Reply #25: Bond Market Implosion! [View All]

[54anickel]

Let's hope this is just pointing out the worse case scenario and something less wicked this way come.

http://www.gold-eagle.com/editorials_04/ekervik041304.html

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With rates artificially low and close to zero, the rate weapon starts to malfunction. Instead of a canon it will behave more like a clusterbomb(still powerfull but with even less precision), hitting all kinds of possible debtors. Since most of the strong debtors are already saturated with debt. The banks will offer their debt even to the weakest debtors. This category of consumers/debtors will be happy to get a loan, and start piling on all the debt they can handle and then some. This last wave of debt bonanza will primarily hit the consumer sector, the smarter business sector, has felt the beginning of deflation putting a lid on sales prices, and has steadily decreased debt levels since the last recession in 2001.

When the consumer has taken on all the debt he can handle (a lot of them take on more than they can handle) the rate weapon siezes to function. With no one left to borrow, in combination with the bond market revulsion in July 2003 (increasing rates on house mortgages). The monetary growth rate starts decling and then reverses. This decline could be seen in the M3 money stock during the last two quarters of 2003. Declines in M3 are rare, the size of this decline have not been seen in at least 50 years. Something ugly is approaching!

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When the March job figures showed a strong 308,000 jobs were created, the large bondmarket players once again sensed the awful smell of inflation approaching and started selling at a rapid pace. With the fading intrest from Asian central banks to buy new debt, the Treasury Dept. have had increasing problems getting all the new debt sold to finance the budget deficit. With recent signs of inflation creating a sell off in bonds and Asian central banks losing intrest in buying, there is no longer anything propping up the bond market bubble. Adding to the problem is the levereged carry trade by major banks and hedge funds. The approaching inflation will keep preassure on bonds in the coming months, thus forcing levereged players to sell at increasing pace, driving prices lower and pushing interest rates to painful heights.

The coming bond market implosion and rising interest rates is expected to almost completly stop the refinancing of home mortgages. With minimal wage increases and no more access to cheap money the consumer will have to cut back on spending. With rapidly increasing bankruptcys in both the consumer and business sector, with todays record low rates. The sharp increase in interest rates will force a large group of weak debtors that has borrowed on the margin, to default on their loans. The banks will act as they usually do and halt their credit lending to all but the strongest debtors, fearing more defaults. This action will kill consumer demand and force businesses to lower prices. The consumer now noticing the lower prices will figure, if he waits he can get even lower prices. US businesses struggling to survive in the competition from Asian manufacturers will lower prices even more. The consumer being right in his conclusion waits some more and the bad cycle of deflation is born. This will once again be seen in the declining M3, this time however one would expect more like a collapse.

This is the first time in 70 years that the US has reached debt saturation at one percent overnight interest rate....

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