Wednesday, February 10, 2016

Mutual Funds & ETFs Are At Risk Of A Run

During the next major decline the average investor will realize the investment products they have been sold (mutual funds and ETFs) do not have ample liquidity behind them. When this realization sinks in it will only feed the panic and investors will rush to sell more in an environment where there are no bids on the buying side. High frequency traders will step away, as they always do, creating massive flash crashes on the way down. Have we started that process? I have no idea, but it's coming. Stability breeds instability and we have had a fairy tale financial environment for 7 long years. We are due for an avalanche.

For more see: Tranquility Creates Fragility: The Coming Collapse Of Financial Markets


Tuesday, February 9, 2016

The World's Biggest Bubble: $7 Trillion In Negative Government Bonds

The graphic below is staggering. It shows the break down in yields for total government debt around the world. With the Bank of Japan's historic announcement to go negative there is now $7 trillion in government debt which is trading at negative yields.



I assure you this is not "normal" and although people have become numb to negative yields this will end in disaster. Why? Bond values decrease when interest rates rise, and there will come a day when investors demand a return above 0.0% to purchase debt on bankrupt governments.

In addition to the actual bonds there are hundreds of trillions of dollars in interest rate derivatives (think of them as off balance sheet bets). Investors feel comfortable they are covered if interest rates rise because a derivative contract will pay them out when that day finally arrives. The problem, just as we saw in 2008 with AIG, is there is certainly one or many counterparties lurking out there that will not have the money to pay when the insurance claims kick in.

For more see: The Mania Chronicles: 10 Year Japanese Government Bonds GO Negative

The Mania Chronicles: 10 Year Japanese Government Bonds Go Negative

“What’s worrying is that stocks aren’t reacting to stimulus from the Bank of Japan and the European Central Bank,” said Tetsuo Seshimo, a portfolio manager at Saison Asset Management Co. in Tokyo who helps oversee $989 million. “Until recently, even if something bad happens, central banks could always rescue us with more easing. But as we’re not seeing that anymore, it may be a sign that authorities can’t keep pushing on that string. We have to consider the prospect that the current bear market will last a long time.”

- From Bloomberg this week

Central banks have pushed many real estate and stock markets around the world to extreme and in some cases bubble valuation levels with their actions since 2008, however, nothing comes close to the speculative mania that is taking place in bonds. I keep waiting for the moment we see the event that signals "peak insanity," but new events continue to unfold that push that date further into the future.

Last night the 10 year Japanese government bond went negative for the first time ever. Yes, this means investors now pay the government to hold their money for 10 years.


The following chart shows the Japanese 10 year yield's steady decline since 1995 when it was trading close to 5%.



Japanese stocks fell 5.4% last night and are now down almost 16% on the year. Bank stocks are down over 32% since January 1. 

Watching these events take place in the Japanese markets should be a very important lesson for those in the United States that still believe the Federal Reserve has "unlimited" and "godlike" power over the U.S. financial markets. The Bank of Japan (Japan's central bank) recently announced they would move their benchmark interest rate negative to match the actions of the European Central Bank. This move would be paired with their current QE program which is gargantuan in size relative to their economy (and any QE program we have seen by any country, in history).

The chart below shows the size of the Bank of Japan's balance sheet relative to their GDP. Their balance sheet grows when they print money and purchase financial assets. To help put this in perspective, in order to match the size of Japan's current QE program the Federal Reserve would need to be purchasing at least $3 trillion in assets annually.


The Bank of Japan has said it will do "whatever it takes" to create inflation and push stock prices higher. Their promise, combined with unprecedented actions, has been shrugged off by the stock market year to date. It is important to note they are not just buying government bonds and mortgages as the Fed was during their QE programs; they are also directly purchasing corporate bonds and stocks. 

There is widespread discussion that if markets continue to fall the Fed's next move will be to bring rates negative in combination with another massive round of QE. While we can be sure the long term damage of these programs will ultimately be catastrophic, it is just as important to know they may not automatically push stocks higher in the short term as investors believe.

For more see: Japan Drops Another Currency War Bombshell With Negative Interest Rates

h/t Wall Street Journal, Bloomberg, ZH

Thursday, February 4, 2016

Kyle Bass On Chinese Banks & South Africa

On China, South Africa and emerging market debt:


In part two he explains to David Faber how he profited off the Japanese yen devaluation:

Tuesday, February 2, 2016

U.S. Government Debt Crosses $19 Trillion

The U.S. government now owes over 19 trillion dollars. Since Obama took office, the national debt has grown by $8.4 trillion and the Federal Reserve has printed over $3 trillion. Unfunded liabilities have continued to mushroom to unimaginable levels while real incomes have tread water and the average American earns 0% on their savings.

