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Credit Market Warning
Submitted by Chris Martenson via PeakProsperity.com,
There are large signs of stress now present in the credit markets. You might not know it from today's multi-generationally low interest rates, but other key measures such as liquidity and volatility are flashing worrying signs.
Look, we all know that this centrally planned experiment forcing financial assets ever higher is simply fostering multiple bubbles, each in search of a pin. As all bubbles do, they are going to end with bang.
I keep my eyes on the credit markets because that’s where the real trouble is brewing.
Today’s markets are so distorted that you can reasonably argue that there’s not much in the way of useful signals emanating from them. And I wouldn’t put up too much of a counter-argument. But it's my contention that the bond market is the place to watch as it will provide the most useful clues that a reckoning has begun. And when these markets eventually return to earth, there will be blood in the streets.
While some may hope that rising yields are signaling a return to more rapid economic growth, or at least that the fear of outright deflation has lessened, the more likely explanation is that something is wrong and it’s about to get... wronger.
Rising Yields
Let’s begin with the first canary in this story, rising yields. The yield of a bond, expressed as a rate of interest, moves oppositely to its price. The higher the price goes, the lower the yield goes. The lower the price, the higher the yield. Imagine the relationship like a playground see-saw.
Over these past few weeks and months, we’ve seen yields moving up quite a lot across a wide variety of bonds, at least in terms of the percentage size of the move (yes, the yields are still historically low by any measure).
Again, not everybody thinks this is ominous. Some think it’s a healthy sign that growth, as well as a "healthy" return to inflation, is on the way:
Interest rate climb brings out optimists
Jun 16, 2015
WASHINGTON — Consumers, businesses and investors are facing an era of higher borrowing costs as some of the lowest global interest rates in modern history begin to rise.
Yet the message from most economists is a reassuring one: Rates won't likely climb fast or high enough to inflict much damage on economic recoveries in the United States or Europe.
Part of the reason for the optimism is that rising rates are a healthy sign: They mean that U.S. and European economies are strengthening, people are spending, companies are hiring and prices are starting to rise at more normal rates. The risk of too-low inflation — which typically slows spending and makes loan repayments costlier — has receded.
(Source)
However it’s not entirely clear that these rising rates have anything to do with better economic prospects or higher inflation.
Why? The world’s markets have been primarily driven by liquidity flows. The headwaters of that river are the easy money policies of the world’s central banks. From there, the river picks up steam as corporations issue debt to buy back their shares. Adding gasoline to the fire, margin loans are extended, and speculators lever up to chase assets world-wide.
Add it all up, and fundamentals don't really matter at times like these. The huge flood of money and credit swamps everything.
Which means that the signals themselves become the news. And at this time, the direction of the tide of this money/credit flow is the signal that matters most.
And what is it telling us. That money is now beginning to move out of the credit markets. This is a huge development.
Take a look at these following charts of German, Spanish, Italian, Portuguese, and US sovereign debt yields. Note that the yields have risen despite the beginning of the recent QE program in Europe. They are back to where they were in November 2014, and have risen by more than 100% from the lows in many cases:
There are a competing variety of explanations for these yield hikes, but since they are occurring across numerous countries -- and in the corporate and junk bond markets as well -- it suggests that instead of any particular economic or fundamental explanation, liquidity is being pulled out of bonds generally.
And why not? After years of bonds going straight up in price courtesy of central bank interventions, bonds have become a massive bubble. Perhaps enough buyers have finally realized that it's time to start selling before things get ugly.
One immediate impact will be on mortgage rates, which have finally ticked back above 4% recently:
Mortgage Rates Top 4% in Test for Housing
Jun 11, 2015
Mortgage rates vaulted above 4% for the first time this year, posing a challenge to the housing market’s strengthening recovery.
For the week ended Thursday, the average rate of a 30-year, fixed-rate mortgage rose to 4.04% from 3.87% the previous week to the highest level since last October, according to mortgage-finance company Freddie Mac.
