In regards to ECB QE bond purchases, inquiring minds may be asking: What hath ECB president Mario Draghi wrought?
I can explain in one picture.
The answer in words: The world’s biggest junk bond bubble.
I prefer gold.
On August 4, I commented on the Bubblicious Debate: Greenspan Says “Bond Bubble About to Break”, No Stock Market Bubble
There’s a bond bubble for sure, but it’s in corporate bonds, not treasuries.
This also isn’t the first time Greenspan has expressed concern about a bond bubble. Two years ago, when the 10-year Treasury yield was 2.44% and the CPI was 0.2%, he told Bloomberg TV that “we have a pending bond market bubble.” In a Bloomberg TV interview July 2016, he expressed concerns about stagflation and said “we’re seeing the very early signs of inflation beginning to tick up.” He also said with the 10-year Treasury yield pushed down to 1.50% by Brexit concerns, that he was “nervous” bond prices were too high.
“No Irrational Exuberance in Stocks”
“There is no irrational exuberance that I can see. In fact, it is just the opposite at this stage.”
Greenspan the Contrarian Indicator
Major comments by Alan Greenspan, widely portrayed by the media are most likely perfect contrarian indicators.
He has been calling the bond market a bubble for years but only recently did he say there was no stock market bubble.
With Greenspan, one needs to be careful. He is frequently correct about some things. However, the things about which he is correct are either never widely published, or they are widely disputed.
“You can’t get growth going so long as entitlement expansion is anywhere near where it’s been recently. It’s eating up the sources of investment and the sources of growth and you can’t have it both ways. You cannot fund all of the entitlements that everybody wants and expect that you are going to get GDP growth out of that at three percent or more.”
Truer words were never spoken. But that particular comment was not widely disseminated, nor does the biased social media agree.
Bubblicious Debate
Is there a bond market bubble? Absolutely!
Say what? Yes, Virginia, there is a bubble. However, it’s not the bond bubble that Greenspan and nearly everyone else sees.
The bond market bubble is in corporate bonds. Junk bonds yields are near record lows. Issuance of covenant-lite bonds with no protections and can pay yields, not in cash, but with more bonds, is at or near all-time highs.
Yields are prices as if defaults will never rise again. That’s the real bond bubble.
When the junk bond bubble bursts (and that is what it may take to bust the stock market bubble), Treasury yields are likely to plunge, and the economy is likely to head into recession.
The low in Treasury yields may not even be in.
Greenspan on Bubbles
I offer this bit of advice on Greenspan.
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Mike “Mish” Shedlock
The whole global “recovery” the past 8 years has been built on the back of ever accelerating debt load.
And people talk of interest rate “normalization”?
The only way they’ll get a few extra miles out of the Titantic is by pushing rates lower … a lot lower.
Years ago when they started selling private pensions the mathematicians used for their model an interest rate of between 6 or 8% because historically that had been the average. Since the GFC and a bit before with Mr Greenspan, interest rates have not been at that level for well over a decade now. Add to this mistake the fact that the law requires pension funds to have a certain % of sovereign bonds, well you have a recipe for disaster.
UK pension funds have been taking on water for some time, government public pensions are unfunded. Now these pension funds have been very eager in their search for yield and without doubt will have taken on far riskier position than they would have under normal conditions. The UK private pension are short now about 600 to 800 billion.
In the USA pension funds are already beginning to fail, some pensions had to be limited in some way. J Yellon is in between a rock and a very hard place. Lower interest rates and blow up even more pension funds or raise rates and push home owners out of their homes.
I bet she is having some sleepless nights. It really does not matter what she does now because the Rubicon was passed long ago. All these CB’s are doing now are spinning plates and eventually it WILL all come down. What is it going to look like? Greece, for most of the west. Sovereign bonds are going to fail, it will be a rolling contagion that will start in one country and then spread from one to another. It will be chaos because bonds under pin most asset classes. When this happens you will get war and more authoritarian governments like Spain. It is simply the nature of the beast, times change bet men’s passions remain the same.
Greenspan was also correct on contingent liabilities that US needs to be prepared to accept.
Made the point that the US will not allow TBTFs to, er, fail … so you need to bail them out / bring their balance sheet(s) under USG umbrella. Those liabilities are in the $trillions. He was pissed that Obama included non financials (GM) in bailout … wanted it reserved for Wall Street.
Of course, I hate his proposition … but when “it” finally hits the fan … everyone deep down knows fedgov will step in.
FedGov will TRY to step in, but it will be like the dinosaurs after Chicxulub.
Money isn’t real. All that is required to sustain our illusions of “confidence” is more illusion. As long as a self admitted all-powerful government is willing to step in and “do something”, people will accept it and go on. The thing that would drive collapse is the sense of desperation of a government that comes out and ADMITS they can do nothing, or simply some more secure appearing alternative. If China could present their illusion of stability as superior to our own, then maybe THEY could provide that alternative that would drain or credibility accounts.
