Podcast

r.classen/Dreamstime

Michael Pento: The Coming Bond Bubble Collapse

All asset classes will collapse in tandem when this bursts
Sunday, September 18, 2016, 1:42 PM

In this week's podcast, Michael Pento, fund manager and author of The Coming Bond Bubble Collapse, explains how the United States is fast approaching the end stage of the biggest asset bubble in history. He describes how the bursting of this bubble will cause a massive interest rate shock that will send the US consumer economy and the US government—pumped up by massive Treasury debt—into bankruptcy, an event that will send shockwaves throughout the global economy:

These are the most dangerous markets I have ever witnessed in my entire life, and I’ve been investing for over 25 years. Let’s go over some numbers to let you know exactly how tenuous this bubble is. Its membrane has been stretched so wide and so tight that it’s about to burst, and any semblance of even maybe a little sharp object, something even a hemophiliac wouldn’t be afraid of, sends the market careening downward.

Global central bank balance sheets are up from $6 trillion in 2007 to $21 trillion today and they are still being expanded at the pace of $200 billion each and every month. What’s happening is that the robotraders, the algorithms, the frontrunners on Wall Street and around the world are just gaming the system, looking for the next increase in central bank credit to take their collateral to the ECB or to the Bank of Japan or to the Fed and buy more stocks and bonds.

That’s the game we’re playing. Even a hint that it might someday end sends the entire investment community scampering for the door; and that door is very, very narrow and can only fit a few people through it. So let’s go through a couple of more data points to emphasize just how big this bond bubble is and why it’s so important.

So the European Central Bank is buying corporate bonds. I hope everybody knows that. So much that there's now 30% of investment-grade debt in Europe trading with a negative yield. This is not sovereign debt (as asinine as it is to ever be able as a sovereign nation to issue debt and get paid to do so). Investment grade bonds in Europe now trade with a negative yield.

The Bank of Japan owns 50% of all Japanese government bonds, JGBs.

About 25 percent (and this number vacillates between days where the German tenure goes north or south of the flat line) of global sovereign debt trades with a negative yield.

So what happened on September 8th? Last Thursday, Mario Draghi came out and gave a press conference after leaving rates unchanged in the European Union. The audience was asking questions like: Did you discuss helicopter money? No, we really didn’t discuss it. Did you discuss extending the QE program beyond March of 2017? No, we didn’t discuss extending the 80 billion purchases of assets beyond March. There was a stirring in the audience, the reporters were beside themselves. They couldn’t believe that Mario Draghi, even though he didn’t even hint about stopping QE, he didn’t extend its duration or its quantity. That sent markets cratering. The Dow fell 400 points. The U.S. 10-year yield jumped from 1.52% to 1.68% in one day.

Now, the market had a bounce back the next day, then was down again more than 200 points on the Dow. So you can tell, anybody with any objective, critical, independent mind can tell this is an unsustainable, very ephemeral rally in stocks that has occurred since 2009. And when the bond market breaks, when that bubble bursts, it will wipe out every asset -- everything will collapse together -- because everything is geared off of that so-called 'risk free' rate of return.

If your risk free rate of return has been warped down to 0% for 96 months, then everything -- and I mean diamonds, sports cars, mutual funds, municipal bonds, fixed income, REITs, collateralized loan obligations, stocks, bonds, everything, even commodities -- will collapse in tandem along with the bond bubble burst.

Click the play button below to listen to Chris' interview with Michael Pento (27m:46s).

Transcript: 

Chris Martenson: Welcome to this Peak Prosperity podcast. I am your host, Chris Martenson and it is September 13, 2016. The financial world is literally insane right now, by which I mean the traditional definition of insanity is doing the same thing over and over again, but expecting different results. The central banks poured money into the financial markets, expecting an economic recovery. They didn’t get that, so they poured even more money in, but that didn’t work.

So they poured even more money in, and that didn’t work, over and over again, insanely. But they did get a monster bond bubble for their troubles, as well as equity overvaluations that I think are in bubble territory, and a renewed housing bubble in many key markets globally. This is the most dangerous time to be an investor in all of history. That’s my view.

So, we’re going to dig deeper into that insanity, and with us today is a Wall Street expert, a financial expert, and author of the book The Coming Bond Market Collapse. Mr. Michael Pento serves as the president and founder of Pento Portfolio Strategies; and that strategy, excuse me, PPS is a registered investment advisory that operates like an actively managed fund without all the expenses.

Their model portfolio uses a proprietary macroeconomic model (so you know I like it) to determine when and how to invest across an inflation/deflation spectrum which, which I know, huge area of interest to all my listeners. You’ve probably seen him on all the major financial news networks. Michael, real pleasure to have you with us today.

Michael Pento: I’m real excited to be with you, Chris. What a great introduction.

Chris Martenson: Well thanks, Michael. I said the intro. I think these markets are dangerous, especially for the passive investor, to give you some more context. What’s your view?

Michael Pento: Well, I think, and I agree with you 100 percent, they’re the most dangerous market I have ever witnessed in my entire life, and I’ve been investing for over 25 years. Let’s just go back and go over some numbers to let you know exactly how tenuous this bubble is. The membrane has been stretched so wide and so tight that it’s about to burst, and any semblance of even, maybe a little sharp object, something even a hemophiliac wouldn’t be afraid of, sends the market careening downward.

Global central bank balance sheets are up from $6 trillion in 2007 to $21 trillion today, and they are still being expanded at the pace of $200 billion each and every month. What’s happening is that the robo traders, the algorithms, frontrunners on Wall Street and around the world are just gaming the system, looking for the next increase in central bank credit to take their collateral to the ECB or to the Bank of Japan or to the Fed, and buy more stocks and bonds.

That’s the game we’re playing. Even a hint that that might someday end sends the entire investment community scampering for the door; and that door is very, very narrow and can only fit a few people through it. So, let’s go through a couple of more data points that I want to emphasize to let your audience understand just how big this bond bubble is, and why it’s so important.

So, the ECB is now buying -- the European Central Bank -- is buying corporate bonds. I hope everybody knows that. So much so, that there are now 30 percent of investment grade debt in Europe trading with a negative yield. This is not sovereign debt, as asinine as it is to ever be able as a sovereign nation to issue debt and get paid to do so. Bonds, investment grade bonds in Europe, now trade with a negative yield.

The Bank of Japan owns 50 percent of all Japanese government bonds, JGBs. About 25 percent, and this number vacillates between days where the German ten year goes north or south of the flat line; about 25 percent of global sovereign debt trades with a negative yield. So, what happened on September 8th? September 8th, last Thursday, Mario Draghi came out and gave a press conference after leaving rates unchanged in the European Union.

The audience was asking questions like, such as did, you discuss helicopter money. No, we really didn’t discuss it. Did you discuss extending the QE program beyond March of 2017? No, we didn’t discuss extending the 80 billion purchases of assets beyond March. There was a shuddering in the audience. The reporters were beside themselves. They couldn’t believe that Mario Draghi, even though he didn’t even hint about stopping QE, he didn’t extend its duration or its quantity. That sent markets cratering.

The Dow fell 400 points. The U.S. ten year yield jumped from 1.52 percent to 1.68 percent in one day. Now, the market had a bounce back yesterday. Today it's down more than 200 points on the Dow. So, you can tell, anybody with any objective, critical, independent mind, can tell this is an unsustainable, very ephemeral rally in stocks that has occurred since 2009; and when the bond market breaks, when that bubble bursts, it will wipe out every asset. Everything will collapse together, because as you said in your intro, everything is geared off of that so-called risk free rate of return.

If your risk free rate of return has been warped down to 0 percent for 96 months, then everything, and I mean diamonds, sports cars, mutual funds, municipal bonds, fixed income, REITs, collateralized loan obligations, stocks, bonds, everything, even commodities will collapse in tandem along with the bond bubble burst.

Chris Martenson: Now, I want to get to what that bursting is going to feel like, because people need to know about that. But I do want to get to some of those numbers you just mentioned. I’m a big believer that every bubble is in search of a pin. You talked about that stretched membrane. Who knew that a Draghi comment could be a pin, but that’s how insane these markets are. They’re keying off of every single central bank utterance, because everything depends on these central banks just continuing to do more of what they’ve been doing.

