The Bond Bubble Has Been Pricked

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As Andy Haldane, Executive Director of Financial Stability at the Bank of England said to Members of Parliament in London last week,

“We’ve intentionally blown the biggest government bond bubble in history.”

Now having pricked that bubble through Bernanke’s taper comments it may now be a case of controlling that implosion. Thats the new game.

bubble-burstIn theory, the Fed could continue to print money and buy Treasuries and mortgage-backed securities, or even pure junk, at the current rate of $85 billion a month until the bitter end. But the bitter end would be unpleasant even for those that the Fed represents – and now they’re speaking up publicly.

“Savers have paid a huge price in this recovery,” was how Wells Fargo CEO John Stumpf phrased it on Thursday – a sudden flash of empathy, after nearly five years of Fed policies that pushed interest rates on savings accounts and CDs below inflation, a form of soft confiscation, of which he and his TBTF bank were prime beneficiaries. That interest rates were rising based on Fed Chairman Ben Bernanke’s insinuation of a taper was “a good thing,” he told CNBC. “We need to get back to normal.”

A week earlier, it was Goldman Sachs CEO Lloyd Blankfein: “Eventually interest rates have to normalize,” he said. “It’s not normal to have 2% rates.”

They weren’t worried about savers – to heck with them. They weren’t worried about inflation either. They were worried about the system, their system. It might break down if the bond bubble were allowed to continue inflating only to implode suddenly in an out-of-control manner. It would threaten their empires. That would be the bitter end.

Andy Haldane, Director of Financial Stability at the Bank of England, put it this way: “We’ve intentionally blown the biggest government bond bubble in history.” The bursting of that bubble was now a risk he felt “acutely,” and he saw “a disorderly reversion” of yields as the “biggest risk to global financial stability” [my take… Biggest Bond Bubble In History Is Turning Into Carnage].

Preventing that “disorderly reversion” of yields is the Fed’s job, in the eyes of Stumpf, Blankfein, Haldane, and all the others. The Fed should let the air out gradually to bring yields back to “normal.” So the Fed hasn’t actually changed course yet. It’s keeping short-term rates at near zero, and it’s still buying bonds. But it has started to talk about changing course – and the hissing sound from the deflating bond bubble has become deafening.

Long-term Treasuries went into a tailspin. The 10-year note had the worst week since June 2009, the days of the Financial Crisis; yields jumped 39 basis points (13 bps on Friday alone), to 2.55%. Up from 1.66% on May 2. And almost double from the silly 1.3% that it briefly bushed last August.

The average 30-year mortgage rate increased to 4.17%, from 3.59% in early May. In response, the Refinancing Index crashed by almost 40%. Banks have sucked billions in fees out of the system via the refinancing bubble, but that game is over. And the Purchase Index dropped 3% for the week, a sign that higher rates might start to impact home purchases.

Then there was the junk-bond rout. They’d had a phenomenal run since the Fed started its money-printing and bond-buying binge. Average yields dropped from over 20% during the Financial Crisis to an all-time insane low of 5.24% – insane, because this is junk! It has a relatively high probability of default, and then the principal vanishes. That was on May 9, the day the rout started. The average yield hit 6.66% on Thursday. Investors have started to take a gander at what they’re buying and would like to be compensated for some of the risks that they’re suddenly seeing again. The feeding frenzy for yield is over. A sea change! Some companies might not be able to find buyers for their junk. And there will be defaults.

To preserve the system, as dysfunctional as it has become, the Fed has set out to tamp down on that feeding frenzy for yield, the hair-raising speculation, and blind risk-taking that its easy money policies have engendered – that is, financial risk-taking which doesn’t create jobs and doesn’t move the economy forward but just stuffs balance sheets with explosives. With its vague and inconsistent words, the Fed pricked the bond bubble but now is scrambling to control the implosion and soften that giant hissing sound. It doesn’t want the bubble to go pop. Its strategy: sowing confusion and dissension so that investors would react in both directions, with violent swings up and down, not just down.

The first big gun to open fire on the “taper” promulgations was St. Louis Fed President James Bullard when he announced on Friday that he’d dissented with the FMOC’s decision “to authorize the Chairman” to discuss publicly “a more elaborate plan” for the taper and an “approximate timeline.” They were premature. “Policy actions should be undertaken to meet policy objectives, not calendar objectives,” he said.

