Yields

Economic Bizarro World: Persistently High Unemployment And Skyrocketing Bond Yields Are Good?

July 5, 2013 by Michael

The mainstream media is heralding today’s “fantastic” employment numbers as evidence that the U.S. economy is steadily recovering. But is that really true? The number of jobs created in June was just a little bit more than what is required to keep up with population growth, and the official unemployment rate remained at 7.6 percent. And if you look deeper in the numbers, they don’t look very good at all. The percentage of low paying part-time jobs in the economy continues to rise, the number of full-time jobs actually decreased and the U-6 unemployment number jumped from 13.8% in May to 14.3% in June. That is a stunning increase. And if the labor participation rate in this country was at the level it was at prior to the last recession, the official unemployment rate would be sitting at 11.1%. But according to the mainstream media, all of this is wonderful news. It is like we are in some sort of economic bizarro world where bad is good and down is up.

When the jobs numbers were released on Friday, Business Insider breathlessly declared that it “was jobs day in America, and America crushed expectations.”

USA Today ran an article on the jobs numbers with the following headline: “First Take: As job gains grow, optimism rises“.

But should we really be celebrating?

Posted below is a chart that shows the percentage of working age Americans with a job since the beginning of the year 2000. This chart does include the jobs numbers that were released on Friday…

Can you see a “recovery” in there somewhere?

Am I missing something?

Let me look again. This time I will squint really hard.

Nope – I still can’t see a recovery.

For three and a half years we have been stuck in a range between 58 percent and 59 percent. We are way, way below where we were before the recession.

So can we please not even begin to use the word “recovery” until we at least get above the 59 percent level?

And most of the jobs that are being created are of very poor quality. As I mentioned above, the figures show that the number of full-time jobs actually decreased last month. And as Zero Hedge pointed out, manufacturing employment has actually declined for four months in a row…

Even as the manufacturing jobs continue to collapse, posting their fourth consecutive monthly drop in June to 11.964 million jobs, minimum wage waiters and bartenders have never been happier. In June Restaurant and Bar employees just hit a new all time high of 10,339,800 workers, increasing by a whopping 51,700 in one month.

Things are pretty good in America right now if you want to flip burgers or wait tables. But if you want a good job that you can support a family with, things are getting even worse.

Meanwhile, bond yields soaring into the stratosphere.

The yield on 10 year U.S. Treasuries absolutely exploded today. It opened at 2.50% and closed at 2.71%. When I saw what had happened I could hardly believe it.

If bond yields continue to climb like this, it is going to cause some massive problems in the financial markets. The following is from an article by John Rubino…

A few things to look for: recalculations of the deficit in light of spiking interest costs, comparisons of US and Japanese yields and speculation about what this means for Japanese rates — followed by dire analyses of Japan’s future borrowing costs — and last but not least, a growing concern for the hundreds of trillions of dollars of interest rate derivatives that now have one counterparty deeply in the red.

Most Americans don’t think too much about bond yields, but if they keep spiking it is going to dramatically affect every man, woman and child in the entire country.

Yesterday, I described some of the consequences that rapidly rising bond yields would have…

And if interest rates on U.S. Treasury bonds start to rise to rational levels, the U.S. government is going to have to pay more to borrow money, state and local governments are going to have to pay more to borrow money, junk bonds will crash, the market for home mortgages will shrivel up and economic activity in this country will slow down substantially.

Plus, as I am fond of reminding everyone, there is a 441 trillion dollar interest rate derivatives time bomb sitting out there that rapidly rising interest rates could set off.

Never before have we had anything like the gigantic derivatives bubble that is hanging over global financial markets like a sword of Damocles.

As interest rates continue to go up, the derivatives bubble could burst at any time. When it does, we are going to see financial carnage unlike anything we have ever seen before.

2008 was just the warm up act. What is coming next is going to be the main event.

But in the economic bizarro world that we are living in, the mainstream media insists that skyrocketing interest rates are nothing to worry about.

Today, USA Today ran a headline that declared the following: “Investors: Don’t panic over bond yield spike“.

And Yahoo actually ran a story entitled “Why higher U.S. yields should cheer investors“. Needless to say, the arguments in that story are not very convincing.