The goal of globalists is to create a world of no other alternatives. A world where all nations are equally deficient and bankrupt and people find themselves stuck, forced to accept whatever newly minted lie is passed down as truth.
Look at what Trump said about Puerto Rico’s debt. that whoever held it…it was gone! People are freaking out, proclaiming that the debt can’t be dismissed. Well, you can call it what you will and repackage it as you like but if it is never paid back…well, it is what it is. They simply don’t want to call it a default because as long as it exists in some form, they can repackage and sell it to someone else….most specifically ultimately US, the US citizens with the stolen identity accounts being run up by billions a day. Of course you could have Greek debt and find that it has been marked down 95%, but at least you weren’t robbed.
We have 20 trillion in sovereign debt that we KNOW will NEVER be paid off. It will be rolled into new and even larger debt. History shows us it is a failed loan, but as we see in Europe and China, there is never a reason for a debt to fail or default as it can ALWAYS BE rolled over into new debt. And we know that corporate debt will see the same fate. Dood Frank made it clear that our government will not allow ANY business to default and put our economy at “risk”.This is the ultimate life’s blood of our illusionary economy.
Debt eternal. It can never fail…unless they deliberately allow it to fail
It will fail.
The Roman Empire and the USA Empire have a lot of similarities. They both had standing armies which are VERY expensive to maintain. Roman soldiers were promised a pension in the form of land they could retire to and of course as usual it was never funded and was always going to be funded by future taxation. The state turned against its own people until taxation became so oppressive that citizens simply packed up their possessions and walked away from their homes, like what is happening in Illinois at the moment and soon to be other states.
The consequences of the USA entering a war and losing would savage any confidence in the dollar and the USA as a safe haven.
Historically, the hallmark of a country in the process of collapse is when they start to debase their own currency to try and stay in the game. It is game over.
It is scary and more so thinking the creators of the mess are the same people expected to tidy it up.
If they could tidy it up they wouldn’t have created it in the first place.
So what will these same people do? Compound the problem, it’s all the know.
What alternative to regime change?
““You can’t get growth going so long as entitlement expansion is anywhere near where it’s been recently. It’s eating up the sources of investment and the sources of growth and you can’t have it both ways. You cannot fund all of the entitlements that everybody wants and expect that you are going to get GDP growth out of that at three percent or more.”” A Greenspan
TRILLIONS (2007/2008/2009 ???) for the HIS Master’s banks and institutions to prevent THEIR collapse, “insider deals” WE will NEVER know anything about (audit the fed ?), and the continued push to monopolize the financial industry by eliminating UNwanted competition (ex > Bear Sterns, AIG, etc) and by DEregulation bought and paid for using donations to the Clintons, et al, via various schemes which if ANY of YOU were to use would put YOU into solitary confinement at Ryker’s Island FOREVER.
These people believe their own bullshit. But the question is should YOU ?
Mish, who is holding the junk bonds? Whether or not they are highly leveraged is very important to the consequences when the bubble bursts.
Marty >
pension plans, individual investors via junk bond funds, hedge funds, individual investors straight up
Not sure to what degree but that order may be about right
I sincerely hope not my pension plan. I am fine with hedge funds and individual investors who should know better. Since some of these are so called reverse yankees and Europe debt market is less developed; who is geographically holding the bag?
The bag holders,,,,,
http://www.zerohedge.com/news/exter-inverted-pyramid-refresher
I used to trade in European HY bonds (along with just about any credit product) for a living: hedge funds, lot of mom ‘n pop retail (mutual) funds and in this era of low yields the pension funds would have a greater exposure to this sector for sure, plus the insurance companies and private banks, stock brokers etc would have some retail products that have HY exposure.
Outside of ‘cash’ bonds we’d often embed CDS contracts with a FRN in an SPV to create synthetic notes — lots of that just before the peak in 2007. Very illiquid stuff as you can imagine.
The reach for yield gets so intense near the top of the market that all sorts of toxic garbage is suddenly welcome that wouldn’t have been tolerated before.
How much ECB largesse has gone to corporations that don’t need it but has helped fund M&A and reduce competition?
In regard to entitlements , why does social security show up as a federal budget item item when it is funded from a trust fund? From what i can glean from the internet Social security does not contribute to the deficit as of yet.
Perhaps of interest, thimk,,,,
https://www.forbes.com/sites/baldwin/2016/06/09/social-security-insolvency-when-and-what-to-do/#4f54fe1b2c51
The corporate bond bubble and the stock bubble are joined at the hip.
If you understand the concept “capital structure” you’ll know that debt ranks senior to equity. If the debt becomes impaired, what is your common equity worth?
In a default situation, somewhere between zero and very little.