But, let’s put some; yes, I can understand how the ECB steps in, buys corporate bonds and people are front running them and an already issued bond; yes, I could see how they could get below negative yield. I can understand that, but just recently we saw Sanofi, the French drug maker. We also saw the consumer goods company out of Germany, Henkel.

Michael Pento: Had issuance, correct.

Chris Martenson: They issued debt with negative yields. They issued negative. How crazy is that? I don’t know how to make sense of it, so I’m asking.

Michael Pento: It's twilight zone. Obviously, if you buy a bond with a negative yield, you're guaranteed to be a loser if you hold it to duration. You're buying bonds, by the way. You’re not buying bonds of some pristine sovereign nation. You’re buying corporate debt. So when you buy a bond that has a negative yield, basically what you're saying is you're gambling that the bid from central bankers will be not only perpetually there, but maybe even increasing. So, you can dump that bond at a principal appreciation price.

That’s the whole game, and that’s why it’s so dangerous. These bonds are owned on leverage. They’re owned on repo. So, you still have 90 percent of your assets that you loan to the central bank. You're getting 90 percent of those assets to buy more bonds, all on leverage. So, when the door looks like it's closing, people run for the exit en masse; and that’s exactly just a hint of what’s going to happen on September 21st.

On September 21st, we have the Bank of Japan meeting. If Mr. Kuroda in the BOJ doesn’t hint at helicopter money, you're going to see the same thing happen that happened on Thursday, September 8th and what’s happening even today on September 13th when this podcast is being recorded. It’s going to be more of the same.

You also have the Fed meeting on the 21st and God forbid they raise rates. You can talk about a complete wipeout. I want to just say this as succinctly as I possibly can. The wipeout that could occur with bond yields spiking and prices tumbling and wiping out much of the gains that has been achieved since 2009. That’s just a preview of what’s going to happen in the future. There's going to come a time when these megalomaniac central bankers become successful, and they actually create the inflation rate that they’re so desirous of maintaining, which is about 2 percent.

But what’s painfully obvious to me is that no central banker could ever peg an inflation target. They can’t meet 1 percent or 1.5 or 2 and even though they don’t measure it correctly, inflation is not going to go to 2 percent and stop. It’s going to keep going higher. So, these central bankers are going to be in unison, going to have to stop what they’re doing with QE. When that happens, you're going to have inflation, negative yielding debt and central bankers becoming sellers of their massive pile.

I mentioned its $21 trillion balance sheet. When that occurs, that’s the real crisis. So, what we’re seeing, what we saw on the 8th of September and what we could see on September 21st, if Mr. Kuroda and Ms. Yellen doesn’t come through with more dovishness, that’s just a preview of the real crisis.

Chris Martenson: I agree and I can’t wait to discuss your book and what that collapse will feel like or mean to the average person, but I want to set the stage here. Everything really depends on will the Fed raise rates or won't they. You can’t follow their language, of course. It’s just crazy talk. Yes, they will or no. They won’t and they’re so market dependent. If the market wiggles a little, they trot somebody else out, is my impression to…

Michael Pento: Chris, let me ask you a question. Let me turn the tables. Do you think the Fed is data dependent or stock market dependent? Which one do you think it is?

Chris Martenson: Can I pick neither? I’ll tell you my pet theory, Michael. It’s this. I think the Fed follows. I don’t think they lead. So, I really want to get your opinion on this. You’ll know much better than I would what this means. I’ve been a little unnerved watching LIBOR quietly creeping up and up and up. It’s now over 0.85 percent. It’s way different from the stated Fed funds rate, and also the European central bank target rate.

So does the Fed have to follow, here or, not because they want to, but because the market’s already done it, or can LIBOR really get that far away from the underlying target rates?

Michael Pento: LIBOR is creeping up because there are changes in the money market funds. I don’t want to get into the weeds on that on the podcast, but the real issue is what I’m concerned about; the success of central bankers. LIBOR is going to spike, interest rates are going to spike. Markets will force rates to spike once inflation becomes entrenched in the economy. What is inflation? It certainly isn’t people becoming more gainfully employed.

Inflation occurs when the market loses faith in a fiat currency purchasing power. That’s exactly what central bankers across the world have been trying to do in earnest since 2009; actually, since 2008. So, when that success comes, then you're going to see free market rates such as that, the dollar cost of; the cost of a dollar over in Europe, short-term dollar loans and you're going to see the free markets and interest rates much, much higher. That’s the real issue and that’s when the chaos begins.

Chris Martenson: Let’s talk about that chaos, because yields on junk rated euro-denominated debt, record low last week, 3.35 percent, a number I don’t even like on a 10 year U.S. treasury. These losses, there's clearly a lot of losses baked into that. For people listening, we’ll explain it offline, but Michael, so who is going to eat the losses, I think is the operative question. If the central bank, if the European central bank suddenly has to begin unwinding its position or the other central banks unwind, there's massive losses. Who eats them?

Michael Pento: Well, the capital at central banks is even narrower than it was at Lehman Brothers, so they have hardly any capital. So, the question is, if they’re going to be selling assets at this huge loss and go through their capital, does anybody care if a central bank isn’t solvent. The answer is yes, in my opinion. Some people will disagree with me.

I think it’s absolutely critical, because if a central bank runs out of assets to sell, then they have no way of draining the money supply. If you can’t take down the money supply, inflation becomes intractable and there’s nothing the central banks can do about it. That’s the real issue.

If that happens, and inflation starts becoming intractable, and you have that spike in bond yields, what happens to every single asset that is planning on, betting on and hoping for this continuance of ZIRP and NIRP forever? Those assets will implode. And what happens to the economies once that occurs? See, I think 2008 was just a preview of what’s going to happen. If we allowed markets to repair themselves in 2008 -- in other words, if we allowed home prices to fall and stock prices to fall, and interest rates to rise, and debt levels to contract -- then we would have had a depression for a few years, at the most, but then we would be able to come out of that with stable money supplies, stable interest rates, a stable currency, low debt to GDP ratios, high productivity rates, massive capital expenditures and a nice healthy, growing economy.

But none of that has been allowed to occur. What we have now, as I think I might have mentioned, we have $60 trillion in additional debt, 230 trillion around the world. 300 percent world record, never happened before; 300 percent global debt to GDP and the debt that’s increasing really very rapidly and has been so since 2009. This debt is not debt that comes from savings that’s used to be borrowed by the private sector to create capital goods and expand productivity.

This debt is used to buy back shares of stock, or to issue junk bonds. So, we are in a very bad situation and, unfortunately, as I mentioned before, it’s not going to end very well.

Chris Martenson: A lot of this sounds structural, because of course, the rationale for going 60 trillion further into debt and ramming up our debt levels globally to these astronomical numbers you just put in was that hey, we’ll get back to rapid growth. We have a decade or more of experience that says we are now in a structurally low growth environment. That is out of comportment entirely with this idea of rapidly expanding debt loads, because those make sense in a rapidly growing environment.

Do you think there are, that we are in a structural low growth environment, much like what Jeremy…?

Michael Pento: Japan.

Chris Martenson: No, I just blanked on the name -- Jeremy Grantham. So are we in a structurally low growth environment like Jeremy Grantham has posited. That it’s just here to stay. If so, what the central banks are doing is even more insane.

Michael Pento: It's more insane.

Chris Martenson: Because there's no way to service it.

Michael Pento: Well, the only way you can service the debt outstanding is by keeping interest rates near 0 percent. The problem is that once you do that for a protracted period of time, eventually the market is going to take those rates higher. So, you’re going to have no choice but to raise interest rates, and that’s when the real collapse comes.

For instance, if we had to pay a normal interest rate -- you go back to 1969, the average interest rate on the 10 year is about 7 percent. Well, where is it today, 1.7 percent? If we had to pay around 7 percent on our outstanding debt, we would be paying a trillion dollars a year just on interest; on debt outstanding.