Hopefully when the next crisis comes we will learn from our mistakes, but I can assure you the same medicine applied previously (additional debt and printed money) will only be applied again on a much greater scale. Eventually the debt super cycle will have finally run its course, and the entire monetary system will begin to break down. The world will certainly not end, but many people will look back and wonder why they didn't purchase precious metals when they were deeply discounted and the most hated asset on the planet.


Friday, January 29, 2016

Japan Drops Another Currency War Bombshell With Negative Interest Rates

The Bank of Japan's historic announcement last night that they would be bringing interest rates negative has pushed yields on government bonds lower around the world. There are now $5.5 trillion in government bonds trading below 0%, which is about a fourth of all global government debt. 



The Bank of Japan joins the European Central Bank (ECB) in bringing rates negative while simultaneously running a massive QE operation. In Europe about half of all government bonds are negative and in Germany, Finland and Switzerland yields are negative out to 10 years



23.1% of global GDP is now governed by central bank countries with negative rate policies (Europe and Japan make up about 21% of global GDP while Switzerland, Sweden and Denmark make up the rest).


Where do we go from here in the theater of the absurd? Many believe if stock markets continue to fall we will see a serious currency devaluation from China and another round of QE combined with negative rates from the U.S. Federal Reserve.

I believe the ultimate winner of this global nuclear currency warfare will be precious metals. It is only a question of when the markets begin to put the pieces together on how this story ultimately ends.

For more see: Global Markets Crash: Is This The Big One?

h/t Financial Times, Wall Street Journal

Sunday, January 24, 2016

Global Markets Crash: Is This The Big One?

Markets around the world have been in a continuous rout since we started the new year. The MSCI world index has dropped 20% from its May 2015 high, meaning it has entered a technical bear market.



Emerging market currencies have been declining since mid 2011, and they've been in free fall for last few years.



Oil has plunged in price and taken down oil dependent currencies like the Russian ruble, which hit a new all time low this week.


Specific sectors within the bond market have begun to implode; particularly high yield energy bonds. The chart below shows yields rising in this sector (underlying bond values fall as yields rise).



Since 2009, whenever we have had turbulence in the markets (meaning they moved downward) there has been an almost immediate announcement of either action or an action plan from the U.S. Federal Reserve and other global central banks.

The Bank of Japan and the European Central Bank are already in full scale quantitative easing mode. The ECB has brought interest rates negative and trillions of dollars worth of debt in that region are trading at sub zero levels.


The Bank of Japan is not only buying stocks and government bonds in its QE program, but they have recently begun to purchase corporate bonds with negative yields.

The actions by both these central banks will be discussed and analyzed for decades once the current global ponzi monetary system unravels, but for now it is a normal part of our everyday world.

The real question on investor's minds is what the Fed plans to do moving forward, and more importantly; what the reaction will be from the financial markets to their action. I think everyone can be confident that if there continues to be stress in the financial system (their beloved U.S. stock market continues to fall), then the Fed will take some sort of easing action.

My guess is the next major move from the Fed will consist of three parts. The details surrounding the when and how these are put in place will depend on the ferocity of the market's decline:

1. Completely reverse course on the future guidance for interest rate hikes in 2016 (slow them down and then take them off the table)

2. Bring interest rates back to zero, and then taking them negative.

3. Announcing a plan for additional QE.

While we have experienced QE1, QE2 and QE3 since 2009, taking rates negative would be uncharted territory for the Fed. The Fed's New York President William Dudley has already told the markets the Fed would consider negative rates if the economy weakened (Janet Yellen has confirmed these discussions as well).

It is certainly possible the Fed's arrival back to the "easing side" of the market will unleash the animal spirits and drive global stock markets back toward all time bubble highs, reduce the value of the U.S. dollar against foreign counterparts, provide a bounce in both commodities and commodity based economies, and reduce some of the stress in the high yield bond market.

While that outcome is unknown, what we do know is their action will only add to the underlying problem in the global economy which was not solved in 2008; too much debt (continuing to grow rapidly everywhere in the world) and too much central bank interference in the markets (creating distortions that will only lead to greater crashes in the future). 


Perhaps this is the time the markets have finally run out of steam no matter how much jawboning or action the Fed takes. The most dominant misconception within the financial community is the Fed controls the markets. I believe the truth is the exact opposite. The Fed acts in reaction to markets, and the fact that markets have risen coincidentally with their actions since 2009 is just that; a temporary coincidence in time.

When the market begins its true decline to cleanse the system of the malinvestment that has been created since 2009, people will see that the Fed is helpless to stop it. Then true fear will enter the market as investors realize their savior is an emperor that wears no clothes. When that fear arrives, and you will definitely know when it does, it will finally be time to buy U.S. risk assets at prices that reflect the reality of the underlying global economy.

For more see: The Fed's Sleight Of Hand Through Stealth QE


h/t Zero Hedge, Bloomberg, Quartz