Everything Is Being Sold

Global financial markets are now in a very perilous state, and there is a much higher than normal chance of a crash. Bernanke's recent statement revealed just how large a role speculation had played in the prices of nearly everything, and now there is a mad dash for cash taking place all over the world.

After years of cramming liquidity into the markets, creating massive imbalances such as stock markets hitting new highs even as economic fundamentals deteriorated (Germany) or were lackluster (U.S.), junk bonds hitting all-time-record highs, and sovereign bond yields steadily falling even as the macro economics of various countries worsened markedly (Spain, Italy, Greece, and Portugal), all of this was steadily building up pressures that were going to be relieved someday. Just over a month ago, Japan lit the fuse by destabilizing its domestic market, which sent ripples throughout the world.

The Dash for Cash

The early stage of any liquidity crisis is a mad dash for cash, especially by all of the leveraged speculators. Anything that can be sold is sold. As I scan the various markets, all I can find is selling. Stocks, commodities, and equities are all being shed at a rapid pace, and that's the first clue that we are not experiencing sector rotation or other artful portfolio-dodging designed to move out of one asset class into another (say, from equities into bonds).

Here's the data. Let's begin with the place that the most trouble potentially lurks  bonds and here we have to start with the U.S. Treasury 10-year note, as that is the benchmark for so many other interest-rate-sensitive items, such as mortgage bonds.

Here there's been a very interesting story that predates the recent Fed announcement by nearly two months. This chart of the price of 10-year Treasurys tells us much (remember, price and yield are exact opposites for bonds; as one moves up, the other moves down):

The first take-away is that the current price of 10-year Treasurys is now lower that at any time since late 2011. The second take-away is that this has happened despite both Operation Twist and QE3.

That is, after all the hundreds and hundreds of billions of dollars of thin-air money-printing and bond-buying, Treasurys are now lower in price than when the Fed initiated Operation Twist and QE3.

And it's not just 10-year rates; the entire yield curve from 5-year to 30-year debt is now higher than it was a month ago:

This is very, very important. On the one hand, it tells us that the Fed may not be omnipotent after all, because you can bet your bottom dollar that the Fed simply does not want long rates to rise and that this was an unplanned and unwelcome move. On the other hand, rising rates will do much to a fragile economy and over-leveraged speculators and institutions.

I may need more hands here, because there are other undesirable effects of rising rates, including falling equities (we'll get to that in a minute), fiscal difficulties for heavy borrowers (many sovereign entities belong to this club), and mortgages becoming increasingly expensive.

An early casualty of rising U.S. interest rates, of course, was mortgage rates, which have climbed approximately 40 basis points (0.40%) over the past month:

Obviously, anything that will impact the housing market at this point is entirely unwelcome by the Fed, which has openly stated that it wants people buying homes and for a variety of reasons, people tend to take out fewer mortgages when rates rise. This is especially true for refinancing mortgages, an important source of revenue for financial institutions.

If it were just U.S. rates that were rising, that would be one thing, but rates have been on the move in Europe and Japan. In this next table, you can see two things: (1) much of the one-month rise in rates can be attributed to the past 24 hours (red arrows), and (2) quite a number of the most problematic nations have bond yields that are below their recent highs (as seen in the green circle).


What I gather from this is that countries like Spain, Portugal, Greece, and Italy do not deserve the ridiculously low rates they now enjoy, and that those old highs in yield will be revisited.

Where the U.S. had a change in yield trend in mid-May 2013, Spain was leading the charge by reversing course in early May:

Who was buying all that junky sovereign debt at inflated prices as Spanish yields fell? Institutions and speculators. The institutions were entities like Spanish banks and the Spain pension system, buying Spanish debt for reasons that seem far more political than financially prudent. For a while, that strategy worked, as rising bond prices delivered both nice yields and capital gains, but now pretty much anybody who bought those bonds in 2013 is (at best) roughly even for the year, leaving plenty who are nursing losses.

