Bill Blain: "This Is What Terrifies Draghi And Other Central Bankers"

Submitted by Bill Blain of Mint Parnters

Austria 2% for 100 year bond will go down as "financial moment". Wake up and smell the coffee of economic reality

Blain’s Morning Porridge – September 13th 2017

“Hey Satan, paid my dues, playing in a rocking band...”

This morning dawns bright and hopeful. After the Caribbean hurricanes, London survived a storm last night which ruffled the waters of the Thames, and caused some mild distress in terms of leaves blown off trees. Do your worst Mother Nature! England is ready!

Markets are enthused, boosted by talk of a US tax-reform roadshow, stock markets hitting new highs because the Norte Koreans haven’t found a match to light the fuse on their next firework, and Apple looking likely to get away with pushing the price of a new bright shinny thing past $1000.

I read a great line yesterday I suspect someone is going to ultimately regret: “We have solid global growth and some of the easiest financial conditions in history… hooray!”

It’s probably true we have ridiculously easy conditions – but playing it won’t be easy and I doubt there will be much to cheer as the unintended consequences of financial asset inflation play out! More about that below.

Or how about reading Goldman Sachs saying there won’t be a Global Stock Crash because “too many people expect it..” (Oh, yes they said it – months after I did!) It’s such an obvious triple bluff: Goldman might be saying they don’t expect the crash because they want you to think they do, but you will further out-think them and figure because they are Goldman and are so awfully smart they’ve worked out you would work that out… and they actually want to buy the whole market, or maybe it’s a quadruple bluff… I’m sure you get the gist.

The latest Merrill fund manager survey points out the highest level of investors hedging against a correction in 14 months. Meanwhile, my macro-man Martin Malone points out the market capitalisation of global equities now stands at 101% of Global GDP. At the time of the last correction in 2008 it hit 115%. The Average is around 80%. As we’ve said before. We reckon the smart money is still anticipating a correction – at which point it’s a buying opportunity.

Meanwhile, the story of the day was Austria launching its century bond. Euro 11bln plus of investors looking for a 2% return for a 100 year investment. I have a suspicion “2% for 100 years” may be the moment that defines the very last drink-addled, drug fuelled party days of the bond bull market – but, I’ve been saying that for years already!

However, bond maths always make sense. In bonds there is truth. Marcus Ashworth of Bloomberg sums it up:

“This new 100 year will be the most price-sensitive bond that exists. In any currency.


A one basis-point change in yield will move the price of this Austria 2117 issue by 43 cents, or 0.43 percent. That is because the coupon is so low for the ultra-long maturity, which makes the bond's duration -- or sensitivity to yield change -- so high.


If you wanted to make a bullish bet on European interest rates dropping again, then buying the new Austrian issue will give you the most bang for your euro. Portfolio managers look for such extra sensitivity to enhance the flexibility of their holdings.”

Of course.. if European interest rates go the other way.. perhaps because of normalisation panic - then you probably lose even more quickly as a retreat degenerates into a rout! (Mario Draghi – take note.)

Going back to my original quote about solid growth and easy financial conditions, it’s true: we do have unfeasibly low interest rates (LIRP, ZIRP and NIRP), low inflation, talk about co-ordinated central bank action, recovering economies, full employment in some, and all that good stuff. You can easily argue these are massive positive growth and value drivers.

For the last 10-yrs global central banks have been struggling to generate inflation to bail out the debt crisis. Now we have economies like the UK and UK pretty close to full employment (whatever that is?) and finally we’re getting some tepid inflation from Washington to Beijing. Macro economists are screaming in unconfined joy, almost wetting themselves with the realisation that 1% interest rates and 3% inflation is generating real interest rates of Negative 2%, full employment and making debt burdens sustainable.. Buy Buy Buy!

