relied upon to deliver all the policies necessary to achieve macroeconomic goals. Governments must also act and use the policy-making space provided by conventional and unconventional monetary policy measures. Failure to do so would be a serious error and would risk setting the stage for further economic disturbances and imbalances in the future."

Investors should hope for the best while making preparations for less benign scenarios. This can be achieved by reducing leverage and speculation and having a healthy allocation to physical precious metals in the safest vaults in the world.

Like other banks, Deutsche has been caught up in the Libor-rigging scandal, and faces another investigation in Switzerland for suspected price-fixing in the precious metal market.

Gillian Tett, ourselves and many others have warned that Deutsche and its massive derivative book has the potential to be a ”European Lehman Brothers”. Is Deutsche Bank, the largest holder of Warren Buffett’s “financial weapons of mass destruction” derivatives in trouble?

Never have markets carried so much risk. And never have markets been as vulnerable to an abrupt change in perceptions with regard to central banker competence, effectiveness and capabilities. At the minimum, global markets will function poorly, but risk is now high for a disorderly – Party Crashing - "run" on financial markets, as faith in central banking begins to wane.