Bond Bubble

I have noticed there has been more interest over the past few years regarding Government Bond Rates. In many countries they are at historic lows, all time lows even. Interest rates in many countries have gone negative, whereby the rate of inflation is now higher than the rate of return in the bond. Its gone even spookier than that now. A rate of return economists thought was impossible has now happened, that is interest rates on bonds have actually turned negative in some countries. In Switzerland a 10+ year bond can be bought to actually have a minus rate of return. This has never been seen before. I first mentioned the bond bubble six years ago and its worth revisiting as it applies equally to where we are now:

However with the new intention for expanding the money supply to "combat" deflation, QE is now monetising many of these bonds, in effect creating artificial buyers. Similar to the recent housing bubble, real demand was never there, it was just people flipping houses to one another with artificial cheap money as the driver. The market anticipates this new QE artificial demand, by lowing rates as there is less risk on default as more buyers have entered the market - seemingly increased demand, limited supply. This is where the real trouble begins, the point we find ourselves in now.... 

We are only in the early stages of the above. In theory, this could be stopped now with the Government abandoning QE, but I doubt it. Not with the huge deficits to come and the lack of Global Capital. The above describes the very process of how the Central Banks believe they can beat the market. However they can't, as the above details, they can only make it worse and the longer they try to 'beat' the market the worse they make the situation. In the event that things go to far they will destroy the currency, the lifeblood of the economy, thus impoverishing us all. Prices are there for a reason. Economists will tell you that when yields come down, that the Central Banks have saved us and proclaim that QE has worked. It can never work and is doomed to failure. The longer they try and hold the short term price down, the higher it will shoot up eventually and the longer it will stay there.

Its a measure of the mess we find ourselves in that rates continue going so low, to lows that we once thought impossible. This is a once in a lifetime super bubble, one that we will tell our Children and Grandchildren about. To an inquiring mind, how and why have rates gone so low and what format will the aftermath take?

A number of reasons exist why bonds have gone so low, the main one however is QE. Its no coincidence that since the ECBs announcement to an extension of the QE program that rates have gone to all new time lows. QE is distorting prices of bonds by creating artificial buyers. The increase in demand causes prices to rise (when bonds interest rates fall, they go up in value as any existing holders can sell theirs on for a increased profit as they locked in higher rates) just like in any market. 

So we have Governments buying bonds but that still doesn't explain private buyers. Well, by law a number of financial institutions have to buy bonds. For example due to regulations set by the Government pension funds for example have to allocate a portion of their funds in Certain Government securities, regardless of the rate of return. How about banks or other buyers who are not forced? We still can't explain why they would buy a bond that will erode in value over time. Like any bubble it works on the premise of buying an asset for the belief it can be sold to a bigger fool.

When people were buying technology stocks in the late 90's, where a company had no dividend, no assets - in fact in some cases barely a business case. Still such companies were on paper worth billions. People bought the stocks not for fundamentals but for the belief they could sell them for a higher price than they bought them for. A similar prognosis back then to now causes this phenomenon; cheap money. Like technology stocks of the late 90's or real estate of the 00's, bonds are the new bubble in town. And just like real estate and the Technology stocks they will go pop. Central banks have made sure of that and when they do you need to stay well away.

How long have we got? I'm sure rates will still go lower, to lows we don't think is possible. However when rates go into long term upward trend Governments (or institutions the Government forces to be buyers) will be the only buyers in town turning the greatest bond bull market in history to the worst bear market. Currencies will gyrate with wild fluctuations. Inflation will go hand in hand with this. Markets will act in ways we have never seen before. Central Banks will provide small glimpses of the illusion that they have control but you can not contain a market price, it always breaks out in some form of spontaneous nature. Stocks and Real Estate will offer no protection. These assets generally go to new all time lows in real terms in such an environment. Precious Metals will once again resume their bull market run, going into a mania phase. CNBC and the such will have feature programs and stories of people getting rich by holding such assets, which incidentally is sure to be the next bubble once the bond market goes up in flames. 

The bond bubble. It may mean nothing to you now. It may mean nothing over the next few years. But in the coming decade however it will mean everything. So long as there exists centralised monopolistic control over money there will be bubbles. Reading what those bubbles will be can be the tricky part but once you can read histories rhythmic patterns the future is for all to see. Then its just a case of taking the correct actions, sit back; relax and watch history unfold.

Another Greek Panic Recedes Once More

Yet another Greek Crisis has been averted, another kicking of the proverbial can. Syriza has seemingly sold out its election pledges to keep the status quo intact. Should it be a surprise? What were the options?

Greece's largest creditors are members of the EU and the European Central Bank. Greece is broke. They have two options, to stick or to twist. Stick involves keeping on the side of their EU creditors. The twist option would be one of even more potential disaster. One only has to look at Venezuela for what happens when a country goes broke. Empty Shelves, rampant inflation, crime waves, brain drain emigration and no foreign investment. Greece could have decided to break from the EU but this would have involved the whole countries banking system becoming insolvent. Capital would be wiring instantly out of the country. A National currency would have been established to replace the Euro. Only the Government is broke. No foreign capital would come forth and with little genuine domestic capital would have resulted in the inevitable currency devaluation accompanied with crippling inflation. Syriza, now in power, realise this reality. They had to get a deal.

