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Bond collapse & impact

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  • Wed, Dec 15, 2010 - 11:24pm

    #1

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    Bond collapse & impact

After reading a number of articles on bonds and what could happen and when. I can’t help but wonder if Deflation may come first. How can Bonds collapse, dollar collapse, Real estate collapse and hyper inflation ensue? Can someone wiser than I explain this. Jon

http://www.financialsense.com/contributors/stewart-thomson/topping-out-or-topping-up

Implications Of The Long Bond Price Collapse

  • Thu, Dec 16, 2010 - 12:03am

    #2
    Peak Prosperity Admin

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    Re: Bond collapse & impact

Well I ain’t wiser than you but yes I think there will be a short period of deflation first but I don’t think it will technically be deflation rather it will be devaluation. When people start to see that its pretty certain that things aren’t going to turn around they will start dumping their debt which until then they had seen as an asset i.e. houses, cars, investment property etc. but when it is done on masse it will create a positive feedback loop and drive prices down driven by fear. But in the end since it wasn’t really deflation, meaning the money supply wasn’t decreasing, it will just kick start hyperinflation and off we goooooo. 

weeeeeeeeeeeeeeeeee

  • Thu, Dec 16, 2010 - 11:10am

    #3
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    Re: Bond collapse & impact

Exsqueeze me, but isn’t a “dumping of debt” rather deflationary?  The dumping of debt is ongoing and isn’t likely to subside for some time to come.  The amount of debt that ultimately will be “dumped” is a number so huge that the fabled printing presses upon hearing it begin to whimper ans scurry off to a dark corner of the basement.

Now all of this wouldn’t be a problem if the credit bubble would only begin to expand fast enough to generate sufficient “money” such that the interest owed on previously incurred debt (plus any principal that may be due)as well as the interest on new debt were payable.  It is sad to report that due to the prior insanity we have reached the point where it has become almost matematically impossible.

IMO inflation is a credit, or debt if you prefer, problem.  Price and inflation are often confused.  Price can be the result of credit expansion as we have seen in the recent global housing debacle.  The fundamentals couldn’t support the price, but “fog a mirror” loans did – that is until the market was literally exhausted of greater fools.  The previous and current commodity insanity is running the same course as the liquidity temporarily surges through the financial world.  You have to ask yourself, just how much would you pay for that fine tulip bulb in the window?

  • Thu, Dec 16, 2010 - 03:05pm

    #4
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    Re: Bond collapse & impact

IMO for there to be any meaningful deflation prices would have to collapse faster than money is being shot into the system. My point is that we won’t get there before hyperinflation kicks in. I suppose what I was driving at was this. There will be a short period of panic when people start shedding their ‘assetts’ once they know they will not see a return and they realize the money they are putting into them is just wasted. They will sell, if they can, at any price just to get out. This in turn will most likely cause the government/Fed to react with more money printing as the economy begins to retreat into what looks like a deflationary direction.

Bernanke is not going to let deflation get a foot hold so any deflationary movement will ellicit an over reaction in the opposite direction and hasten the hyperinflation scenario.

  • Fri, Dec 17, 2010 - 12:16pm

    #5
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    Re: Bond collapse & impact

The entire system is confidence and psychology driven.  What most observers either have missed or over discounted is the simple fact that there has been a dramatic 180 degree shift in the “thinking” of the average consumer.  When real estate prices were soaring and enormous amounts of “easy” money were pouring into the system, consumers couldn’t borrow enough money fast enough.  This was almost all “money” being spun out by the securitization of not only RE, but also all other types of loans.  We are talking trillions of dollars a year over the course of several years.  Then the bug hit the windshield.  No more easy money and the hangover began.  The result is a consumer that for the most part now buys based on real need instead of want.  Saving is back in vogue as is the pay down of existing debt.  The stigma of walking away from debt has gone from “you lazy deadbeat” to “intelligent strategic default”.  In the past these dramatic reversals have long lasting ramifications that persist for a generation or two.

Surveys of business owners clearly reveal that there is no lack of money to borrow, but they have no desire to borrow the money as there is no need (demand) sufficient for them to expand operations.  Consumer borrowing has clearly been shrinking in RE, revolving and non-revolving debt.

The system is deleveraging by paydown and default, but most importantly it is deleveraging because the overall bubble is deflating or not expanding fast enough to generate growth in new debt. Those huge reserves the banks are sitting on is not money they really want to lend because it is really all that’s keeping their ratios at “solvent” levels and even it would be woefully inadequate if they were forced to mark to market and bring everything onto the balance sheet.  This is making the lenders a lot more careful about whom they lend to and at what leverage ratio.  This is what a fractional reserve system looks like when slammed into reverse.  That’s the mechanics.  But the true driver of the whole system remains the dominant psychology. 