And in that story they even admit that record amounts of money were being pulled out of bond funds in June…

Capital is already flowing out of low-yielding bonds. PIMCO Total Return fund, the world’s largest bond fund, suffered record outflows of $9.6 billion in June, in a second straight month of withdrawals.

Mutual and exchange-traded bond funds lost a record $79.8 billion in June, according to TrimTabs Investment Research.

The rush for the exits in the bond market is threatening to become an avalanche.

I hope that this is not the beginning of a financial panic. I hope that we have more time before the next major wave of the economic collapse strikes.

But I certainly cannot guarantee that things will remain stable. Once fear starts to sweep through financial markets, things can change very, very quickly.

The Trigger Has Been Pulled And The Slaughter Of The Bonds Has Begun

June 25, 2013 by Michael

What does it look like when a 30 year bull market ends abruptly? What happens when bond yields start doing things that they haven’t done in 50 years? If your answer to those questions involves the word “slaughter”, you are probably on the right track. Right now, bonds are being absolutely slaughtered, and this is only just the beginning. Over the last several years, reckless bond buying by the Federal Reserve has forced yields down to absolutely ridiculous levels. For example, it simply is not rational to lend the U.S. government money at less than 3 percent when the real rate of inflation is somewhere up around 8 to 10 percent. But when he originally announced the quantitative easing program, Federal Reserve Chairman Ben Bernanke said that he intended to force interest rates to go down, and lots of bond investors made a lot of money riding the bubble that Bernanke created. But now that Bernanke has indicated that the bond buying will be coming to an end, investors are going into panic mode and the bond bubble is starting to burst. One hedge fund executive told CNBC that the “feeling you are getting out there is that people are selling first and asking questions later”. And the yield on 10 year U.S. Treasuries just keeps going up. Today it closed at 2.59 percent, and many believe that it is going to go much higher unless the Fed intervenes. If the Fed does not intervene and allows the bubble that it has created to burst, we are going to see unprecedented carnage.

Markets tend to fall faster than they rise. And now that Bernanke has triggered a sell-off in bonds, things are moving much faster than just about anyone anticipated…

Wall Street never thought it would be this bad.

Over the last two months, and particularly over the last two weeks, investors have been exiting their bond investments with unexpected ferocity, moves that continued through Monday.

A bond sell-off has been anticipated for years, given the long run of popularity that corporate and government bonds have enjoyed. But most strategists expected that investors would slowly transfer out of bonds, allowing interest rates to slowly drift up.

Instead, since the Federal Reserve chairman, Ben S. Bernanke, recently suggested that the strength of the economic recovery might allow the Fed to slow down its bond-buying program, waves of selling have convulsed the markets.

In particular, junk bonds are getting absolutely hammered. Money is flowing out of high risk corporate debt at an astounding pace…

The SPDR Barclays High Yield Bond exchange-traded fund has declined 5 percent over the past month, though it rose in Tuesday trading. The fund has seen $2.7 billion in outflows year to date, according to IndexUniverse.

Another popular junk ETF, the iShares iBoxx $ High Yield Corporate Bond, has seen nearly $2 billion in outflows this year and is off 3.4 percent over the past five days alone.

Investors pulled $333 million from high-yield funds last week, according to Lipper.

While correlating to the general trend in fixed income, the slowdown in the junk bond business bodes especially troubling signs for investment banks, which have relied on the debt markets for fully one-third of their business this year, the highest percentage in 10 years.

The chart posted below comes from the Federal Reserve, and it “represents the effective yield of the BofA Merrill Lynch US High Yield Master II Index, which tracks the performance of US dollar denominated below investment grade rated corporate debt publically issued in the US domestic market.” In other words, it is a measure of the yield on junk bonds. As you can see, the yield on junk bonds sank to ridiculous lows in May, but since then it has been absolutely skyrocketing…

So why should the average American care about this?

Well, if the era of “cheap money” is over and businesses have to pay more to borrow, that is going to cause economic activity to slow down.

There won’t be as many jobs, part-time workers will get less hours, and raises will become more infrequent.

Those are just some of the reasons why you should care about this stuff.

Municipal bonds are being absolutely crushed right now too. You see, when yields on U.S. government debt rise, they also rise on state and local government debt.

