When Doves Fly - Bond Market Turbulence Ahead - by Michael Carino

It is largely acknowledged that after a decade of unprecedented
monetary accommodation in the US and abroad, bond markets are extremely
overvalued.  Globally, central banks are
trying to slowly deflate this bubble but the beast created is not easily
broken.  A decade of manipulating bond
prices has created a small consortium of large balance sheet traders who trade
the most liquid Treasury market in a high volume fashion, thus setting global rates
much lower than historical norms. This manipulation reallocates billions in
interest payments from badly needed investors such as pensions to a few hedge funds
and banks. These practices end up costing the government much less in interest
costs so these gargantuan bad practices continue (Over a trillion of US
Treasuries trade daily in cash and futures markets and there are only 14
trillion Treasuries. Additionally, foreigners own half and the Fed owns 2.5
Trillion – clearly too high of volume compared to securities available).

These questionable trading practices have rallied long term
Treasuries over 50 basis points in just the past month – a substantial move.  Even more spectacularly, this happened when
the Fed raised the Fed Funds Rate 25 bps and said they expect 1.75% in further increases,
set out their path to trillions in future bond sales to reduce their balance
sheet and the government is planning on issuing ultra-long dated bonds.  Yes, it’s clear to see that the Fed’s
manipulative practices from the last decade has turned the bond market into
something resembling the wild west.  This
will end tragically with systemic issues in the bond market.  This has been the modus operandi of the Fed for
the last 20 or so years.  Over accommodate
the economy with easy monetary police, create systemic issues and resolve with
more accommodative policies. This time around, the blame will be placed
squarely on monetary policy and the Fed knows it.

To try to limit the calamity from the insanity in the bond
market, the most dovish of Fed officials have been trying to limit these
manipulative strategies and slowly steer rates out of the upper stratosphere and
on a path to normalization. We continue to get economic data showing the
economy is not only normal but poised to overheat with accelerating inflation.  GDP of 3% and inflation of 2% does not justify
depression era level of rates.  Home
prices just surged to a new record high! No.  History shows rates should be at least 2% to
3% higher.  Long term Treasuries could
have market losses of 50% if rates normalized and you could still argue they
are overpriced.  When markets are this
overpriced, the probability of a severe parabolic move to higher yields is
elevated.

The Fed knows this and wants to change this environment
before the forgetful public gets scorched again.  Recently, New York Federal Reserve President
William Dudley, a dovish member of the FOMC, stated that he is confident that
economic expansion has a way to run and strong labor markets will eventually
trigger a rebound in inflation. 
Tragically, the media barely touched on these comments and longer dated
bonds rallied on high volume.  Short dated
bond yields have not been moving lower.  There
are too many bonds available, they are priced right on top of current funding
costs and this part of the interest rate curve is difficult to manipulate. 

Even more obvious of the Fed in unison trying to deflate the
bond market bubble, uber-dovish Federal Reserve Bank of Boston President Eric
Rosengren said that the era of low interest rates in the United States and
elsewhere poses financial stability
risks and that central bankers must factor such concerns into their
decision making process.  This is as high
of an alarm that can be rung – and just rung by one of the most accommodative of
FOMC members.  Media – please report and
make the public aware of these risks that now even the Fed feels compelled to
highlight these issues.  How can there be
comments like this and the public still is invested in this investment class?  What’s the excuse going to be this time around
when there are significant losses in the bond market.  I missed those Fed speeches?

 

These Fed comments acknowledge there is a serious problem in
the bond market and they are trying to encourage a more rational pricing
function in rates – good luck. The only way to create normality in the bond
market after such buildup of risks from the most accommodative monetary policy
in the worlds history is a financial crisis that will put these manipulative trading
strategies out of business.  And that
leads to different issues that can leach into slower economic growth.  The Fed has to pick their poison. It appears
they want this mispricing of bonds to come to an end.  Unfortunately, it appears they are fine with a
slow end to these practices.  A slow end
means risks will continue to build and the end will be that much more painful
and destructive.  We all know the longer
you wait to take your medicine, the sicker and more painful the situation
becomes.  I just hope the patient isn’t
left in critical condition from the Fed’s medicine again.

 

by Michael Carino, 6/21/17

Michael Carino is the CEO of Greenwich Endeavors, a
financial service firm, and has been a fund manager and owner for more than 20
years.  He has positions that benefit
from a normalized bond market and higher yields.  Do you?

 

    

What Is America Going To Look Like When Stock, Housing, And Even Used Car Prices All Crash?

