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The Fed Meets This Week Dealing with Alarming Bond Market Bubble
By EconMatters
The Bond Market Bubble is Reaching Epic Proportions
The 10-Year Bond now has a Yield of 2.08% right before the all-important Fed Quarterly Meeting and Press Conference this Wednesday, the 10-Year basically lost 24 basis points in a week, and mind you the week right after the strongest Employment Report (a positive 321,000 jobs added for the month) since the Financial Crisis, capping what has been a remarkable year in added jobs to the US economy, even wages spiked 0.4 % with strong upward employment revisions for the prior months. In short, in a normal functioning Bond Market Yields should be rising with improved economic conditions. Especially in a week with a robust Retail Sales Report up 0.7 % for the month. Bond Yields in the US should be much higher given the strong economic performance for 2014, and the Fed not only exiting QE, but about to start raising rates in 2015.
Too Much Cheap Money Sloshing Around Financial Markets
In short there is just way too much liquidity in the system, and buying of any assets is what follows regardless of price or the fundamentals, and the Bond Market is such a bubble right now that the Fed needs to start pricking it fast before it crashes all at once where everyone tries to get out at the same time, which of course they cannot do. This is where a responsible Fed comes in and prepares the Bond Market for the inevitable Rate Hikes in 2015.
Low Gasoline Prices are Inflationary in the Big Picture
The latest argument for inflating the bond market bubble has been the drop in oil prices indicating strong deflationary pressures but this is just a poor understanding of economic theory. High oil and gasoline prices are deflationary over the long-term whereas low oil and gasoline prices are stimulative for economic growth, and actually inflationary over the long-term. And I think the Fed economists are sophisticated enough to get this relationship, that in fact lower gasoline prices will add to GDP growth in the coming quarters, and put even more pressures on inflation with a transfer from the bad comps of energy prices year on year, over to other core components as this new found wealth by consumers in the form of a massive tax cut finds its way into other buckets like dining and retail expenditures, all of which have additive effects for the US economy. In short cheaper energy costs are a net positive for the global economy, it leads to more productive and sustainable economic growth.
Wages Starting to Spike
Watch out for wages, they have been bubbling under the surface for a while, slowly rising underneath everyone`s negative outlook on the subject, and with an ever tightening labor market this is the area to watch for real runaway inflation in the economy. A 0.4 % spike in wages for a month is something to take notice of, for example extrapolate this on an annual basis and 0.4 % adds up real quick to runaway inflation. So expect there might be a slight lag as consumers feel comfortable with the extra money in their pockets but eventually this money finds its way into other spending buckets so there should be a transfer from the energy component to the core inflation reading.
Oil Bubble Bursts, Next Up Bond Markets
It is obvious that there is too much liquidity in the financial system as essentially bonds and stocks are near their all-time highs at the same time, and oil would have been there too if it wasn`t for the fact that 7 years of QE artificially inflated high oil prices motivated a lot of people to start producing oil in the US and around the globe and we finally have an oversupplied oil market and essentially a price war to compete for global market share. The old adage there is no cure for high prices like high prices applies here. And there is no cure for low wages like low wages in a tightening labor market, and this is the inflation boogie man that is currently flying under the radar right now in financial markets.
US Economy Running Hot
An economy cannot add this many jobs in a year without market consequences, and so far the bond market has been able to do what it wants which is take advantage of cheap money and chase yield at any price without regards to downside risks. We are already seeing signs of the tightening labor market here in the US as employees are now quitting their jobs to take advantage of better opportunities in the labor market, this is all indicative of higher wages and increased inflation pressures in the economy for 2105.
Much Lower Oil & Much Higher Interest Rates as Lower Oil is Stimulative
The low oil prices means the Fed never raises rates argument is just flawed, look back in history of $30 a barrel oil, the economy wasn`t in a “deflationary death spiral” in fact it was quite robust and interest rates and bond yields were much higher by a large margin than these “Doomsday Recession Era” Rates that we currently have in the massive bond market bubble.
All Bubbles Burst – No Cure for Financial Bubbles like Financial Bubbles
The only reason this bond bubble exists isn`t due to the lower price of oil, it is directly a result of too much cheap liquidity in the financial system and ridiculously low interest rates by central banks. Well the US economy by recent data points with 321,000 jobs created in a month, 0.4% monthly wage inflation, third quarter GDP revised up to 3.9%, Retail Sales Report up 0.7 % and lower gasoline prices adding additional stimulus to the US economy means the Fed will have to raise rates in bunches for 2015, and it is increasingly alarming that the bond market is as unprepared as a market can be going into this rising rate environment for 2015.
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The bubble is not restricted to the bond markets...
http://www.globaldeflationnews.com/anatomy-of-a-bubble-how-the-federal-r...
And a look at the future of the 10 YR...
http://www.globaldeflationnews.com/10-yr-u-s-treasury-index-yieldelliott...
https://www.youtube.com/watch?v=yph8TRldW6k
Animated Chart: US Treasury Yield Curve Since 2002 (Re-upload)
Any extra cash due to rising wages will be used to pay down debt. There is no way out except inflation, and that will create a high probability of hyper inflation thereafter as there will be no Real growth. Real interest rates will be negative.
