Thursday, August 29, 2013

Bond Crash is coming, will crash other markets as well

We have warned here more than a year ago that the bond bubble was finished. So, there was ample of time even for slow-moving institutions to get out of this asset class.

Now the long term trend in long bonds has started to turn down, a prerequisite  for a crash sooner rather than later (Memo: markets that have not already lost momentum usually just don't crash out of the blue - but this market has already turned now).

It might be that geopolitical jitters around Syria might hold this development up a littlebit, but the inherent weakness will remain. As soon as Bond Futures push meaningfully through the current key support zone, we should see accelerating selling.

This will most likely be poison for most other asset markets, and could also crash the still overtexended equities.

Of course, after a little while, central banks will have to step in and try to save the day - as long dated interest rates are the fulcrum that could move the entire artificially calmed asset spectrum from stability to considerable chaos.

The only question that remains is, where has the Fed drawn its line in the sand: 121 ?  120 ? 118? 112? (referring to the 10 year T-Note Future).

So if there is an accelerating selloff, and if the Fed moves somewhere around 112 to 120 in force, that could provide for anotther powerful (albeit temporary) buying opportunity that could trigger another wave of levitation to stocks.  But it will be medium-term temporary in nature.

Meanwhile, we have developed a disciplined and broadly-based systematic approach to manage directional bond risk for institutional investors, providing an Overlay for existing bond portfolios by tactically and directionally shorting 10-Year Treasury Note Futures and/or 10-Year Bund Futures.

Monday, July 1, 2013

Attention please, the New Chinese Government proudly announces....

"No pains, no gains for China's economy"

which could be translated to: "Deflating Bubbles is actually OK!" 

While many dismiss CCTV (China's state-controlled incarnation of CNN) as an arm of Chinese government propaganda not even worth watching, I believe that this time, it might be different. 

Apparently, China's new leadership has decided that the emergency liquidity measures and stimulus packages taken on during and after the crisis of 2008 have created lots of bad investments and - who would have thought that: a credit bubble!

Therefore, as any good incoming executive, the new leaders can now conveniently blame the old leadership and try to restructure and correct the debauchery of past times:

Please see here:

"It is time to deflate bubbles and restore normal practice.
[...] The road-map is clear. [....]  

If long-term gains can be secured, short-term pains will be worth it."

It might also be interesting to see how PBOC Governor Zhou Xiaochuan had been quoted in his speech on Friday:
"[....]the People’s Bank of China will continue its prudent monetary policy with timely adjustments."

And here's what had happened recently in Chinese Interbank lending rates:

I am still wondering whether Communist Engineers will finally be able to do what no Capitalist Economist had ever been able to achieve: a central-bank engineered "soft landing" of a major economy while deflating a credit bubble.

But again, the CCTV talking heads are already warning about some minor pain to come, non?

Monday, June 24, 2013

Bond Market Rout is on - we warned about it already a year ago...

On June 29, 2012, we wrote:
"THIS IS IT -  The Bond Bubble will deflate from here"

And, as an additional warning, on Monday, May 13, 2013, this is what we wrote:
 "....could [the tremors in the Japanese Government Bond] become the famous flapping of the butterfly's wings?
If this bond market (which has in implicit central bank guarantee) starts to slide, my guess is it will spill over into the confidence of other, allegedly "guaranteed" and complacent bond markets, causing them to unwind some of their excess.
This, in turn, could question the entire current investment equation of ultra-low long term interest rates, which seem to be one factor in the ever rising and extraordinarily calm equity markets."

And here's how it came out so far:

(Chart shows the Vanguard Total Bond Market ETF, which comprises a broad a wide spectrum
of public, investment-grade, taxable, fixed income securities in the U.S.)

Now the question is, if and when the Central Banks will try step in in order to stop this avalanche.
Remember, this is the biggest market in the world, and ît is tied to a massive bubble of derivatives.

Wednesday, May 15, 2013

US Stock Market - recent stellar performance and what to expect.

If the US stock market would continue to raise as it has risen recently, this would result in the following annualized returns:

  • If it would continue to raise as it has since the start of the year: annualized gain = 58%.
  • If it would continue to raise as it has since April 18 (the last small correction): annualized gain = 170%

In the face of stalling earnings growth and increasingly weak macro data from around the world, it is only a question of time until this train will be derailed. 

Also, here applies the same principle as for other markets. A big part of this upside action is most likely being driven by trading robots, which tend to allocate bigger and bigger positions into low-volatile, rising markets.

Once volatility increases, these positions will be liquidated quickly.

Monday, May 13, 2013

The Tremor that nobody seems to take seriously...

