Thursday, October 10, 2019

How Your Money Goes "Poof" to "Money Heaven"

By far the biggest financial bubble in the world, and in history, is the rush to buy European bonds causing negative yields. The quantity of bonds with negative yields recently reached $17 Trillion!  Of course this is causing a bond-buying mania in every other market, driving the US 10 Year bond to 1.5%

I warned a friend recently that it’s dangerous and there could be a violent reversal.

Then, in recent weeks, the ECB reverted to more QE to keep the game going. But surprisingly, there has been a chorus of people who, stating the obvious, roundly criticized the decision both on the ECB's monetary committee and in the media that the negative rates are killing the banks and the financial system. This dissent is new. But Draghi did it anyway despite the criticism on his own committee. He didn't even allow the committee to vote!

The Important EU Countries Are Now Against QE and Negative Rates!!
The ECB's QE motion was actually passed with a "relatively narrow majority" which explains why Draghi refused to take a vote as it would show that only Europe's B and C grade nations - such as Italy, Spain, Portugal, Estonia, Malta and Cyprus - were for a restart in debt monetization.

The Whole Scheme Could Fall Apart

There's a chorus of "economists" across the world who are also increasingly critical of negative yields.  It's becoming a consensus. And it's about time! QE and negative rates haven't helped; they've hurt and caused damage to retirees, pension funds, insurance companies and most importantly the banking system (especially Europe).

So, we're one populist revolt in a single EU country like Italy or Greece leaving the EU that could begin a real bond rout. Or what if Germany left the EU?  What if the ECB decides to abandon the QE effort now that there is consensus that it's actually crazy?

It’s mindboggling to think about the chain of events that could unfold. Greece recently priced some bonds with negative yields, which is clearly insane. If any EU country leaves, like Greece, their bond prices would drop 80% overnight to drive their yields to 5%, 6% or maybe 10% from -0.5%.  The same effect if QE is suddenly disavowed, bond prices across the EU would drop very hard--like 40%. This would lead to huge losses in the rest of the world's bonds too!

The effect could include the instant bankruptcy of nearly all EU banks whose effects would spread to the US and World. The ECB itself would be understood to be technically bankrupt. Bank runs could easily erupt since depositors are at risk in the EU in the event of a bank bankruptcy. A flood of money to the US would ensue. The dollar would rocket higher as US interest rates rise dramatically.

Remember, the world-wide bond market is valued at least $110 Trillion and the world's stock markets are "worth" some $40 Trillion.  Losses in a combined stock and bond rout could be something like 70% or $110 Trillion wiped-out in a very short period.  $110 Trillion in fiat money would go to "money heaven."

Then, for the real disaster, there is a real possibility that once the bond rout gets going, you’ll wake up one morning and the stock futures markets are halted limit down! And then stock markets stay limit down for days or weeks and don’t or can’t re-open! When they reopen, they are down 80%. This is not an insane concept. The entire worldwide Central Bank bubble can get wiped-out within months. Scary stuff!

This is how “excess” money goes “poof”. And, in our fiat world, far too much money/credit has been created and will likely go “poof."  The world would be instantly be plunged into a deep depression especially with Central Banks understood to be bankrupt.


Calheintz said...

I love your blog... you have the guts to say what is obvious truth. No "new emperor's clothes" for you! Now, about that Negative Interest post. There seems to be some disconnect in the conclusions drawn. First, I agree that the European fiasco is a gasoline vapor filled balloon looking for a spark. When it does explode, money will move to other "reserve currencies" -- which would be the U.S. Dollar. When that happens, you have excess money chasing a limited number of assets.... and that causes inflation. The dollar would become stronger as it is bid up by foreigners exiting EU mess. Then, those dollars would flood the US stock markets creating a huge bubble as money is looking for someplace to land. Bonds would increase in value, meaning that the interest rates would fall further. So now we have the perfect scenario of a rolling bubble... from Europe right to our doorstep. (just like Europe was the cause of the 1930's depression, and exported it to us) What happens next? The Fed pulls back, trying to counter the inflationary effects, raising interest rates to counter the deflationary effects of too much money. They try to shrink the money supply, all of which stabilizes Wall Street, but wrecks havoc on Main Street. That reverberates back to lower earnings, which, with the mess in the European economy then causes stocks to tank. In other words, they solve one problem only to have that solution trigger a bigger and worse problem. Now we have an unstable currency, a rolling depression and no real way out, since Fed tools just won't work any longer. Welcome to the 1930's. Look for a populist government with huge public works programs or some big war to "solve" these issues.

Doug said...

Thanks Calheintz!

What I was proposing is that wealth and money could be wiped out on a global scale if the world-wide bond bubble blows up. There won't be any money to flood anywhere. Of course, the central banks could get really busy, real fast after such an event. I'm thinking that the value of everything contracts including gold, but certainly stocks and bonds. Now, I don't know if I'm right about any of this.

"Authorities"know the danger of the bond market and will do everything to keep it from unraveling. What I'm saying is that if the EU flys apart, there won't be an "authority" to fix it. The Fed will be around to do QE to the moon however, so I'm really getting over my skis to think about secondary effects after a bond market blow up.

Thanks for your comment! Doug