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Something Is Haywire in Global Financial Markets: On a Dead-Cat Bounce

Tuesday, March 10, 2020 18:09

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“Something Is Haywire in Global Financial Markets:

On a Dead-Cat Bounce”

by David Stockman

“The Stock Exchange is something very different. There is no economy and no production of goods and services. There are only fantasies in which people from one hour to the next decide that this or that company is worth so many billions, more or less.”

– Stieg Larsson, “The Girl with the Dragon Tattoo” (2005)

“Dow Futures pointed toward a 1,000-point open this morning, this time in green though, as it becomes ever more obvious that something is haywire in global financial markets. Here’s how the inimitable Eddy Elfenbein forecast it:

Looks like a “dead cat” to me…

The yield on the 10-year U.S. Treasury note was 0.559% when I started typing this morning. And that’s downright ludicrous. After all, the core inflation rate posted at 2.27% in January. That means the most fiscally profligate government in modern times gets to borrow long-term funds at negative 171 basis points in real terms. Bond “bulls” want you to believe that nearly return-free yields on government debt is all very rational. In their wisdom, bond “investors” see a weak economy down the road and are therefore discounting the next recession.

I’ve got no problem with the “recession” call. But that’s not why there is $16 trillion in bonds around the world currently trading at negative nominal yields. And that’s not why the benchmark for the entire global financial system, the 10-year U.S. Treasury note, is almost there with a nominal yield that’s barely holding on to an integer.

What you have here is the financial equivalent of caribou soccer. It’s what six-year old boys and girls do as they chase the biscuit around the pitch, a rambunctious pack with no regard for strategy or team play.

In the case at hand, global central banks have fostered so much restless speculative capital that when the scoreboard flashes “risk off,” they all pile into U.S. Treasurys and other sovereigns as a nearly cost-free place to park. And they buy the bonds on 95% repo. And they repeat it until the ball is back toward the “risk-on” end of the field.

The fact is, recessions (or their prospect) do not cause negative yields. Nothing does except central banks irrationally bidding for debt, along with front-runners who jump on for a quick price gain from what are supposed to be fixed price instruments bearing a modest yield. Here’s how long-term U.S. Treasurys behaved at recession points during the era before monetary central planning systematically falsified bond pricing…

Click to Enlarge

During December 1953, as the recession set in, the bond yield was 2.79% versus a year-over-year Consumer Price Index (CPI) reading of 0.60%. That’s a real yield of 219 basis points.

During the next recession, in October 1957, the bond yield was 3.73% versus CPI inflation of 2.94%. That’s a real yield of 79 basis points.

During September 1960, the figures were 3.82% and 1.23%, generating a real yield of 259 basis points.

And even during June 1970, when Federal Reserve-fueled inflation was picking up steam, the bond yield of 7.00% exceeded the 6.00% inflation rate by 100 basis points.

In short, today’s hideously low bond yields are not due to low inflation or the recession lurking just around the bend. They are the handiwork of central bankers run amuck. This happens in defiance of common-sense laws of economics under which investors require a meaningful margin over and above inflation to compensate for risk and the time value of their savings.

Moreover, today’s virtually non-existent bond yields are not merely a case of “too bad for the widows and orphans” who don’t have the requisite chest hair to chase after the big money in equities and high-yield debt. In fact, today’s yield on the 10-year U.S. Treasury – and the negative yields on the German and French counterparts – are symptomatic of global asset prices that have gone tilt under the heavy-handed ministrations of the central banks.

Here’s the thing: Capitalist prosperity and stability requires efficient money and capital markets to intermediate the flow of savings into productive investment. But when the world’s $90 trillion bond market has become a speculative hall of mirrors and the $85 billion equity market has morphed into the kind of machine-driven casino evident in the chart below, all bets are off.

Sustainable growth will positively not happen under the bad money regime monetary central planners have foisted on the world. The scramble for yield is causing zombie companies to remain artificially alive, startups to waste prodigious amounts of capital chasing will-o-wisps, and Corporate America’s C-suites to function as stock trading rooms and financial engineering joints.

The financial malignancy has set in so deep that the response of politicians and speculators alike to any challenge – like COVID-19 and the fracturing of global supply chains – is to urgently call for the injection of even more monetary poison into the system…

Click to Enlarge

Let this be fair warning that the end of the 30-year fantasy driven by monetary central planners is near. The amplitude and speed of price change is happening with such violence that it’s only a matter of time before a 2008-style meltdown is triggered by the mutant arrangements that have metastasized in global financial markets.

There are now in excess as $7 trillion of passive assets allocated to exchange-traded funds, index funds, and trend-following trading vehicles that could be sucked into a self-fueling chain reaction of selling. And out-of-dry-powder monetary and fiscal authorities will be powerless to reverse it. Indeed, these coiled springs of speculative energy are undoubtedly the reason why this correction happened in record time. Compared to the history of 25 such 10% or better stock market drawdowns since 1946, this one is literally off the charts.

Well, the jig is up. And it’s now only a matter of weeks – months, maybe – before this Bubble of All Bubbles goes down. To common sense…”

- http://deepstatedeclassified.com/

Source: http://coyoteprime-runningcauseicantfly.blogspot.com/2020/03/something-is-haywire-in-global.html

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