Wednesday, August 14, 2013

Don’t Worry Be Happy Stock Markets Ignores the Bond Vigilantes

The “don’t worry, be happy” crowd is back. 

Rising stock markets are being driven anew by the yield chasing bandwagon mentality where punters have been stampeding back into the stock markets, rationalizing their actions with “fundamentals” (e.g. recovering global economy)

Yet rising stock markets has obviously has been ignoring important risks factors, particularly, what has been happening at the global bond markets. 

Well last night, the bond vigilantes has driven yields of 10 year bonds of some major economies to fresh highs.

image

US 10 year spiked to 2.715%! 

The last time bond yields hit this level global stock markets had a huge shakeout. Remember the Bernanke taper

I guess markets today have become desensitized or jaded to rising yields.

And this has not been just a US event.

image
image

Yields of UK 10 year gilts have closed also at June highs (will this be a double top or rounded bottom?)

image
image

Yields of Germany’s 10 year bonds also near or at June high levels, echoing UK bonds.

image
image
Yields of French 10 year bonds also ascendant but ironically is still distant from June highs.

I say ‘ironically’ because France seem as the weakest link among the above, both in terms of economic performance and sensitivity to credit risks, yet bond yields have been more relatively subdued.

I almost forgot, yields of China's 10 year bonds has also resonated with the above. (pls press on the link to see the chart)

Higher yields means higher cost of refinancing and increased costs of acquiring debt on a system that has been intensely leveraged or exposed to debt.  

Higher yields also extrapolate to higher costs of capital and increased credit risks. 

Well, for the don’t worry be happy crowd, none of this applies.

And one more thing, oil remains at above $105 levels.

The stock markets operates on a Wile E. Coyote moment. These forces are incompatible and serves as major headwinds to the stock markets. Such relationship eventually will become unglued. Either bond yields and oil prices will have to fall to sustain rising stocks, or stock markets will have to reflect on the new reality brought about by higher interest rates (and oil prices), or that all three will have to adjust accordingly...hopefully in an 'orderly' fashion. Well, the other possibility from 'orderly' is disorderly or instability.

Caveat emptor

1 comment:

theyenguy said...

The Interest Rate on the US Ten Year Note, ^TNX, traded strongly higher to 2.71%, turning Aggregate Credit, AGG, lower, and forcing International Treasury Bonds, BWX, European Debt, EU, and the following interest rate sectors lower: Solar, TAN, Homebuilding, ITB, Energy Partnerships, AMJ, Mortgage REITS, REM, Residential REITS, REZ, Premium REITS, KBWY, Small Cap Real Estate, ROOF, Real Estate, IYR, and Utility Stocks, XLU, seen in this Finviz Screener, lower.


What Doug Noland terms the Global Govenment Finance Bubble has finally and totally popped, on the rise in the US Ten Year Note, from 2.59% to 2.71% on Tuesday August 13, 2013, as is seen in the charts of Aggregate Credit, AGG, World Treasury Bonds, BWX, 30 Year US Govenment Bonds, EDV, 10 Year US Government Notes, TLT, International Corporate Bonds, PICB, Corporate Bonds, LQD, Mortgage Backed Bonds, MBB, Emerging Market Bonds, EMB, Junk Bonds, JNK, and Ultra Junk Bonds, UJB, trading lower. Credit broke down on Tuesday August 13, 2013, when the 30 Year US Government Bond, EDV, and the US Ten Year Note, TLT, led all of the world’s credit investments, seen in this Finviz Screener, parabolically lower.


Another word for credit is trust. Investors no longer trust in the world central bank’s monetary policies to support profitable investment choice, and to provide stimulus for credit and currency carry trade schemes enabling global growth and trade. Ben Bernanke’s, Haruhiko Kuroda’s and Mario Draghi’s monetary policies have crossed the Rubicon of sound monetary policy and have made “money good” investments bad.


While the closed end stock fund CSQ rose, its peers, PTY, AWP, PFL, RCS, and EIM, as seen in their combined ongoing Yahoo Finance Chart traded lower, communicating that the way is now down in all financial markets.


On May 24, 2013, Jesus Christ, operating at the helm of the economy of God, Epheians 1:10, enabled the bond vigilantes to call the interest rate on the US Governmant Note, ^TNX, higher to 2.01%, making for an extincton event that terminated Emerging Market Investment, EEM, and Utility Stock Investment, XLU. The rise of the interest rate on August 13 2013, to 2.71%, constituted an “apocalyptic event” that has terminated fiat money.


With the failure of credit on August 13, 2013, both the sovereignty of democratic nation states, (this being seen in World Treasury Bonds, BWX, collapsing in value), and the seigniorage of the world central banks, has failed. Jesus Christ, has pivoted the world’s economic and political paradigm from Liberalism to Authoritarianism.

From August 13, 2013, forward, regional nannycrats, will set the rules for the formation of the new money, that being diktat money, which will determine everything else.

World Stocks, VT, are tremendously leveraged over Credit, AGG, as is seen in the chart of World Stocks, relative to Credit, AGG, VT:AGG. The Risk Off ETN, OFF, and Volatility, XVZ, have been rising since August 5, 2013, confirming that a top in the stock market hass been achieved.

Ambrose Evans Pritchard of The Telegraph reports Investors euphoric as US margin debt reaches 'danger' levels. Fund managers are around the world are gripped by euphoria, convinced that America is in full recovery and Europe has overcome its debt crisis.