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 [15]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 [16], 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 [17], 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.
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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 [19], 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 [20]when we showed that 53% of all global government bonds are yielding 1% or less!
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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 [22]. 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 [23].
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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.
