The Market Ticker
Commentary on The Capital Markets- Category [Federal Reserve]

Central banks have made uneconomic decisions look wise -- for a while.  There are those who call this "mis-allocation of capital", but that's a false statement in its premise as what central banks (and all banks, really) do is not allocate "capital" at all.  They instead sell debt, a thing that is at its heart destructive to capital.  Debt cannot be other than destructive to capital because debt always comes with interest; a parasitic leech upon the capital at its base (if there is any at all.)

Emerging market borrowers have been issuing dollar bonds at an average real rate of just 1pc. The great worry is what will happen as increasingly large blocs of bonds or loans - typically on five-year maturities - come due for refinancing in a far less friendly world. The dollar has almost doubled against the Brazilian real and the Russian rouble since mid-2012.

Got it yet folks?  An increase in real rates of just a couple of percent is enough to destroy the cash flow of these economies and markets.

This is the 2006 housing market on a global scale.  Remember that what set off the firestorm in the United States housing market was not an increase in rates but rather the disappearance of "covenant non-existent" loans otherwise known as "liar loans" and similar.  That in turn was triggered by a cessation of the mathematically-impossible claim that houses will always go up in price; when this revealed to be a bald lie those who had bought paper predicated on these uneconomic "loans" discovered they were holding worthless "securities."

There was fraud in the inducement across the board but there was also plenty of pie-in-the-sky dreaming by the buyers too.  Arithmetic makes indefinite exponential series of any sort impossible.

Blowing a bigger bubble to try to rescue the prior one is the legacy of the last 30 years.  Trying to spread it thinner and further so as to make it "better" is also part of that legacy.  The problem is that it may be spread further, but it is never thinner; as such the destruction when the subsequent bubble bursts is always larger!

In this case the spreading is global and the damage will be cataclysmic.

The only debate we have left is exactly when it hits, and whether you will have achieved minimum safe distance before it does -- and whether that's possible.

View this entry with comments (registration required to post)
 

Main Navigation
MUST-READ Selection:
No Kidding? Stan Sees The Problem?

Full-Text Search & Archives
Archive Access
Legal Disclaimer

The content on this site is provided without any warranty, express or implied. All opinions expressed on this site are those of the author and may contain errors or omissions.

NO MATERIAL HERE CONSTITUTES "INVESTMENT ADVICE" NOR IS IT A RECOMMENDATION TO BUY OR SELL ANY FINANCIAL INSTRUMENT, INCLUDING BUT NOT LIMITED TO STOCKS, OPTIONS, BONDS OR FUTURES.

The author may have a position in any company or security mentioned herein. Actions you undertake as a consequence of any analysis, opinion or advertisement on this site are your sole responsibility.

Market charts, when present, used with permission of TD Ameritrade/ThinkOrSwim Inc. Neither TD Ameritrade or ThinkOrSwim have reviewed, approved or disapproved any content herein.

The Market Ticker content may be reproduced or excerpted online for non-commercial purposes provided full attribution is given and the original article source is linked to. Please contact Karl Denninger for reprint permission in other media or for commercial use.

Submissions or tips on matters of economic or political interest may be sent "over the transom" to The Editor at any time. To be considered for publication your submission must include full and correct contact information and be related to an economic or political matter of the day. All submissions become the property of The Market Ticker.