As stocks were heading south, three hours before what might have been a very ugly Friday close, after Thursday’s plunge, Jon Hilsenrath was dispatched. He is considered a backchannel mouthpiece of the Fed, and markets feed on his morsels. “The markets might be misreading the Federal Reserve’s messages,” he wrote in the Wall Street Journal. Stocks turned around on a dime. Others chimed in. The cacophony grew. And any consensus of when the Fed might actually taper its bond purchases dissolved into hot air.

That’s the plan. To accomplish its goal of preventing, as Haldane called it, “a disorderly reversion” of yields, the Fed will redouble its efforts to spread dissention and uncertainty, to intersperse periods of misery with periods of false hope, to stretch out the process over years so that big players have time to reposition themselves – and make some money doing it, or fall off the cliff and get bailed out, while others will end up holding the bag. Which is how bubbles end.

Source: TestosteronePit

QE, Its Shit or Bust Now

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If you are wondering when Central Banker or politicians will ever end QE, think again. Since Bernanke said on 22 May that the Fed may taper back QE. Within a few weeks over $2.5 trillion has being wiped from the value of equities across the globe. Despite what has been said about trying to get a recovery going, the stock markets will be kept propped up as long as the global ponzi debt scheme can be fed because the alternative to them is unthinkable. Unfortunately for the rest of us the alternative will one day become a reality and that’s a mathematical certainty. All fiat currencies end in disaster and this time is no different.

printingThe Federal Open Market Committee meets next week after the Bank of Japan this week left its lending program unchanged. Global stocks have plunged 5.2 percent from their May 21 peak this year on speculation the Fed may ease stimulus.

“People are still trying to assess the prospects, likelihood, and timing of tapering from the Federal Reserve,” Chris Green, an Auckland-based strategist at First NZ Capital Ltd., a brokerage and wealth management firm, said. “Markets want stability in the economy but they also want unlimited stimulus. The two can’t continue to exist together.”

Trillions Erased

More than $2.5 trillion has been erased from the value of global equities since Federal Reserve Chairman Ben S. Bernanke said May 22 the Fed could scale back stimulus efforts should employment show “sustainable improvement.”

………

To summarize: after three years of the most aggressive deficit spending and monetary ease in human history, the global economy is…slowing down. Meanwhile, central bankers, finally realizing that their random lever-pulling has created asset bubbles without any actual new wealth, and that the likely (very ugly) aftermath might make them unpopular in retirement, are trying to untangle the mess they’ve created.

But even hinting that they might, at some point in the distant future, consider planning to discuss a timetable for eventually gradually phasing in a slightly lower heroin dosage has sent the global financial junkie into a fit of anticipatory withdrawal. Like any good enabler, the bankers will of course respond that they were misquoted and that easy money is now a permanent feature of the modern world. So relax, everything’s going to be okay. Go back to your derivatives trading, and have a little more leverage on us.

Now, there’s no way to know if this is that time, but a time is coming when things are so complex and the moving parts are moving so quickly and erratically that no policy response will make a difference. When that time finally comes it will look a lot like tonight’s Asian markets.

Source: Dollar Collapse

Are Central Bankers Losing Control?

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In light of all the money printing going on, including Japan going full retard with the printing press followed by the Nikkei index collapsing by 15% the question to be asked is, have the Central Bankers lost control? Although things went well in Japan initially, May has not been a good month and cracks are appearing.

The last couple of weeks have been very interesting. Remember that, certain regional differences aside, Japan has, for the past two-plus decades, been the global trendsetter in terms of macroeconomic deterioration and monetary policy. It was the first to have a major housing and banking bubble, the first to see that bubble burst, to respond with years of 1 percent interest rates, then zero rates, then various rounds of quantitative easing. The West has been following Japan each step on the way – usually with a lag of about ten years or so, although it seems to be catching up of late. Now Japan is the first developed nation to go ‘all-in’, to implement a no-holds-barred money-printing regime to (supposedly) ‘stimulate’ the economy. This is called Abenomics, after Japan’s new prime minister, Shinzo Abe, the new poster-boy of policy hyper-activism. I expect the West to follow soon. In fact, the UK is my prime candidate. Wait for Mr. Carney to start his new job and embrace ‘monetary activism’. Carnenomics anybody?

But here is what is so interesting about recent events in Japan. At first, markets did exactly what the central bankers wanted them to do. They went up. But in May things took a remarkable and abrupt turn for the worse. In just eight trading days the Nikkei stock market index collapsed by 15%. And, importantly, all of this started with bonds selling off.

Are markets beginning to realize that all these bubbles have to pop sometime and that sometime may as well be now? Are markets beginning to refuse to dance to the tune of the central bankers and their printing presses? Are central bankers losing control?