So, it’s not possible that we can allow interest rates to normalize. We would have a debt implosion. So, the central bankers are caught. They’re going to lose their credibility on the 21st Chris, because there's about four or five Fed members, voting members on the FOMC, who have been out there telling us -- even Janet Yellen hinted at it in Jackson Hole -- the economy is close to reaching our goals and we will be ready to continue raising interest rates very shortly.

They’re on record saying that. If they don’t do that on the 21st, they’re going to be the FOMC that cried wolf. They’re going to lose all credibility. Yet, if they do not raise interest rates, I’m sorry, if they do raise interest rates, they’re going to lose credibility, because they’ve been telling us all this time that they are data dependent. Well, if they’re data dependent, let’s look at the data.

GDP is up 1.2 percent year over year. That’s half the trend rate of growth that we’ve seen since 2010. S&P 500 earnings are down six quarters in a row. Tax revenue is down year over year. Productivity is down three quarters in a row. Look at the August ISM, manufacturing 49.4. The service sector, 51.4, that crashed from 55.5.

So, what data are they looking at? If they’re truly data dependent, they shouldn’t move at all. If I put myself in the mind of these Keynesian group thinkers, but if they do raise rates, if they don’t raise rates, what are they threatening about? So, I think they lose credibility either way.

Chris Martenson: They lost all credibility with me back with Greenspan, but I’m a real skeptic about all this monetary engineering that a group of people sitting around a mahogany table with a dessert trolley nearby can macro engineer something like the economy. So, I’m more a hands off kind of guy to begin with. Here we are, I think…

Michael Pento: Count me aboard that, too, Chris. The Fed should sell, they should their assets. They should drain their balance sheet, which is about 4.7 trillion. They should drain that balance sheet a trillion dollars a year until they’re back down to where they were pre-crisis and then just go home, close shop. I agree with you.

Chris Martenson: Absolutely, and my model is it would have been painful to fall off the stepladder in 2008, but now we’re 12 rungs higher on an extension ladder. I just think it’s going to be kind of painful, so walk us through that, your book is The Coming Bond Market Collapse. Collapse is a strong word. I’m wondering, did you tweak that a little for effect or is a collapse possible and if so, what does it feel like? What happens?

Michael Pento: Zero hyperbole, now I wrote this book in 2012. That was when the Fed was halfway through their QE program and really didn’t have the BOJ and the ECB even kick in yet. So, I never even imagined or even dreamed in 2012 that you’d have 25 percent of the world sovereign debt trading with a negative yield. I wouldn’t even fathom that thought, or that you would have negative yielding corporate debt.

So, when the bond bubble bursts, and I touched on it earlier in this interview, every asset in the world is pegged off that risk free rate of return. So, when the debt bubble bursts, everything bursts. You mentioned, you said the stock market might be overvalued. The price to sales ratio is at virtually an all-time high. Total market cap to GDP at an all-time high, virtually all time high. Median PE ratios, at an all-time high.

If you look at what’s going on, it’s mostly the PE ratio as high as it is; really should be much higher, because what are corporations doing. They’re borrowing money to buy back their shares, reduces the share count and that lowers the PE ratio; raises the earnings per share. So, I think stock prices collapse. I think global bond markets collapse. I think commodity prices collapse, with the exception of precious metals.

I think every other asset, too; I’m talking about real estate. If you look at cap rates in commercial real estate, they’re at virtually all-time lows. So, this is pervasive and its global. Just to think back in 2008, in 2008, yes, the United States and parts of the world had a real estate bubble. That’s a problem. That turned out to be a huge problem.

But now we have the entire world’s cache of sovereign debt in a bubble; and when that breaks, it’s going to be exponentially worse than the housing bubble, especially because there is nothing left for central bankers to do. Do you remember back in 2008, what occurred? We took interest rates, the Fed, Mr. Bernanke started 5.25 percent all the way down to zero.

What are we going to do now? The Fed fund rate is pretty much at 50 basis points, the effective Fed fund rate. So, there's no room left and we already blew up the Fed’s balance sheet by $3.5 trillion, 3.7 to be exact. So, what else is there for the Federal Reserve or central bankers to do? It’s going to be very devastating.

Chris Martenson: I want to test you on this, because I’ve seen trial balloons. I know you're familiar with them. I’d love to get your views. Helicopter money, obviously a thing they can do, but first you have to get everybody in a ring fence and close the gate. You can’t let people have access to cash. That doesn’t work.

So, the war on cash comes out and you’ve got, of course, Larry Summers and Rogoff and Andrew Haldane out of the Bank of England, et cetera,; this chorus of people saying oh, no cash. It's bad stuff. Criminals use it. But instead, what they really need is, they need me and you trapped in our bank accounts so they can push money out and force us into negative interest rates. I think that’s obviously what they’re thinking about. Do you think they can do it?

Michael Pento: I’ve written about this. It’s impossible to really charge you an interest rate on your deposit unless they outlaw physical currency. You see some talk about this in Europe, about lowering the 500 euro bill. For some reason now $100 bills are the safe haven for drug dealers, so we’re talking about getting rid of those. That’s the first salvo into what I feel yes, eventually we’re going to go completely digital currency.

So, you have no chance. You can either spend your money or leave it in the bank. You have no choice. You cannot take it out of the bank. You can spend it, or you can leave it in the bank. You cannot take it and hoard it. That’s why I think the reliance on precious metals and hoarding of gold is going to be absolutely crucial.

Chris Martenson: So, precious metals, big believer in that; and my listeners, as well. More than an insurance policy. My number is whatever number you would like to never see go to zero.

that’s a good amount to have. Final question, because we’re running out of time here for you, is: Are we going to have the much anticipated second half recovery, or will it be the ever illusive third half recovery? Which one are we going to get?

Michael Pento: I don’t know who has less credibility, the Fed or the Wall Street carnival barkers who come on television regularly and tell you that the second half is going to be better than the first half. No, I see no reason why the second half is going to be different in 2016 than it was in 2010, ’11, ’12, ’13, ’14 and ’15. The only semblance of recovery that we’ve had has come from a lowering constantly, perpetually lowered borrowing costs, so that has run out of room, and perpetually inflating asset bubbles.

That is running out of room. So I certainly don’t think, even though we have those conditions where people could refinance their mortgages at lower and lower interest rates, they’ve been doing that really since 1981, and asset prices that continually rise; rising stocks, bonds and real estate. That’s pretty much ending, and it’s pretty much ending across the globe. Even at that pace, we’ve been running at a 2 percent GDP growth rate since 2010. Now, we’re at 1 percent; and now that those conditions are ending, I really don’t believe we’re going to have a second half recovery. I think we’re going to be in a recession.

Chris Martenson: All right. Well, thank you so much for that. This has been a fantastic interview. I’m sorry we don’t have more time. Tell people how they can follow you more closely.

Michael Pento: So, the website is pentoport.com and my email is [email protected] and the number here at the office is 732-772-9500. I publish a weekly podcast. You should go to the website and get a trial subscription for that. It's $49.99 a year and great insights, great data you’ll find nowhere else. I also manage money. Part of what I do here is I manage money, as you mentioned, the inflation deflation dynamic portfolio.

If you’re going to have central bankers that are going to helicopter money, which is very possible, you're going to have to change your investment spectrum to fit that model. But if central bankers are going to end QE, and if the Fed is going to raise interest rates, you better have a wholly different investment strategy. So, that’s what I do. It's dynamic; it doesn’t stand still; don’t really like principal depreciation here at Pento Port. We’re doing very well this year, and I hope to have some of your listeners reach out to me so I can help them.

Chris Martenson: Well, fantastic. I’m sure some will. Michael, thank you so much for your time today. Let’s do this again.

Michael Pento: Oh, it would be my pleasure Chris.

