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So You Want To Fight The Central Banks? Then Short Treasurys
Following the great financial crisis in which capitalism was almost wiped out due to too much debt, a funny thing happened on the path to recovery (paved with some $57 trillion in even more debt) - Quantiative Easing, that deus ex conceived by central bankers as the miracle tool that would fix the world, stopped working. And it stopped working for a very simple reason.
As central banks have scrambled to push risk assets ever higher in hopes of creating that elusive Keynesian inflationary "trickle down", they are limited in the security they can buy. In fact, most can only purchase government treasurys, which they have done en masse. This is known as QE.
According to BofA calculations, central banks now own $22 trillion in "assets" - almost entirely in the form of government debt (an amount greater than the GDP of the US and Japan combined) - which they have to buy in order to create the balance sheet liability, reserves, which primary dealers and the world's commercial banking system use to bid up risky assets.
Furthermore, according to Citigroup, the amount of debt monetizations in 2015 will be the greatest in history: so great is the scramble to reflate that central banks around the globe (most recently the BOJ's expanded QE and the ECB's brand new Q€) that the money printing academics have now gone all in.
As the chart above shows, the global financial situation is so grotesque, central banks will monetize all net debt issuance around the entire world just to push everyone into the riskiest of assets: stocks.
If there is still any question why nobody believes the falacy of a "recovery", the chart above should be sufficient to prove to anyone that there is no self-sustaining economy in the world anymore just one massive printing orgy and a doomed attempt to reflate $200 trillion in global debt at all costs.
But back to the topic of QE: as central banks rush to issue reserves, they have no choice but to buy government bonds. Some $22 trillion of them as we noted above. And what happens when epic, epic amounts of government debt are purchased by central banks (just yesterday the BOJ monetized about $10 billion in debt in its daily POMO - and this happens several time per week)? Well, as we have shown since 2012, the bond markets freeze up because central banks soak up all the liquidity, but more to the point, bond prices go up and yields go down.
And this is where traditional economists #Ref! out. Because what is the fundamental prerogative behind QE? It is not to push the S&P to 2100, 3100, or higher. It is to stimulate inflation. The problem however arises when central banks just can't get enough of government Treasurys and their yields, as witnessed recently, go negative. In fact it was just a month ago when we showed that 53% of all global government bonds are yielding 1% or less!
And the punchline: what are bond yields? Well, in a normal world, they telegraph the market's long-term inflation expectations. However, in this parallel banana universe in which everything is planned by a view clueless academics, all they "telegraph" is that central banks are the first, last and increasingly (hi Greece) only buyer of sovereign debt. The irony is that the higher stocks go, not because they should but because central banks push them higher, the lower yields slide as central banks buy more bonds to inject more reserves, to push stocks higher, to blow an ever greater asset bubble across all asset classes: both bonds and stocks.
Even more ironic is that not a day passes without one clueless pundit after another appearing on TV and reading from the teleprompter like a stoned zombie that one must not fight the Fed (and central banks) and buy stocks while shorting bonds. And yet what are central banks buying?
Not stocks (at least not officially in the case of the Fed; only the BOJ and the SNB admit to openly monetizing equities).
The answer: bonds.
And as Bloomberg reports, following the biggest bond market rout of 2015, who is piling into Treasuries? Why "overseas central banks" of course.
Foreign official accounts raised their holdings of U.S. securities in custody at the Federal Reserve to $2.99 trillion as of May 13, the highest level in 2015, based on Fed data. Investors also clamored to buy Treasuries at government debt auctions this week, after a selloff that pushed U.S. 10-year yields to a six-month high of 2.36 percent this week. Treasuries climbed a second day Friday as a global rout in fixed-income assets eased.
“For governments and central banks, this is a big chance to buy Treasuries,” said Wontark Doh, head of overseas fixed-income investment in Seoul at Samsung Asset Management, which oversees $112.5 billion. “The Treasury yield compared to other countries is attractive.”
None of this should come as a surprise to regular ZH readers of course: after every single 10 Year auction we note just how much of the final take down goes to foreign central banks. But to most other readers, and certainly clueless economists not to mention even more clueless CNBC pundits, all of this may come as a shocking surprise.