The increase followed a Treasury-market sell-off over the past week that drove yields higher on most kinds of bonds. Bond yields rise as prices fall.
(Source)
Of course this will have an impact on real estate, but probably not too much yet. In the immediate term, sales volumes will cool as people wait for rates to ‘get back into the threes’ before taking on a mortgage.
Stocks Are For Show, But Bonds Are For Dough
All told, since the March highs in bond prices some $625 billion has been wiped off of the global sovereign bond index. That is a lot of vaporized capital. And rates are still incredibly low. Imagine how much more could be lost if rates were to march back up to their historical averages.
The conclusion here is that you should keep your eyes firmly on the bond markets because they will signal for us that a change in trend has occurred well before the equity markets will. These rising yields should have your full attention.
The reason we care is because when the bond markets finally turn, all of the grotesque market distortions induced by the central banks are going to snap violently. The process will be fast, chaotic and exceptionally destructive for everyone who is not prepared.
Agreeing with this view is a former Fed staffer who went public this week with similar concerns:
Former adviser to Dallas Fed's Dick Fisher, Danielle DiMartino Booth speaking in a CNBC interview slams The Fed for "allowing the [market] tail to wag the [monetary policy] dog," warning that "The Fed's credibility itself is at stake... they have backed themselves into a very tight corner... the tightest ever." As she writes in her first Op-Ed, "The hope today is that the current era of easy monetary policy will have no deep economic ramifications. Such thinking, though, may prove to be naive... All retirees’ security is thus at risk when the massive overvaluation in fixed income and equity markets eventually rights itself."
(Source)
I’ll go further and say it is not just retirees' security that is at stake, but much more than that. Our financial markets may simply stop working when this "mother of all bubbles" -- comprising both equities and bonds -- finally bursts.
Given the much greater size of money and credit that will be desperate to find an exit, and the lack of remaining options the central bankers have now versus then, the 2008 crisis may look tame in comparison.
In Part 2: The Warning Indicators To Watch For Trouble In The Bond Market we examine the key factors that will signal the kind breakdown in bonds that could cause a chain-reaction conflagration across all financial markets.
After 90 months of risk-free money inflows courtesy of the world's central banks, all the major market players are addicted and dependent on that ever-rising tide. What will happen when that tide reverses (and likely, all at once)? It's looking like we may be about to find out.
Click here to read Part 2 of this report (free executive summary, enrollment required for full access)
* * *
What is perhaps even more worrisome - the credit cycle has turned and a dismal sense of deja vu is about to come upon US equity markets...
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Very recently at least 14 Western government had NIRP which is not sustainable.
US claims inflation in 2014 was 0.8% while the Chapwood Index claims it was 9.7% or 1212% higher.
US bonds would lose at least 80% of their value if the Chapwood Index Inflation was used to evaluate them
Extend and pretend there is no inflation.
Inaccurate Statistics And The Threat To BondsThe Chapwood number in the table is the simple arithmetic average of the 50 cities. The year-in, year-out 10% inflation rate is notable. Furthermore, Chapwood shows cumulative inflation rate as shown by the CPI for the four years to be understated by 39.9%, and using Chapwood numbers in place of the GDP deflator, real GDP has slumped a cumulative total of 21.4% over the four years.
No wonder the poor in America are suffering: when their wages and benefit increases have been aligned to the CPI, they have fallen nearly 40% in real terms over the last four years. The resulting decline in business on Main Street revealed by these figures explains why Wal-Mart are laying people off and closing stores, and why trade associations continually issue disappointing trading assessments.
Understated price inflation fundamentally distorts everything that is macroeconomic, from monetary policy to economic commentary. It misleads central bankers into thinking they are missing their inflation targets when they are in fact exceeding them by a dangerously wide margin. It misleads analysts into thinking we are on the brink of a deflationary slump with prices maybe about to collapse. And most worryingly of all, bond markets have become more mispriced than even hardened bears realise, something that's very likely to be corrected through a financial shock.
http://www.zerohedge.com/news/2015-05-29/inaccurate-statistics-and-threa...
http://www.chapwoodindex.com/
You have to be insane (or knuckle dragging stoopid) to buy 10 year bonds at a yield of 1%.
