Markets in Chaos & Long Term Interest Rates

In the debt cycle model, an increase in money supply has an inflationary character which primarily affects asset prices rather than consumer prices. As asset prices rise, more capital is available, which in turn puts downward pressure on interest rates. Interest rates fall, sometimes due to the active support of central banks thereby delaying the crises, until capital destruction occurs via hyperinflation or debt deflation. Historically, prolonged periods of low interest rates are not an anomaly. At the end of each capital cycle with an excess of capital, the interest rate levels fall and remain low until large amounts of capital is destroyed or new opportunities, i.e. capital sinks, emerge.

As US Treasury bonds currently hold little value, given the low interest rates' inability to keep up with growing inflation, investors have dumped their bonds (1) and migrated over to stocks such as Big Tech, hoping to find there a positive ROI after inflation (2). The Fed has been left with the responsibility to compensate for the dwindled domestic and foreign interest in US bonds, creating a budget deficit of ⅕ of GDP (3), leaving the Fed little choice but to maintain lowered rates, as any increase would dramatically raise the deficit, essentially exploding the barely-contained, and ever expanding debt-bomb (4).

Historical attempts to taper Fed bond-buying caused equity markets in 2013 to plunge, and a similar response has been seen this year, despite the Fed's reassurance that no tapering will occur in the immediate future, rates will remain lowered until at least 2022 (5), and QE will continue -albeit with this monetary expansion risking CPI hyperinflation (6). Faced with "dammed if they do, dammed if they don't", in markets which are beginning to crack (7), the Fed must struggle to maintain their teeteringly-balanced monetary policy see-saw else risk an implosion of the entire fiasco (8).

QE and yield-curve maintenance by Australia's central bank falls short in bottling the growing sentiment of bond traders increasingly convinced that a rate increase is only a matter of time in coming, as the surge in commodity costs adds upward pressure to local currency and pushes yields higher. The lack of enthusiasm in bond-buying also causes yields to rise, as the price of bonds fall (9). Europe and the US are fast-tracking towards the economic zombification seen in Japan (10), while BofA's sell signal comes dangerously close to being triggered (11).

 

References

  1. For Bonds, This Is Now The Second Worst Bear Market In 40 Years

  2. Futures Soar, Yields Plunge After RBA Panics And Buys Double The Amount Of Bonds In Daily QE

  3. Tempest in T-bond pot abates

  4. The tiger the central banks have by the tail isn’t inflation – it’s deficits

  5. A tantrum without tapering

  6. Monetary inflation: the next step

  7. Historic Repo Market Insanity: 10Y Treasury Trades At -4% In Repo Ahead Of Monster Short Squeeze

  8. Albert Edwards: We Are At The Breaking Point

  9. Australia's Yield Curve Control Is On The Verge Of Collapse

  10. Japan's Well-Fed Zombie Corporations

  11. BofA "Sell" Signal Triggered Any Moment... The Last This Happened Time Was June 2007



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