 ‘Sell in May and go away’

Let’s turn back the clock for a moment, if only just a bit. Let’s revisit April 2013 for a moment. At the time I spoke of central bankers enjoying a kind of ‘policy sweet spot’: they were either pumping a lot of liquidity into markets or promising to do so if needed, and all of them were keeping rates near zero and promising to keep them there. Some started to consider ‘negative policy rates’. Yet, despite all this policy accommodation, official inflation readings remained remarkably tame – indeed, inflation marginally declined in some countries – while all asset markets were on fire: government bonds, junk bonds, equities, almost all traded at or near all-time highs, undeniably helped in large part by super-easy money everywhere. Even real estate in the US was coming back with a vengeance. And then, in early April, central bankers got an extra bonus: Their nemesis, the gold market, was going into a tailspin. I am sure Mr. Bernanke was sleeping well at the time: financial assets were roaring, happily playing to the tune of the monetary bureaucracy, seemingly falling in line with his plan to save the world with new bubbles, while the cynics and heretics in the gold market, the obnoxious nutters who question today’s enlightened policy pragmatism, were cut off at the knees.

But then came May and everything sold off.

However, that is not quite how the media presents it. Here, one prefers the phrase ‘volatility returned’, as that implies that everything could be fine again tomorrow. And it certainly can. Maybe this is just a blip. But what if it isn’t? And, more importantly, what is driving it?

A widely debated theory is that the prospect of the Fed ‘tapering’ its quantitative easing operation, of it oh-so carefully, ever-so slightly removing its unprecedentedly large and more than ever alcohol-filled punchbowl could end the party. There has for some time been concern about and even outright opposition to never-ending QE within the Fed. So there is, of course, a risk (a chance?) that the Fed may reduce or even halt its asset-buying program. (As a quick reminder, since the start of the year, the Fed has expanded the monetary base already by more than $340 billion, and at the present pace, the Fed is on course to create $1,000 billion by the end of the year.)

Ben Bernanke – tough guy?

However, I do not think that markets have a lot to fear from the Fed. Should a pause in QE lead to a sell-off in markets, to rising yields and rising risk premiums, then, I believe, the Fed will quickly revert course once more and switch on the printing press again. The critics inside the Fed will be silenced rather quickly. Remember that most of them seem to argue that additional QE is not needed; they do not appear to reject it on principle. Ultimately, nobody in policy circles is willing to sit on his or her hands when the markets seriously begin to liquidate. The ‘end’ to QE, if it is announced at all, is likely to be just an episode.

The last central banker who had the cojones to take on Wall Street was Paul Volcker. Ben Bernanke, as well as his predecessor Alan Greenspan, have been nothing but nice to the speculating and borrowing classes. Both subscribe to and have, on numerous occasions, articulated the notion that it is part of the central bank’s remit to bring good cheer to households and corporations by lifting their house prices and inflating their stock prices and executive option packages. What the country needs is optimism and what is more conducive to optimism than a rising stock market and happy faces on CNBC? Bernanke declared that boosting financial assets can kick-start a virtuous circle of borrowing, investing and self-sustained growth. David Stockman has aptly called this approach ‘prosperity management’ through ‘Wall Street coddling’. Of course, Greenspan tightened in 1994, and again very carefully in 2005, and yes, both times financial markets caved in. But this only serves to illustrated how unsustainably bloated and dislocated the financial system has become, and how addicted to cheap money from the Fed. I think the Fed will be very careful to reduce the dosage of its drug anytime soon.

Although he didn’t quite put it in those terms, global bond guru Bill Gross, founder and co-chief investment officer at asset management giant PIMCO, seems to see it similarly. In an interview with Bloomberg in the middle of May, he confirmed that he and his team saw “bubbles everywhere”, which certainly implied that everything could go pop at the same time. He also stated that the Fed would “not dare” to do anything drastic anytime soon as the system is so much more leveraged now than it was in 1994, when Greenspan briefly tried to play tough and tighten policy.

My conclusion is this: if market weakness is the result of concerns over an end to policy accommodation, then I don’t think markets have that much to fear. However, the largest sell-offs occurred in Japan, and in Japan there is not only no risk of policy tightening, there policy-makers are just at the beginning of the largest, most loudly advertised money-printing operation in history. Japanese government bonds and Japanese stocks are hardly nose-diving because they fear an end to QE. Have those who deal in these assets finally realized that they are sitting on gigantic bubbles and are they trying to exit before everybody else does? Have central bankers there lost control over markets? After all, money printing must lead to higher inflation at some point. The combination in Japan of a gigantic pile of accumulated debt, high running budget deficits, an old and aging population, near-zero interest rates and the prospect of rising inflation (indeed, that is the official goal of Abenomics!) are a toxic mix for the bond market. It is absurd to assume that you can destroy your currency and dispossess your bond investors and at the same time expect them to reward you with low market yields. Rising yields, however, will derail Abenomics and the whole economy, for that matter.

