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The Ides Of October
Via Clive Hale of A View From The Bridge blog,
Back in early August we suggested that we might have seen a few chinks in the armour of the markets only to be derided when the powers that be pressed the “buy me now” levers yet again. The central bankers have truly been the markets best friends and Dr Aghi and Kuroda-san have been taking over where Ms Yellen has all but left off, but even they can do little in the face of protest and dissent by various members of the global populace and the continuing stupidity and arrogance of our “democratically” elected representatives.
One area of the market that is returning to its senses is high yield or junk bonds as we affectionately used to call them. The realisation that yields were perhaps a touch on the low side has happened slowly but like bankruptcy it could all too quickly come all at once.
In Europe all bond yields are artificially low courtesy of ECB policy, but, historically, in the high yield sector they have tended to be higher than in the US. Some catching up is on the cards here which will be painful for bond holders. The “Bill Gross” effect will also be putting upward pressure on yields. The King of Bonds has moved to Janus (any similarity to the Roman god is merely a coincidence) and redemptions from his PIMCO funds are likely to continue at significant levels. There will inevitably be some “round-tripping” if the redemptions get reinvested with his new company but some bond investors may take this opportunity to look elsewhere; in fact they should be encouraged to.
Quite when interest rates are going to rise is anyone’s guess and sovereign bond yields could yet follow the Japanese path below 1% - German 10 year Bunds are already there and French OATS, would you believe, are at 1.26%. Did anyone say deflation? This would be the last thing the central bankers would want, but Draghi’s TLRTO initiative and ABS bond buying programme have been abject failures. Under TLRTO banks can theoretically borrow from the ECB at 10 basis points and any loans they make as a result would come at a very attractive rate.
The only problem is that no one ex the student loan fraternity and the Top Gear wannabees are interested. The ABS market is tiny and the ECB’s scheme will just encourage the investment banks to dream up more bond erotica for the unsuspecting, which is how we got into this jam in the first place Stanley!
Low bond yields should theoretically support higher equity prices in a normal world where stock valuations are generally driven off the risk free rate, but if that rate is artificially low, which they are courtesy of central bank manipulation, then equity prices are too high are they not? This is nothing new and until very recently markets have been a one way bet driven by money searching for a return – any return – better than cash. This is not a rational way to invest it is speculation pure and simple.
I can do no better than quote from a recent John Hussman newsletter.
“As I did in 2000 and 2007, I feel obligated to state an expectation that only seems like a bizarre assertion because the financial memory is just as short as the popular understanding of valuation is superficial: I view the stock market as likely to lose more than half of its value from its recent high to its ultimate low in this market cycle.”
“At present, however, market conditions couple valuations that are more than double pre-bubble norms (on historically reliable measures) with clear deterioration in market internals and our measures of trend uniformity. None of these factors provide support for the market here. In my view, speculators are dancing without a floor.”
“Dancing on the ceiling” is not an option either…Beware the Ides of October.
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Well, that cleared things up.
Let me give it a try with an analogy. (Not that you asked, but for what it's worth...)
Remember when the first "stealth" airplanes made their debut? Weird angular things. Didn't look much like airplaces to the human eye at all. As it turns out, they didn't look much like airplanes to the air, either. They can only fly because of computer controls making small interventions to the various control surfaces constantly.
This is what our markets have become. Flying bricks with wings and bumps and weapons packages hanging off everywhere you look. Without constant intervention (or outright control) by central banks, this bitch would have lawn-darted into the desert floor long ago. If the central banks can keep attitude adjustment within specified range, it will continue to fly. If not (when not), it will drop out of the air like the brick it is.
Great analogy.
Priced for perfection. The ultimate in fragile. Taleb must be chortling in his beer.
The positive feedback loop beloved of fans of flaming crashes can show up at any time. One program fault can make an entire system go stupid.
"...In my view, speculators are dancing without a floor.”
They're dancing on current and future generations of individuals and families.
Dancing on a gallows trapdoor.
October Surprise 2014: Ebola, Enterovirus 68, TB, common flu, bubonic plague, common cold, lice, "latin american kissing disease" plus God knows what else = single digit voter turnout.
Diebold don't care how many voter digits turn out.
I just wish that whatever is gonna prick this boil of a bond bubble would happen sooner rather than later.
be careful what you wish for, uninteded consequences or unrealized cant be put back in the bottle...
Just prep, live life to the fullest either way.... :)
EU Needs to Reassess Relations With Russia: Italian Foreign Minister http://en.ria.ru/russia/20141006/193741898/EU-Needs-to-Reassess-Relation... via @ria_novosti
BRUSSELS, October 6 (RIA Novosti) - The European Union needs to reassess relations withRussia, Italian Foreign Minister Federica Mogherini said at a hearing in the European Parliament.
"We need to reassess relations with Russia, might not be a partner right now, but a strategic country and neighbor," Mogherini was quoted as saying on the twitter of the European External Action Service.
she gets it !
What is this "markets" thing mentioned repeatedly in this piece?
Any idea?
I would suggest using the exit now rather than later. The problem is....where do you exit to?
All the exit doors seem to be empty elevator shafts.
Looks like a good time to grab some popcorn, live the rest of my life as i see fit, sit back and watch it all burn.
I got Farmland, essential consumables and currently unfashionable PMs.
No exit possible. Shelter in place. Whatever they instruct, ignore.
Everything that OskarSchindler was trying to procure in "Schindlers List" Hennessee, fancy sardines, good chocolate, caviar, fine wine, gold, and silver.
"Back in early August we suggested that we might have seen a few chinks in the armour of the markets"
Sure, blame the Chinese.
Yeah get the popcorn is right.
I can't wait to see what happens when Chief Fed Bitch Yellen is handed the "X-Box" controller and has a panic attack , a bee stings her fat ass, whatever and she "drops the box" and the economy dives into financial hell.
:)
hairball
See http://andreswhy.blogspot.com/2014/10/prodigies-update-ii.html
Analyze the Dow using .The Secretary Problem Algorithm . Hint : treat each datum point as random . Only the number of datum points and period matters .
Surprizingly accurate over 11 years until QE kicked in . Stripping QE out , leaves the DOW at about 1300's with a big correction due .
In other words , a sharp crash to about 1300 , then a more gradual decline .
"Oh my theory ! Oh my Ducats !" to paraphrase Shakespeare .