If The Bond Bull Market Is Over....
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2018-01-10 09:19 by Karl Denninger
in Macro Factors , 306 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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Nevertoolate
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Even if rates were to stay the same, one will have to make it the "good old fashioned way" by earning it. Even playing with pro forma versus GAAP won't do it. Not sure anyone knows how to truly make money without running some kind of a scam or fraud. Going to get interesting fast.

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Democracy is a conversation between 2 wolves & a sheep discussing what's for dinner. A Constitutional Republic is found when the sheep pulls out a gun & makes clear that his 2nd Amendment Right will be exercised should the wolves attempt to hold such a "vote."-KD 9-29-15
Tickerguy
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@Nevertoolate - Yep, that's been my point for quite some time. Even if rates just sit flat you still can't take any more leverage out -- you can only maintain what you have.

But if rates DO continue to rise, well, then you're ****ed.

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Winding it down.
Themortgagedude
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saint louis
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Let me put my Tinfoil Hat on here. They have a guy in the White House who isn't a UniParty representative. And they have half of America that just hates him. Hates him! Honestly 5% of Americans would probably shoot him themselves for the good of the country if given the chance. They couldn't tell you in an intelligent way why they hate him that bad. But they do.

We have a bubble which is unsustainable in the bond market (and in every other market because it's all a search for yield of some sort). This gives them the perfect fall guy. Because someone sometime is going to have to take the fall for this. (Should have been Mr. Andrea Mitchell and/or Bernanke). So now the question is how do they orchestrate the rise in bond yield in a way that The Orange Menace takes the fall? I don't have that answer. The Tinfoil Hat is screwed on so tight my brain is having trouble providing all the answers.

Ok time for me to take the Tin Foil hat off and go back to work. This bubble has to burst sometime and I don't think it's far off. I've been saying for 7 or 8 years that they can't let the rates rise because that will kill the stock market and the housing market. But that they can't keep the rates down forever. I've always stated that when rates rise it would be sudden and catastrophic. I'll retract that theory somewhat now. I think that it will be a slow process over months. Maybe up to a couple years. Then it will reach a tipping point when the realization hits that we cannot have higher rates and the current levels of government services(I use that term even though I don't know if they provide any service). Then it will blow. Around the world.

We're all responsible for this. So if you want to see who caused it you might as well look in the mirror. Anyone that's been on this board for any amount of time can't say - "Well who could have ever seen this coming?"

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I think its time we ask ourselves if we still know the freedoms that our founding fathers intended for us. Ronald Reagan 1964
Tickerguy
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Exactly.

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Winding it down.
Mangymutt
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One of the things I like about Market Ticker is the No Bull**** way Karl lays things out and many of the posters here are able to shine light in the corners that could not be covered in a single ticker and we are able to see how things are affected by their shared experiences.

Once you see the truth you cannot un-see it except for willfully lying to yourself.

I do not claim to be the sharpest card in the tool shed, and even before 2007 I could see the writing on the wall as far as people taking on debt. And I am not even close to being surprised that Intel and other chips are compromised. If we send the production of our commodities to a foreign country, who happens to be our enemy, what do we expect in return.

But now what?

Let's say the Bond Bull Market truly is over.

Now what?

Price of everything collapses, cars, houses, education becomes worthless. For those hoping gold, silver or bitcoin will be your meal ticket - Good Luck.

I know my questions are rhetorical as even the best laid and thought out scenarios are only theory based, the world has never been so connected and in debt all at once. In 2007-08 I never expected QE to be able to keep things a float like it did.

Now what?

Does the Fed and our government and the world government push the two and five year debt into 15, 20 and 30 debt? Or do they create 50 year or longer debt? How much time does that buy them?

Fortunately thanks to the Market Ticker, (Not just Karl but those who participate with their insight)I have been able to keep my resolve in not taking on ANY debt. It has not been easy and or fun, especially when you can see others partying naked in the moon light - It looks like so much fun.

If the Bond Bull Market is over for the U.S. it is over for the world's bond market. Does the Congress take on more debt? How much time does that buy us?

It looks like to Bond Police just might be at the neighbors moon light party and about to break it up, what happens when all those drunken louts stumble into the streets?

Curious times.
Nadavegan
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The South
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I would think we will get a war before any of the above scenarios come to fruition. Gotta try all the tools to keep the scam going.
Themortgagedude
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saint louis
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Mangy sums it all up.