Ten years is a long time and the pace of change around the world is only accelerating. 1% doesn't even cover the risk of bad weather!!
Nobody but nobody should be able to sell ten year debt at 1% (not even Moses could see the future that clearly), anyone with even a shred of price sensitivity knows this.
What happened here was that the Central Banks quest to maintain market liquidity has utter destroyed the markets price sensitivity and now EVERYTHING is mispriced. I cannot overstate the size of it. EVERYTHING in the entire world is mispriced.
Yes on the surface the markets appear to be functioning and yes only the biggest player have to worry about liquidity. But in reality this functionality is a thin veneer. A mirage of what the market once was, and by erecting this pseudo-market the Central Banks have completely warped everything.
In the world today it is impossible for corporations to invest because everyone knows prices are all out of whack. So the entire corporate world has spent 5 years recycling their profits to their shareholders via buybacks so that everyone can front run one another in a gigantic Ponzi race fuelled once again by exuberantly low interest rates.
Let's use a Zero Coupon Bond Calculator to see the effect of fake inflation on a $1000 bond for 30 years:
A zero coupon bond is a bond bought at a price lower than its face value, with the face value repaid at the time of maturity
With Fed's 0.8% fake inflation, Zero Coupon Bond Value = $787.38
With Chapwood inflation of 9.7%, Zero Coupon Bond Value = $62.20
nice illustration
Son, when I was a boy we lived in houses made out of fine Chapwood, not this crappy polyethylene.
Shut up old man or I'll sell you to the Soylent Green factory!
of course people, entities and brokers are selling the bonds. no one wants to be left holding the bubble when it pops. gets very messy.
this economy is holding on by its fingernails. for now it's the smart money exiting first. just wait until the rest of the herd get spooked. could happen any day now...
I'm making over $7k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life. This is what I do... www.earnmore9.com
Rollin thunda you make me laff.
Persistent at least.
Any chance chapped wood will slow the butt pounding?
This is it!! Cash gold and bitcoins save us!!
I remember the first-signs of major issues in 2008 were credit cards available credit balances were cut to balance owed and HELOC availability were cancelled ....it's coming back bigger this time.
ABCP freeze-up will really get things rolling downhill fast.
Does this count?
I've got a friend who is building a house. It's almost finished. Bank is fucking with him hard. LTV is ( well that is a magical number, always) under 75%.
They TOLD him they do not want his loan. Please try to get approval from another institution. We will forward the last &10-15000 to finish.
Talk in the builder circle is, banks do not want mortgages.
So how come he left out the part about Danielle DiMartino Booth saying they should have issued 100 year terms?
Bring it, motherfuckers. I can't wait to buy RE at 75% of current valuations.
"flashing worrying signs".
Chris, call me when she's flashing her tits. Everything else is nothing.
Part of the reason for the optimism is that rising rates are a healthy sign: They mean that U.S. and European economies are strengthening, people are spending, companies are hiring and prices are starting to rise at more normal rates. The risk of too-low inflation — which typically slows spending and makes loan repayments costlier — has receded.
Waaaaaa??
The X files - Intro - Opening theme - Orginal HQ
http://www.youtube.com/watch?v=rbBX6aEzEz8 (0:42)
Take a look at these following charts of German, Spanish, Italian, Portuguese, and US sovereign debt yields. Note that the yields have risen despite the beginning of the recent QE program in Europe...
despite?? Rates rose after every single QE announcement in the usa. Buy the rumor, sell the news. Nothing has fundamentally changed except that equities are now at nosebleed levels and look a bit toppy. the author got this part correct:
However it’s not entirely clear that these rising rates have anything to do with better economic prospects or higher inflation.