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37 Comments

abhills's picture
abhills
Status: Member (Offline)
Joined: Apr 7 2011
Posts: 7
Pento's crash

It seems that the only place to go is cash and gold which does not pay anything for years to come since it is hard to pin down when the end comes. At some point central banks will have to stop repeating the insanity of buying bonds and inflating assets for the top 1% of society like myself who live off interest and dividends while ignoring main street. Helicopter money would seem to make more sense since they could have given $50,000 to every US family instead of printing trillions of dollars, 95% of which went to the top 1%. A lot less could have stimulated the economy more than the low interest rates which do not incentivize banks to lend long term except to the most credit worthy who probably don't need it. A gradual normalizing of rates combined with some direct stimulus for lower income families might cushion the crash? A flexible payroll tax might do it with lower rates when the economy is slow and higher when recovery starts instead of pushing on a string with money printing. It would put cash into paychecks within the week for people that actually spend it instead of raising asset values for the few with little result for the economy. Of course it could be  cut it off quickly at the first sign of inflation. At least Janet Yellen has stopped the money printing making the USA seem more palatable for ones money. Next step, stop rolling over the bonds at the Fed to reduce the balance sheet at the fed slowly? Maybe sell some too while prices are high or would that crash the bond market? 

davefairtex's picture
davefairtex
Status: Diamond Member (Online)
Joined: Sep 3 2008
Posts: 4664
two things

First, [econo-geek alert], Michael Pento just explained to us what the impact is of a central bank taking losses in excess of capital.  I've been wondering what the downside to this would be for quite a while, and he's now filled in that piece.  Yes, I really do sit around and wonder about things like this.

Basically, all those bonds on the balance sheet of the Fed represent base money that is in circulation.  If and when inflation ever strikes, the Fed-owned bonds allow the Fed to mop up the excess money by selling them on the open market and thus pulling the money out of circulation.

Now then, if the Fed takes losses, and they end up having a negative net worth, they will be unable to mop up the money out there to the extent they have losses.  ECB will take losses on all those negative-rate bonds they've purchased when they mature.  That should be interesting when these negative-rate bonds become a larger portion of their inventory.

Second - in 2008, when we had our most recent massive crash, all the money fled into bonds.  They were the safe haven, and all the sovereign debt shot higher.  But we are already at a high in bonds; if bonds are the thing that craters this time, and the banks aren't trustworthy either, where will the money go instead?  Armstrong thinks equities will get a moonshot, along with gold too.

Armstrong thinks very high grade corporates, equities, and gold are the places to be - once confidence cracks in the sovereigns.

robie robinson's picture
robie robinson
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abhills

PM is always welcome for food, friends and first aid at our farm. What else do you need? More precious metals!

robie robinson's picture
robie robinson
Status: Diamond Member (Offline)
Joined: Aug 25 2009
Posts: 1123
abhills

PM is always welcome for food, friends and first aid at our farm. What else do you need? More precious metals!

robie robinson's picture
robie robinson
Status: Diamond Member (Offline)
Joined: Aug 25 2009
Posts: 1123
abhills

PM is always welcome for food, friends and first aid at our farm. What else do you need? More precious metals!

AKGrannyWGrit's picture
AKGrannyWGrit
Status: Gold Member (Offline)
Joined: Feb 6 2011
Posts: 377
Wow this podcast was very

Wow this podcast was very scary and confusing.  As I have said before I do not have a college degree and so never studied economics in college.  Perhaps that's a benefit.  I suspect I represent a large portion of our country, Mr. And Mrs. Middle America. Anyway it is very difficult to wrap my head around what is happening and what was discussed.  It seems easy to understand using cash, buying and selling and taking out a loan, you know basic activities of daily life transactions.  Here are a few items that boggle my simple mind and that don't make sense to me.

  • How can a bank balance sheet go from 6 trillion to 21 trillion, and what does that mean? Perhaps the banks are really, really carrying a lot of debt (from what) or we are taking out a lot of loans and they are expecting big payments from us or the banks  are playing some kind of digital games with numbers and saying those numbers represent money?
  • "Investment grade bonds in Europe now trade with a negative yield" -why would anyone buy a bond that does not pay a yield that makes no sense.  Are we at the point when the problems are so ludicrous that stupid becomes logical?
  • It's as if the whole financial system has become a casino with no common sense or rules.  Computer programs buy and sell stocks for the most astute manipulators and manipulating the system is the name of the game.  There seems to be no real representation of reality.  Numbers on a computer screen or printed on a piece of paper are creations of banks, governments and other entities and game playing, or perhaps its financial war, continues unabated as we poor saps are led to believe we are not spending enough, buying enough and don't pay enough for anything (like health care, food, or utilities).  
  • I suspect manipulating the financial system has become a game for some within the system and we poor saps, the middle class and the poor are just pawns to be moved around and fed propaganda.
  • How could a system like this not collapse?  
  • This system is all sooooo confusing my eyes are crossing and I have brain fog.  

Okay how did I do? Any insight for us novices?

 

AKGrannyWGrit

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You understand it quite well actually
AKGrannyWGrit wrote:

Are we at the point when the problems are so ludicrous that stupid becomes logical?

Yes.

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Haven't I heard this before?

There's an old story about the Saskatchewan farmer who was ecstatic when the maternity nurse told him his wife delivered a pre-mature, 1 lbs., baby girl and that her chances of surviving were slim. The nurse was puzzled as to why he was so happy, given the situation. His reply was, " Where I farm, we're lucky if we get our seed back at the end of the year". Ever increasing yields, whether agricultural or financial, have their limits (EROEI anyone).

Mr. Pento is only echoing what has been droning across the blog-o-sphere, webcasts and Fox-ownion airwaves for months and perhaps even the last couple of years. When you buy on margin and use those assets as collateral to buy more assets, balance sheets soar and CB's keep extending credit. Electronic, algorithmic traders continue to skim the cream and savers remain holding the bag. Mr, Pento  has read things correctly, but CBer's continue their prestidigitation in order for the very rich to continue their financial ploys. Getting local and increasing productivity are essential first steps in climbing out of this hole. PP's glimpses of the scarcity cards should grab the attention of all of us frequenting this site. Embrace resilient living and continue to share your ideas with all who will listen. Chris and gang, keep up the good work.

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brain fog

granny-

One at a time.

  • How can a bank balance sheet go from 6 trillion to 21 trillion, and what does that mean?

Pento was talking about the central bank balance sheets.  The central bank controls how much money is in circulation by increasing or decreasing its balance sheet.  For every dollar of "balance sheet" increase, the central banks have printed one dollar of new "base money".  They are trying to create inflation, in order to combat the deflationary pressure of the debt bubble pop, by creating more money supply.

You would think that "more money out there = more inflation" and thats true most of the time but not always.  Japan is a perfect case in point.  When people are scared, they save, they don't spend.  So all the new money created by the central bank just sits there, right alongside the old money.  No inflation (at least, no monetary inflation).

(Monetary) price inflation actually comes from money that is actually spent.  So if you borrow money and then stick it under your mattress, that's not inflationary.  If you borrow money and spend it on a vacation - that is inflationary.  Its what you do with the new money that counts.  Of course, paying it back is deflationary, and that's the state where society is now - in aggregate anyway.

Inflation can also come from people switching from saving to spending.  If people start to panic, thinking their money won't be any good - for whatever reason - then even if money supply doesn't change, inflation can pick up because people don't want to save anymore.  Whatever they decide to spend it on will go up in price.

So central banks can control the money supply, but they cannot control people's emotions.  People scared of debt & deflation won't spend.  That's why CB balance sheets have gone from 6 trillion to 21 trillion.  Its an attempt to create inflation.

  • "Investment grade bonds in Europe now trade with a negative yield" -why would anyone buy a bond that does not pay a yield that makes no sense.  Are we at the point when the problems are so ludicrous that stupid becomes logical?

People plead guilty and get prison terms all the time.  This seems stupid on its face - by doing this, you are guaranteed to go to prison.    But by pleading guilty they are trying to avoid a possibly much-longer prison sentence.  Everyone knows what this is: its a plea bargain.

Same thing with buying a negative-rate bond.  Big company has its payroll and working capital in the bank.  If the bank dies, in Europe, Big Company payroll will get "bailed-in", and they'll lose maybe 50-100% of their deposits.  If they buy a high grade short-term corporate, they'll lose a guaranteed -0.5%, but that's a much better fate than the potential 50% loss from the bail-in.  That's just one example.

Think of buying negative rate bonds as a plea bargain.  They're just trying to avoid a much worse fate.

  • How could a system like this not collapse?  

