If The Bond Bull Market Is Over....
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2018-01-10 09:19 by Karl Denninger
in Macro Factors , 305 references Ignore this thread
If The Bond Bull Market Is Over....
[Comments enabled]

..... then so is the bull market in equities, real estate, and damn near everything else.

Folks, I've written more articles than I can count on the utter nonsense of alleged "GDP and economic growth" fueled by debt-based expansion.  Specifically, nobody ever pays off their debt in the larger context.

I've noted many times that despite the so-called "financial crisis" commercial loans outstanding never went down.  Not once, for even one quarter.  In addition state and local governments never pay down their debts either; they roll them over.

And why not?  You borrow a million at 10% interest, you must pay $100,000 in interest per year.  But a "bond bull market" means when the year, two or ten is up you can refinance it at a lower rate.  Now that $1 million costs $50,000 (if the rate is now 5%.)  Why not borrow another million, since you can cover the $100,000 interest payment?

When the rate of interest reaches 1% you now have $10 million out, or ten times as much.

Where do you think all the "buybacks" came from?  Where do you think all the consumer credit came from (yes, I know, your interest rate on your credit card didn't go to 1%, but the bank's loan to get the money to let you have did.)

So we did all that; Obama doubled the national debt during just a few short years.  But don't blame just him -- look at what Bush did before him and then look at Trump who put over $600 billion on the national debt during his first year in office too.

Oh, those "tax cuts"?  That'll boost it further.

That only works when rates are generally declining and you can thus issue the new debt and roll over the old to keep borrowing more money while paying a lesser or equal amount in interest.

If rates rise then the game's over for one simple reason: When you go to refinance that bond the amount you must pay to keep the same amount of money borrowed outstanding goes up and you don't have it.

You also don't have the cash to redeem the bond in question because you spent it on some form of consumption -- it's gone.

So what happens to "valuations" across the board -- stocks, houses, commercial buildings, etc -- when the 71:1 leverage (what the fairly recent ~1.4% ten year Treasury rate amounts to) goes to this morning's 2.6% and thus represents a 38:1 leverage ratio -- pretty close to being cut in half.

That's pretty simple -- you have to come up with roughly half of the money you borrowed because otherwise the interest payment is going to double and you don't have either half of what you borrowed or the doubled interest payment.

Valuations are "reasonable" eh?  Sure they are -- the leverage base on which they're predicated just got cut by 50%.

Oh by the way the 5-year move is even more-impressive; it has gone from a 200:1 leverage ratio to 42.6:1 or a contraction of approximately 79%.

It took several years for the leverage available in the five-year to wind up in equities.  That's no surprise; it should take about five years (duh!) and it did -- from 2013 to now.

If Bill Gross is right, and if the bond market bull is over then so are the other bull markets and that excess leverage, over the next few years, is going to come back out.

Where does that leave the stock market?

About where it was in 2013 -- if you're lucky.

Oh, that assumes the move higher in rates stops here which, if the bull market in bonds is over, it won't.

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