Thursday, June 16, 2016

Swiss 30 Year Bonds Enter The Insane Asylum

Are you frustrated you can lend the German government your hard earned money, and pay them to hold it, for "only" 10 years? Does it bother you Japanese bonds are "only" negative out to 14 years? Have no fear! There is an investment alternative that has arrived which is even further out on the limb of absurdity. Enter the 30 year Switzerland government bond, which as of this morning has now moved negative.



You heard that correct. A simple investment today will provide you the opportunity to give the Swiss government your money and then pay them for 30 straight years. You can join all the other proud investors around the world currently holding bonds below the zero bound, a place I refer to as the insane asylum.


Meanwhile, the chart below made the rounds yesterday in the financial world, which shows a long term history of the 10 year government bond yield in Germany.



Investors may take comfort seeing yields also went to 0% back in 1922 - 1923, but a little context is important. What was happening in Germany during that time? Hyperinflation. The bond market was closed during that period so there was no yield. Every German government bond on the planet had a value of $0.0. Why? If the value of the paper currency in your hand was dropping by 10% or more per day, what would be the value of an I.O.U. of that paper 10 years into the future? Much, much less than used toilet paper.

Ironically, we will eventually shift back into that mindset at some point in the future. A tipping point will arrive when investors move from:

Greed: Yields will always continue to fall (even below zero) and we will receive capital gains on the value of the underlying bonds.

Concern: Yields bottom and investors realize the top may be in. At this point they will believe yields will only move up slightly, at a slow pace, and then remain at a permanently low trough.

Panic: The third phase will unfold in one of three ways:
 (A) Investors will collectively realize the governments they are lending their money are bankrupt and have no way to ever pay back the principal and interest with a currency of equal value in the future.
(B) Inflation picks up and investors demand a return (interest rate) high enough to compensate the natural loss of their purchasing power.
(C) Both A and B arrive simultaneously, as they did in Weimar Germany in 1922, and the worst case scenario becomes a reality for that country.

The question to ask yourself is; where will capital flow when it is flooding out of the bubble bond market? You want to position yourself today to be where capital will flow tomorrow, and do your best to not pay attention to the surrounding noise while you wait.

For more see: German 10 Year Bonds Enter The Insane Asylum

Wednesday, June 15, 2016

A Brief Thought On Guns In America

I don't own a gun and I've never fired one, so for me the charts below paint a picture of excess regarding Americans and gun ownership. However, I try to see things from other people's perspective before making comments on sensitive issues. I'm sure if someone had broken into my house in the past with the intention of causing my family harm, I would likely own a gun now and appreciate laws that allow me to do so.

From my perspective it seems as if we can find a middle ground; the right to bear arms should stay, but perhaps we should revisit the right to own mass killing weapons like assault rifles.






























Tuesday, June 14, 2016

German 10 Year Bonds Enter The Insane Asylum

Investors were provided the "opportunity" during today's early hours of trading to purchase 10 year German government bonds at a negative yield. While yields have been hovering close to zero all week, investors can finally lend the German government their hard earned money for 10 years and pay the government to hold it


The bond market bubble shows no signs of slowing. Although we know this story will end in complete disaster it is fascinating to watch how low investors will bid these yields before the market implodes. Wondering what the next "Big Short" will be? It has arrived.  





















Monday, June 13, 2016

Bubbles Bloom Everywhere As The Systemic Crisis Builds Under The Surface

Pension Partners put together the excellent visual below illustrating the point where government bonds move into negative territory on the duration scale. As a reminder, green does not mean good, it means slightly less insane because you are not actually paying the government to hold your money.



With the announcement this week the European Central Bank (ECB) will begin purchasing corporate bonds (in addition to the 800+ billion euros of government bonds it has bought since March 2015), traders have already begun to front-run the purchases, pushing corporate yields to the lowest in history. Corporate bonds in Japan have already moved into negative territory as the Bank of Japan began purchasing negative yielding corporate bonds back in January.



Bloomberg estimates the entire size of the European corporate bond market available to purchase under the ECB's guidelines is about 620 billion euros. This means they will quickly "become the market" for these bonds and liquidity will disappear (which has already occurred in Japan). Ironically, U.S. corporations that have foreign subsidiaries can participate in this insanity by issuing debt in European and Japanese markets. Look for corporations to flood the market with debt in the coming months even if they have no need for additional capital. They will likely use the money to repurchase their own shares in an attempt to drive stock prices even higher. Corporate executives are paid to make stock prices go higher every quarter, and central banks are telling corporations they will print money, give it to them, and then pay those companies for taking the free money (once rates go negative). Can you see how QE flooding the markets creates simultaneous asset bubbles through the spillover effects?

Meanwhile, with banks being penalized for holding cash with the European Central Banks (they are now charged .04% because rates are negative), one of Germany's largest lenders, Commerzbank, is considering putting physical cash in secure vaults. There are already plans in place to make this process more difficult for banks (they are reducing the availability of larger denominated notes). The central banks do not want anyone holding cash. They want all available capital flooding stock, bond and real estate markets to drive each bubble further and further away from prices that can be supported by the real underlying economy. 

The global bond bubble has now pushed rates to the lowest levels we've seen in 5,000 years.



Mario Draghi, the head of the European Central Bank, must surely be pleased with the distortions he is helping to create in the financial markets. Every day the global systemic crisis builds under the surface, but as long as bond yields keep falling and stocks and real estate keep moving higher, let the good times roll.

For more see: The Global Bond Market Bubble Moves Further Into Negative Territory