Authored by Michael Snyder via The Economic Collapse blog,

Have you ever thought about what comes after the bubble?  In 2008 we got a short preview of what life will be like, but most Americans seem to have come to the conclusion that the last financial crisis was just a minor bump in the road toward endless economic prosperity.  But of course the truth is that the ridiculously high debt-fueled standard of living that we are enjoying now is not sustainable, and after this bubble bursts it will be an extremely painful adjustment for our society.

Since the last financial crisis, the U.S. national debt has nearly doubled, corporate debt has doubled, stock valuations have reached exceedingly ridiculous extremes, the student loan debt bubble has surpassed a trillion dollars, we are facing the largest unfunded pension crisis in U.S. history, and in many parts of the country (particularly the west coast) we are facing a housing bubble that is even worse than the one that burst in 2007 and 2008.

And even with all of these bubbles, U.S. GDP growth has been absolutely anemic.  Even if you believe the grossly manipulated numbers that the federal government puts out, the U.S. economy grew at a “miserably low” rate of just 1.6 percent in 2016…

In terms of GDP, the fourth quarter was revised up slightly, but there were adjustments for prior quarters, and overall GDP growth for the year 2016 remained at a miserably low 1.6%. We’ve come to call this the “stall speed.” It’s difficult for the US economy to stay aloft at this slow speed. As Q4 gutted any hopes for a strong finish, GDP growth in 2016 matched the worst year since the Great Recession.

And corporate profits, despite a stock market that has been surging for years, are even worse. A lot worse. They’ve declined for years. In fact, they declined for years during the prior two stock market bubbles, the dotcom bubble and the pre-Financial-Crisis bubble. Both ended in crashes.

Things have continued to get even worse early in 2016.  At this point, it is being projected that U.S. GDP will grow at an annual rate of just 0.9 percent during the first quarter of 2017.

So anyone that tries to tell you that the U.S. economy is in good shape is simply not being honest with you.

But even though things don’t look great now, they are going to look far, far worse after the biggest debt bubble in human history bursts.

For example, what do you think that America will look like after half of all stock market wealth disappears?  In a recent note to his clients, John P. Hussman stated that his team is projecting that by the end of this current market cycle “roughly half of U.S. equity market capitalization – $17 trillion in paper wealth – will simply vanish”.

And of course that projection lines up perfectly with what I have been saying for quite a while.  In order for key measures of stock market valuation (such as CAPE, etc.) to return to their long-term averages, stocks are going to have to fall at least 40 to 50 percent from their current levels.

As this coming crisis unfolds, other asset classes will experience astounding downturns as well.  This week, Morgan Stanley (one of the too big to fail banks) released a report that said that used car prices “could crash by up to 50%” over the next several years…

For months we’ve been talking about the massive lending bubble propping up the U.S. auto market. Now, noting many of the same concerns that we’ve highlighted repeatedly, Morgan Stanley’s auto team, led by Adam Jonas, has just issued a report detailing why they think used car prices could crash by up to 50% over the next 4-5 years.

Housing prices are primed for a major plunge as well.  This is especially true on the west coast where tech money and foreign purchasers from Asia have pushed home values up to dizzying levels.  Half a million dollars will be lucky to get you a “starter home” in San Francisco, and it was being reported that one poor techie living there was paying $1400 a month just to live in a closet.  Many believe that some cities on the west coast will be quite fortunate if home values only go down by 50 percent during the coming crash.

Everywhere you look there are bubbles.  In a recent piece, Daniel Lang pointed out some more of them…

• Eric Rosengren, the president of the Federal Reserve Bank of Boston, recently made a startling tacit admission. We may be in the midst of yet another real estate bubble. Major financial institutions in this country are in possession of over $14 trillion worth of residential real estate loans. That’s well over $40,000 for every man woman and child in America.


• Low interest rates have fueled a bubble in subprime auto loans, and that bubble appears to be reaching its limits. There are now over 1 million ordinary and subprime auto loans that are delinquent, a number that hasn’t been this high since 2009.


• There is now well over a trillion dollars worth of student loan debt in this country; much of it owned by low income families. And there’s little hope that these students will ever see a return on their investment. That’s why at least 27% of student loans are in default. While more than one in four students are in default now, that number was one in nine a decade ago. And if current trends continue, there could be $3.3 trillion of student loan debt by the end of the next decade.

At some point the imbalances become just too great and the system collapses in upon itself.

In other words, we are heading for a massive implosion.

And once the implosion happens, people are going to go absolutely nuts.  Anger and frustration are already rising to the boiling point all over the country, and it isn’t going to take much to push millions of Americans completely over the edge.