It is, of course, too early to tell. The whole thing could end up being just a storm in a tea cup. It could be over soon and markets could fall back in line with what the central planners prescribe. But somehow I doubt that this is just a blip – and interestingly, so does Mohamed El-Erian, Bill Gross’ colleague at PIMCO and the firm’s other co-chief investment officer. In an interesting article on CNN Money yesterday, he contemplated the possibility that markets were beginning to lose confidence in central bankers.

If that is indeed the case it won’t be confined to Japan but will rapidly reverberate around the world. This is a much bigger story than a modest slowing of QE in the US. Could it be the beginning of the end?

I think the central bankers may not be sleeping so well now.

Source:  detlevschlichter.com

Peter Schiff: This Is Going To End Badly Much Worse Than 2008

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Peter Schiff counters the MSM cheerleading for Bernanke and irresponsible money printing. The end is on the horizon and will be much worse than 2008.

Ron Paul & Jim Rogers: Chaos Up Ahead

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Hard to argue with common sense especially from 2 heavyweights like Ron Paul and Jim Rogers in this 3 minute clip.

These are clear warnings signs that a rational person simply cannot ignore.

Bottom line, Nations are going bust. And the worse things get, the more desperate their tactics become. This isn’t the first time that the world has been in this position. This time is not different. History shows that there are serious, serious consequences to running unsustainably high debts and deficits. And those consequences have almost invariably involved pillaging people’s wealth, savings, livelihoods and liberties… either directly or indirectly.

What’s happening right now is playing out in textbook fashion. More taxes, more debt, more printing, more confiscation, less freedom. I’m not talking about the end of the world here, I’m talking about difficult times ahead, and the things that go beyond economics. It’s time to face facts and look at how society will change (and has already changed).

Many people will resist the change and instead cling desperately to the old system – the cycle of debt and consumption that provided jobs, stability, and prosperity. These people will have their lives turned upside down because that system is gone forever. And in case it still weren’t obvious, here is three minutes of clarity from Ron Paul and Jim Rogers…”I would expect that there is going to be a lot more chaos still to come.” – Ron Paul; “They won’t take our bank accounts…they will take our retirement accounts.” – Jim Rogers

Via Simon Black of Sovereign Man blog,

The world is truly an enormous place… and, despite the dearth of good news and positive trends out there, I still see a lot of amazing opportunities in my travelsBut it’s really important to remain grounded about the challenges that face us. As I pen this letter to you, in fact,

– The NSA’s Utah data center, which will intercept every phone call, email, and tweet sent across the Internet, is nearing completion.

– The Marketplace Fairness Act, which will create additional sales taxes on US-based Internet transactions, is set to pass the Senate next week.

– The government of Cyprus just passed the final bail-in measures, officially authorizing the direct confiscation of people’s savings in that country’s banking system.

– The Bank of Japan recently announced its intentions to double down on their already unprecedented money printing operations.

– Not to be outdone, the US Federal Reserve just announced that they will maintain their Quantitative Easing program, which dilutes the existing money supply by more than $1 trillion annually.

– At $16.83 trillion, the US federal debt is at a record high and set to breach $17 trillion early this summer.

– President Obama recently proposed to cap the tax deferral benefit on Individual Retirement Accounts in the Land of the Free

These are clear warnings signs that a rational person simply cannot ignore.

Bottom line, nations are going bust. And the worse things get, the more desperate their tactics become.

This isn’t the first time that the world has been in this position. This time is not different.

History shows that there are serious, serious consequences to running unsustainably high debts and deficits. And those consequences have almost invariably involved pillaging people’s wealth, savings, livelihoods and liberties… either directly or indirectly.

What’s happening right now is playing out in textbook fashion. More taxes, more debt, more printing, more confiscation, less freedom.

I’m not talking about the end of the world here, I’m talking about difficult times ahead, and the things that go beyond economics. It’s time to face facts and look at how society will change (and has already changed).

Many people will resist the change and instead cling desperately to the old system– the cycle of debt and consumption that provided jobs, stability, and prosperity. These people will have their lives turned upside down because that system is gone forever.

