In the unending blowing of the most epic financial market bubbles of all time, Germany may have just announced “peak crazy”. Overnight they issued 30-year bonds that had a NEGATIVE yield. With all of the financial shenanigans going on it is not even a surprise that they did it.
The real surprise is that the “authorities” were surprised when people didn’t line up for the honor of losing money financing their profligate debt. According to Zerohedge, the German government issued $2 billion of these bonds and the Bundesbank (German Central Bank) was forced to buy 58% of the offering.
What this really should tell everyone is that those who actually earn their money rather than conjure it up out of nowhere actually care what type of return they are going to get for the risk that is being taken. Of course, when money is conjured up out of nowhere and at virtually no cost to the “printers” any return of capital is more than they started with. There could also be a few hedge funds out there speculating that rates will go even lower and lead to a short-term profit. (If there are any buyers at an even more negative rate).
Personally, I saw a chart of how bond prices (because of decreasing yields) have been rising dramatically. It almost appeared to be like the Nasdaq bubble at the end of 1999. In the past few weeks the steepening has been breathtaking. For 35 years bond yields have been for the most part falling here in the USA. There is now talk about taking the yield negative as has already been done across Europe and in Japan. To me, this is an epic bubble and epic bubbles usually don’t just pull back- they pop.
My questions are simple. If rates continue to fall then how do pension funds, insurance companies, banks and others relying on dependable sources of income survive? If a bank (like in Denmark) is forced to offer a negative interest rate mortgage I’d like to know how they make a profit lending out $100,000.00 and getting back $99,000 over 15 years. That would be like someone wanting a loan from me and saying, “if you give me $10,000.00 today, I’ll pay you back $9900.00 over 10 years- can you lend it to me?” I would have to be awfully benevolent to make that loan- something the banks most assuredly are NOT. So, tell me again how negative rates help the economy? It appears to me to be a dagger to the heart of the real economy. Take the profit motive out and commerce will come to a standstill- as all the charts are showing is already happening.
How will pension funds hit the 7-8% bogey with negative interest rates? Will they rely on an ever-expanding stock market or forever lower rates to produce the gains? Good luck with both!
If insurance companies earn less on their investments expect insurance premiums to rise. Again, causing another negative impact to an already reeling real economy.
The only thing propping up this illusion is ever expanding and increasingly risky DEBT.
It appears to me that the idea is that as rates go lower debt is easier to pay. Higher debts but less interest expense makes the larger debt load easier to manage. Ok that is likely true. BUT, since many people have passive (interest paying) income there is now less income to service the debt. Since companies have found it easier to play financial games rather than grow their businesses there are fewer investments in plants and equipment (Costing those jobs who would be doing construction projects, etc.) and fewer jobs going forward because of decreasing demand. It appears to be a feedback loop that is deadly to the real economy while propping up the artificial asset prices.
In addition, SocGen’s Albert Edwards said: “ that the cycle is ending with the central banks having failed to drive core CPI inflation higher. So Japanese-style outright deflation lies ahead at a time when western economies have piled debt sky high”. In English, as deflation hits and asset prices fall the debt remains and becomes an albatross on the economy. At this point, my only question is who eats the loss?
There is another side to this story also though. What if rates rise uncontrollably because of the realization of the risks that are inherent in these markets? What if people look for the exit and there are no buyers to provide that exit?
It is likely that, at some point, the price of bonds will come down enough and yields will be high enough to provide an exit point. A great question is where that may be. In the meantime, if rates were to merely go back to anywhere near normal -let alone where they may actually go- the actual carnage to banks, pensions, insurance companies, hedge funds and individual investors would likely be catastrophic.
More than likely, the many pensions that are grossly underfunded even with all of the record asset prices in the assets that they mostly hold, would be mortally wounded in a scenario like this. Banks, who I wrote years ago had $570 + trillion in derivative bets- just on interest rates- would also be mortally wounded. Insurance companies would see many assets that were deemed “safe” losing a large portion of their value. Finally, many retirees and those who were counting on income from stocks, corporate bonds, munis, government bonds, etc. would likely see large losses to their portfolio and outright defaults by many less creditworthy entities.
For those who don’t trust bonds and want to buy stocks- I implore you to look at their debt load. The first casualty in a default is the common stockholder. The first person to stop getting dividends is the common share holder. There is a greater possibility of gains but also a greater risk of loss.
After seeing what is happening in the real economy and watching the central banks across the globe taking emergency actions while trying to pretend “all is well” I can only ask “Do you feel lucky?”
This is no time to rely on luck and it is no time to stick your head in the sand thinking that the central banks have our backs. Where were they in 2000? In 2008? Where will they be when the third bust follows the third boom in the last 20 years? So many have forgotten already.
I don’t pretend to know how this will all end. I am just sure that it will. When it does those who have prepared will likely be in far better shape than those who are anticipating that the next 10 years will be like the last 10 years. To me, that is EXTREMELY unlikely.
As a matter of fact, since the central banks bought 571 tons of gold last year and are buying far more this year- year to date- it doesn’t appear they expect the next 10 years to even resemble the last 10. The major banks, hedge funds and many billionaires are also following this lead. Are you astute enough to see what is happening here?