In a recent interview with Greg Hunter, author James Rickards warned that when things get really bad in America we could actually see what he refers to as “money riots”…

So, could we be facing a “Mad Max” world if the financial system totally crashes? Rickards says, “In ‘Road to Ruin,’ I talk about what I call the money riots.  There is a lot of reasons for rioting.  When you start shutting banks and the stock exchange and they say you can’t get your money, it’s only temporary, trust us, people will go out and start to burn down banks.  The government is ready for that also with emergency response and martial law. . . . Governments don’t go down without a fight. . . . You can see the shutdown coming because they will try to buy time until they come up with a solution, whether it’s gold, Special Drawing Rights (SDR), guarantees or whatever it might be.  There are only two or three possibilities here, but all of them will take time, and they will have to shut down the system. . . . People will not sit for that.  So, that means people will riot.  They’ll burn down banks.  They will smash windows, but what is the reaction to that?  The answer is martial law, militarized police, actual military units and you get something that looks like fascism pretty quickly.”

I very much agree with his assessment.

All it is going to take is another major financial crisis and this nation will go completely and utterly insane.

Unfortunately, all of our long-term economic problems have proceeded to get a lot worse since the last time around, and so when things fall apart this time we will likely be looking at a scenario that is absolutely unprecedented in American history.

A lot of people have become very complacent out there these days, but that is a huge mistake.

Just because a crisis is delayed does not mean that it is canceled.  And because our leaders have kept making this economic bubble larger and larger, that just means that the coming crisis will be even more painful than it otherwise could have been.

Multiple Bubbles Are Going To Bring America To Its Knees: "The Warning Signs Are There"

Authored by Daniel Lang via SHTFplan.com,

If you’ve been paying attention to the ongoing degradation of the American economy since the last financial crisis, you’re probably flabbergasted by the fact that our economy has managed to make it this far without imploding. I know I am. I find myself shocked with every year that passes without incident.

The warning signs are there for anyone willing to see, and they are flashing red. Even cursory research into the numbers underlying our system will tell you that we’re on an unsustainable financial path. It’s simple math. And yet the system has proven far more durable than most people thought.

The only reasonable explanation I can think of, is that the system is being held up by wishful thinking and willful ignorance. If every single person knew how unsustainable our economy is, it would self-destruct within hours. People would pull their money out of the banks, the bonds, and the stock market, and buy whatever real assets they could while their money is still worth something. It would be the first of many dominoes to fall before the entire financial system collapses.

But most people don’t want to think about that possibility. They want the relative peace and prosperity of the current system to continue, so they ignore the facts or try to avoid them as much as possible. They keep their money right where it is and cross their fingers instead. In other words, the only thing propping up the system is undeserved confidence.

Unfortunately, confidence can’t keep an unsustainable system running forever. Nothing can. And our particular system is brimming with economic bubbles that aren’t going to stay inflated for much longer. Most recessions are associated with the bursting of at least one kind of bubble, but there are multiple sectors of our economy that may crash at roughly the same time in the near future. For instance:

• Eric Rosengren, the president of the Federal Reserve Bank of Boston, recently made a startling tacit admission. We may be in the midst of yet another real estate bubble. Major financial institutions in this country are in possession of over $14 trillion worth of residential real estate loans. That’s well over $40,000 for every man woman and child in America.


• Low interest rates have fueled a bubble in subprime auto loans, and that bubble appears to be reaching its limits. There are now over 1 million ordinary and subprime auto loans that are delinquent, a number that hasn’t been this high since 2009.


• There is now well over a trillion dollars worth of student loan debt in this country; much of it owned by low income families. And there’s little hope that these students will ever see a return on their investment. That’s why at least 27% of student loans are in default. While more than one in four students are in default now, that number was one in nine a decade ago. And if current trends continue, there could be $3.3 trillion of student loan debt by the end of the next decade. Clearly, this isn’t going to go on for much longer.


• And who could forget the stock market? Despite experiencing low GDP growth every year since the last recession, the stock market continues to break new records. Many of the companies on the stock market (especially tech companies), have a market cap that is between 20 and 100 times their sales or earnings numbers. Some are much higher, despite experiencing slow growth, or even no profits at all.

Our economy is awash in cheap money and financial bubbles that threaten to wipe out tens of trillions of dollars worth of savings, investments, and assets. Everyone can close their eyes and hum while they hope that everything is going to be just fine, but it won’t be.

I said before that if everyone knew how unsustainable this economy is, it would all come crashing down. But they’re going to find out one way or another when it comes crashing down anyway. Hope and confidence can only prop up a bubble-ridden economy for so long.