In fact, things have been so bad that hundreds of millions of dollars of municipal bond sales have been postponed in recent days…

With yields on the U.S. municipal bond market rising, local issuers on Monday postponed another six bond sales, totaling $331 million, that were originally scheduled to price later this week.

Since mid-June, on the prospect that the Federal Reserve could change course on its easy monetary policy as the economy improves, the municipal bond market has seen a total of $2.6 billion in sales either canceled or delayed.

If borrowing costs for state and local governments rise, they won’t be able to spend as much money, they won’t be able to hire as many workers, they will need to find more revenue (tax increases), and more of them will go bankrupt.

And what we are witnessing right now is just the beginning. Things are going to get MUCH worse. The following is what Robert Wenzel recently had to say about the municipal bond market…

Thus, there is only one direction for rates: UP, with muni bonds leading the decline, given that the financial structures of many municipalities are teetering. There is absolutely no good reason to be in municipal bonds now. And muni ETFs will be a worse place to be, given this is relatively HOT money that will try to get out of the exit door all at once.

But, as I wrote about yesterday, the worst part of the slaughter is going to be when the 441 trillion dollar interest rate derivatives time bomb starts exploding. If bond yields continue to soar, eventually it will take down some very large financial institutions. The following is from a recent article by Bill Holter…

Please understand how many of these interest rate derivatives work. When the rates go against you, “margin” must be posted. By “margin” I mean collateral. Collateral must be shifted from the losing institution to the one on the winning side. When the loser “runs out” of collateral…that is when you get a situation similar to MF Global or Lehman Bros., they are forced to shut down and the vultures then come in and pick the bones clean…normally. Now it is no longer “normal,” now a Lehman Bros will take the whole tent down.

Most people have no idea how vulnerable our financial system is. It is a house of cards of risk, debt and leverage. Wall Street has become the largest casino in the history of the planet, and the wheels could come off literally at any time.

And it certainly does not help that a whole host of cyclical trends appear to be working against us. Posted below is an extended excerpt from a recent article by Taki Tsaklanos and GE Christenson…

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Charles Nenner Research (source)

Stocks should peak in mid-2013 and fall until about 2020. Similarly, bonds should peak in the summer of 2013 and fall thereafter for 20 years. He bases his conclusions entirely on cycle research. He expects the Dow to fall to around 5,000 by 2018 – 2020.

Kress Cycles by Clif Droke (source)

The major 120 year cycle plus all minor cycles trend down into late 2014. The stock market should decline hard into late 2014.

Elliott Wave Cycles by Robert Prechter (source)

He believes that the stock market has peaked and has entered a generational bear-market. He anticipates a crash low in the market around 2016 – 2017.

Market Energy Wave (source)

He sees a 36 year cycle in stock markets that is peaking in mid-2013 and down 2013 – 2016. “… the controlling energy wave is scheduled to flip back to negative on July 19 of this year.” Equity markets should drop 25 – 50%.

Armstrong Economics (source)

His economic confidence model projects a peak in confidence in August 2013, a bottom in September 2014, and another peak in October 2015. The decline into January 2020 should be severe. He expects a world-wide crash and contraction in economies from 2015 – 2020.

Cycles per Charles Hugh Smith (source)

He discusses four long-term cycles that bottom roughly in the 2010 – 2020 period. They are: Credit expansion/contraction cycle; Price inflation/wage cycle; Generational cycle; and Peak oil extraction cycle.

Harry Dent – Demographics (source)

Stock prices should drop, on average for the balance of this decade. Demographic cycles in the United States (and elsewhere) indicate a contraction in real terms for most of this decade.

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I was stunned when I originally read through that list.

Is it just a coincidence that so many researchers have come to such a similar conclusion?

The central banks of the world could attempt to “kick the can down the road” by buying up lots and lots of bonds, but it does not appear that is going to happen.

The Federal Reserve may not listen to the American people, but there is one institution that the Fed listens to very carefully – the Bank for International Settlements. It is the central bank of central banks, and today 58 global central banks belong to the BIS. Every two months, the central bankers of the world (including Bernanke) gather in Basel, Switzerland for a “Global Economy Meeting”. At those meetings, decisions are made which affect every man, woman and child on the planet.

