John Auther in the FT is worth reading although it requires a premium sub to get to do so (paid for by my university, I might add), for which I am grateful. Today he argues:
US Treasury yields on Monday broke through what had long been billed as an important point of resistance, at 2.66 per cent, and rose above 2.7 per cent. That appeared to break the fabled long-term downtrend in 10-year Treasury yields:
What he then argues, in essence, are three things. The first is that the other two peaks were just before crashes.
The second is that in each case the peak was because of a market euphoria, and he provides evidence that this is just what we are suffering from.
Third, the question is then 'when' and not 'if' there is what is politely called an 'adjustment'.
This matters to the world at large. Such 'adjustments' tend to impose substantial costs on society at large, which makes asking why we subsidise wealth so heavily entirely appropriate.
Second, this means alternative thinking is needed.
Third, in the UK any such adjustment might happen as the government itself is already in freefall. We could not be worse prepared for this. May and markets crashing together is not a pretty prospect but seems entirely plausible.
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I’ve not read it but wonder what he means by ‘important point of resistance’-it sounds like an appeal to a ‘mysterious force.’ The Fed controls the interest rates, so there is no ‘mysterious force’ there-but as I say I haven’t read it.
The only think I can think of is that there may be a rush into stocks from treasuries due to some crazy belief that the US can go broke and that causes the ‘euphoria’ which becomes a cycle of rate hikes + more move into stocks as people believe the rate increases signify imminent collapse of the dollar.
Is this possible?
Actually stocks are falling
The realisation is that of interest rates rise stocks are heavily over valued
The belief is rates must rise
Markets have not thought about the consequences of that
So-as the number of bonds increases through unwinding/higher interest rates then stocks are being dropped due to increasing yields and the increase in the cost of borrowing?
No, everything is in sell off due to higher rates
Simon Cohen says:
January 30 2018 at 5:08 pm
“wonder what he means by ‘important point of resistance’-it sounds like an appeal to a ‘mysterious force.’ ”
If enough investors think that the trend line is drawn in the right place on the chart, then the price breaking above that line becomes significant because of the number of players who are watching it and believe it’s significant. The ‘mysterious force’ is group think. If enough players think the trend has changed direction the trend will change direction. It’s a form of self fulfilling prophecy.
“…. imminent collapse of the dollar………Is this possible?
Yes, it’s possible. Doesn’t mean it will happen and doesn’t tell you what constitutes ‘imminent’ if it is going to happen. Whether there is an underlying fundamental reason or not is irrelevant because the collective psychology, ‘market sentiment’ creates a positive feedback.
Daft, I call it. Billions of currency units changing hands reflecting no material change in real terms.
It will be a buying opportunity apparently
As many of my critics tell me
Short, they sat
I am not a gambler
Wally says:
January 30 2018 at 9:14 pm
“It will be a buying opportunity apparently”
The theory is dead simple. The session before the collapse you sell all your share holdings, then you sit on the cash until the crash hits the bottom and then you buy back anything that’s still standing and looks likely to stay in business and watch the prices gradually climb up again.
What could possibly go wrong with such a simple plan?
QE has forced traditional income seekers into riskier areas.. everything is overvalued. Unless central banks continue to buy their own debt then it is inevitable yields will rise and prices fall across all asset classes, bonds , property and equity. For markets to crash investors will need to believe inflation will be a barrier to further QE.,
We’ve been here before with you on this one.
The QE program ended quite some time ago. It had an effect, yes, but it ended.
Marco Fante says:
January 31 2018 at 3:49 pm
“The QE program ended quite some time ago. It had an effect, yes, but it ended.”
Don’t think so Marco, unless the ECB has stopped its programme. Last I noticed they were to reduce the monthly total at the end of last year, but not stop QE. Mario still ‘doing whatever it takes’. This QE cash moves across borders willy nilly so it’s still piling into Wall Street and the FTSE.
I think Dc is right. If the Central banks are prepared to do more QE they can keep markets afloat indefinitely. It’s what the speculators are betting on and the late entrants having missed out are still joining to catch the last burst of euphoric gains.
Unless someone has an alternative plan markets will crash or we’ll get more QE to mitigate the damage.
Ladies and gentlemen. Place your bets !
I think I’ll just watch, but I don’t believe the CBs will let this baby burn. A crash will cripple the banks because huge amounts of this bubble is composed of corporate and private loans which won’t be repayable.
What do we follow a GFC with? Even-Greater Financial Crash ? GFC 2.0. ? TMMD (Total Market Melt Down? Sub editors the world over will have lists of monikers they are itching to see in print.
This is high octane madness.
QE has forced traditional income seekers into riskier areas .. everything is overvalued. –
Yes everything is overvalued, but it isn’t just QE, it’s also the unequal distribution of wealth especially over the last 10 years.
In the UK before QE the market valuation of the UK debt was £640 bn, now it’s £1,920 bn according to the quarterly DMO report. The two biggest holders of this debt, have increased the value of their holdings from a market value of £ 233bn to £522bn (Overseas) and £229 bn to £561 bn (Pensions and Insurance). Around 25% of that increase is due to inflation, so money hasn’t been fleeing Gilt in search of riskier areas, it’s flooded into gilts, but there is so much of it in the hands of institutions and wealthy individuals that they are able to flood both the gilt markets and pump up asset values.
If the distribution of new wealth had been fairer then there wouldn’t be as much personal debt, and asset values would be higher, but not at the mad levels we’ve seen in recent years.
The biggest holder is the Bank of England, of course
The market valuation of the BoE holding is 472 billion (24.6%)
Overseas is £522bn (27.2%) with
Pensions and Insurance the biggest at £561 bn (29.2%)
https://www.dmo.gov.uk/media/15185/jul-sep17.pdf
I believe there should be one out today.
Thanks
I was referring to a single owner
Richard,
I take it that you have seen this?
https://www.theguardian.com/business/live/2018/jan/31/capita-profit-warning-shares-tumble-markets-nervous-eurozone-inflation-federal-reserve-business-live
I have, but not long ago
I have been doing an extended seminar, which has been hard work!
Agree with you Martin QE has caused inequality and imbalances all over the place…asset & property owners to non owners, savers v borrowers, DC pensions to final salary etc.. world economies as well as capital markets now have a dependency on low interest rates through QE.
And Marco even if it was all stopped tomorrow and no further purchases were made (as opposed to reversed) just add up the the trillions of central bank exposure to national debt and assume a fair proportion of that is still in equity & property etc thereby inflating their values.
Central banks have no exposure
Central banks can print money
You really do not undertsand do you?
Ok I rephrase to “central bank ownership”.. the same points remain through the imbalances QE has created.
And yes I do understand a fiat currency has an unlimited supply so there is no default risk .
I always warned of the risks of QE
There are of course other risks to QE / printing..indeed some of them are highlighted in this thread I.e inflation, in this case asset inflation.
As I argued would happen in 2010
Let’s not pretend then that QE / Peoples QE/ Printing is a magic money tree than can provide a solution to any or most economic problems..
DC
We don’t have to pretend
It is
Your problem arises from denying a self evident truth
Richard