Indirect bidders, a class of investors that includes foreign central banks, bought 50.8 percent of the securities at Thursday’s $16 billion 30-year bond sale, compared with an average of 48.6 percent at the past 10 auctions.
So-called indirects surged at Wednesday’s $24 billion 10-year note sale to the highest level since December 2011, while demand at Tuesday’s $24 billion three-year note sale was the highest since December 2009.
The bolded sentence means that central banks' apetite for Treasurys is the highest in over three years... even as they desperately try to push the price lower, using vapid sellsider economists to talk about "great rotations" and such, and even more vapid drama major "economists" to report how any minute there will be a rout in the bond market.
What rout? There is $200 TRILLION in global debt. What happens to the interest on that debt if rates go up? And just where will the debt issuers get the money to pay it.
But nowhere is the "fight against central bank" more visible than in the Fed's weekly update of Treasurys held in custody on behalf of foreign central banks. In the week ended May 13, this number rose to a fraction of its record high $2.99 trillion.
And the paradox as explained above, is that the higher central banks push stocks, the lower yields will go, leading to such monetary policy mutants as NIRP, which directly telegraphs that the moment of inflation liftoff is further than ever before, forcing central banks to push stocks ever higher, and buying up even more bonds, thus sending yields ever lower! Until finally one day, the global Treasury markets, already flash crashing on a monthly basis on either side of the Atlantic, and more illiquid than they have ever been before, break, and unleash the end of the fiat regime... but not before central banks give it one last try, and monetize anything and everything that isn't nailed down, culminating with Friedman's endgame of literally paradropping money out of helicopters.
It is at that moment that the concept of paper money will officially die.
Until then, however, if you really want to fight central banks, just short bonds. Make their day.
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http://www.peakprosperity.com/blog/92594/self-employed-middle-class-hard...
Sure I will take on and short the 3 headed beast.
Someone said years ago to buy gold against the fiat currency purge. My silver gains even buying a few years back, are in the loss column. Sprotts and physical, eagles and junk stuff.
Sure, I love getting my ass handed to me over and over.
Do you really think you can defeat an institution that can print money at will?
GET REAL
Cant we just tell everyone that it's not money? Wouldn't that fix everything?
If only people listened... :/
It's a hell of a thing, convincing a man to short UST, you take away all he's got and all he's ever going to have.
Just burn the money, all of it...
Strange game professor. It seems the only winning move is not to play .... The WOPR
@Ruff
eh, the article call to short treasuries was said sarcastically...
I know sometimes not everyone takes the time to read the whole thing
the question to consider is quite simple: where does one place one's wealth in a world of increasing counter-party risk, considering this risk is off the charts, never before seen and impossible to reduce?
hmmmm...
Index funds... Why fight $200 trillion.
"It is at that moment that the concept of paper money will officially die.
Until then, however, if you really want to fight central banks, just short bonds. Make their day."
So they can fuck us in the ass by more QE? No thanks!
Sure, bonds and fiat money will implode one day, but the big problem and difficulty is one thing: the exact date of "that moment."
“I am afraid the ordinary citizen will not like to be told that the banks can and do create money. And they who control the credit of the nation direct the policy of Governments and hold in the hollow of their hand the destiny of the people.” Reginald McKenna, as Chairman of the Midland Bank, addressing stockholders in 1924.
So many paper promises, so few real assets.
Rip your own face off, save yourself the time and some cash...
nice work
excellent read. i have absolutely doubt that it will happen although i have no clue as to when. they've been able to get away with this shit for alot longer than anyone would have thought. the BOJ is where ive always thought it would start (and still might) but when & at what level (debt-to-GDP). these c-banks are no different than any trader caught on the wrong side of the market; they keep doubling & tripling down on their bets. up until now, they've not been called in & have had zero "redemption risk". what i have not heard 1 person on any financial network refer to is default risk. again, i have no clue at what point we consider any particular sovereign "insolvent". the very notion that puerto rico was advised by the 3 major credit agencies to borrow additional $$$ so they can service existing debt (that everyone knows is impossible to pay back) was where i stopped trying to calculate it & just said "it will happen when it happens." if someone told me i have to take out a visa card to pay off my american express bill, id start the process of rethinking my life, starting with my spending habits.
given the state of the current trajectory, i have no doubt where this road leads. i just hope im dead for when we reach the eventual destination cuz i don't wanna be alive to witness the fallout.