And in case it still weren’t obvious, I’d like to present Ron Paul and Jim Rogers, speaking together at our event in Chile a few weeks ago, with their own views on the situation.

“They won’t take our bank accounts…they will take our retirement accounts.” – Jim Rogers

“We are going to have a calamity in economics and political crises as economies worldwide are a lot weaker than they tell us.” – Ron Paul

“I would expect that there is going to be a lot more chaos still to come.” – Ron Paul

“There are so many distortions because we disobeyed economic law – no matter what Bernanke tell’s you.” – Ron Paul


“Bernanke’s whole intellectual career has been dedicated to the study of printing money.” – Jim Rogers

 


“I don’t doubt [the confiscation] at all; and they will use force and they’ll use intimidation.” – Ron Paul

Source: ZeroHedgeSovereignMan

Fed Has No Plan B

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According to Kevin Warsh,( former member of the Board of Governors of the Federal Reserve from from 2006 to 2011), the Fed has no “plan B” and Washington has no strategies for growth. Well one thing is for sure, whatever they are trying, it ain’t working.

At the very crux of the financial crisis, former Fed governor Kevin Warsh notes, “experimental extreme monetary policy,” had the “right risk-reward”, but, he warns, in this excellent (and somewhat chilling) discussion at the Milken Institute, “we left a financial crisis more than for years ago.” While the politicians may ‘prefer’ to think of this as a crisis – and indeed “for them it is a crisis as they preside over an economy that refuses to grow,” which has tended to lead to loss of office, but, Warsh condemns, “they have run out of excuses.” Over the last several years, “[the Fed] has over-promised and under-delivered,” and the bank’s most important asset – credibility – is under attack.

The Fed has “enabled” Washington to do nothing, since the politicians expect the same “rabbit out of the hat” rescue that occurred in the darkest days of the financial crisis. This means no growth strategies (“the mix of policies has to be right”) will occur. Since the financial crisis, Washington has done its level best to focus on GDP in the next quarter, or perhaps the election, and precious little beyond that short-term horizon. Warsh concludes, “There Is No Plan B.”

The Fed has fewer degrees of freedom and the rest of Washington is not coming to the rescue; and furthermore “the ability of a central bank, exclusively, without the rest of Washington doing any bit of the task, to turn an economy from a modest recovery to a robust one is an experiment that is untested – and will not prove to be successful.

Click for full story.

Source: ZeroHedge

Why Bernanke Is Wrong

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Bernanke is turning the US into Japan economically speaking. Instead of taking the banks down the route of Iceland and recovering quickly he has chosen the path of Japan and its slow demise.

There’s a problem with kicking the can down the road – Ben Bernanke, (December 12 2012)

I’ve taken this quote out of context — Bernanke was actually talking about the fiscal cliff, and not monetary policy. But kicking the can down the road is exactly what Bernanke is doing in his domain.

Instead of letting the shadow banking bubble burst and liquidate in 2008, Bernanke has allowed it to slowly deflate, all the while pumping up the traditional banking sector with heavy, heavy liquidity:

It’s been one long, slow brutal grind:

The Fed continues to fight a losing battle, in which it has no choice but to offset any ongoing deleveraging – be it through maturities, prepays, or counterparty failure, or just simple lack of demand for shadow funding conduits – in the shadow banking system.

Trillions and trillions of liquidity later, Bernanke is barely keeping the system afloat:

The reduction in shadow liabilities remains a massive deflationary and depressionary force (and probably the main reason why a tripling of the monetary base has not resulted in very severe inflation). We could have taken the pain in one go back in 2008 — let the failed banks and failed sectors fail, let the junk be written down, and let all efforts go toward rebuilding a more robust system less sensitive to counterparty risk. But we chose to kick the can down the road, and try to reinflate the biggest bubble in history through helicopter drops to the financial sector, the outcome of which has been booming incomes for the rich, and a total lack of growth and opportunity for the poor (except, perhaps for the dubious “opportunity” to join the masses of the long-term unemployment and claim a slice of the increasingly unsustainable welfare pie).

We chose the path of Japan (which has spent the last twenty years depressed) not the path of Iceland (which is emerging from its depression). We chose to kick the can down the road. Like Bernanke said, there is a problem with that. No amount of buying financial sector assets up to an unemployment or inflation or NGDP target — which empirically seems to do more to enrich the financial sector and the big banks than to create jobs  — will fix that. The system is rotten, and the debt load is unsustainable.

Source: azizonomics

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