Econ Matters should thank the Council of Foreign Affairs for their generous gift makig it possible for Econ Matters to write this article.
EconMatters lives on what planet? Economy heating up, wages spiking, etc. etc.-what crap!
buy bonds at any price when you can get free fed money.. no skin off any ones back except the public be dammed... let the bail ins cover the risk
Maybe the market is the bubble? If the economy is so great, why would anyone buy bonds that pay 2%. And I'll watch germanies 0.6% bonds.... When they burst... Then I'll be worried.
"An economy cannot add this many jobs in a year without market consequences"
It can if they are all part time, low wage, no benefits jobs with government assistance making up the difference.
Just might post this too from the article of econ matters. For me a totally incomprehensive quote.
competent economists like James Bullard who should be head of the Federal Reserve, and actually can make sound objective judgments regarding the state of the US economy apart from his ideological disposition.
I am speechless.
I will give some 101 econ lesons here. The US is the new Japan. That is why yields are crashing.
Japan had no source of external demand, ie: no trade deficit. The USA has a huge number of outstanding claims on its economy. I give it a couple years until the shale wells really deplete bad and there's nobody in the debt/credit markets to lend any more money to drill in America. Then we will see very strong inflation, particularly in energy, which will feed into everything else. They'll probably try another QE program but it will just feed gold/silver.
You are right but I am trying to be positive. I should have added If we are lucky. Japan had a trade surplus and massive domestic savings. Debt is held by the natives.
Hyperinflation is aacording to me also the endgame after the deflationary bust. It like Mike Tyson that hits you first with his left and then the uppercut. Good luck managing that in that asset markts. Only gold, Silver and farmland will escape IMHO.
Don't quit your day job.
Couple of items right outta the chute:
- '321,000 jobs' - without quantifying or qualifying. It's just 321,000 jobs, and that's all that matters. Forget what sectors, forget what duration - who the hell cares because the headline number is all that matters...?
And this gem:
"...that in fact lower gasoline prices will add to GDP growth in the coming quarters, and put even more pressures on inflation with a transfer from the bad comps of energy prices year on year, over to other core components as this new found wealth by consumers in the form of a massive tax cut finds its way into other buckets like dining and retail expenditures, all of which have additive effects for the US economy. In short cheaper energy costs are a net positive for the global economy, it leads to more productive and sustainable economic growth."
Yeah, 'dining & retail' are really 'productive and sustainable', aren't they? They produce - what? More public storage lockers? More fecal matter for the sewage treatment plants to process...?
I tend to agree with you. Unless the $ savings from oil actually produces something that is value added it is a zero sum gain is it not? And if the oil is exported, then the US economy is actually losing dollars
All true...if the Fed could raise rates...without destroying the US government...which it cannot...so it won't..cuz it can't..this guy does not share enough ZH pesimism to see clearly.
I wonder if he even considered how long it would take the entire system to explode if rates did go up.
The term "liquidity trap" that has been used by Allen Greenspan and others can be difficult to understand. At some point the return on loaning money is simply not worth the risk! Why do you want to loan money if most likely you will never be repaid or repaid with something that is totally worthless? When this happens the only safe place to store wealth will be in "tangible assets" and the only lenders will be those who print the money that nobody wants.
A solid lack of buyers in the bond market will signal the bubble bursting and that a liquidity trap has sprung. It might soon become apparent the economic efficiency of credit is beginning to collapse and the additional money poured into the system coupled with lower rates can no longer drive the economy forward. When this happens we are at the end game. The collapse of credit can pose major problems such as what we saw when many sellers were forced to demand payment up front before shipping goods in 2008. More on this subject below.
http://brucewilds.blogspot.com/2014/06/the-economic-efficiency-of-credit-can.html
It has already started : each US$ injected in "the economy" as added debt hardly generates a few cents in terms of additional GDP. And the only buyer left for treasuries and bonds is the FED. It could go fast next year.
So in theory this could make sense if one substitutes the dollar for debt (as oil prices collapse the value of those dollars becomes quite high. This is also true of Chevies.). Hence "why have a thirty year when I could just have a dollar instead?"
Undortunately this argument is not considered here so yet again "econ doesn't matter" looks like a moron. Being long treasuries however I HAVE considered this problem and resolved it by saying "the collapse in the entire commodity complex now including oil is a sign of a bad economy. When overlaid with equities at nosebleed levels I therefore concluded....
blah blah blah
Welcome back econo. I was worried about you. Thought maybe you were margin call toast.
Maybe you will get a tiny bounce in yields to salvage what little you can. Be quick.
Yes. this guy is saying that the "cleanest dirty shirt" i.e. US$ bonds play is dead. LOL
Bond market not going anywhere.
This guy shows up once in a while with this CNBC/Yellen approved nonsense, and somehow is allowed to publish on ZH, who are obviously just checking to to see if we are awake. We are, and this is gibberiish.
Economy running hot? Wages spiking? On what planet? Doesn't sound like the US at all. Looks closer to another leg down, especially for housing and the broader economy, than anything that resembles something that requires monetary policy tightening. Oil is collapsing for a reason, and it certainly isn't OPEC supply growth, that's for sure.
I don't know how to respond here except TLT needs to spike higher than Oct to finish off the bubble. Otherwise it's still Fed controlled