And the BIS has just come out with its annual report. In that annual report, the BIS says that central banks “cannot do more without compounding the risks they have already created”, and that central banks should “encourage needed adjustments” in the financial markets. In other words, the BIS is saying that it is time to end the bond buying…

The Basel-based BIS – known as the central bank of central banks – said in its annual report that using current monetary policy employed in the euro zone, the U.K., Japan and the U.S. will not bring about much-needed labor and product market reforms and is a recipe for failure.

“Central banks cannot do more without compounding the risks they have already created,” it said in its latest annual report released on Sunday. “[They must] encourage needed adjustments rather than retard them with near-zero interest rates and purchases of ever-larger quantities of government securities.”

So expect central banks to start scaling back their intervention in the marketplace.

Yes, this is probably going to cause interest rates to rise dramatically and cause all sorts of chaos as the bubble that they created implodes.

It could even potentially cause a worse financial crisis than we saw back in 2008.

If that happens, the central banks of the world can swoop in and try to save us with their bond buying once again.

Isn’t our system wonderful?

Why A Greek Exit From The Euro Would Mean The End Of The Eurozone

May 14, 2012 by Michael

What was considered unthinkable a few months ago has now become probable. All over the globe there are headlines proclaiming that a Greek exit from the euro is now a real possibility. In fact, some of those headlines make it sound like it is practically inevitable. For example, Der Spiegel ran a front page story the other day with the following startling headline: “Acropolis, Adieu! Why Greece must leave the euro”. Many are saying that the euro will be stronger without Greece. They are saying things such as “a chain is only as strong as its weakest link” and they are claiming that financial markets are now far more prepared for a “Grexit” than they would have been two years ago. But the truth is that it really is naive to think that a Greek exit from the euro can be “managed” and that business will go on as usual afterwards. If Greece leaves the euro it will set a very dangerous precedent. The moment Greece exits the euro, investors all over the globe will be asking the following question: “Who is next?” Portugal, Italy and Spain would all see bond yields soar and they would all likely experience runs on their banks. It would only be a matter of time before more eurozone members would leave. In the end, the whole monetary union experiment would crumble.

As I have written about previously, New York Times economist Paul Krugman is wrong about a whole lot of things, but in a blog post the other day he absolutely nailed what is likely to soon unfold in Greece….

1. Greek euro exit, very possibly next month.

2. Huge withdrawals from Spanish and Italian banks, as depositors try to move their money to Germany.

3a. Maybe, just possibly, de facto controls, with banks forbidden to transfer deposits out of country and limits on cash withdrawals.

3b. Alternatively, or maybe in tandem, huge draws on ECB credit to keep the banks from collapsing.

4a. Germany has a choice. Accept huge indirect public claims on Italy and Spain, plus a drastic revision of strategy — basically, to give Spain in particular any hope you need both guarantees on its debt to hold borrowing costs down and a higher eurozone inflation target to make relative price adjustment possible; or:

4b. End of the euro.

By itself, Greece cannot crash the eurozone. But the precedent that Greece is about to set could set forth a chain of events that may very well bring about the end of the eurozone.

If one country is allowed to leave the euro, that means that other countries will be allowed to leave the euro as well. This is the kind of uncertainty that drives financial markets crazy.

When the euro was initially created, monetary union was intended to be irreversible. There are no provisions for what happens if a member nation wants to leave the euro. It simply was not even conceived of at the time.

So we are really moving into uncharted territory. A recent Bloomberg article attempted to set forth some of the things that might happen if a Greek exit from the euro becomes a reality….

A Greek departure from the euro could trigger a default-inducing surge in bond yields, capital flight that might spread to other indebted states and a resultant series of bank runs. Although Greece accounts for 2 percent of the euro-area’s economic output, its exit would fragment a system of monetary union designed to be irreversible and might cause investors to raise the threat of withdrawal by other states.

In fact, yields on Spanish debt and Italian debt are already rising rapidly thanks to the bad news out of Greece in recent days.

What makes things worse is that a new government has still not formed in Greece. It looks like new elections may have to be held in June.

Meanwhile, the Greek government is rapidly running out of money. The following is from a Bank of America report that was released a few days ago….

“If no government is in place before June when the next installment (of loan money) from the European Union and International Monetary Fund is due, we estimate that Greece will run out of money sometime between the end of June and beginning of July, at which point a return to the drachma would seem inevitable”

In the recent Greek elections, parties that opposed the bailout agreements picked up huge gains. And opinion polls suggest that they will make even larger gains if another round of elections is held.

