Neg rates put world on course for biggest mass default in history

SpacePete · Apr 29, 2015

Don't panic, it could be worse.

Negative interest rates put world on course for biggest mass default in history
More than 2 trillion-worth of eurozone government bonds trade on a negative interest rate. It's a bubble that is bound to end badly

Here's an astonishing statistic; more than 30pc of all government debt in the eurozone around 2 trillion of securities in total is trading on a negative interest rate.

With the advent of European Central Bank quantitative easing, what began four months ago when 10-year Swiss yields turned negative for the first time has snowballed into a veritable avalanche of negative rates across European government bond markets. In the hunt for apparently "safe assets", investors have thrown caution to the wind, and collectively determined to pay governments for the privilege of lending to them.

On a country by country basis, the statistics are even more startling. According to investment bank Jefferies, some 70pc of all German bunds now trade on a negative yield. In France, it's 50pc, and even in Spain, which was widely thought insolvent only a few years ago, it's 17pc.

Not only has this never happened before on such a scale, but it marks a scarcely believable turnaround on the situation at the height of the eurozone crisis just a little while back, when some European bond markets traded on yields that reflected the very real possibility of default. Yet far from being a welcome sign of returning economic confidence, this almost surreal state of affairs actually signals the very reverse. How did we get here, and what does it mean for the future? Whichever way you come at it, the answer to this second question is not good, not good at all.

[snip lots of stuff, charts, etc]

The flip side of the cheap money story is soaring asset prices. The bond market bubble is just the half of it; since most other assets are priced relative to bonds, just about everything else has been going up as well. Eventually, there will be a massive correction, in which creditors will suffer sickening losses.

Nobody can tell you when that moment will arrive. We live in an "extend and pretend" world in which economies pathetically fight between themselves for any scraps of demand. One burst of money printing is met by another in an ultimately futile, zero-sum game of competitive currency devaluation. As if on cue, along comes another soft patch in Britain's economic recovery, with first-quarter growth quite a bit weaker than expected. Like a constantly receding horizon, the point at which UK interest rates begin to rise is pushed ever further into the future. It's like waiting for Godot. When Bank Rate was first cut to 0.5pc in response to the financial crisis, markets expected rates to start rising again in a year. Six years later, Bank Rate is still at 0.5pc and markets still expect them to rise in a year. In Europe it's not for four years.

Full article: http://www.telegraph.co.uk/finance/...urse-for-biggest-mass-default-in-history.html
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SpacePete · Apr 29, 2015

From the above article:

One by one, all the major central banks have joined the money printing party. First it was the US Federal Reserve. Then came the Bank of England and later the Bank of Japan. Just lately, it's the European Central Bank. Now even the People's Bank of China is considering the "unconventional" monetary support of bond buying. Anything to keep the show on the road. It's what Chris Watling of the consultancy Longview Economics has termed the "philosophy of demand at any cost". A crisis caused by too much debt has been fought with even more of the stuff.
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Today we see reported on the news:

China readies fresh easing to tackle specter of debt

BEIJING China's central bank is readying its most aggressive easing tool since it launched a massive stimulus plan in 2008 to counter the global financial crisis, in a bid to help one of the government's most important economic-rescue initiatives get off the ground.

Chinese leaders have singled out the ballooning debts of various levels of government as an economic threat that must be defused. But a debt-for-bond swap plan aimed at giving provinces and cities some breathing room has started to hit snags as many of China's commercial banks are balking at purchasing the new bonds.

http://www.marketwatch.com/story/ch...o-tackle-specter-of-debt-2015-04-28-191033934
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TheEnd · Apr 29, 2015

Gees thanks S.P my day was going o.k until I saw this?

How long until Armegeddon???

SpacePete · Apr 29, 2015

TheEnd said:

Gees thanks S.P my day was going o.k until I saw this?

How long until Armegeddon???
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That's the trillion dollar question.

Everyone thinks they'll be smart enough to spot the signals and get out ahead of the crowd. Most of them will be wrong.

This is building up to something huge...

Margin Debt Strikes New High
"Along with the markets currently being more overbought now than at any other point in history, they are also more leveraged as well.

Late last week the NYSE released its latest margin debt figures for March. Despite a rather sluggish market, investors piled on margin debt pushing levels to all-time highs as shown below."

"It is worth noting that when net credit balances have plunged very negative levels it has been coincident with major mean reverting events in the market.

While "this time could certainly be different," the reality is that leverage of this magnitude is "gasoline waiting on a match." When an event eventually occurs, that creates a rush to sell in the markets, the decline in prices will reach a point that triggers an initial round of margin calls. Since margin debt is a function of the value of the underlying "collateral," the forced sale of assets will reduce the value of the collateral further triggering further margin calls. Those margin calls will trigger more selling forcing more margin calls, so forth and so on.

Notice in the chart above that margin debt reductions begins innocently enough before accelerating sharply to the downside."

http://streettalklive.com/index.php/blog.html?id=2703
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SpacePete · Apr 29, 2015

^^^ "gasoline waiting on a match."^^^

It is really starting to feel like that.

SpacePete · Apr 29, 2015

The final paragraphs in the above article are also interesting. What will be the catalyst?

The important thing to remember about margin debt is that alone it is inert and poses no real danger to the market. However, when combined with the correct catalyst, it will act as an accelerant to a market correction when forced liquidations fuel additional selling.

Few investors have survived the corrections that in hindsight were deemed "obvious." However, in the short-term, these dangers remain dismissed as the markets continue to climb a "wall of worry." But that is a climb that does not last forever.
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sammysilver · Apr 29, 2015

Armageddon out of here!

bordsilver · Apr 29, 2015

She'll be right. The debt problem ill just be fixed as it has been the past couple of decades. With more debt and regulations/technologies that discourage/ban the use of cash to allow genuine savers any choice in the matter.

havo · Apr 29, 2015

imagine how much you would have made by buying bonds over the last 30 years...

errol43 · Apr 29, 2015

zero % is not good for savers. People who are about to retire, no longer receive an income from their super savings or general savings. Their savings will be eroded in no time at all.

At least Australia is still in positive mode.

I'm believe that the Reserve Bank will cut another .25% next Tuesday. Why? Well the AU$ is rising to nearly 80 cents against the US$ and that is not good for Australian exporters.

Regards Errol43

havo · Apr 29, 2015

errol43 said:

zero % is not good for savers. People who are about to retire, no longer receive an income from their super savings or general savings. Their savings will be eroded in no time at all.

At least Australia is still in positive mode.

I'm believe that the Reserve Bank will cut another .25% next Tuesday. Why? Well the AU$ is rising to nearly 80 cents against the US$ and that is not good for Australian exporters.

Regards Errol43
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perhaps it is rallying because there will be no cut?

Caput Lupinum · Apr 29, 2015

Was I reading on here or somewhere else about large pension funds wanting to withdraw physical cash in large amounts from Swiss banks because they would rather than 0% yield than negative?

SpacePete · Apr 29, 2015

Caput Lupinum said:

Was I reading on here or somewhere else about large pension funds wanting to withdraw physical cash in large amounts from Swiss banks because they would rather than 0% yield than negative?
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And they weren't allowed to: http://forums.silverstackers.com/message-797894.html#p797894

Pirocco · May 1, 2015

Makes me think about that gold Forward Offered Rate turning negative - WooHoo hurry buy gold.
A negative rate is just a continuation of a same trend direction (10 > 7 > 4 > 1 > -4 > -7 > -10).
And on its own, it says nothing. A rate of -5% in a world where prices drop 10%, means 5% extra to buy.
For ex crude oil price, not exactly a small market, is now its 5 years average -66%.

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