TSP Charts: “Unthinkable Harm” (Updated)

What’s updated: I added more links to references and pretty pictures for some who have commented that I’m making this stuff up. While I agree narratives are subjective, the evidence is not.

If you are getting a sense that all is not well in the financial world, you would be on to something.

Inquiring minds are asking why the Fed is considering an interest rate cut when the SP500 is sitting at an all-time high, unemployment is near an historical low, wage growth is solid and of course we keep hearing we are in “the greatest economy ever”.

TSP Smart: Chart of European wealth extraction from savers to save the financial system is signaling “Oh Sh*!”

The answer the Fed Chairman is providing is that it will be an “insurance interest rate cut” to keep the financial economic expansion going until late 2020 – which curiously is when the next election will be held. Hmmm.

Insurance from what? And more importantly will it work?

The last two “insurance” interest rate cuts during bubble periods were in 1927 and 1998. It did not help the economy then either, but it sent the stock market into its terminal melt up phase. Followed by melt downs and the great depression and great recession.

But for those hoping to jump on the rocket ship higher, remember we have already had a melt up in the US stock market to levels higher than 1929 and 2000 based on reliable valuation methods. And global interest rates are well ahead of the Fed “cuts” with interest rates across the globe probing new lows.

Dr. Hussman’s models

In other words, we may have already seen most of the melt up in the bond prices. I mean how negative can they go. I inverted the first chart to give it the proper perspective of Europe’s financial situation – that’s over 5 trillion in debt with negative interest rates! (I’ve inverted the above graph for perspective)

A better way at looking at negative yielding bonds

And really, Greece bonds are trading on par with the US Treasuries – Seriously, Greece!

Hmmm, Do I invest in Greek bonds or US Treasuries?

Which may explain why the market is not in rocket mode after the Fed Chairman yesterday basically said he will be cutting interest rates in July.

Judy Shelton was just nominated to the Fed and she does thinks the markets and not a bunch of academics should be setting interest rates. While I agree with her, you have to stop the central bank madness in the rest of the world before the markets can re-orient themselves.

The market wanted more – last month, like zero rates now! So the market is now worried it will only get a measly quarter point cut instead of a half a percent cut it priced in months ago.


Because all the criteria the Fed has used for interest rate policy setting is NOT signaling a need for cuts and may be soon signaling a need for raising interest rates later in the year. The market is saying, “Dammit, where is that recession” so we can get our next shot of financial (cough, cough) economic stimulus.

So what is going on

Simply put, the global credit bubble the central banks blew and nurtured since the financial crisis (the crisis they were largely responsible for) is sending signals that it is close to imploding. So we need to get back to zero interest rates and stand by the printing presses to cover all the losses hidden in the $600 trillion of derivatives on the major global banks balance sheets.

“We then stress the importance of “netting” within the OTC derivative contracts. Our methodology shows that, even using data from before the worsening of the crisis in late Summer 2008, the potential cascade effects could be very substantial.”IMF Working Paper

Since a graph on derivatives is too big to insert into an article I posted one at the bottom of this page for reference.

Okay, okay… derivative losses are not exactly listed on their balance sheets since the banks make up whatever value they want for their speculative bets (derivatives). And for some crazy reason they all show positive balances even though they are betting against each other.

So to keep this simple, ask yourself if everything is so great does this make sense:

I’m sure its nothing

Soooo… some money printing entity (read central bank) will need to absorb all the derivative losses to all the other parties (banks) for the next 50 years to keep the financial system from another panic. And of course the profits were extracted a long time ago.

And don’t get me going on JUNK bonds with negative interest rates… okay, I can’t help myself… Junk bonds come with high risk of default which is why they are “High Yield!!!” bonds. But negative interest rates GUARANTEE losses. Only a price & loss insensitive investor (hint, hint) would buy this JUNK!

Now central banks will make something up behind closed doors for the criminal organization called Deutsche Bank. One ponders if Deutsche Bank purposely took the losing side of the bets to enable profits for their buddies bets at the other banks when the central bank prints money to pay for these losses – oh, just pondering how the financial sociopaths in charge might think.

But you don’t have to take my word for this mess. The Fed Chairman just explained it what happens when the global credit bubble ponzi scheme is not feed ever-increasing debt to sustain it.

Fed chairman warns of ‘unthinkable’ harm if debt ceiling isn’t raised July 2019

Now multiple that by 1000 if Deutsche Bank’s derivative bets are not covered under the table by the central banks.

So what does it mean to our investments?

I’ll write more for my members of course, but let’s just say the word volatility comes to mind when considering the stock market. And we have seen a lot of volatility since early 2018.

