Posted on June 5, 2015 by JayWill7497
Every great con game at some point is done. For years, global central banks have been exploiting the financial marketplace with their monetary voodoo. Somehow, they have persuaded investors around the world to invest tens of trillions of dollars into bonds that provide a return that is way under the real rate of inflation. For quite a long time I have been insisting that this is extremely illogical. Why would any logical investor want to put money into investments that will make them poorer on a purchasing power basis in the future? And when any central bank triggers a policy of “quantitative easing”, any logical investor should instantly start demanding a higher rate of return on the bonds of that country. Creating money out of thin air and pumping into the financial system cheapens all existing money and creates inflation. Consequently, logical investors should respond by driving interest rates up. Instead, central banks said to everyone that interest rates would be forced down, and that is exactly what occurred. But now things have changed. Investors are beginning to behave more rationally and the central banks are beginning to lose control of the financial markets, and that is a very bad sign for the rest of 2015.
And needless to say it isn’t just bond yields that are out of control. Despite how hard they try, financial authorities in Europe can not seem to fix the issues in Greece, and the issues in Italy, Spain, Portugal and France just proceed to skyrocket as well. This week, Greece became the very first nation to skip a payment to the IMF since the 1980s. We’ll talk about that some more in a second.
Over in Asia, stocks are ever-changing very wildly. The Shanghai Composite Index plunged by 5.4 percent on Thursday before recovering all of those losses and essentially closing with a gain of 0.8 percent. When we see this kind of intense unpredictability, it is a very bad sign. It is during times of intense unpredictability that markets crash.
Bear in mind, stocks usually tend to go up during calm markets, and they typically tend to go down during choppy markets. So most investors do not want to see lots of unpredictability. Sadly, that is exactly what we are witnessing all over the world today. The following comes from the Wall Street Journal…
“Volatility over the last days has been breathtaking, especially in bond markets,” stated Wouter Sturkenboom, senior investment strategist at Russell Investments. He stated that it rippled through equity and currency markets, which overreacted.
The yield on the benchmark German 10-year bond touched 0.99%, its highest level since September, before erasing the day’s rise and falling back to 0.84%. The 10-year U.S. Treasury yield, which hit a fresh 2015 high of 2.42% earlier Thursday, lately fell back to 2.33%. Yields rise as prices fall.
Occasionally when bond yields go up, it is because investors are taking money out of bonds and putting it into stocks because they are feeling really good about where the stock market is maneuvering. This is not one of those times. As Peter Tchir has said, the tremendous moves in the bond market that we are now witnessing are the direct result of “sheer panic in the market”…
In a morning note before the open, Brean Capital’s Peter Tchir had written: “It is time to reduce US equity holdings for the near term and look for a 3% to 5% move lower. The Treasury weakness is NOT a ‘risk on’ trade it is a ‘risk off’ trade, where low yields are viewed as a risk asset and not a safe haven.” And Tom di Galoma, head of fixed-income rates and credit at ED&F Man Capital Markets, informed Bloomberg, “This is sheer panic in the market from the standpoint of what’s been happening in Europe … Most of Wall Street is guarded here as far as taking on new positions.”
But this wasn’t expected to come about.
After seeing the Federal Reserve be able to effectively use quantitative easing to drive down interest rates, the European Central Bank made the decision to try the same thing. Sadly for them, investors are beginning to act more rationally. The central banks are beginning to lose control of the financial markets, and bond yields are rising. I think that Peter Boockvar made clear where we are at present when he stated the following…
“I’ve said this before but I’m sorry, I need to say it again. What we are witnessing in global markets is the inherent contradiction writ large that is modern day monetary policy where dangerously ZIRP, NIRP and QE are considered conventional policies. The contradiction is simply this: the desire for higher inflation if fulfilled will result in higher interest rates that central banks are trying so hard and desperately to suppress.
Outside of the short end of the curve, markets will always win for better or worse and that is clearly evident now. The ECB is getting their first taste of the market talking back and in quite the violent way. In the US, the bond market is watching the Fed drag its feet (its never-ending) with wanting to raise interest rates and finally said enough is enough. The US Treasury market is tightening for them. Since mid April, the 5 yr note yield is higher by 40 bps, the 10 yr is up by 55 bps and the 30 yr yield is up by 65 bps.”
And if global investors proceed to move in a rational direction, this is just the starting point. Bond yields all over the planet should be much, much higher than they are right now. What that means is that bond prices possibly have a incredible amount of room to go down.
