I admit it - I am completely baffled.
According to Bloomberg, globally $17 Trillion in bonds now have negative yields. No, it's not a typo, it really is trillion: i.e. the 10 to the 12th power usually associated with astronomical measurements. As the article puts it: "Thirty percent of all investment-grade securities now bear sub-zero yields, meaning that investors who acquire the debt and hold it to maturity are guaranteed to make a loss."
Now, I started my career in financial markets back in 1984 (hey, that's my 35th anniversary! - it skipped my mind!) when US interest rates where in double digits, a condition that I thought was ridiculous for the world's richest nation, sporting the world's then only reserve currency. In other words, US bonds were a phenomenal bargain; and so was the American economy, as a whole: stocks, real estate, factories, university educations, whatever...with money so dear, prices were CHEAP.
These days the world is topsy - turvy. The US is FAR from being the world's single, undisputed economic superpower, the President sets economic policy using game show host rules, the economy is ambling along with an eviscerated middle class while the rich have become astronomically rich (them trillions, again).
And oh, yeah, over in Europe things are SO BAD that lenders are paying borrowers. It's like money has become Henny Youngman's wife ("Take my wife, please!"). I first thought it was bad troll B.S., but no, its true: Danish banks now pay "borrowers" for home mortgages. Ben Franklin would be whipsawed: Neither a lender nor a borrower be, he once famously said, and I bet even he wouldn't be able to figure who is who in this scheme.
Anyway, all joking aside this is serious business. Very serious, indeed. I know its a bubble of immense size, even greater and more pernicious that the subprime loan and debt derivative one of 2006-08. But... like I said, I'm baffled. I have absolutely no clue how it will end and what will happen when it bursts.
I mean, with bad debt plus insane leverage it was easy to predict what would happen in 2008: default, deleveraging, margin calls, bankruptcy, recession (BIG recession) and, eventually, a bounceback when the Fed & ECB started printing money with abandon. It had happen before, many, many times: just leaf through some classic books (e.g. Extraordinary Popular Delusions And The Madness Of Crowds written in 1841 is always a favorite).
But, negative interest rates for astronomically exponential sums? Unh-Uh, nope, never seen this before. So, if any of you are still reading this blog and have some bright ideas, please feel free to share them by commenting.
According to Bloomberg, globally $17 Trillion in bonds now have negative yields. No, it's not a typo, it really is trillion: i.e. the 10 to the 12th power usually associated with astronomical measurements. As the article puts it: "Thirty percent of all investment-grade securities now bear sub-zero yields, meaning that investors who acquire the debt and hold it to maturity are guaranteed to make a loss."
Now, I started my career in financial markets back in 1984 (hey, that's my 35th anniversary! - it skipped my mind!) when US interest rates where in double digits, a condition that I thought was ridiculous for the world's richest nation, sporting the world's then only reserve currency. In other words, US bonds were a phenomenal bargain; and so was the American economy, as a whole: stocks, real estate, factories, university educations, whatever...with money so dear, prices were CHEAP.
These days the world is topsy - turvy. The US is FAR from being the world's single, undisputed economic superpower, the President sets economic policy using game show host rules, the economy is ambling along with an eviscerated middle class while the rich have become astronomically rich (them trillions, again).
And oh, yeah, over in Europe things are SO BAD that lenders are paying borrowers. It's like money has become Henny Youngman's wife ("Take my wife, please!"). I first thought it was bad troll B.S., but no, its true: Danish banks now pay "borrowers" for home mortgages. Ben Franklin would be whipsawed: Neither a lender nor a borrower be, he once famously said, and I bet even he wouldn't be able to figure who is who in this scheme.
Anyway, all joking aside this is serious business. Very serious, indeed. I know its a bubble of immense size, even greater and more pernicious that the subprime loan and debt derivative one of 2006-08. But... like I said, I'm baffled. I have absolutely no clue how it will end and what will happen when it bursts.