The speculators in this story represented the hottest of the hot money, involving hedge funds jumping on any trades that seemed to be headed in the right direction and/or offered useful yields for spread trades, both of which conditions were met by southern European sovereign debt. But that hot money is best described by the phrase easy come, easy go. It arrives fast and leaves even faster.

Okay, so what we can say at this point is that bonds are being sold off around the world. This is very bad for equities, because there's a connection between falling yields and rising equities. As yields fall, the risk-appetite of investors climbs because they need returns, and so they put more money into equities and real estate. This is especially true when interest rates are negative, meaning that they yield less than the rate of inflation, and that is precisely what the Fed engineered. On purpose.

However, this coin has two sides, and the less virtuous face combines rising bond yields with falling equities. It is simply the reverse of the Fed's desired and manufactured outcome of the prior several years.

If we look at the U.S. stock market, as typified by the S&P 500, we see that it peaked in May (to no one's surprise, I hope) and has been steadily falling over the same period that interest rates have been rising.

1600 is now the magic 'round number' for the market to break through if it is heading lower, which I think it is. We'll also note that the 50-day moving average (the rising blue line) has been critical support for the S&P 500 throughout the entire advance (green circles), and that it has been soundly violated on this drop.

Commodities have been heading down, too, but seemingly as a part of a larger move that's been underway for a couple of years:

Note that commodities are now beneath their 200-week moving average, which is a very bearish indicator (green circle).

Collectively, the move away from commodities, bonds, and equities in all markets globally tells us that there's nowhere to hide and that this is a 2008-style dash for cash. Everything is being sold, as it must, to meet margin calls, pay down leverage, and get out of positions; all are signs of the end of a speculative phase.

I know it's a lot to claim that we are at that turning point, but the evidence that we are there is now more than a month old, and it's time to consider that we are entering the next phase of our date with destiny.

What's Coming Next

In Part II: The Ride Down from Here, we look at the increasing number of flashing indicators warning that a 2008-style but worse sell-off is arriving. We say "worse" because this time it looks like it will be accompanied by a vicious cycle of rising interest rates. Plus, governments and central banks have used up all of their major options already. There are no more white knights to hope for.

We examine the likeliest course from here for asset prices and what to expect from the central planners as desperation increasingly drives the decision-making. We also look at what defensive steps individual investors should be considering. Because, as we've been advising for months, now is a time for safety.

Buckle up. It's going to be a bumpy summer.

Click here to read Part II of this report (free executive summary; enrollment required for full access).

This is a companion discussion topic for the original entry at https://peakprosperity.com/everything-is-being-sold/

Is there such a thing as Pre-Traumatic Stress Disorder?

Everything may be selling, but at least someone (JPM?) appears to be buying
CME Hikes Gold Margins By 25%

Two days ago in the Living Two Lives thread some of us were complaining about how long we had been preparing and how the old world just kept rolling along.  Today we appear to again be at the precipice.  Life can be like New England weather.  Just wait a minute and it will change.
Keeping my eyes open and my ears perked. Waiting to see what this new storm will blow in.

Thanks Chris for the analysis in this post and in the Off the Cuff session with Mitch and in the Ride Down from Here article.

Thanks. I needed that. 

My guess is leveraged longs are not gonna want to have any exposure to a weekend of unknowns…I'll bet tomorrow will see a dip/rally, but I'm betting on a bloodbath.  Nothing but air under this thing and he who sells first sells best.  I can't wait to see HFT's leap frogging each other on the way down!

Oh, my. Here it comes, maybe. Is my gas tank full? And I need to go plant a few more of…everything.