Meanwhile, in one of the more important sovereing credit markets, the Japanese Government Bond, volatility has started to explode (at least relative to its historical norms).
Since years, the JGB has been trending up or remained pretty stable, with some upside levitation despite Japan's 200% Debt-to-GDP ratio. Low-volatitlity markets that exhibit an upside bias tend to attract larger and larger positions from computer-based trendfollowing funds, as these funds' allocations are often based on a combination of trend and volatility.

Once fundamentally driven investors start to take their profits (as is happening now) volatility starts to pick up a bit and the trends could start to break down.  Therefore, such activity will be followed by reinforced selling by computer-driven futures funds. 

I believe this is what is happening now in the JGB, and I also believe that this could just be the beginning of a huge move. 

Admittedly, this is currently only a tremor, but could it become the famous flapping of the butterfly's wings?

If this bond market (which has in implicit central bank guarantee) starts to slide, my guess is it will spill over into the confidence of other, allegedly "guaranteed" and complacent bond markets, causing them to unwind some of their excess.

This, in turn, could question the entire current investment equation of ultra-low long term interest rates, which seem to be one factor in the ever rising and extraordinarily calm equity markets.

Thursday, April 11, 2013

The Cyprus "Template" that wasn't - or was it...?

Could it be....

...that the Cyprus "bail-in"  – which first looked like an accident of some politicians' negligence, then became a template, and after that, very quickly "no template at all", in fact actually was not a template, but a test following an already preconceived template, carried out on a comfortably small scale -  with a hopefully limited impact ?  

Whatever the facts are, and despite the now comfortably low volatility in all kinds of rising asset markets, it will pay to remain vigilant.

The course taken in Cyprus at least seems to be awkwardly similar to what we can read in this "Recommendation Report" already formulated back in 2010:

Bank for International Settlements, March 2010: 

Report and Recommendations of the Cross-Border Bank Resolution Group

see Page 43 ff:

Recommendation 10
National authorities should adopt crisis management and resolution strategies that reduce moral hazard by minimising public expenditures. Losses should be allocated among shareholders and other creditors, where possible; and private sector resolutions rather than public ownership should be facilitated. Where temporary public ownership is necessary, authorities should seek to return assets to private ownership and management as soon as possible. At the time of public intervention, national authorities should seek to develop public understanding about the amount of fiscal support that may be necessary, estimates of the time horizon for intervention, risk sharing arrangements and the possible losses borne by the taxpayers.
SIGNATORIES to the document which proposes that creditors of financial organizations, the depositors, carry responsibility to "bail in" bankrupt organizations.
  • Members of the Cross-border Bank Resolution Group
  • Swiss Financial Market Supervisory Authority
  • Federal Deposit Insurance Corporation Banco Central de la República Argentina National Bank of Belgium
  • Commission bancaire, financière et des assurances, Belgium Banco Central do Brasil
  • Office of the Superintendent of Financial Institutions, Canada Commission Bancaire, France
  • Deutsche Bundesbank
  • Bundesanstalt für Finanzdienstleistungsaufsicht, Germany Banca d’Italia
  • Bank of Japan
  • Financial Services Agency, Japan
  • Commission de Surveillance du Secteur Financier, Luxembourg De Nederlandsche Bank
  • Banco de España
  • Sveriges Riksbank
  • Swiss National Bank
  • Swiss Financial Market Supervisory Authority
  • Bank of England
  • Financial Services Authority
  • Board of Governors of the Federal Reserve System Federal Reserve Bank of New York
  • Office of the Comptroller of the Currency
  • Office of Thrift Supervision
  • Federal Deposit Insurance Corporation
  • European Commission European Central Bank (ECB)
  • Financial Stability Board
  • Offshore Group of Banking Supervisors
  • Bank for International Settlements
  • Financial Stability Institute
  • Secretariat, Basel Committee on Banking Supervision

Thursday, March 28, 2013

Meanwhile, European Credit Traders send another Warning Shot...

U.S. stock market indices have so far been holding up like there was a fully automated "constant bid" algorithm active in the S&P500 futures contract (or is there...?).  The Eurostoxx stock market index was also just consolidating sideways, at best, for the last couple of weeks.

Meanwhile, European credit traders are not so enthusiastic and have started to change their mind regarding  European financials institutions credit quality - a development that had already started on January 11 (!) and has accelerated over the last couple of days:

(the Red Line is the Inverse of the Markit ITraxx European Financials Subordinated Debt CDS Spread - or in plain English: the insurance premium that one has to pay to insure against default of the average European bank or insurance company, here shown inverted (i.e., the premium has shot up considerably over the last days).

As Emerging Markets remain rather weak, China broke its medium-term uptrend and sold off by 2.5% today, the Chicago Purchasing Manager Index just missed its forecasted value by a wide margin, and base metals such as Copper erode further, we stay "c&c" - concerned & cautious....