Wednesday, October 11, 2017

Euture Bonds: Safe or Disaster

Question: What is the biggest market, and thus, can cause the greatest economic impact?
Clue:        It is a four letter word.
Answer:   Bond market.

The Federal Reserve chair, Janet Yellen has stated that the Fed will unwind the securities that it purchased to ease the financial crisis of 2008/09. This will be a slow process and it should not disturb the bond market. Words are easier said than actions and this action has many repercussions. When debt is reduced, premiums for bonds rise. In addition, the Fed has also stated that interest rates will rise. Yellen claims one more increase this year and three in 2018. I say that she, whether she still has a job or not, is bluffing and it won't happen. There are many reasons.
If one were to reread the above, one would realize that the Fed's actions are in conflict. You cannot reduce debt which raises yield and at the same time, control that premium when you are raising interest rates. This is two opposing concepts. Recent history reveals how markets react. Another less valid point is that President Trump may actually fire Yellen in January 2018 and install his puppet.
Financial Crisis 2009
the premium for bonds was over three points. Today, it is 0.25%. This is central for the price of bonds. By the way, the recent historical average is 1.6%.
In a report by Bloomberg on the outlook for government issues, old "Helicopter" Ben Bernanke list three main components. He says this is the make-up for any given bond. First, the bond's premium. Next, the market's expectation for interest rates and thirdly, the inflation level.
Now, put that data to Yellen's outlook. She is raising rates. This kills part of any given bond. As for inflation, we all know it is there, but the Fed does not count what we all need like food, energy and shelter. She is increasing the premium by reducing debt. In essence, she is combating all three components of a bond issue. In addition, who wants an old low paying bond when higher rates are on the horizon?
Dear reader, we should all realize that the Fed is nothing more than a shill for the banking industry. They have destroyed the sound thinking in finances by penalizing savers and glorifying debt. They have basically outlawed gold and old Ben even claimed gold was not money. Such is our life.
100 Year Bond 
Yes, this is part of our life and what central bankers are doing in Austria. Think back for a moment 100 years? How much has the world changed? This won't even have value to pass on as inheritance. Insanity is reflected today in our financial leaders. In that vein, if the Federal Reserve were audited, it would be declared bankrupt. Nevertheless, no one wants that box opened. As long as the game is playing, the status quo rule. Maybe this thinking and negative interest rates are new school, but I'm old school - gold backed currency, fight inflation, stable currency and economy.
Keep in mind, rates effect currency. As I say in my unpublished work, all things are connected. The US rate is higher than Europe or Japan which helps the value of the dollar. This was reflected in the dollar in 2016 as it rose to almost par with the euro. Today, even though the US rates are still higher than competing nations, there is pressure on the dollar. Its future will be based on the easy money policies of central banks, the Chinese effort to circumvent the dollar in global trading and the relationship of the dollar to oil or the Petro-dollar.
As you can see rate changes effect many aspects to finances to economies, and especially to bonds. The Fed is banking on higher rates to protect the dollar and at the same time, using the easy money policies of other central banks as a counterweight to their policies. The Fed believes it can reduce its holdings, raise rates to a more normal level and stabilize the bond market. I say Shakespeare had it right, "Oh, what a tangle web we weave when we deceive."