I'm not sure the system overall needs to collapse (i.e. a Mad Max dark age), but I think there does need to be a big reset before we can return to something approaching normality.  As Chris always says, the question is who will eat the losses during the reset.  Or as Nicole Foss would say, right now we have "excess claims to underlying real wealth," and some of those excess claims will need to be extinguished before we get back to something approaching normal.  Whose claims will be extinguished is another way of saying that same thing.

That's what happens in a debt bubble pop.  Excess claims are extinguished.  And nobody in that top 1% wants their particular claim to vanish...so the central banks are doing everything they can to try and avoid this fate for as long as possible.

"Please, everyone, borrow more money so we don't have to face the debt problem we're in.  I don't want my excess claims to be extinguished."

The last 8 years have been all about avoiding having the "excess claims extinguished" event from happening.  Its long-term impossible, of course - and the efforts to avoid this fate have warped the system beyond recognition.  In the meantime, everyone that has a claim is looking at which claims are more likely to be extinguished, and which are less likely.  Prices of the less-likely-to-be-extinguished group are bid up to silly levels.  And that's why we have negative rates, and the talk of banning cash.  (Cash, during the 1930s depression, was a claim that could not be extinguished; they're trying hard to "fix" that this time around).

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davefairtex wrote:You would
davefairtex wrote:

You would think that "more money out there = more inflation" and that's true most of the time but not always. 

My understanding is that we are seeing inflation up in the stratosphere of the economy the top 1% occupies; high art, luxury items, multi-million dollar estates, etc. The target strata of QE was the upper crust, but I expect helicopter money targeted at "middle 'murica" would have a more inflationary effect. This is why Chris advocates running, not walking, to buy everything you need at the moment you see helicopter rotors on the horizon, or hear them coming.

 

I'm just hoping Chris will alert us ahead of time, though I don't want to put it on his shoulders and ignore my own senses and agency.

davefairtex wrote:

 Of course, paying it back is deflationary, and that's the state where society is now - in aggregate anyway.

So central banks can control the money supply, but they cannot control people's emotions.  People scared of debt & deflation won't spend.  That's why CB balance sheets have gone from 6 trillion to 21 trillion.  Its an attempt to create inflation.

And yet, all debt has to be paid back sooner or later, or at least there must be an expectation of that happening (why would you loan money if not to get paid back with interest??). So the conundrum, as I understand it, is that we have massive accumulated debt that must be paid back, hitting at a time when economic growth is low and not expected to get to pre-2007 levels for a long time - if ever - and thus the chances of present debt being paid off in a lower-growth future seems ludicrous at best, and downright insane if one considers demographics, resource limits, environmental impact, etc.  

davefairtex wrote:

Think of buying negative rate bonds as a plea bargain.  They're just trying to avoid a much worse fate.

Doesn't that mean that entities willing to buy bonds at negative rates are implicitly admitting the shit is already hitting the fan? Or are they just so certain of making good once the central banks buy those bonds off of them at a higher rate?

 

davefairtex wrote:

I'm not sure the system overall needs to collapse (i.e. a Mad Max dark age), but I think there does need to be a big reset before we can return to something approaching normality. 

Again, as always, I don't see a reset happening in a system this interconnected and complex, especially if the elite are likely to lose influence, power, or money in any reset. One can always hope, though, for a reset and not a total collapse.

davefairtex wrote:

That's what happens in a debt bubble pop.  Excess claims are extinguished.  And nobody in that top 1% wants their particular claim to vanish...so the central banks are doing everything they can to try and avoid this fate for as long as possible.

Which is why, in my opinion, you have politics moving towards the fringes in most of the industrialized nations. The bulk of peoples around the 'developed' world implicitly feel their share of the pie is getting smaller, their lives harder, and their children's futures' diminished, yet very few know exactly why or whom to blame. Plus it is far easier to scapegoat immigrants, Muslims, women, whoever than to analyze the inherent flaws in the system. You'd have better luck explaining water to fish.

 

davefairtex wrote:

Prices of the less-likely-to-be-extinguished group are bid up to silly levels.  And that's why we have negative rates, and the talk of banning cash.  (Cash, during the 1930s depression, was a claim that could not be extinguished; they're trying hard to "fix" that this time around).

Every time I imagine TPTB trying to take cash away from us, I get "Deforest Kelly face," because I feel like that's the robber robbing the car we are sitting in without us noticing. However, given what I know from history and from life, I also feel that betting against human stupidity or our penchant to see roses instead of thorns is a foolhardy bet, especially when the truth is hard or scary

 

By the way, great response Dave. Very clear and concise! 

 

 

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Re-set

I can't help thinking that any re-set will look a lot like WW3.

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inflation

snydeman-

My understanding is that we are seeing inflation up in the stratosphere of the economy the top 1% occupies; high art, luxury items, multi-million dollar estates, etc.

Yes that's true.  Inflation is such a slippery term.  The CPI doesn't measure "asset price inflation" (maybe we should construct such a measure...boy would that one be interesting) and yet quite rightly you have pointed out we've seen top-1% prices increasing at some really impressive rates.

I guess a more precise way to say it is, we haven't seen "general consumer/middle class inflation" - which would first hit primary consumer goods prices, and then wages will theoretically follow.  That's what the CPI is structured to measure - price increases in middle class consumer items.  (Before all the "adjustments" of course).

Fed wants to see "middle class inflation" because when the wages rise, it makes the debts easier to pay.  Debts get effectively inflated away.  So at the core of it all, the Fed really wants to see wage inflation.  So far, not much joy on that front.

And yet, all debt has to be paid back sooner or later, or at least there must be an expectation of that happening (why would you loan money if not to get paid back with interest??).

This is where things get a little funny.   Turns out, debt does not need to be repaid.  It can be rolled over year after year.  That's called debt slavery!!

The gang owning the debt would (probably) like nothing better than to keep us all in a state of maximum debt, where we can just barely make that minimum payment every month - but without defaulting.  That way, the maximum possible portion of our income can be siphoned off to the debtholders.  Its just a new version of a "company store" type middle-class harvesting mechanism.

Another way to "pay down" debt is to default, of course.  This is what must occur after reaching the ponzi top in the debt bubble.  If we were all rational actors the ponzi would never happen, but people just get too excited, and the banks just can't resist lending money to anyone with a pulse.

Doesn't that mean that entities willing to buy bonds at negative rates are implicitly admitting the shit is already hitting the fan? Or are they just so certain of making good once the central banks buy those bonds off of them at a higher rate?

I think both observations are true.  The second gang (the ones front-running the ECB) will play for as long as they think the ECB will buy.  The first group is playing more for survival than as some money-making scheme.

Ultimately, negative rates are a danger sign.  But its not only about bail-ins.  In the Eurozone, there's an additional wrinkle; people are buying German bonds (pushing them into negative territory) expecting that if the EZ blows up, by owning German government bonds, they will end up being denominated in a future Deutsche Mark currency - which will immediately rocket higher after the EU goes away - at the same time, the buyers will avoid a massive currency plunge in their own soon-to-be Lira/Peseta/Drachma.  I'd guess the swing on that (DM +30%, Lira -50%) would vastly overwhelm the modest -0.5% penalty they are paying now for Bunds.

This is "capital flight in advance" - disguised as a bond purchase that pushes German rates negative.  Its a strong vote of No Confidence in the long term future of the Eurozone.

The EZ doesn't have currency differentials to absorb impact from confidence problems, so the bonds end up taking the heat - at least when existential issues become more front and center.  The ECB has intervened to try and neutralize this effect by "buying everything", but you can still see the impact if you look.

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davefairtex wrote: Fed wants
davefairtex wrote:

Fed wants to see "middle class inflation" because when the wages rise, it makes the debts easier to pay.  Debts get effectively inflated away.  So at the core of it all, the Fed really wants to see wage inflation.  So far, not much joy on that front.

If I followed this podcast correctly, Mr. Pento points out that inflation is a tricky beast to control. Once it is unleashed, it isn't always easy to rein in.

This is also reminds me of why I sometimes object to the charge that current Fed policies are Keynesian; Keynes would have advocated for monies being funneled into the productive classes - ie. the working and middle classes - because those classes are inherently obligated to spend such money back out into the economy. This would have caused more inflation of both wages and prices...or at least more than QE did. So, from what I know of his theories, Keynes would have opposed QE as it eventually manifested. Wasn't QE modeled more on the neo-classical models that were merged with Keynesian macro theories, or...?