Now I do not equate volatility with “risk” like many financial advisers do. Portfolio “theory” equates volatility of your portfolio to “risk” which is why most investors ignore the word “risk”. And I don’t blame them.

I equate “risk” with the likelihood of significant losses. And today that risk is high… extremely high BUT…

Yes, indeed an all time high

The problem with terminal phases in bubbles and especially ones where the Fed is supporting terminal phase excess is that melt-ups can occur before the plunge back to reality. And financial “reality” is far, far below where we are today. Not just the surface level 20 percent below. So I am intently watching… from a lifeboat called the USS G Fund.

In the near term the SP500 index is near the area where it experienced three major tops in last 2 years followed by steep plunges. So maybe it is not a time to be all-in.

Rapid reversals at the tops and bottoms

And for those wondering about the divergence between the bond market and stock market, usually in the end the bond market is right. And the bond market is not pricing in any good outcomes. The divergence can last a while. And what stood out to me this last week was that ALL financial assets were rallying at the same time.

Where did the flows come from to see an everything rally?

It’s a trick question. All financial markets can rally on euphoria alone without inflows of funds for short periods of time. But they can also crash without outflows on fear. Or stop rallying when Euphoria comes to the end of its track.

Did Euphoria reach the end of the track

With the market now pricing in rate cuts back to zero, any disappointment or fear of not hitting zero will cause the market to “unprice” some of its recent gains. Or maybe the market now focuses on other pending financial disasters such as Duetsche Bank, the global industrial recession, the US corporate earnings recession, etc.

the market is NOT the economy

Anyway, both your equity funds AND bond funds can move in the same direction at the same time when it is factoring future central bank actions. And today (18 July) it appears both asset classes may want to pull back on lowered free money expectations, or at least slower free money from the Fed. (Free money = interest rates below inflation or QE).

What is setting the price today

“Passive investments control about 60% of equity assets…” –JP Morgan

With 60-70% of investors now passive, we have left the markets to the Artificial Intelligence and computer algorithms which are trying to out algo each other. With the massive reduction in financial assets (central bank buying and corporate buybacks & mergers) and a smaller percent of the market actively traded, the markets are easier to move either direction and are prone to sharp reversals.

Most computer algorithms don’t care about fundamentals like profits or the fact that the SP500 is turning to junk status thanks to excessive debt. Algos do move on financial indicators which are driven by central banks. And on headlines especially in during the futures markets such the 164 tweets that “we are close to a trade deal”.

What has some very nervous is what happens when all the computers decide it is time to sell at the same time. Especially the bond funds. Which is why the Fed Chairman sounds nervous these days when he was so confident last year with his announcement of 3 rate hikes in 2019 and selling down their balance sheet was on “auto-pilot”.

“These funds are built on a lie, which is that you can have daily liquidity, and that for assets that fundamentally aren’t liquid”

One last pointer

So far the smallest 2000 companies in the US exchanges are not buying the SP500 all-time high. And they probably won’t unless they see another massive monetary injection from the central banks.

The Russell 2000 has another head & shoulder pattern like in 2014-2016. And while the bull market continued in 2016, it needed 4 trillion dollars of central bank financial asset buying in 2016 alone. I would not bank on a full repeat this year.

Need more free money

The central banks at some point will attempt to blow hard into their ballooning credit bubble to keep the economic expansion credit bubble intact. We’re watching. But at some point this bubble is going to go the way of all bubbles. And then it gets real interesting.

One Last Dig

This is what caused the dip in the stock market the 17th…

The market dived on the 18th on this bad good bad good news


Forcing the Fed talking heads to pump the markets back up on the 18th…

Pushing rates down and the stock market up
18-19 July 2019

The Fed had to walk back the 1/2 point rate cut implied by Williams and Vice Chair Clarida. But these two know the Fed follows the market and they were pushing rates lower to help the Fed follow with a bigger rate cut in July. Nice manipulation guys.

No, this is not how they taught me how it works in my investment finance courses. I had to do a lot of unlearning to understand the markets.

Invest safe, invest smart

Michael Bond

PS. If you are looking for a place to start try our free articles:

Why I am Defensive Today or Best TSP Funds & Allocations

And members should check in on out Market Commentary from time to time on our website for regular updates and comments.

TSP & Vanguard Smart Investor for reluctant investors who simply want the warnings and a better understanding of what they are investing in. And serious investors who want to know more than the typical financial marketing answers about the markets. And our priceless trading day seasonal almanacs for traders.

(source the Money Project) December 2015 data

Categories: Perspectives, TSP Charts

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