Seventeen trillion dollars of negative yielding bonds and climbing is not the result of free market capitalism. It is the terminal phase of the global credit bubble.
Printing money out-of-thin air to buy bonds to force yields down in a grand experiment was never a good idea because there is no way out. At least no good way out.
So I’m not surprised the EU just picked a very political lawyer, not a banker or economist or business person, to led the European Central Bank.
And I am not surprised she just said that negative interest rates are great for the economy (they aren’t) and they can go lower – she had to say it.
Here is what you need to know
When yields stop being manipulated ever-lower, the terminal bubble phase ends.
And that means, future returns will never be lower.
Future stock market returns are the same, you can not diversify out of this.
Why are people rushing to buy debt now?
Because plunging yields provide huge capital gains… capital gains reverse when yields stop plunging. Then you are stuck with negative yielding debt – you know, guaranteed losses. So this is when everyone will try to sell – at the same time.
Then what happens?
What happens when everyone tries to sell at the same time? Good question, because there will not be anyone to sell too. At least no “investors”. So it tends to lead to market dislocation and bond fund’s halting redemptions.
When will this happen?
Ask yourself when would you stop buying and start selling? When yields hit zero, -1% (already there in Europe), -2% or -5%?
Think about -5% yields for a second. If your fixed income fund such as the TSP F fund or AGG ETF maintained -5% annualized yields for 10 years, your nest egg drops by half depending on how you calculate it even with no withdrawals. Some retirement fund.
And so I ask again, when do investors stop holding this insanity and bail out of the financial system instead of bailing out the financial system.
I don’t know, but I run this simple exercise to help myself understand that there is a point where the global credit bubble will end – some how and in some way.
And we are getting closer. Faster.
Central Banks are not independent
A central bank beholden to securities market Bubbles has already forsaken independence. After accommodating the mortgage finance Bubble with years of loose monetary policy, the Fed has been completely hamstrung for the past decade. Our central bank waited too long to commence the process of normalizing policy.
In the end, it was unwilling to impose any semblance of a tightening of financial conditions, despite securities markets signaling dangerous monetary excess. Still, the Fed is now condemned for excessive tightening that has put U.S. markets and economic prospects at risk. This is the narrative the President is using as he fashions a scapegoat while aiming to hammer the Fed into submission. –Doug Noland
Terminal Phase is now
How long is the terminal phase? We’ve been in it for awhile. It is hard to figure the exact start date. But there is usually a blow-off or melt-up stage and the bond market appears to be in this stage now.
How will it end? With the global central banks making larger and larger interventions and it now appears global Treasury departments are in the market propping game. Ultimately, the bubble wins the tug-a-war with the policy makers.
What does “winning” look like?
A global market crash or the central banks print and consume the markets. You know, socialize the markets. Take ownership. So the current speculators do not have to lose as much. Japan has been doing it for some time.
Ironic. Socialism through Capitalism. But for the few.
The top 0.1% wealth approaching the wealth of the bottom 90% -Wikipedia
How to invest?
Invest safe, invest smart.
TSP & Vanguard Smart Investor for serious and reluctant investors