But, we are equally burdened by nearly 10-years of extraordinary monetary policy. $14 trillion of QE is only part of it – it’s the unintended consequences of that $14 trillion in driving over $200 trillion of financial asset price inflation that matters…

  • Bond yields are unreasonably low because of QE, driving false valuations across all asset classes. Fact.
  • Corporate, Hi-yield and Emerging Market spreads are unrewardingly tight due to the distorting influences of QE. Fact.
  • Stock markets are bid higher by yield tourists, and by the effects of corporates awash with cheap cash indulging in stock buybacks and investing their zero-cost borrowings in inflated financial assets. Fact
  • Even Non Financial Alternative assets are out of sync. Top end property prices no longer make any sense – yields from core London 2 bed flats (average price of £2.5mm) are less than 2%. Prime London (£1 mm ave small flat price) barely test 3%. (UK house priced up 5.6% last year – but not so much in London) Facts.
  • Alternatives like Wind Farms are now yielding a fraction of what they did just a few years ago – although at least that’s a product of bigger, better and more efficient and proper management..

In short… it looks like full employment, rising inflation and signs of growth are going to force normalization, at which point the bond music stops and we all realise financial assets have been dancing naked in the Emperor’s New Clothes lap-dancing bar as the proverbial tide goes out! 

As I said last week, that’s a prospect that must terrify Draghi and other central bankers. He needs this to keep going on long enough for real recovery to overtake the prospects of a correction.


Mr 9x19 BennyBoy Wed, 09/13/2017 - 07:39 Permalink

when i recently read in an article that  " banco popular crash was due to customers, they made a bank run, making the bank to collapse ", i realized the end not going to happen until population get ready to fight to death, physical revolution, and total breakdown of the way of living.considering the system is permanently selling good idea such full tele-voting,  full credit card payments, EVs... and all magnificients ideas,

  1. people will not wake up, because there are permanently lied to.
  2. those wake up don't know why they are awaken since nothing can be changed.

 only global natural disaster will reset the system. i don't trust or put faith in humanity anylonger. it's worthless, better trust a pet.

In reply to by BennyBoy

Last of the Mi… Wed, 09/13/2017 - 06:19 Permalink

The truth is that it would take 100 years to unwind after the massive printing of the last 8 years. It's just not possible to maintain the stock market and asset bubbles (read fear of deflation here) and stop printing. Printing is not even the issue here, the VELOCITY of printing is the problem. It's through the frigging roof for the sake of a couple of metrics, such as the stock market and it ain't going to stop any time soon. The result is that the real problem (stealth or hidden inflation) will continue to destroy real purchasing power as the debt mounts and the recipients of all the corporate welfare see their customers slowly drown in a sea of higher prices.

illuminatus (not verified) Wed, 09/13/2017 - 06:21 Permalink

the central bankers are terrified that if they don't do what they are told they get suicided.

DontWorry Wed, 09/13/2017 - 06:36 Permalink

Cougar_w: Thu, 05/24/2012 - 17:18 Hope you didn't put much money on that bet, Dawg. These fuckers are going to print hard enough to wake the dead. They'll print like mo'fos, print like mad men, print like fly pimps. Print until their eyes bleed. They will print via the swaps, via bank bailouts and mergers, via fixed Treasury yields, via real honest-to-God negative interest rates, via loans to banks on no collateral, via payroll tax reductions, and in the end via actual fiat paper instruments which they might very well drop in bails from actual mutherfucking helicopters. They will not give two figs what anyone thinks. Here is why. Because this is the Goddamned end of it my friend. There is no accounting beyond this point. There will be no history of it. No one to take notes of rates of exchange, or of the graft and violence, nobody to worry about the deficit or the GDP or the national debt of any nation large or small under the blazing Goddamned sun. End. Of. It. Does anyone bitch about how Rome totally debased their coinage at the end? Hell no. But whoever did it had enough to hand and grabbed some land with a nice vineyard and sat back and waited for the Middle Ages to start 700 years further on. And that's what a singularity is about. Anything that passes through is striped of all meaning. Nothing we think is important now will remain so beyond the event horizon. Nobody will remember, nobody will write about it, nobody will be held to any standard. Ever for evar. So yeah, they'll print like the mad crazed terrorists they are. Because they have nothing to lose, and maybe something to gain. Maybe a dollar. Maybe a day. Maybe a slim chance to escape with some of the loot. Whatever the fuck advantage they see in it, for themselves and their elite crap wanking buddies, they will full-on-full-time-fucking do it to advantage. Watch for it, Dawg. It's totally on this time, on like Donkey Kong. And when the dust is settled in a generation hence it's going to have become another unbelievable episode among the ages of men. 