And given that corporate balance sheets (in aggregate) have never been more levered in modern history …
O/T
Puigdemont has replied to the kings speech calling it as following and paving the way for government policy. In a strong breach of protocol he addresses the king directly “This way no”, labelling the king’s choice as inadequate, and sets the scene for being labelled impertinent etc. by many Spanish. He also invokes that Spanish and Catalans together protested violence yesterday together, something that insinuates that part of the Spanish population are sided with Cataluña.
Here are a couple of updating on this from today, the El Pais one does not translate, the other has some errors in translation of Puigdemont’s speech.
https://translate.google.com/translate?sl=auto&tl=en&js=y&prev=_t&hl=en&ie=UTF-8&u=http:%2F%2Fwww.naciodigital.cat%2Fnoticia%2F139756%2Fminut%2Fminut%2Fsetmana%2Fdespr%2Freferendum%2Fdirecte&edit-text=
https://elpais.com/ccaa/2017/10/03/catalunya/1507011899_178320.html
Puigdemont’s speech is here for those that understand Catalan or want to get a sense of the presentation. I will link in the King of Spain’s also for reference.
https://www.youtube.com/watch?v=iYP8DsqeAaQ
“Bond Bubbles: The accuracy of Greenspan’s calls is inversely proportional to the number of people who believe them.”
You are being too generous and polite to the maestro.
Unbelievable spreads . We have entered a new era ,where fundamental true risk taking valuations are no longer valid . Well we have entered:
https://www.youtube.com/watch?v=-b5aW08ivHU
It is surreal, I don’t see an exchange rate justification for that chart and that would mean that yields are just not a valid representation anymore at international level … sort of signals a very big market disconnect between continents instead of the convergence it first appears…but really at a loss to explain it beyond systemic but uncoordinated pumping.
“Save the children! Turn those guns in!” I’m pretty sure those that created this forthcoming catastrophe are the ‘children’ in question here.
“What Hath Draghi Wrought?”
He has successfully stolen enough of productive working people’s, who buy goods, wealth; to prevent goods prices from rising despite him printing money like a drunken sailor.
Then he has handed the the stolen funds to connected, wealthy, people. Who predominately spend their money on “assets”; stocks, bonds, houses; rather than on goods.
In the process ensuring that ever more of Europe’s wealth, is controlled by people who owe it all to Draghi; rather than by people capable of producing wealth on their own.
The top story remains as what happens in Catalonia yet we see little to no coverage.
The official government reply to Puigdemont’s speech was to completely dismiss any form of negotiation, noting that the longer Puigdemont continues down his path, the greater will be the cost to all.
Now they are habilitating disused police barracks, and the question is over when and how the full intervention in Cataluña will take place. Some say it will be before a declaration of independence takes place, but on the other hand that may be used as final justification for a declaration… if they wait till after a declaration they will be able to completely legitimately ( according to Spanish law) tie Puigdemont up in court indefinitely,be able to present full justification for the use of force, and I suppose basically rub in the idea that to go outside of constitutional law is not worth it.
That will be the start of the next chapter…wherever that leads.
All the news that’s fit to print,,,,,
http://www.catalannews.com/
The Puerto Rican bubble blowers have run out of soap suds.
“There is no irrational exuberance that I can see. In fact, it is just the opposite at this stage.”
Greenspan said he couldn’t see a bubble before it burst. He is unqualified to make any statement about the market.
The end of usury.
/s.
The meddling by the central bankers (who have anointed themselves the role of saviours of the world) since 2009 is mind-boggling. They have used their powers to control interest rate and create money as weapons of mass destruction. Only thing remaining is for people to realize this.
Who are these guys to assume the mantle of Atlas? At every instance e.g. Brexit – they are ready with the money spigot assigning themselves unlimited powers. I fully expect that one day the pitchforks will be out for these central bankers as they have destroyed capitalism all in the guise of saving the world and helping the common man. Who are these arrogant buffoons to assume that they can and that people want them to?
It is my fond hope that at the end of this round there would be profound changes in the financial system as the course with the central bankers at the helm started in 1913 will be laid to rest. IMO, a reset is coming one way or the other if only because we cannot get out of the existing system without it. The silly jackasses have brought capitalism to its knees by removing the ability to price risks and thereby capital.
What if the buyer of all of these Euro junk bonds is the ECB with printed money?
If this is the case this is not a bond market bubble but another Central Bank manipulation disguised as a market bubble. If this is the case one could expect a surge in Euro junk bond issuing.
How can i trust am man (Mr. Greenspan) that did do so much pain to the world ? ? ?
No way !
People STILL don’t “get it” that Greenspan’s entire career was for the purpose of being and playing a real-life “John Galt” the main protagonist of Rand’s seminal novel “Atlas Shrugged” ; only unlike Galt, who operated behind the scenes, Greenspan did it in BROAD DAYLIGHT with the ENTIRE WORLD watching. As they say in the Guinness commercials, “Brilliant!”