Watch the long bond. When the yield nears zero, some things will begin to unwind rather quickly.
The name is Bonds. James Bonds.
"Not stocks (at least not officially in the case of the Fed; only the BOJ and the SNB admit to openly monetizing equities)."
So who ramps up S(hit) &P(iss) futures ?
Didn't they already monetize everything? MBS, ABCP were accepted at face value at the discount window. They probably bought the same mortgage many times over. Next time they'll take bags of dog crap as collateral.
on mbs US Treasury announced a 3 year window of backstopping any/all GSE losses on debt/mbs ... risk moved to treasury
on ABS, iirc, borrowers had a (minimal) haircut at discount window
anyways, after FASB 157 (mark to model) passed spring of 2009 did not matter
Right: have hear a million times now how 'illiquid' the markets are, and they are going to blame it on that, instead of the fact that even in a good market they would never get par on their 'mark to model' crap.
quite simple
if interest rates rise, then central banks that have QE'd will be (massively) underwater (and risk needing legislative bailout ... and no doubt lose "independence")
if interest rates sink, then central banks that have QE'd will be (massively) above water (and if unload securities will REALIZE very large capital gain that can be returned to Treasury ... much kudos from legislators)
Unload their securities to whom? There isn't anyone who is available to buy them in any size that would matter except another central bank.
There are actually a lot of bond-market guys who are saying sell bonds. The monthly momentum charts on 10's and long bonds have given sell signals for the first time in 15 months and there are quite a few guys saying sell rallies.
well, they're wrong
US entering a RECESSION
yields going down ... big time
recession does not necessarily equal low yields. when the lender of last resort is no longer trusted, default risk will lead rates.
As one doesn't not have an infinite printing capacity of ones said money.
Nor can they infinitely get nearer to infinity of printing money without penalty of reality creeping up distortions ass ....
"when the lender of last resort is no longer trusted"
Game Over
but that ain't happening (this go round)
DOH! When they say "sell" they mean to them......
no turning back. to many lives hanging in the balance of moar qe. so many ring fenced wards of moar qe. chaos is the alternative. greenspasm started the current keynsian madness. the ride to the bottom, the valley of an unknown, but germany and their print fest gives us some clues. many assets destoyed and lives in scambles. but moar pressing matters are taking center stage. water, food, health care, to mame a few, ha...
Stocks; risky..... HA
Pull up a monthly of the SPX, you have basically taken no heat being long the market in over four years. There were like 4 months in as many years where we failed to paint candles with bodies at higher lows.
I hate when the Merry Go Round stops....this is going to be a doozy!
The assumption being central banks will raise their special "banker only rates" and also stop pushing up Treasury prices with printed money. I say that is a false assumption. There is no longer a connection between central bank set rates and bonds. You would have to be insane to walk into that rigged bond casino and expect economic reality to appear. Why would they stop buying bonds just because they raise rates for CB lending? There is no bond market. The only way you fight is to take their gold as long as they are still raising and bluffing. Because they are bluffing until this thing breaks.
i bookmarked this gem from april 2014
67 of 67 "experts" expected yields to rise in the next 6 months.
Yields tanked H2 2014
http://www.zerohedge.com/news/2014-04-23/groupthink-or-black-swan-rising...
If I had $10 trillion, the market and treasuries would do exactly as I wanted them to do. They have an infinite amount of 'money'. Good f'n luck.
Again default risk. It's not who will borrow, but who will lend?
paper faith with no viable alternative. we are captives.
Short the dollar when oil climbs.
Fuck treasuries.
My best guess as to "when this pops?" A country or entitiy will dump a small number of bonds in a highly illiquid moment, causing a catastophic chain reaction. Then expect this event to be misdirected towards the biggest target the US wants destroyed and world war will proceed in the fog of economic collapse.
The Fed already buys most issuance with money they print from nothing, right in font of everybodys faces. It's not a real market, so shorting bonds probably won't work until Big Jew doesn't have the printing press any more.
lol on the #Ref! out
Just like the previous bubbles, except this time there is no question about it, CBs encourage malinvestment, which always leads to huge losses somewhere and thus everywhere. They are the scourge of the world.