In a desperate search for yield, the entire world’s money creation system, centred on, but not limited to, the World Reserve Currency, has been co-opted and commandeered.
The Bond Market as a result, has been relentlessly abused and driven into the biggest Bubble in history.
Yesterday, Michael Pento, of Pento Portfolio Strategies, published a piece about the Bond Market Bubble.
His opening comments are particularly pertinent …
“One of the most ironic and fascinating characteristics about an asset bubble, is that Central Banks claim they can’t recognize one, until after it bursts!
And Wall Street apologists tend to ignore the manifestation of bubbles, because the profit stream is just too difficult to surrender.
The excuses for piling money into a particular asset class, and sending prices several standard deviations above normal, are made to seem rational at the time:
Housing prices have never gone down on a national basis, and people have to live somewhere, the internet will replace all brick & mortar stores, and perhaps the classic example, is that ‘variegated tulips’ are so rare they should be treated like gold!
Now those 17th century Dutch tulip speculators may have had at least some small excuse, given that what became known as “Tulip Mania” had very little, if any, historical precedent at the time.
But today’s Central Banks have have no such excuse!
They have been in total control of all asset bubbles for well over a century now, at least, and so their “protestations of innocence” and “mock suprise” when “bubbles burst”, is transparently ludicrous.
“The Lady doth protest too much methinks” … that is for certain!
Pento though, succinctly outlines the three convergent indicators, that must come together, to form the classic warning sign of a bubble.
They are, that the particular asset class is :
- Over Supplied
- Over Owned
- Over Priced
… all compared to historical norms of course.
He sites the Real Estate market circa 2005 as classic example to illustrate his case.
The supply of new homes in the USA, peaked around 2 million units per year in 2005.
That was about 400,000 units higher than the “historical average”.
Just prior to the start of the Great Recession, the level of home ownership also hit a high, of 69%
Today incidentally, the rate has fallen back to 63.7%, the lowest rate in 25 years.
During the real estate bubble, homes were also massively “Over Priced.
At their peak, in 2006, house prices were 39% “overvalued”, based on “median incomes” and “cost to rent” ratios.
Even though home prices are once again currently “overvalued”, the housing market is not technically in a “classic bubble”, simply because the Real Estate market isn’t currently “Over Owned”, nor is it “Over Supplied”.
The Bond Market Bubble however, is a very different beast, and in a VERY different and critical condition.
Thanks to Wall Street predators and the Federal Reserve’s subversive manipulations, the Bond Market is in a very dangerous bubble indeed.
It is most certainly in “Over Supply”.
A total of $60 trillion in additional global debt that has accrued since 2007.
During the first half of this year, $891 billion in Bonds were issued in the U.S. alone!
That’s already 7.5% up from 2014, which was itself a record year. This according to the “Securities Industry and Financial Markets Association”.
Ironically, “Junk Bonds” to the tune of $185 billion have been issued so far this year!
But In just the same way as more risk was taken on, toward the final stages of the housing bubble, with “sub-prime” somehow becoming “the norm”, twice as many bond issuing company’s have been downgraded as have been upgraded; the worst ratio since 2009.
Bonds are also hugely “Over owned” too.
In an era of virtually zero rates, investors, starved of yield and under masive pressure to perform for their members, have been driven particularly into “riskier Bonds” … and in massive numbers, 2015 for instance, has seen the largest inflow into them since 2001.
Last year alone, investors poured in excess of $204 billion into bond funds, almost twice the $121 billion, that was poured into Stock Funds.
So finally, to the third “leg” of the perfect bubble.
Are bonds “Over priced” compared to historical norms?
Bond yields and prices are always inverted.
As bond prices fall, yields rise.
The current yield, on U.S. 10-year Treasuries is around 2.3% … close to its historic low, and way, way below the 7% average over the last 40 years!
This makes the price of bonds massively, some would say insanely “expensive” right now!
And that’s to make no mention of the insane volume of Bonds that the Fed has had to buy at auction and put on its books, simply to keep the machine in motion!
Now that brings us to something that we touched on in the recent Special Report on Greece.
If, as promised by Janet Yellen, The Fed starts raising interest rates, many already spooked investors are almost bound to want to start selling their riskier “junk bonds” in the same way that “sub-prime mortgages” were the first “crack” to appear and burst in the housing bubble of 2008.
At that point, another “unintended consequence” of the increasingly desperate measures that The Fed and the US government have been taking, may just come home to roost!
And that is, that Government regulations have already stripped banks of their “proprietary trading desks” in many cases.
At that point …
“What happens when bond prices crash?”
“Who is going to buy all that debt?
The bottom line, is that every other asset class, derives its “value” from the “cost of money” Bond Market.
That is why, even though the Stocks Market and Real Estate Markets aren’t actually in classic bubble territory, they are still vastly overvalued.
Again, in a frantic search for “yield” in the synthetic, manipulated markets, investors have been driven to compete fiercely over the seven years for ROI on property.
When this Bond Bubble bursts, and it absolutely will, then the Central Banks will find that they are the only buyers left in the market!
At that point, will Central Bankers be seen as “saviours” or “sinners”?
THAT is the multi-Trillion Dollar question.
The result of the ensuing market chaos of such a monopoly on the ability to even trade, will make the Great Recession of 2008 seem like the “good old days”!
To Your Secure Financial Future, as always
The Q Wealth Report Team