J J Pettigrew Wed, 09/13/2017 - 06:43 Permalink

Central Bankers pushing for inflation while they carve cost of living adjusted pensions for themselves.Central Bankers insulate themselves from that which they push upon us.....just like Congress and Obamacare...for Congress is exempt from Obamacare...This is the mega problem.  The ROYALTY in the castle knows better than markets, armed with theories that disguise the ruination of the system they themselves destroy. In attempts to iron out the cycles that are normal and serve a purpose, the Central Bankers create one MEGACYCLE that cometh...

Batman11 Wed, 09/13/2017 - 06:51 Permalink

The BIS have kept the secrets of money to themselves and this is the result.Milton Freidman’s “monetarism” didn’t work because he didn’t understand the monetary system.“…banks make their profits by taking in deposits and lending the funds out at a higher rate of interest” Paul Krugman, 2015.Paul Krugman wasn’t equipped to work out the cause of 2008 as he didn’t understand money, debt and banks; so he attributed it to a “black swan”.The US money supply leading to 2008: going exponential, a credit bubble is underway (debt = money)Milton Freidman’s “monetarism” would have stopped 2008 from happening, but it didn’t work.We need to understand the “credit creation” theory of money if we are going to get anywhere.It was understood in 1856 but we have been going backwards ever since.Credit creation theory -> fractional reserve theory -> financial intermediation theory“A lost century in economics: Three theories of banking and the conclusive evidence” Richard A. Werner credit creation theory of money is correct and is now acknowledged by the BoE. reserve theory was used to develop “monetarism” which didn’t work. Milton Freidman thought Central Bank reserves controlled the money supply.Financial intermediation theory left Paul Krugman to come up with a “black swan” explanation for 2008, there are going to be more black swans if our economists stay with this nonsense.The BIS use the credit-to-GDP ratio: and 2008 suddenly stick out like sore thumbs.They kept it to themselves.The numpty FED, in 10 years, have got us to a position that is slightly worse than before the Great Depression.They'd have trouble telling their arse from their elbow.

max-kisser Batman11 Wed, 09/13/2017 - 07:23 Permalink

Cut'n'paste from a comment on silverdoctors

J P Morgan and the Panic of 1907
The Rockefeller interests of “Amalgamated Copper” had a plan to destroy the Heinze combine, which owned the Union Copper Co. By manipulating the stock market, the Rockefeller faction drove down Heinze stock in Union Copper from 60 to 10. The rumor was then spread that not only Heinze Copper but also the Heinze banks were folding under Rockefeller pressure. J P Morgan joined the Rockefeller enclave to announce that he thought the Knickerbocker Trust Co would be the first Heinze bank to fail. Panicked depositors stormed the tellers’ cages of the Knickerbocker Bank to withdraw their money. Within a few days the bank was forced to close its doors, making Morgan’s prediction self-fulfilling. Similar fear spread to other Heinze banks and then to the whole banking world. The crash of 1907 was on.

The Panic of 1907 was a credit crunch that spread from New York to the whole country, closing banks and businesses. It was the major impetus for the formation of the Federal Reserve System. While the nation had considered central banking systems in the past, it was the severity of the Panic of 1907 that inspired congressional action leading to establishment of the Fed.

Millions of people were sold out penniless and rendered homeless by bank foreclosures, and their savings wiped out by bank failures. The destitute and the hungry fended for themselves as best they could, which was not very well. Circulating money was hoarded by any who happened to still have some, so before long a viable medium of exchange became practically non-existent. Many business concerns began printing private IOUs and exchanging these for raw materials as well as giving them to their workers for wages. These “tokens” passed around as a temporary medium of exchange.