Why? The world’s markets have been primarily driven by liquidity flows...
But failed to put 2 and 2 together. the flows don't just come from cbs, they come from front running hedgies too and they always sell into the cb buying.
Bugs Bunny Theme - This Is It
http://www.youtube.com/watch?v=F-t8PngHgWY (0:41)
Waiting to buy a beach house , I'm looking forward to naming my price.
+1, me too. prices are outrageous. waiting for the current "owners" to bleed out. last time i checked florida had 250K listings on zillow. i'm guessing there are million who would sell if they could at today's notional prices. i say notional because lol at list prices.
I'm North East so I'm thinking Maine or New Hampshire. Shores I Iike the seasons. But the ocean is in my veins .... I find it peaceful .
good luck. in the south you have to be on the beach or the bugs will eat you alive.
You guy's shouldn't worry so much.
President El bozo just told the 'news' a few days ago that of all the problems he deals with as our leader, the economy is his highest priority.
Between El bozo's efforts, and those of Europe's finest.....
Surely we the 'people' will be just fine-:)
Former adviser to Dallas Fed's Dick Fisher, Danielle DiMartino Booth speaking in a CNBC interview slams The Fed for "allowing the [market] tail to wag the [monetary policy] dog," warning that "The Fed's credibility itself is at stake... they have backed themselves into a very tight corner... the tightest ever." As she writes in her first Op-Ed...
Going along, on schedule?
http://redefininggod.com/nwo-schedule-of-implementation/
Yep. They'll have to do a lot of printing and then a lot more printing to keep this going. System will soon be growing to fast to feed.
Can someone provide a link to a ZH article that discussed 500 trillion in capital wiped out in global bond market if interests rates were to rise? My father mentioned it to me (maybe posted in last ten days?) but I can't find it.
Thanks!
Nevermind. Found it:
http://www.zerohedge.com/news/2015-01-13/555-trillion-reasons-why-centra...
I feel all global markets are grossly mispriced at the present time. Current financial asset pricing can ONLY be justified on a comparative basis. As long as the JGB and Bund 10 are selling under 1%, the US 10 won't be going anywhere (comparative bargain). When the bond markets start slipping in earnest, the equity markets will likely follow suit....quickly. I am currently watching the JGB/Bund. I suspect they will be the early tell. I do not know for sure...if I did, I'd be very wealthy.
SELL
that simple
SELL
I PREDICT
That real interest rates are near zero. THERE IS NO YIELD anywhere.
THERE IS MONEY CHASING MONEY CHASING YIELD. BUT THERE IS NONE realative to price. NONE.
THE fed has painted itself in a corner. It wont raise rates by much or at all.
The RISK IS NOT RAISING RATES
ITS Asset markets crashing while rates are still near zero.
Now this may give MR Market an opportunity to start working again. AND I am poised to buy then.
HOWEVER IT WILL BE MASSIVELY DESTABILIZING. Companiess will bankrupt. No one will want the bonds or T notes. No one will want anything.
A fill on global recession with CENTRAL BANKS OUTA AMMO.
That is what is going to happen.
Asset markets the beneficiaries or FREE MONEY. Asset market collapse under own weight bringing real economy once again to its knees.
BUT THIS TIME CENTRAL BANKS WILL BE OUTA AMMO.
STUPID OF THEM REALLY.
They never had ammo.
They have fraud and plenty of it.
Hey hey this will be fun. I wonder who gets to play the Bear (Stearns) while dressed in a Canary Costume???? If you get out of the financial bus, make sure you step into the tracks left by the tires, cuz their could be something just under the surface!!
Something is going on. I turned on CSPAN this weekend and saw a congressional hearing where every single congressperson was grilling Jack Lew about bond market liquidity. I seriously doubt if any of these distinguished statespersons had ever actually heard the phrase "bond market liquidity" before being briefed by somebody -- wonder who it was?