One thing that could accelerate the global bond crash is the meltdown in Greece. Talks between the Greeks and their creditors have been dragging on for 4 months, and no deal has been reached. Now, Greece has skipped the loan payment that was due to the IMF on June 5th, and it is requesting the IMF to bundle all of the payments that are due this month into one huge payment at the end of June…
“Greece has asked to bundle its four debt payments to the International Monetary Fund that fall due in June so that it can pay them in one batch at the end of the month, Greek newspaper Kathimerini reported on Thursday.
The request is expected to be approved by the IMF, the newspaper said. That would mean Greece does not have to pay the first tranche of 300 million euros that falls due on Friday.
Greece faces a total bill of 1.5 billion euros owed to the IMF over four installments this month.”
Needless to say that payment will not be produced either if a deal does not occur by then. And with each passing day, a deal appears less and less likely. At this point, the package of “economic reforms” that the creditors are demanding from Greece is totally undesirable to Syriza. The following comes from an post in the Guardian…
“Fresh from talks in Brussels, Tsipras faced outrage on Thursday from highly skeptical members of his own Syriza party. A five-page ultimatum from creditors, presented by the European commission president, Jean-Claude Juncker, was variously described as shocking, provocative, disgraceful and dishonourable.
“It will never pass,” said Greece’s deputy social security minister, Dimitris Stratoulis. “If they don’t back down, the country won’t be lost … there are alternatives that would cost less than our signing a disgraceful and dishonourable agreement.”
Truly, I don’t think that we are going to see a deal.
Clearly, I have a tendency to concur with this bit of analysis from Andrew Lilico…
“The Eurozone does not want to make any compromise with the current Greek government because (a) they don’t believe they need to because Greek threats to leave the euro are empty both because internal polling suggests Greeks don’t want to leave and because if they did leave that doesn’t really constitute any threat to the euro; (b) because they (particularly perhaps Angela Merkel) believe that under enough pressure the Greek government might collapse and be replaced by a more cooperative government, as has happened repeatedly before in the Eurozone crisis including in Italy and Greece itself; and (c) because any deal with Greece that is seen to involve or be presentable as any victory for the Greek government would threaten the political positions of governments in several Eurozone states including Spain, Portugal, Italy, Finland and perhaps even the Netherlands and Germany.
Furthermore, it’s not clear to me that the Eurozone creditors at this stage would have much interest in any deal based upon promises, regardless of how much the Greek had verbally surrendered. Things have gone too far now for mere words to work. They would need to see the Greeks deliver actions – tangible economic reforms and tangible, credible primary surplus targets and a sustainable change in the long-term political mood within Greece that meant other Eurozone states might eventually get their money back. That is almost certainly not doable at all with the current Greek government. The only deal possible would be with some replacement Greek government that had come in precisely on the basis that it did want to do a deal and did want to pay the creditors back.
On the Syriza side, I see no more appetite for a deal. They believe that austerity has been ruinous for the lives of Greeks and that decades more austerity would mean decades more Greek economic misery. From their point of view, default or even exit from the euro, even if economically painful in the short term, would be better than continuing with austerity now.”
You can study the rest of his outstanding post right here.
Without a deal, the value of the euro is going to completely plummet and bond yields over in Europe will skyrocket. I am completely certain that this is the outset of the end for the eurozone as it is presently constituted, and that we stand on the brink of a great European financial crisis.
And needless to say the financial crisis that is coming won’t just be in Europe. The global financial system is more interconnected than ever, and there are tens of trillions of dollars in derivatives that are tied to foreign exchange rates and 505 trillion dollars in derivatives that are tied to interest rates. When this massive house of cards collapses, the central banks will not have the ability to stop it.
In conclusion, could we at some point see the entire central banking system itself totally collapse?
Which is what Phoenix Capital Research is convinced is about to happen…
“Last year (2014) will likely go down in history as the “beginning of the end” for the current global Central Banking system.
What will follow will be a gradual unfolding of the next crisis and very likely the collapse of the Central Banking system as we know it.
However, this process will not be fast by any means.
Central Banks and the political elite will fight tooth and nail to maintain the status quo, even if this means breaking the law (freezing bank accounts or funds to stop withdrawals) or closing down the markets (the Dow was closed for four and a half months during World War 1).
There will be Crashes and sharp drops in asset prices (20%-30%) here and there. However, history has shown us that when a financial system goes down, the overall process takes take several years, if not longer.”
We stand at the precipice of the biggest economic change that any of us have ever witnessed.
Although things may appear very “normal” to most people right now, the truth is that the global financial system is essentially problematic, and cracks in the system are beginning to show up all over the place.
When this system does fail, it will take most people completely by surprise.
But it shouldn’t.
All con games at some point fall apart in the end, and we are about to learn that wisdom the hard way.
Thanks to: https://jwilliams7497.wordpress.com