At this critical juncture, J P Morgan and his assembled team working out of his library offered to salvage the last operating Heinze bank (Trust Co of America) on condition of a fire sale of the valuable Tennessee Coal and Iron Co in Birmingham to add to the monopolistic US Steel Co, which he had earlier purchased from Andrew Carnegie.

This arrangement violated existing antitrust laws but in the prevailing climate of depression crisis, the proposed transaction was quickly approved in Washington. Morgan was also intrigued by the paper IOUs that various business houses were allowing to be circulated as a medium of exchange. He persuaded Congress to let him put out $200 million in such “tokens” issued by one of the Morgan financial entities, claiming that this flow of Morgan “certificates” would revive the stalled economy. As these new forms of Morgan “money” began circulating, the public regained its confidence and hoarded money began to circulate again as well. Morgan circulated $200 million in “certificates” created out of nothing more than his own “corporate credit” with formal government approval. The business press was full of praise on how a selfless Morgan risked his own money to save finance capitalism. It was in fact a superb device to make millions with no risk.

On November 22, 1910, a handful of powerful people met at the J P Morgan estate on Jekyll’s Island, Georgia. This secret meeting included Aldrich; A P Andrews, professional economist and assistant secretary of the Treasury; Frank Vanderlip, president of the National Bank of New York City, which later became Citibank; Harry P Davidson, senior partner of the J P Morgan Co, which after several mergers is now JP Morgan/Chase; Charles D Norton, president of Morgan’s First National Bank of New York; Paul Warburg, partner of the investment banking house of Kuhn, Loeb Co in New York; and Benjamin Strong of the J P Morgan Co central office in New York, who later became the first president of the New York Fed and dominated the new central bank for the first two decades. After nine days, they produced a draft bill for Congress that was later submitted as the “Aldrich Plan”. Conspiracy theorists have made much of this infamous secret meeting.

From its beginning, the dominant guiding principle of the Fed was financial rather than economic, though its charter directed it to “accommodate the needs of commerce and industry”. Fed policymakers concentrated on preventing inflation to calm investor fear, not on lowering unemployment or restoring falling farm prices. Fed officials spoke of “liquidation of labor” as part of sound central-banking principle, which harbors a bias toward preserving the health of the financial sector over the real economy. In order to restore the former, it was necessary to punish the latter.

In reply to by Batman11

Batman11 max-kisser Wed, 09/13/2017 - 08:53 Permalink

Thomas Jefferson in 1809 knew the benefits of financial instability to bankers:“If the American people ever allow private banks to control the issue of their  currency, first by inflation, then by deflation, the banks…will deprive the people of  all property until their children wake-up homeless on the continent their fathers conquered…. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.”Blackrock did very well buying up sub-prime defaults.The sub-prime owner’s children woke-up homeless on the continent their fathers conquered.Tent cities this way children.Richard Werner studied the BoJ as it blew up the Japanese economy before 1989.“Princes of the Yen” Richard Werner Asian crisis was set up and then triggered by George Soros.Goldman Sachs vulture funds were ready to swoop on the distressed assets being sold off in fire sales.The house of cards just needed a tiny push.In the video.Whole families committed suicide together in South Korea.Never mind, Soros and Goldman Sachs were making money.   

In reply to by max-kisser

chestergimli max-kisser Wed, 09/13/2017 - 09:45 Permalink

The way out of this problem?

Just eliminate any and all monetary systems. End all banks, financial companies, 90% of lawyers, accounting departments of all companies, pay day loan companies, etc, etc, etc. Eliminate the medium that is controlled by the (((few))) to the detriment of the rest of humanity.

Just imagine no one worrying if they have any of that stupid money to pay for their needs in this world. If they work toward the production and distribution of goods and services, they should be able to partake of them without waiting for a third party to provide them with money.