You can hold the horse’s head under water, but trying to force it to drink won’t work.  There is the real economy of all human interactions and there is the financial sphere made up of mostly theoretical money.  When you look at the derivatives markets and their near quadrillion dollar notational amounts, it is hard to square that against a global economy of about $70 trillion and broad measure global money supply of about the same.  Bear in mind those numbers are both from the CIA and are based on the really dumb “purchasing power parity” method which wildly inflates the true numbers.

Now if you can show me rapid wage increases, increasing debt (please don’t forget to use your calculator’s minus sign to allow for defaults, pay downs and write downs.) combined with physical printing of “money”, then I’ll be happy to consider an imminent hyperinflation after a brief period of disinflation.  I stay firmly in the deflation camp because while gravity can be temporarily overcome, once the energy is exhausted, gravity will reassert itself.  We have for the moment jumped off the floor.

 

  • Mon, Dec 20, 2010 - 02:34am

    #6
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    Re: Bond collapse & impact

[quote=yobob1]

The entire system is confidence and psychology driven.  What most observers either have missed or over discounted is the simple fact that there has been a dramatic 180 degree shift in the “thinking” of the average consumer.  When real estate prices were soaring and enormous amounts of “easy” money were pouring into the system, consumers couldn’t borrow enough money fast enough.  This was almost all “money” being spun out by the securitization of not only RE, but also all other types of loans.  We are talking trillions of dollars a year over the course of several years.  Then the bug hit the windshield.  No more easy money and the hangover began.  The result is a consumer that for the most part now buys based on real need instead of want.  Saving is back in vogue as is the pay down of existing debt.  The stigma of walking away from debt has gone from “you lazy deadbeat” to “intelligent strategic default”.  In the past these dramatic reversals have long lasting ramifications that persist for a generation or two.

Surveys of business owners clearly reveal that there is no lack of money to borrow, but they have no desire to borrow the money as there is no need (demand) sufficient for them to expand operations.  Consumer borrowing has clearly been shrinking in RE, revolving and non-revolving debt.

The system is deleveraging by paydown and default, but most importantly it is deleveraging because the overall bubble is deflating or not expanding fast enough to generate growth in new debt. Those huge reserves the banks are sitting on is not money they really want to lend because it is really all that’s keeping their ratios at “solvent” levels and even it would be woefully inadequate if they were forced to mark to market and bring everything onto the balance sheet.  This is making the lenders a lot more careful about whom they lend to and at what leverage ratio.  This is what a fractional reserve system looks like when slammed into reverse.  That’s the mechanics.  But the true driver of the whole system remains the dominant psychology. 

You can hold the horse’s head under water, but trying to force it to drink won’t work.  There is the real economy of all human interactions and there is the financial sphere made up of mostly theoretical money.  When you look at the derivatives markets and their near quadrillion dollar notational amounts, it is hard to square that against a global economy of about $70 trillion and broad measure global money supply of about the same.  Bear in mind those numbers are both from the CIA and are based on the really dumb “purchasing power parity” method which wildly inflates the true numbers.

Now if you can show me rapid wage increases, increasing debt (please don’t forget to use your calculator’s minus sign to allow for defaults, pay downs and write downs.) combined with physical printing of “money”, then I’ll be happy to consider an imminent hyperinflation after a brief period of disinflation.  I stay firmly in the deflation camp because while gravity can be temporarily overcome, once the energy is exhausted, gravity will reassert itself.  We have for the moment jumped off the floor.

 

[/quote]

 

+1

 

For the hyperinflation scenario, where do people think the money is coming from? Wages are not going up and assets against which to borrow, are still declining. Is the FED really going to make a large deposit of free money (no collateral, no repayment) in every consumer’s bank account?

  • Mon, Dec 20, 2010 - 01:31pm

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    Re: Bond collapse & impact

So then we will continue to see businesses collapse in the commodities areas as they cannot raise prices? Who was the recent grocery market chain to file CH-11 instead of raising prices to keep pace with the commodities increases?

And the end result is….still food products that cannot be purchased due to lack of retail space (most stores go out of business trying to eat the increase)….or that prices move higher as businesses try to save themselve from collapsing margins.

If prices do not go higher to reflect the additional costs of raw materials (corn wheat, soy, feed grains, fuel etc) then everyone goes bankrupt. If they do increase to maintain the margins, then they have to run up as much as the markets have run up.

So cotton is up 200% and wheat is up 180%.

Retail prices will eventually reflect this and if the price increases are done gradually over a period of time while commodities prices stabilize, then I don’ t see too big of a problem.

But what if commodities continue to reflect the injections of cash the Fed is giving?

RIght now….now you have retailers who are over 3 months behind in price increases. They have to gain some margins back or they will not be able to stock the shelves next month. Prices must rise. Commodities prices continue to rise….price on the shelf rise again. THe Fed prints more, commodities rise….retail prices rise with it….the consumer gets fed up and starts trying to buy ahead to avoid the price increases he now knows are getting baked in. Hoarding and velocity of money both increase exponentially…..