" Once you see the truth you cannot un-see it except for willfully lying to yourself."

And for that I'll be eternally grateful to KD for helping me see it.


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I think its time we ask ourselves if we still know the freedoms that our founding fathers intended for us. Ronald Reagan 1964

Themortgagedude
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saint louis
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The question of what happens when it all blows??? That's the $64 trillion dollar question so to speak. And how do you position yourself to come out the other end.

The way I look at it is do we take our poison now or later. We have been faced with this question for a long time and refused to eat the **** sandwich. There are examples of countries that ate the **** sandwich and defaulted. And examples of countries that tried to have others eat the **** sandwich and printed. It's turned out almost always that if you default things will be ok in the long run. And if you print you're just ****ing everyone.

I expect they'll print. smiley

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I think its time we ask ourselves if we still know the freedoms that our founding fathers intended for us. Ronald Reagan 1964
Tickerguy
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If you generate enough people who no longer have anything to lose by printing you generate a whole bunch of people who shoot.

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Winding it down.
Nevertoolate
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That's entirely correct. Assuming you still have guns and ammo. Otherwise you wind up eating zoo animals aka Venezuela.

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Democracy is a conversation between 2 wolves & a sheep discussing what's for dinner. A Constitutional Republic is found when the sheep pulls out a gun & makes clear that his 2nd Amendment Right will be exercised should the wolves attempt to hold such a "vote."-KD 9-29-15
Tickerguy
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@Nevertoolate - There is a zero chance of anyone in America managing to get rid of enough of the guns and ammo that are currently spread around the country to be able to materially change that over generational time frames.

Now in another hundred years or so, maybe. Of course I'll be long dead by then and so will my kid, so I don't give a **** about THAT sort of timeline.

On a shorter timeline, however -- certainly anything in my remaining life, and probably anything in hers, any such attempt that tries to materially further expand what was already done in the 2008 timeframe runs an extremely high risk of generating an awful lot of formerly-middle-class people who then have exactly nothing left -- and thus nothing to lose. A very large percentage of those people do and will own the means of deciding they're going to cast one final vote, and it's not going to be in a ballot box. Odds are they'll get better than even money on the expenditure of their life too.

This, in the end analysis, is the constraint on such behavior by the government. As the leverage is cranked higher so is the amount required to make it work "again." The check and balance on the last round was suppressed but the last round never really threatened to invoke the "nothing to lose" problem among the general public -- it was banksters and their pals who were about to be under the table and have nothing left to lose, and there simply aren't enough of them to produce mass unrest. They could have all gone postal and the FBI and ordinary Americans could have killed and eaten them all in an afternoon. But there WERE plenty of those ****ers to bribe, cajole and threaten Congress (e.g. Hanky), which is exactly what they did.

THIS TIME the crank has been turned too far for that to work because if you try it again virtually the ENTIRE middle class is wiped out. The poor already are there but they've both been placated with welfare and don't have enough of both moxie and guns to decide to shoot in the first place, other than at each other (which the gang-bangers do all the time.) In addition a huge percentage of them are too drunk, wasted on opiods or similar to get off their ass and be motivated enough to do it even if they own the means. Spread that from the gang-banger class into the 80%ish of society that makes up the middle class, however, especially the young middle class, and it's all over for the big guys at the top as exactly ZERO of them below the President and perhaps a few top cabinet officials maintain enough security in terms of perimeter and constraints (mostly because they won't tolerate living that way, even if the government pays for it) to matter.

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Winding it down.
Quik49
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Frogs in boiling water

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Long Vaseline....

Ktrosper
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TMD wrote..
gives them the perfect fall guy

Yep and he served himself up on a silver platter by tweeting his ass off about how TRUMP is the reason for this record stawk ramp. Doh!

He owns every bit of the downside now, and they're laughing their asses off at him.

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The unexamined life is not worth living.-Socrates
The only stable state is the one in which all men are equal before the law.-Aristotle
Liberty exists now in the spaces government has not yet chosen to occupy.-Doc Zero
I anticipate that 10 Dallas Cowboys Cheerleaders will blow me this evening.-K.D
Tickerguy
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Yep -- and what's the most-amusing about this is that the end of the bond cycle was CLEARLY VISIBLE five years ago.

As I've repeatedly said there are no GOOD outcomes. There's only somewhat bad (yields flatline) which, once maturities are all rolled, stops the leverage accumulation or REALLY bad (yields go up.)