Admittedly, my knowledge of deep Keynesian theory is lacking, or more accurate to say "as deep as a historian needs to explain certain elements of history to his students,", so I'll put it out there that I could be wrong.

davefairtex wrote:

This is where things get a little funny.   Turns out, debt does not need to be repaid.  It can be rolled over year after year.  That's called debt slavery!!

Another way to "pay down" debt is to default, of course.  This is what must occur after reaching the ponzi top in the debt bubble.  If we were all rational actors the ponzi would never happen, but people just get too excited, and the banks just can't resist lending money to anyone with a pulse.

Funny, as in "The Joker" funny, rather than "John Belushi" funny.

 

The problem, it seems to me, is that there are far too many middle-class Americans on the verge of default than there are who are capable of taking on any more debt loads. Or, perhaps simultaneously, there are far too many middle-class Americans who are choosing not to take on any more debt loads because '07-'08 scared the bejeezus out of them. Hence the opening rounds in the "war on cash," right?

 

davefairtex wrote:

I think both observations are true.  The second gang (the ones front-running the ECB) will play for as long as they think the ECB will buy.  The first group is playing more for survival than as some money-making scheme.

Dangerous game, that, since it has been pointed out even by mainstream economists that the exit is never big enough to accommodate the crowd in the room when they all try to get out at the same time. Are there signs emerging that there are big players who are positioning themselves near the exits? Like, in a number large enough to warrant serious alert status among us sheeples?

davefairtex wrote:

Ultimately, negative rates are a danger sign. 

Add this to the list of red flashing lights on our dashboard. And here I was thinking we might avoid catastrophe.

davefairtex wrote:

But its not only about bail-ins.  In the Eurozone, there's an additional wrinkle; people are buying German bonds (pushing them into negative territory) expecting that if the EZ blows up, by owning German government bonds, they will end up being denominated in a future Deutsche Mark currency - which will immediately rocket higher after the EU goes away - at the same time, the buyers will avoid a massive currency plunge in their own soon-to-be Lira/Peseta/Drachma.  I'd guess the swing on that (DM +30%, Lira -50%) would vastly overwhelm the modest -0.5% penalty they are paying now for Bunds.

This is "capital flight in advance" - disguised as a bond purchase that pushes German rates negative.  Its a strong vote of No Confidence in the long term future of the Eurozone.

The EZ doesn't have currency differentials to absorb impact from confidence problems, so the bonds end up taking the heat - at least when existential issues become more front and center.  The ECB has intervened to try and neutralize this effect by "buying everything", but you can still see the impact if you look.

And this is where I feel like a AAA player trying to hit a major-league fastball. I followed what you are saying, but good lord your ability to see the devil in the details of economics makes me feel totally in the dark; I'm ok with this, mind you, because I have my plate full with lots of other things to learn and know, so I'll rely on people like you to give people like me a SitRep when necessary.

Anyway, I knew all about the rates, but didn't realize how much was at play in the background, and what's at play seems to be some big players moving towards the exits. Fortunately I'm not a big enough investor to be in that room, so I can watch this all play out from the outside rather than worry if I will make it to the exit. If only I could find a way to shrink that door. That would make it all the more amusing to watch when the music stops! Which, by the sounds of this podcast, may be as early as this week? Joy.

 

 

None of this makes me feel any less unsettled about our current global economic situation.

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Inflation

Snyderman,

CPI is highly controversial.  What it is "structured to measure" is highly debatable.  What organization is responsible for the CPI?  The same BLS that gives the bogus job numbers (& says we are currently at "full employment") month after month based off the hocus-pocus birth-death model produces the CPI.  The government has incentives to "manage" this number.  For example, a lower CPI will give a higher GDP.  Thus, a method to show fake "growth" and produce an artificially high GDP is to have an artificially low CPI.  Charles Hugh Smith had an article about his "Burrito Index" two months ago & how it outpaced the official CPI by 4.5x since 2001.

https://www.peakprosperity.com/blog/99392/burrito-index-consumer-prices-...

So, I think only the people who are high up in the BLS can explain what the CPI is structured to "measure".

 

In regards to the Fed, only the officials at the top of the Fed can say what they "want" or don't want in regards to "middle class inflation", etc.  What Fed officials say publicly does not mean that's what they are thinking privately.  The Fed answers to no one.  It's 100% privately owned & managed.  It's one of the most secretive organizations in the world.  The Fed started with virtually no assets & now is the largest real estate owner in the U.S.  Need I say more?

Your assumption that all debt has to be paid back is absolutely false.  Wall Street has made trillions based off the fact they know the current debt can never be paid back & this Ponzi scheme has passed the point of no return.  Thus, they have been banking (pardon the pun) on the fact that anything & everything will be done as far as money printing (eg conterfeitting) goes to keep the game going for as long as possible.  They will continue becoming extremely wealthy playing this paper game.  Where is all of this going?  The Ponzi grows & grows & grows until it is impossible to grow any further.  In this process the current concept of "money" (or currency as Mike Maloney says) is dying.  When things implode the paper assets will start approaching the value of paper & wealth will flow into real world hard assets.  The $64 quadrillion question is when the paper Ponzi implodes.

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Inflation - part 2

Snyderman,

High inflation / hyperinflation is generally from a loss of faith in a currency or government.  Playing games with massive money printing is an extremely dangerous game.  Go a few dollars over the edge & when it gets going trying to reel it in can become impossible.

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The Future

Good points and thanks for qualifying the type of inflation as monetary.  Of course the big problem is, and why we will never get back to the old normal, is that there is structural inflation. By that I mean the fundamental change in EROEI.  The low hanging fruit in the current in the exploitation based model has been picked.  Soils are being exhausted, non-renewable energy consumed, fish stock depleted, forests clear cut, uranium depleted, water table dropped, ice storage in our highlands depleted, essentially every resource you can imagine, depleted, exhausted, poisoned. This creates structural inflation which no monetary policy can ever fix.

Talking about monetary policy in isolation, is a bit like chasing your tail, it leads nowhere. And even if your monetary heroes were suddenly and magically controlling all the financial levers of power, whether that means actively incentivizing different behavior, or letting the magic of the free markets do their thing - NOTHING CHANGES.  Just like in politics, no one ever questions (or even admits), that we are part of a global empire run under the threat of force, both monetary and military.  Everyone just talks about (in coded words of course) how to run the empire better........lets make America great again?!?!?!?!

If we can not ditch the empire, exploitation, a competitive violent fear based system, which is part and parcel of our current monetary system, tweaking the edges with "policy" changes, is a total waste of time.  Relocalizing our economy where we can get back to a paradigm where we realize that our neighbors and the natural world are not our enemies is the way out of the madness, otherwise we will live in a world based on terror, whether it be political, ecological, financial, or mental.

 

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Not false!
dryam2000 wrote:

Snyderman,

Your assumption that all debt has to be paid back is absolutely false.  

Not false at all. It's just that I'm approaching the issue from the perspective of a person who has been trained to pay back debt. TPTB don't care about such trivialities, which still butts up against my indoctrination. =/

 

 

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My desperate attempt...

Here's my latest Facebook post, in which I'm trying, yet again, to alert my friends and family to what the hell is going on. Please keep in mind that I'm a "big picture" kind of person, and that I have to keep it "broad-brush" for the audience I'm addressing. Let me know if I'm missing something big that I should add!.

 

"Economic- So, for all two of you who care about such stuff, this could be an interesting week in the financial world. The Japanese central bank and the Federal Reserve central bank are each holding meetings this Wednesday to assess current central bank policies in Japan and the United States, respectively.
 
See, the current high levels of the U.S. stock market, as well as historically low bond yields (the interest a bond issuer will pay to a bond purchaser), are all directly tied to the "easy money" policies of the world's largest central banks that have emerged over the last decade. In some nations, bond yields have even turned negative - a fascinating phenomenon because "issuing a bond" means "issuing an IOU and borrowing money," and "purchasing a bond" means "loaning money" - so purchasers of negative-yield bonds are PAYING for the honor of loaning money.
 