[quote=Wendy S. Delmater]Oh, my. Here it comes, maybe. Is my gas tank full? And I need to go plant a few more of…everything.
"Gimme just a little more time, Lord, gimme just a little more time…Gotta lotta things I'd like to do…"
I guess if I didn't have a perpetually renewing to-do list, I wouldn't be who I am.  Although I've come a long way with my preps, I'm not where I'd minimally like to be, through no personal failure…just simple mathematics of time and money. 
I think now would be a good time to look at how far I've come and resolve not to worry about what comes next.  Worrying won't help.
I do think that for the government and the good of the people as a whole, getting the whole thing over with – austerity, pain, etc. – is preferred.  But for me as an individual, I'd like another year or more to just get more solidly settled in where I am.  May be too much to ask, but I will ask anyway.

Its important to remember that a "crash" sometimes happens in one day, and sometimes it is a process that takes months if not years to (more or less) finally resolve itself.  The 2008 crash really started back when the market topped in Oct 2007, and finally completed in March 2009.  The most exciting bits were in fall 2008 to be sure, but unlike the 1987 one-day crash, "the 2008 crash" literally took 18 months to sort itself out.
On the topic of things sorting themselves out, there are some pretty dramatic money flows happening these days.  One currency I happen to watch closely - the Thai Baht - took 8 months to decline from 31 down to 28.50.  In the past 2 months it has moved from 28.50 to over 31 (a 9.3% move).  Same thing for the Aussie Dollar over that same period - 104 in May, 92 today (a 13% move).  Brazil Real: 2.00 to 2.22 (11% move).  India Rupee: 53.50 to 58.80 (10% move).  Money has fled those countries, quite dramatically, all starting May 1.

At that same time those currencies started moving, the US bonds started downhill.  Since May 1, US mortgage rates jumped 60 basis points, TIPs yields jumped 90 (!) basis points,  20 year treasurys jumped 75 basis points.  What's more fun, this same thing happened in the eurozone core too at the same time - France, Germany, Finland, Austria.  The same thing happened in the periphery too, though initially it was less pronounced - Italy, Ireland, Spain, Greece, Portugal.  In Japan too, bonds tumbled starting May 1, although intervention from the BOJ capped the rise to only 25 basis points.  Utility equities in the US also topped May 1.  It was like a big switch flipped that day.  (I was dimly aware of all this when it happened, but didn't put the pieces together until today)

Then two weeks later in mid-May, every equity market in virtually every country topped, and started moving downhill - some more dramatically than others.  The NIKKEI kicked off their move with a 6% drop.  And money started to surge from the USD into Europe and Japan, driving up the EUR and JPY.

Now, in the last few days, money has slopped back into the USD.

What does it all mean?

  1. Money is fleeing the periphery.  My guess: peripheral countries are selling their currency reserves (typically stored in major-nation bonds) to try and compensate for the exodus of hot money from their countries.  This drives up bond prices.

  2. Among the core nations, money has no idea where it will be safe, so money runs between the major markets as sentiment changes.  A trader friend of mine likes to describe this type of environment like this - "the cat is always on the wrong side of the door."

  3. The same concerns driving people to flee the periphery is causing (with a lag) people to sell risk assets, including equities and likely commodities as well, including PM.

So rates are not rising due to inflation expectations.  Rather, it seems to be all about currency flows.  Rising rates during a time of relatively poor economic performance will hurt GDP.  The same forces that impelled rates lower (emerging nations importing inflation by buying US treasurys to stem their currency appreciation as hot money flowed in) will drive rates higher as they reverse.  And unless the Fed starts buying every bond offered, their current printing regime won't keep rates down.  Certainly, it hasn't done so since May.

If these money flows continue, bond rates will continue to climb; India, Brazil, and Thailand together have about 800 billion dollars in foreign currency reserves - likely  60% of that are US treasury bonds, or 500 billion.  They will probably continue to dump them to try and reduce wild currency moves.  Who knows what China is doing, perhaps the same thing.  My main question is, will others with large holdings in sovereign bonds follow along?  If so - we might be seeing the end of the 30 year bond bull market started in 1981.  And the start of that move might end up being dated May 1, 2013.