I guess this eliminates all you folks involved with making money off of money and not doing anything toward providing anything worthwhile toward your sustenance, but there is more of us regular everyday folks than there are of you.

As an aside, I understand that St. Joseph of Cupertino hated money and he once had a fellow priest take some that someone had given because he couldn't stand to have it on him.

In reply to by max-kisser

unklemunky Wed, 09/13/2017 - 07:55 Permalink

So, the theory is that as they tighten the money supply and in effect strengthen the dollar ( or whatever currency) then interest rates on bonds will go up and the money sitting in the stock market will just leave stocks and rush into bonds? Not to mention he flow of foreign dollars chasing rising yields or unwinding carry trades,etc. Uh......correct me if I'm wrong, but wouldn't that big rush of investors jumping into bonds put upward pressure on prices therefore smashing down yields? To further the thought, then all of the so called yield seekers will have to go back to stocks? and forget gold if the dollar is getting pumped up. This system is so fucked up. They have no clue how to fix this. At the end of this bullets will be the only currency and led will be the precious metal.

East Indian Wed, 09/13/2017 - 09:01 Permalink

If everything remains the same and money supply doubles, then it will take 4 - 7 years to absorb that increase in money supply, without damaging the purchasing power of the currency, only by doubling the national wealth (Piketty - national wealth = 4 to 7 years' GDP; money doubles, GDP must double to keep the purchasing power; I know, I know, it is simply impossible). Now the money supply has gone up manifold - no data available on M3. Inflation is openly felt. And a deflation in real economy. Not even 100 years can undo the damage.

NEOSERF Wed, 09/13/2017 - 09:18 Permalink

There is only one direction on this road now and that is more QE, fill the gaps with printed money whether those are city bankruptcies or pension them quickly and don't let the markets see you sweat...there is no going back to balanced budgets and debt ceiling farces...the gloves are off and it is now just trying to stuff the minimum amount of QE into the holes in the dike so that the dam doesn't burst.  All eyes are on ECB (what do they do when they run out of bonds) and Japan who has already monetized 75% of the ETFs there...they will have to start buying overseas like the SNB which should be good for the US for another 10 years.

Ron_Mexico NEOSERF Wed, 09/13/2017 - 10:10 Permalink

"helicopter money" is coming my friend. Why do you think they're trotting out the "Minimum guaranteed income" narrative?  It's the perfect guise under which to do QE2. Of course, this raises larger questions about how the 1% keeps control. All just part of the larger story arc of the total electronic/cashless society.

In reply to by NEOSERF

taketheredpill Wed, 09/13/2017 - 09:31 Permalink
  • Bond yields are unreasonably low because of QE, driving false valuations across all asset classes. Fact.

 I disagree.  During the onset of QE you had Equity Rallies / Bond Selloffs.  Once QE was halted the flows went the other way as profit taking ensued Bond Rallies / Equity Selloffs.....QE3 ending was the outlier with the Taper Tantrum....But I don't think it's a done deal that QT (reverse QE) will result in a Bond selloff.Bonds will only be crushed if you believe stocks trade where they do because of a sustainable recovery that can stand alone without Fed Reserve intervention.Who really believes that?  

Cutter Wed, 09/13/2017 - 10:02 Permalink

Many of the articles on future yields seem too narrowly focused on the Central Banks role in determining yields, as we have been conditioned this last decade to think they are the only player. But its a mistake to exclude geopolitics and the actions of non-government investors.For geopolitical reasons I see China, Japan, and Russia divesting their US treasuries, China and Russia to weaken the US militarily since we are threatening them and to weaken US dollar hegemony, and Japan due to their coming bond crisis, in which they will need every penny at home.  Who is going to pick up all $3 trillion in treasuries?  Is the Fed going to print another $3 trillion?  The Fed printing would drive the 10 year to 0, or even negative, and would kill the financial and insurance industries.I think analysts are overplaying the ammo Central Banks have left, and given geopolitics we are in for a rate surprise.