What is that called?

I would say it’s hyperinflation, but not due to productivity demand from Main St but currency inflation from the Fed.

Why is everyone saying this cannot happen? I can see that it already is by looking at the cost of goods sold column in my business and the commodities futures and the Feds continued response to the housing market and no collapsing bond market.

Jager06

  • Mon, Dec 20, 2010 - 01:57pm

    #8
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    Re: Bond collapse & impact

[quote=Jager06]

So then we will continue to see businesses collapse in the commodities areas as they cannot raise prices? Who was the recent grocery market chain to file CH-11 instead of raising prices to keep pace with the commodities increases?

[/quote]

That would be A & P . They are a very big east coast chain.

[quote=Jager06]

Why is everyone saying this cannot happen? I can see that it already is by looking at the cost of goods sold column in my business and the commodities futures and the Feds continued response to the housing market and no collapsing bond market.

Jager06

[/quote]

I see inflation every day in the things that I buy – especially food.

  • Mon, Dec 20, 2010 - 09:15pm

    #9
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    Re: Bond collapse & impact

[quote=Jager06]

So then we will continue to see businesses collapse in the commodities areas as they cannot raise prices? Who was the recent grocery market chain to file CH-11 instead of raising prices to keep pace with the commodities increases?

And the end result is….still food products that cannot be purchased due to lack of retail space (most stores go out of business trying to eat the increase)….or that prices move higher as businesses try to save themselve from collapsing margins.

If prices do not go higher to reflect the additional costs of raw materials (corn wheat, soy, feed grains, fuel etc) then everyone goes bankrupt. If they do increase to maintain the margins, then they have to run up as much as the markets have run up.

So cotton is up 200% and wheat is up 180%.

Retail prices will eventually reflect this and if the price increases are done gradually over a period of time while commodities prices stabilize, then I don’ t see too big of a problem.

But what if commodities continue to reflect the injections of cash the Fed is giving?

RIght now….now you have retailers who are over 3 months behind in price increases. They have to gain some margins back or they will not be able to stock the shelves next month. Prices must rise. Commodities prices continue to rise….price on the shelf rise again. THe Fed prints more, commodities rise….retail prices rise with it….the consumer gets fed up and starts trying to buy ahead to avoid the price increases he now knows are getting baked in. Hoarding and velocity of money both increase exponentially…..

What is that called?

I would say it’s hyperinflation, but not due to productivity demand from Main St but currency inflation from the Fed.

Why is everyone saying this cannot happen? I can see that it already is by looking at the cost of goods sold column in my business and the commodities futures and the Feds continued response to the housing market and no collapsing bond market.

Jager06

[/quote]

Don’t you see the missing link in your scenario?  The insane “printing” by Ben & Co. is not making it to the consumer.  It is locked within the financial sphere.  The top 5% may be benefiting beyond their wildest dreams, but they cannot make up for the consumption decline of the other 95% – even if the decline is just a few percentage points.

So you can have a scenario of large retail price increases, but given that were on the edge as it is, you are also going to see significant volume drops in response to price.  Volumes always have optimum efficiency levels.  You can’t run too fast, you can’t run too slow.  Doing either runs the cost per unit higher meaning lower profit.  Sometimes you lose less by selling more at a lower price.

If you’ll look at the “commodity bloodbath” thread you’ll see a recent post that shows the levels of speculation now are higher than the height of commodity bubble circa 2008.  I have virtually no doubt that the commodities are mostly a giant bubble of speculation that may be also viewed as an “anti-dollar” trade.  You may wish to see Machineheads recent posts on that subject. 

I think the easiest sell right now is inflation – I’d sure as heck rather be selling inflation than deflation – but I have to stick with my gut on this – there’s too much missing cash flow that will sooner or later rear its ugly head.  That “selling” of inflation has lead to huge speculative positions – a very lopsided bet on the verge of rolling over.  Time will tell.

I again point to the BDI.  If you just looked at the paper markets you would assume you couldn’t charter a ship for your commodity booty.  You would be wrong.  If all these commodity trades aren’t between producers and users, then what else are they?

If this were just paper, like equities or bonds, then there’s no problem.  But commodity contracts are hooked to real things, and sooner or later the mismatch between the paper value and the street value will collide.

20 December 2010

Baltic Dry Index (BDI)    -44   1955

 

We’re already seeing the hot money move off the bond markets and sell some of the riskier stuff.  I wish I knew exactly when this bubble pops, but I suspect that there will be no QE III and so the pomos will expire in a few months and we’ll find out who is swimming naked.

  • Mon, Dec 20, 2010 - 10:41pm

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    Re: Bond collapse & impact

Yobob1

So what end scenario do you see in this deflationary collapse?

Ok, so we have massive deflation and no hyperinflation then as everything implodes I walk away with my dollar not only surviving but being worth a lot more? Is that what you are saying?

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