I mean, with bad debt plus insane leverage it was easy to predict what would happen in 2008: default, deleveraging, margin calls, bankruptcy, recession (BIG recession) and, eventually, a bounceback when the Fed & ECB started printing money with abandon. It had happen before, many, many times: just leaf through some classic books (e.g. Extraordinary Popular Delusions And The Madness Of Crowds written in 1841 is always a favorite).
But, negative interest rates for astronomically exponential sums? Unh-Uh, nope, never seen this before. So, if any of you are still reading this blog and have some bright ideas, please feel free to share them by commenting.
Hellasious, I was coming back here periodically to get some clarity from you! The most logical explanation I find has come from trusted advisor Gary Shilling:https://www.newsmax.com/Finance/StreetTalk/helicopter-money-america-gary-shilling/2016/08/06/id/742417/
ReplyDeleteHe claims we have been in a deflationary period for the last 10 years at least, and has predicted sub 1% rate on the Ten Year note for many years
Thanks A.!
DeleteYes, Shilling is a really intelligent and thoughtful advisor. Surely we’ve been in a deflationary low growth cycle, particularly in Europe. Thus the negative interest rates.
I keep asking myself how this unprecedented situation will end and I come up with a blank... maybe the global economy will re-inflate from necessary Green Tech spending and higher energy, food, etc prices... but... I’m just not sure..
It ends in war. =)
ReplyDeleteHi Hell,
ReplyDeleteI have followed your blog for many years. For interest and for profit. Thank you. =)
To venture a guess at your question. Negative rates are a way of giving money to elites. Dude, if you know where I can get negative rates, tell me, I will borrow as much as they will lend. =)
The negative rates are an indication of how much the elites have captured society. I have seen this style of "subsidy" in other industries... My guess is it eventually ends in revolution.
I have this suspicion that our "Hell" already has an answer, and he is testing the waters to see what the masses are thinking. If that is what is on your mind, I only really started thinking about the question after you raised it.
Btw.... I am interested in your take on China..... I am Chinese, born and bred.
Your most sincere,
Chicken
Chicken, the US is historically very politically resilient. We live in the age of populism, therefore, maybe a popular solution:
DeleteMy guess is something like Hellasious's gradual, rosy scenario (which I hope for), "Greening" project, or something like Andrew Yang's free $1,000-per-month stipend to reinflate the system.
aye..... you may be right... I love your country deeply... Beautiful place...... did you know the Chinese call America "the beautiful country"... Shame if something were to happen to it.
DeleteI feel so mixed about the rise of China... At some level, I wish America would rule forever.... At some level, I wish China would be strong... Truly, I wish both could be true...... But it seems like that cannot be....
Chicken,I think that is the best outcome, both be strong, balance of power.
DeleteI did not know that Chinese expression of beauty for the US. Thank you for that, and a lot of us here fight to keep it that way.
This comment has been removed by the author.
Delete*Do note that America is an entire continent, not just the US.
DeleteGuys, to put your minds at ease, I honestly have no clue whatsoever how the negative rate bubble burst will happen and how it will play out.
ReplyDeleteI agree that “revolution” (in lots of quotation marks) is a possibility, particularly if/when the populist billionaires let down the expectations of the squeezed middle class.
Well, if you look at the 10 year monthly yield chart, rates are precisely at resistance here. So, anything could happen. The deflationary scenario seems very plausible. The '08 crisis was never really fixed as you well point out (middle-class evisceration). Yet, at least on paper, the US economy seems to be humming along. The key to that is "on paper". Seems like yields are just reflecting the new post-'08 crisis reality on the ground? If that is the case, are low yields are the new normal? Maybe it will end when there's a glut of zero-yielding debt around and then yields start creeping up due to supply and demand? Even Spain's 10 year government bond is negative now.
ReplyDelete*Spanish 10y is near zero. Not negative. Sorry.
DeleteGreat to read you again by the way Hells!
ReplyDeleteThanks very much, glad to see you are still reading me ;)
DeleteNo idea what to do but just thought I would note that of the many finance blogs I started reading your is the only one left that hasn't gone totally quite or totally mad. Please keep writing!
ReplyDeleteThat's quite the compliment, many thanks!
Delete