Tuesday, December 16, 2014

The Real Crisis Will Be North of $100 Trillion

"The 2008 crash was a warm up.

Many investors think that the markets could never have a crash again. They think that the 2008 meltdown was a one in 100 years crisis.

They are wrong.

The 2008 Crisis was a stock and investment bank crisis. But it was not THE Crisis. THE Crisis concerns the biggest bubble in financial history: the epic Bond bubble…

If you need proof that bonds are in a truly epic bubble… one that will implode the financial system when it breaks… consider that half of ALL government bonds in the world currently yield less than 1%.

What is clear is that the world has become addicted to central bank stimulus. Bank of America said 56pc of global GDP is currently supported by zero interest rates, and so are 83pc of the free-floating equities on global bourses. Half of all government bonds in the world yield less that 1pc. Roughly 1.4bn people are experiencing negative rates in one form or another.

These are astonishing figures, evidence of a 1930s-style depression, albeit one that is still contained. Nobody knows what will happen as the Fed tries to break out of the stimulus trap, including Fed officials themselves.


Why are yields this low?

Because, by holdings interest rates at zero or even negative, global Central Banks have forced investors to pile into bonds in search of yield (stocks are too risky for many of the largest pools of capital).

When investors pile into bonds, bonds rally, which drives yields lower. This has been reinforced by the fact that Central Banks have been engaging in or promising QE (buying Government debt) consistently for the last five years. So investors have been front-running the Fed and other Central Banks.

After all… if you know a Central Bank will buy your bond at a price that is higher from where the market prices it… you effectively know there is a “bigger fool” waiting in the wings.

The end result?

The bond bubble today is over $100 trillion. When you include the derivatives that trade based on bondsit’s more like $500 TRILLION. And it’s growing by trillions of dollars every month (the US issued $1 trillion in new debt in the last 8 weeks alone)..."

at http://www.zerohedge.com/news/2014-12-16/real-crisis-will-be-north-100-trillion

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