Its a bit premature to make that call now, but - seriously, watch 10-year sovereign rates and emerging markets currencies.  To my mind, they're a lot more important than the US equity market.  Rates are what the Fed wants to control; through rates, everything else eventually happens.


I think this is a spot on assessment, Dave.  My question, and the trillion dollar question, will The Fed allow rates to rise to above 6.5% without massively intervening?  I.e, really opening up the QE spigot and debasing the dollar?I see nothing good (from an economic perspective) to rising interest rates right now.  In fact, housing IMHO would take a massive hit as prices are not far off their highs pre-bubble bursting. Home sales would come to a grinding halt.  These are not bad things, but to the fragile mindset of th American consumer they could be.
I think PP is going to have to hire a shrink consultant to break down Bernanke's mumbo-jumbo and get to the core of his mind tricks.

WHY home prices are near their record prices - and to me, imho, let it burn.  Maybe more people can buy then instead of paying high rent to a bunch of banksters.

Jcat-Yes, that's the trillion dollar question.  Or perhaps even the multi-trillion dollar question.   I agree, rising rates (because of currency movements rather than an improving economy) are definitely unhealthy.  Housing will be hammered as you say, as will corporate profits, banking, etc.  That might cause even more capital flight from the emerging markets.
Just those three countries I mentioned have a half-trillion in US treasury bonds.  I'm beginning to think that the last few years of this great bond rally was caused half by exporting countries trying to keep their currencies from appreciating, and half by Fed bond-buying.  Here's a chart I made - totaling the foreign currency reserves of a bunch of exporting nations: China, Russia, Saudi Arabia, Japan, South Korea, India, Thailand, and Mexico.  China and Japan are the big players, with about 4 trillion of the 7 trillion total.  Say 60% of the 7 trillion is the USD.  That's 4.2 trillion dollars.  The Fed owns 1.9 trillion in treasurys, as a matter of comparison.  If money continues to flee the emerging markets, even more of those foreign-owned bonds will be sold…its not just about China.  Is emerging market bond-buying a one-way trade?  Perhaps it isn't.  What if its cyclical?

If long rates ever get to 6%, anyone still holding 30 year 3% bonds (which is anyone buying the long bond from Sep 2011 - May 2013) will have taken a 50% hit to capital.  For a very long time, owning bonds (and/or being in a bond fund) has been a no-brainer moneymaker.  When that reverses for real, it will be much more violent than the Fed can contain - without them buying every single bond being sold.  And I think that bond market panic will happen long before the 30 year gets to 6%.
Kyle Bass was asked this question - "what happens if the BOJ simply buys all the bonds, and then forgives them."  He replied, that's when the monetary system becomes completely unhinged.

Here's my take on the recent uptick in real estate prices. . Real estate prices have risen but will not be able to stay there for very long. Lower interest rates have enticed people to buy homes, but there are not enough new home startups to fill the demand, so the prices are rising. Many in construction saw the writing on the wall 5 - 10 years back and got out of building homes. They know the demand won't last as the interest rates rise, and then they'll be stuck under water, holding half-built homes with no buyers. In additions, Main Street banks don't want to take the chance either, so they're not lending. 
Just my two cents. Would like to hear other opinions. 

I wish it were that simple treemagnet.  But if we go thru a scenario where home prices are halved, inventory would come to a halt and people would be forced to stay where they are for a majortiy of their loan (most 30 yrs.)  On top of that, many people would just up and leave and tell the banks to stick their mortgage where the sun don't shine.  That's when any confidence left in the system goes up in smoke.The Fed & their criminal banker cohorts have once again dug themselves a hole that I have no idea how they're going to get out of without causing some sort of crisis. 