The Coalition of the Radical Left, also known as Syriza, surprised everyone by coming in second in the recent elections. Current polling shows that Syriza is likely to come in first if new elections are held.

The leader of Syriza, Alexis Tsipras, is passionately against the bailout agreements. He says that Greece can reject austerity because the rest of Europe will never kick Greece out of the eurozone. Tsipras believes that the rest of Europe must bail out Greece because the consequences of allowing Greece to go bankrupt and fall out of the eurozone would be far too high for the rest of Europe.

A spokesman for Syriza, Yiannis Bournos, recently told the Telegraph the following….

“Mr Schaeuble [Germany’s finance minister] is pretending to be the fearless cowboy on the radio, saying the euro is secure [against a Greek exit]. But there’s no way they will kick us out”

So Greece and Germany are playing a game of chicken.

Who will blink first?

Will either of them blink first?

Syriza is trying to convince the Greek people that they can reject austerity and stay in the euro. Syriza insists that the rest of Europe will provide the money that they need to pay their bills.

And most Greeks do actually want to stay in the euro. One recent poll found that 78.1 percent of all Greeks want Greece to remain in the eurozone.

But a majority of Greeks also do not want anymore austerity.

Unfortunately, it is not realistic for them to assume that they can have their cake and eat it too. If Greece does not continue to move toward a balanced budget, they will lose their aid money.

And if Greece loses that aid money, the consequences will be dramatic.

Outgoing deputy prime minister of Greece Theodoros Pangalos recently had the following to say about what would happen if Greece doesn’t get the bailout money that it needs….

“We will be in wild bankruptcy, out-of-control bankruptcy. The state will not be able to pay salaries and pensions. This is not recognised by the citizens. We have got until June before we run out of money.”

If Greece gets cut off and runs out of money, it will almost certainly be forced to go back to using the drachma. If that happens there will likely be a “bank holiday”, the borders will be secured to limit capital flight and new currency will be rapidly printed up. It would be a giant mess.

In fact, there are rumblings that the European financial system is already making preparations for all this. For example, a recent Reuters article had the following shock headline: “Banks prepare for the return of the drachma”

But a new drachma would almost certainly crash in value almost immediately as a recent article in the Telegraph described….

Most economists think that a new, free-floating drachma would immediately crash by up to 50 percent against the euro and other currencies, effectively halving the value of everyone’s savings and spelling catastrophe for those on fixed incomes, like pensioners.

A Greek economy that is already experiencing a depression would get even worse. The Greek economy has contracted by 8.5 percent over the past 12 months and the unemployment rate in Greece is up to 21.8 percent. It is hard to imagine what Greece is going to look like if things continue to fall apart.

But the consequences for the rest of Europe (and for the rest of the globe) would be dramatic as well. A Greek exit from the euro could be the next “Lehman Brothers moment” and could plunge the entire global financial system into another major crisis.

Unfortunately, at this point it is hard to imagine a scenario in which the eventual break up of the euro can be avoided.

Germany would have to become willing to bail out the rest of the eurozone indefinitely, and that simply is not going to happen.

So there is a lot of pessimism in the financial world right now. Nobody is quite sure what is going to happen next and the number of short positions is steadily rising as a recent CNN article detailed….

After staying quiet at the start of the year, the bears have come roaring back with a vengeance.

Short interest — a bet on stocks turning lower — topped 13 billion shares on the New York Stock Exchange at the end of last month. That’s up 4% from March and marks the highest level of the year.

If the eurozone is going to survive, Greece must stay a part of it.

Instead of removing the weakest link from the chain, the reality is that a Greek exit from the euro would end up shattering the chain.

Confidence is a funny thing. It can take decades to build but it can be lost in a single moment.

If Greece leaves the euro, investor confidence in the eurozone will be permanently damaged. And when investors get spooked they don’t behave rationally.

A common currency in Europe is not dead by any means, but this current manifestation is now operating on borrowed time.

As the eurozone crumbles, it is likely that Germany will simply pull the plug at some point and decide to start over.

So what do you think?

Do you think that I am right or do you think that I am wrong?

Please feel free to post a comment with your thoughts below….