The real question how many crisis will we get? France, Belguim, Spain, Italy - you could name any of the EU countries, they all have terrible fundamentals. There will be other issues elsewhere, but all will be papered over, kick that can - thats what I can be sure will happen. How long can that "can" be kicked for? As I've said until the centralised central policy makers - IMF, Central Banks, Governments - can't fix the problem. In other words events go beyond their control. Currently they have the illusion of control. But in time they won't. We are in the midst of a super bubble, the bond bubble. I knew it would go bad but I didn't think it be this bad. 

It may sound like a doom rant but it was the same back in 2006 when I said similar (housing, Government Deficits etc). People not only didn't want to know, they think you to be some sort of loon. Then 2008/09 hit with everything going into a tailspin. Its going to be the same once more, only this time worse. I still believe we have some years to go. Interest Rates will go lower. Stocks will go higher. All this will fool everyone to believe all is well. But don't be fooled. The bond bubble will burst with catastrophic consequences. Currencies will be decimated. Chaos will ensue in financial markets once more, worse than in 2008/09. Governments and Central Banks will be helpless. It will be an economic event that we will all remember and tell our Children and Grandchildren about. 

"This Down Cycle is Likely to be Remembered in a Hundred Years"

"We are in the first stage of this downturn. It is too early to see what will happen - a change of this magnitude means the darkness and mist is very great. This down cycle is likely to be remembered in a hundred years"

Crispin Odey, Hedge Fund Manager

The next great financial crash. Its not a matter of if, its when. Crispin Odey correctly predicted the first crash back in 2007/2008 and is warning once more that the system is looking decidedly shaky. Other hedge fund managers have also stated the current "recovery" is propped up by a debt fueled binge built on paper straws. I too know it will all not end well. So how bad are things?

Debt just keeps getting worse. Its been allowed to get worse as Governments are all on a fiat based based monetary standard and have moved interest rates as low as possible. In most countries Governments have also been active buyers of their own debt through schemes such as "Quantitative Easing". These factors are allowing Governments to keep the party going. Consumers once more are taking on more debt. Larger mortgages fueling real estate bubbles along with consumer credit which in the UK is back to its 2008 peak. 

The 2007/08 crisis was a warning that private debts were too high. These were caused by Governments throwing money in the system after the dot-com crisis. Their solution to the banking collapse was to throw more money into the system, thus propping up private debts and exacerbating them. At the same time Governments debts have also continued to rise at an alarming rate. So countries are back to the 2007/08 position, only in a worse state. All of which makes a mockery of the Conservatives "Austerity" program in the UK. George Osborne has not eliminated the deficit as he claimed he would back in 2010 - in fact he's not even halved it, despite another inflationary credit boom. The countries credit rating was downgraded. In four years he's borrowed more money than all previous Labour Governments in history combined. Public Spending has increased - Austerity means you cut your outgoings, not increase them. I never believed Cameron and Osbourne back in 2010. The US Dollar continues to strengthen, interest in precious metals is apparent once more and Commodity prices have tanked - all indicating the economic environment has become more uncertain.

The Bond market is a bubble. In many countries we have not seen bond rates so low for centuries. QE and fiat money are causing these abnormally low rates. When this goes bang all hell will break loose. Forget about crisis it will be Armageddon. I think we will get a number of "mini" crisis before this calamity hits us. Why? Governments will continue using monetary policy to paper up the cracks. No private bond buyers? Governments and Central Banks will buy their debt more and more, until only the Central Banks will be the major buyers. In turn this money will come out of thin air. This is a tipping point which can either result in high inflation or runaway inflation. There's two components to Inflation. Increasing the supply of money and peoples psychology, the latter is the tipping point.

• Inflation is caused by an expanse in the money supply. Making too much money in relation to an increase in goods and services causes consumer prices to rise. A Government can get away with this process for a while like now. Markets have been lowering costs, Governments take advantage of such action by increasing the money supply. Its not at a critical point yet, but central banks are laying the foundations for it to potentially get out of control. The most important factor involved in inflation is human psychology.
• A collapse in currency is generally caused by a fall in confidence of the public. The Public becomes weary that the Government will continue to print more money. People start trying to spend or exchange such money for anything. Thus supply outstrips demand causing it to devalue further. This cycle can be re-enforcing, prices rise further, people loose confidence thus putting increased selling pressure. If a Government has burdensome debts it becomes very hard to stop QE or raise interest rates to defend the currency as its not in a position to do so. 

The final point is of particular importance to any crisis, the general public's perception at the current time. There were few people warning prior to 2007/08 saying a crisis was coming but there were a few who could see it coming. It is only when the masses realised the reality that the crisis came. Again, the same people who were warning about 2007/08, including Crispin Odey, are sounding the alarm once more. Why? Because the fundamentals are terrible and there has to be a crisis. Governments don't stop financial mishaps, they cause them. How long have we got? No one knows. All you can do is get ready and accept this will not end well.