If that doesn't make your head swim, I don't know what else will, because the whole concept of "interest" since the inception of capitalism (and even before that) has been that YOU pay ME interest when I loan you money.
 
Now, there are only two reasons for any investor to buy a bond at a negative rate: 1) You have no other choice because there's nowhere else "safe" to park your large money (a scary indicator of how bad things have gotten in the global financial world), or 2) You are "front-running" the central banks by buying bonds at one rate directly from the government or corporation, then selling them to the central bank at a higher, more lucrative rate.
 
So this is where it gets interesting. IF the Bank of Japan and the Federal Reserve both signal that they may be wrapping up this whole "buy bonds willy-nilly" program, those bondholders who bought bonds at historically low rates stand to lose shit-tons of money. So, on any signal that this might happen, there could be massive bond selling going on late Wednesday into Thursday, which would cause bond rates to rise...and borrowing costs for governments and corporations to also rise...which would also cause further losses for anyone caught holding low-yield or negative-yield bonds. God forbid the Federal Reserve actually raise interest rates too, since that would have the effect of pushing things along even faster.
 
Many mainstream economists think that neither Central bank will do anything rash, and will continue the historically low interest rate and bond-buying policies, but if those predictions prove not to be true, THAT might explain any market chaos/bloodbath in the second half of this week.
 
This only matters to us little people because, oh, I don't know, most of us have 401k retirement plans that are heavily invested in both stocks and bonds.
 
We live in interesting times."

 

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missing nuance

dryam-

CPI is highly controversial.  What it is "structured to measure" is highly debatable...

I think you missed the part where I said "after the 'adjustments.'"

The original CPI, as constructed in 1913, was structured to measure middle class inflation, because of what was in the basket they measured.  They didn't include bottles of Chateau Lafite, or Picassos, or properties in the Hamptons.  It was cans of tuna, milk, eggs, bread, chicken.  Roughly speaking, that's middle class stuff.

If you want to get wrapped around an axle about what the CPI was supposed to measure, that's up to you.  Clearly the methodology has changed since 1913, we all know this - its Crash Course 101 - and I've said as much any number of times in the past.

Not even the Fed believes the CPI measures anything useful anymore.  I sometimes wonder what they actually use behind the curtain.  PPI, perhaps?  Check out how the CPI (roughly) stops tracking PPI after 1980.

In regards to the Fed, only the officials at the top of the Fed can say what they "want" or don't want in regards to "middle class inflation", etc.  What Fed officials say publicly does not mean that's what they are thinking privately.

Oh sure.  They could want all sorts of things.  The mind boggles.

But in terms of monetary outcomes, the Fed is pretty clear about wanting inflation (wage inflation, in this case) to order to make the debt easier to pay down, in tandem with financial repression.  That's the one relatively painless way out of a debt bubble.  There have been plenty of papers written on exactly this subject, Reinhart & Rogoff being one such paper.  Fed is big on papers.  Of course, once again, you can choose to get wrapped around an axle about what they do or don't want and the grand mystery as to what is truly in Janet Yellen's heart, but common sense would suggest that they actually do want a way out of this mess other than a deflationary collapse (or a hyperinflationary explosion), and this is what their favorite papers are saying so - Occam's Razor and all that.

Will they get this?  So far - there hasn't been much wage growth to speak of.  Globalization hosing wages, cartels ratcheting up costs, junk fees - it all seems to be structurally against their dream coming to pass.

And yet...look at the deflation in this recent chart of home mortgage debt/GDP ratio.  Overall mortgage debt has dropped, and GDP has risen - so this chart is the result.  Private mortgage debt as a percentage of GDP has dropped back down to 2003 levels.  That's better than a poke in the eye.

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in the background

snydeman-

Anyway, I knew all about the rates, but didn't realize how much was at play in the background, and what's at play seems to be some big players moving towards the exits....

I didn't come up with the bit about Bunds being a bet on a EZ implosion - that was Martin Armstrong.  I read it, and said, "wow, that's a really clever move."  Money moves in advance of the trouble.  He has said many times that his computer can see wars coming, because the connected insiders always move their money prior to the start of the affair, and the computer watches the money flows.

What "big money" will do when the EU has its real crisis is absolutely key.  It won't just sit there and let itself get "extinguished", it will try to move somewhere it sees as relatively safer, and the price of that thing will explode higher.  This is Martin Armstrong again saying this, but I totally agree with it.

If you lived in Spain, and you knew for certain (from your friend, the FinMin) that Spain was going to leave the EZ, you'd move every penny you have "somewhere else" - where it wouldn't get turned into Pesetas.  You'd park it there for a time, and then move it back once all the fuss was done.  This would allow you to buy up real things back in Spain at half price, maybe better.  And Martin Armstrong's computer can see this happening - from what he says anyway.

This flee-then-return recipe was used when Argentina had its currency trouble; the rich people sucked money out of the country, it snapped the peg, and then when it calmed down they came back and bought up all their favorite things for pennies on the dollar.  This is also why all the gold fled the US immediately before FDR took office in 1933 - rich people who were at least somewhat awake got the message that he'd devalue so they took their gold out of the country, waited for the reprice, and then returned to collect the 40% gain.

This affects us here because the US is seen as safer than the EU, so the prices of our "financial stuff" should pop hard when this event occurs, but once things calm down back in the home country...all that money will flow right back out again...ouch...

 

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Belmontl
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New Systems emerging

George harrison said it best "all things must pass"

And that includes All systems ( economic, social, political, etc), 

The dialectic of progress is always "good news- bad news"... where the problems of the old paradigms create a shift in thinking ....to create new systems

 

http://thenextsystem.org/the-pluralist-commonwealth/

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Snydeman
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BoJ

Ok, so I've read what the Bank of Japan just did, but my basic reaction was that it has done "nothing much." Dave, Chris, anyone... am I missing a devil in the details?

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BoJ now shooting wildly in the dark
Snydeman wrote:

Ok, so I've read what the Bank of Japan just did, but my basic reaction was that it has done "nothing much." Dave, Chris, anyone... am I missing a devil in the details?

I know that the BoJ has always been shooting wildly in the dark, based on my stubborn insistence at looking at things like trade volumes, GDP,  and price deflation, but they've taken it to a whole new level.

The high priests of money are out of ideas so they are wildly doubling down, shaking up the magic incantations in the hopes that this time there will be some sort of appropriate response from the economic and market gods.

In my view, there cannot be any clearer sign that the BoJ is really, truly, and totally out of ideas than last night’s “decision.”

Bank of Japan Fires in Two Directions at Once

Sept 21, 2016

It is a sign that two views are clashing within an organization when it announces plans to do two contradictory things at once.

That is what happened at the Bank of Japan on Wednesday with a policy that amounted to a retreat on unpopular monetary easing, paired with language suggesting no retreat was happening.

The core of the BOJ’s new policy is a pledge to buy as many or as few Japanese government bonds as necessary to ensure that the yield on 10-year bonds is zero. Simultaneously, the central bank said it would maintain its existing policy of increasing its government-bond holdings by about ¥80 trillion ($785 billion) a year and said it was “strengthening monetary easing.”

The two goals are incompatible. Imagine a banana trader who assures growers that he will buy as many or as few bananas as necessary to keep the market price at 50 cents a pound, and simultaneously announces plans to buy 80 tons of bananas a year from them. One day, high demand drives the price up to $1 a pound, before the trader hits the 80 ton target. Then what?

If the BOJ truly tries to carry out both its new and existing policy, it will eventually run into a similar dilemma. The 10-year JGBs are the benchmark of a bond market worth trillions of dollars. If there was a sudden crash in demand, the BOJ might have to buy more than ¥80 trillion a year to keep yields at zero. Conversely, demand for 10-year JGBs among risk-averse Japanese investors could be so strong that the BOJ wouldn’t have to buy any bonds.

Gov. Haruhiko Kuroda explained the contradiction essentially by disavowing the ¥80 trillion target. The actual number could “increase or decrease,” Mr. Kuroda told reporters, handing himself enough wiggle room for a dance party.