I was merely addressing the fraud and corruption surrounding insiders getting to buy up vast portfolios of mortgages for pennies on the dollar and rent/attempt to rent those properties for all they can.  Blackwater et al, preying on others using their insider status, expert networks, access to money for mere basis points, and on, and on.  You are right, its a much more diverse topic.  Seems like everything thats not right these days are multi-faceted due to financialization, fraud, corruption, cronysim, etc.  It just shouldn't be so complicated. But really, its gonna be ugly - and for the simple fact that after cheap money gooses whatever it can for as long as it can…then what?  What will provide the next 'high' - what could?  Where I'm at up north, you can't get a contractor to return a call - we're talking total, flat-out, balls-to-the-wall, rock-n-roll fest here, build, baby build.  Okay, so what happens when people stop building and just hunker down - paying off the loan?  What comes next?  I don't know, but I'm betting nothing good.  Its funny how we see stuff like in Spain where construction was so much a part of their 'boom', and its so clear for us to see from here but not here - when a group of people build a building that lasts…decades and decades, that only employed them for a summer?   Anything but sustainable -  I don't know, just my thoughts, my ramblings.

I'd imagine right after the close of the market yesterday there was a rather tense phone conversation between uncle Benny and Shinzo…"Hey, Shinzo, buddy.  We're wiring you a couple of hundred billion right now, get your *** down to the trading floor and buy up the Nikkei 225 - RIGHT NOW!!!"

Except I think Ben had Yellen make the call - she's going through training you see, gotta learn the ropes from the wizard.

There are two bond funds I watch: TLT, and IEF.  TLT yields 2.72% and contains 20 year treasury bonds.  IEF contains 7-10 year treasury bonds, and yields 1.7%.
As of today, losses since May 1 are:

  • TLT: -13%

  • IEF: -6.4%

Holders of bonds are not used to big losses in their bond funds - bonds are for safety and making money, and they're supposed to go UP when stocks go DOWN.  That's not happening now.

Things are getting interesting.  As Mish said, "what happens when there is nowhere to hide?" *

  • except cash, of course.  much-maligned cash.  who would have thought?

I recall reading something striking once, perhaps it was from Martin Armstrong.  Whoever it was said that the Great Depression systematically stripped value from each and every asset class in turn.  Stocks (via the crash) then bonds (via default) and commodities (via deflation) bank deposits (via bank failures) and then real estate (foreclosures driving prices down).  There was nowhere to hide.  Even cash was devalued in the end - immediately after gold was confiscated.

Perhaps its the bond's turn up to bat.


Thanks for providing your insights on these threads! On another thread you said that it doesn't feel the same as it did in April. I agree. I just checked APMEX to see what premia they're charging. Gold AGEs are still at $57.99 per coin when you buy 20 or more. Lower quantity purchases are up to $10 higher each. Same for Buffalo coins. Canadian Maples are up to $42.99 per coin for 20 or more.

Silver ASE premium is up to $3.19 from $2.69 last week when buying 500 or more. The premium increases to $4.69 if buying 19 or fewer. I don't recall what spread was last week. Canadian Maples currently have a $2.99 premium. Interestingly, junk silver (pre 1965 US coins) are commanding $3.59 per oz premium when buying at least $1,000 face value (715 oz.)

It looks like they have plenty in stock. There are some items out of stock, but not like it was in April. Has anyone heard if Asian bullion buyers are stampeding the exchanges now? I haven't looked very deeply into this, but it was front page news in April.

The Dow gained 41 points today - not much of a dead cat bounce. Oil was down 3.30. Rates for 10 yr bonds were higher today. Next week should be interesting. I'm expecting a continuation of yesterday's trend unless something drastic happens (war, quake, meteor, Bankers telling the truth, etc.)

From www.MarketWatch.com:

  • Dow           14,799    +41  0.28%
  • Nasdaq        3,357      -8  0.23%
  • S&P 500      1,592      +4  0.24%
  • GlobalDow  2,086      -6  0.30%
  • Gold            1,295      +9  0.68%
  • Oil                94.94  -3.30  3.36%
Treasury yields: Grover