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Winding it down.
Ktrosper
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Exactly! Mr. Very Stable Genius didn't freaking see that????

Had he stayed the course with the "We're in a BIG FAT UGLY BUBBLE" talk, he'd have come out golden in the end:
 by ktrosper
but his ego wouldn't allow it...
He bought the ramp hook line and sinker.
This is the Trump eCONomy now.

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The unexamined life is not worth living.-Socrates
The only stable state is the one in which all men are equal before the law.-Aristotle
Liberty exists now in the spaces government has not yet chosen to occupy.-Doc Zero
I anticipate that 10 Dallas Cowboys Cheerleaders will blow me this evening.-K.D
Flappingeagle
Posts: 2719
Incept: 2011-04-14

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Quote:
Even if rates were to stay the same, one will have to make it the "good old fashioned way" by earning it. Even playing with pro forma versus GAAP won't do it. Not sure anyone knows how to truly make money without running some kind of a scam or fraud. Going to get interesting fast.


This is the catch we all see. If things are "over levered" and I think they are, then there are enough debtors out there who can't survive without continued injections of money, to sink the system. Once they don't get their free money the domino effect starts and the party is over for everybody.

It is the people/companies who can't tread water who will sink the system because everyone else is to leveraged to absorb their defaults.

Flap

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Here are my predictions for everyone to see:
S&P 500 at 320, DOW at 2200, Gold $300/oz, and Corn $2/bu.
No sign that housing, equities, or farmland are in a bubble- Yellen 11/14/13
Trying to leave the Rat Race to the rats...
Nevertoolate
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You are totally correct. Especially that all us old bastards really don't care and taking one for the country is well worth it. I would expect that the military won't turn against the general population either. I will modify my previous statement to read, "Zoo's in liberal cities like Portland, San Francisco, Seattle and other like minded areas might not have to worry about their exhibits having anything in them for long."

As I see it, when the SHTF, all the snowflakes will be killed by the gang bangers/illegals in the liberal cities and that will take care of that side of the gene pool. Most everyone (with the exceptions of the major cities in the middle of the country should survive if they have any (common sense). (Ever heard of survival of the fittest?)

It will be a new dawn in America. Reset button has been used.


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Democracy is a conversation between 2 wolves & a sheep discussing what's for dinner. A Constitutional Republic is found when the sheep pulls out a gun & makes clear that his 2nd Amendment Right will be exercised should the wolves attempt to hold such a "vote."-KD 9-29-15
Themortgagedude
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saint louis
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We'll grow our way out of this mess. smiley


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I think its time we ask ourselves if we still know the freedoms that our founding fathers intended for us. Ronald Reagan 1964
Mr_clueless
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Why do we think the bond bubble is over? Bill Gross has been wrong many times.

Rates can not only stay low, they can go even lower. Look at Japan. Rates can even go negative.

I don't think this bubble is over just yet.
Tickerguy
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You're welcome to keep believing.

In fact, for the market to keep going, you need to. And so do a lot of other people.

Facts be damned.

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Winding it down.
Themortgagedude
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saint louis
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Mr clueless - they can still get the toothpaste back in the tube. But not forever.

And me and my tinfoil hat are not that sure they want to get it back in the tube for The Orange Menace.

Hey Gen can you bring back Tin as a category? I always found that amusing reading.

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I think its time we ask ourselves if we still know the freedoms that our founding fathers intended for us. Ronald Reagan 1964
Aquapura
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South of Canada
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Quote:
As I see it, when the SHTF, all the snowflakes will be killed by the gang bangers/illegals in the liberal cities and that will take care of that side of the gene pool. Most everyone (with the exceptions of the major cities in the middle of the country should survive if they have any (common sense).


There is a song about this.

Flappingeagle
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As long as people keep believing then the bubble by definition is not over. Once belief falters the exit door gets awfully tiny awfully fast.

Flap

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Here are my predictions for everyone to see:
S&P 500 at 320, DOW at 2200, Gold $300/oz, and Corn $2/bu.
No sign that housing, equities, or farmland are in a bubble- Yellen 11/14/13
Trying to leave the Rat Race to the rats...
Tickerguy
Posts: 151187
Incept: 2007-06-26
A True American Patriot!
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Quote:
As long as people keep believing then the bubble by definition is not over.

That is DEFINITELY not true.

Belief can often lead or lag fact -- for a while.

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Winding it down.
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