In banana terms, he said that what he really wants is the 50 cent-per-pound price, and everything else is secondary.

 

So...bananas are going to be $0.50 a pound.  That's the new magic incantation.  Left completely unsaid is exactly how this time that's going to do something to help something, somehow.  The press has completely given up on asking about the linkage between policy and outcomes; the transmission mechanism is so embarrassingly vague that it's not brought up in polite circles anymore.

Reading between the lines, the BoJ has no more ideas on how to tame the complex market ecosystem.

Truthfully, they should have admitted defeat many years ago.  So now they are just doing MORE of the same, hoping for different results.

The Forex market has already spoken after deliberating for all of an hour and said "Nahhhhh...this was a whole lot of nothing!"

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Snydeman
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Thanks, Chris

Ok, my read on the situation wasn't far off then. I mean, I read the official press releases three times, but felt like in the end I was nowhere new.

 

All eyes on Yellen now, I suppose. I almost want them to raise rates today just so we can get this show kicked into the next Act, or to cue the Fat Lady once and for all (so to speak).

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Price controls never work in the long term....

Amazing to see (Bank of) Japan openly admitting to such as a goal.  Think about it.....

From the reference Chris quoted;

The core of the BOJ’s new policy is a pledge to buy as many or as few Japanese government bonds as necessary to ensure that the yield on 10-year bonds is zero.

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BBC's view

Interesting.

http://www.bbc.com/news/business-37426559

 

The headline suggests the policies will bring growth, but the article presents lots of counterpoints to that premise. Is the mainstream media finally catching on?

 

Wait. Are those Goths I see? Just over that hill?

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Snydeman
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Rate hike

No rate hike. I'm shocked. SHOCKED​, I tell you.

 

On the plus side, the comments over at Zerohedge are just downright fun to read right now.

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Fact Check

Correct me if I am wrong, but I believe the following statement to be not true:

The Bank of Japan owns 50% of all Japanese government bonds, JGBs.

I recall more than one source where July/August BOJ JGB holdings is somewhere around 38% of the JGB market. I believe that the BOJ is on-track to achieve the 50% threshold. However, as of now it is just not true. Here is just one source of many.

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Fact checked BoJ numbers
philthy wrote:

Correct me if I am wrong, but I believe the following statement to be not true:

The Bank of Japan owns 50% of all Japanese government bonds, JGBs.

I recall more than one source where July/August BOJ JGB holdings is somewhere around 38% of the JGB market. I believe that the BOJ is on-track to achieve the 50% threshold. However, as of now it is just not true. Here is just one source of many.

Good catch.

 

Here's the break down.

The BoJ owns 64% of the JGB 5 + 2 year market (I just ran the numbers myself)

The BoJ owns 34% of the 10 to 40 year market.  

There are also floating rate and inflation indexed bonds...mush it all together and it comes to around 38% at present.

My sources are here (Boj) and here (MoF).

I think the "50%" comment comes from the idea that the BoJ now owns more JGB bonds than the Japanese banks, which is a form of slow death for the market.  The other main holder, pensions (and other private non-banks) are not really market makers for these bonds...they buy them and hold them.  

And here's the other bit of information that matters if we want to toss around %-ownership-by-the-BoJ numbers. :

Thanks for the fact check!

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Snydeman
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philthy wrote: Correct me if
philthy wrote:

Correct me if I am wrong, but I believe the following statement to be not true:

The Bank of Japan owns 50% of all Japanese government bonds, JGBs.

I recall more than one source where July/August BOJ JGB holdings is somewhere around 38% of the JGB market. I believe that the BOJ is on-track to achieve the 50% threshold. However, as of now it is just not true. Here is just one source of many.

Good fact catch, although I think the underlying concern with what this represents for the wider system won't be allayed either way. Still, PP aims to keep facts accurate, so this was due diligence on your part!

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God bless you, sir.

Thanks for clarifying, as it really does help to recap on past graphs and other tidbits. So, by "slow death" are you referring to liquidity in the JGB market drying up? Because, as the Fed does, the BoJ is just sitting on these JGB's and rolling them over upon maturity (i.e. not a "market maker")?

Relevant quote: 

“If the BOJ does not sell stocks, then liquidity will disappear,” Murakami said. “As liquidity falls, the number of shares you can buy starts to decline -- the same thing that’s happening in the JGB market.”

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It takes COURAGE to accept HOPELESSNESS..

I think everyone is overlooking the elephant in the room as usual - a symptom of increasing denial that infects both pro and contra economic points of view.

Faced with global systemic failure, faced with utter collapse, even the most honest politician, economist or FOMC member is going to break the law.  And the government/senate is going to condone it.

The idea that "the market will decide" is no longer applicable, we're way past basic economic theory now.  In a world where every wall street banker, every senator, every corporate CEO and every economist has a gun to their heads, market motivations can't be compared to anything that has happened in the past.  These people have no choice but to try and keep the system propped up.

Death of money is NOT an option so the big banks, the big wigs, the big money even the man on the street may NEVER be inclined to sell at all.   The end result is that the big banks (Deutsche for example) are probably broke and will therefore be encouraged to fiddle their books (condoned by the worlds SECs) to hide the truth.  Going forward the FED and its banking cronies will simply tell us what the rates are (which the BOJ are already suggesting), perhaps fabricating the bid/sell prices of bonds as necessary.  All very easy to do in a robotised market reliant on digital money.   That kind of numerical collusion is already happening at the BLS and is widely supported by the media and governments already.

In other words, the economic rule of law is no longer based on supply-and-demand or affected by peak debt, fund-rates or gold prices.  Instead it is paralyzed, made artificial by the fear of desolation.  The result is self-preservation, book-cooking and collusion.  Thus manipulation of the message and the numbers is the new normal that even our most respected leaders are now forced to condone.

The real question that needs to be answered before anyone can predict when/if a collapse will happen is:  Just how long can the over-regulations, market manipulations and collusion keep the broken global economy in tact.  Can losses be hidden forever if the SEC and FOMC agree to hide them or print over them in the shadows for the sake of the greater good.   Clearly it can't go on for ever but analysts need to start looking at the problem differently, not like economists but like SEC detectives.  And after burning their economics textbooks.

It's time to start thinking outside the box and grow a pair.  To recognize the possibility that there won't actually be a wealth transfer, that gold might not save us because no-one will be allowed to capitalize on it even if it's price is allowed to "get out of control".  That the collapse will happen but it could take years of misery first.  That short of some kind of accident (like a flash crash, war or terrorist attack or more likely a middle class rebellion) the facade will hold.

Hope like blind faith, the other side of denial, is just gutless ignorance.

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Time2help
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Not hopelessness

Death.

There is no tomorrow. There never was. Only in your mind.

There is only now.

Let go. And take back your hope.

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Cornelius999
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Posts: 323
Two great points of view!

Two great points of view!  I'm going to have to brush up on some despairing French existentialists. I've gotten the impression somewhere ( perhaps wrongly ) that the new book:  " At the Existentialist Cafe "  might  actually be an entertaining read.

I've also happened to notice that big words starting with Ex; Exponential is another one - seem to cause great problems in the world. I humbly suggest that only good could come from banning these words.... to begin with. 

In gutless hopeful despair,

A local Manic - Depressive

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robie robinson
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Hope,

That patrons of the "Existentialist Cafe", will move to the "Transcendentalist Garden" where there is peace.

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_mongo
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Negative Specific Heat

Chris, instead of watching the "debate" tonight I watched a live SFI lecture by Seth Lloyd from MIT on entropy, thermodynamics and negative specific heat as it applies to gravitational and financial systems. He did a neat lecture back in 2010 on "Financial Black Holes".

With the huge amount of money printing since then, his 2010 lecture seems to be very prescient. Tonight was the first of a series and I'm curious to see his current take on the financial system from this angle.

I've been trying to wrap my head around the perpetual motion mentality of central bankers. This is good stuff and the negative specific heat concept was a big piece of the puzzle that had been missing for me. I was wondering if your thoughts had wandered into this area? Would be great to have your perspective.

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_mongo
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Information Edge
 
The Information Edge: Creation and Destruction in Life, the Economy, and the Universe
(9/26,9/27)
 
 
 

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