Stock Market

A Screaming Comes Across Their Screens

By David Stockman  |  September 9, 2019

“Price” today is being driven by a three-headed monster. There’s the mindless headline-reading algorithm. We have also the idiot day-trader. And, finally, it’s the momentum-riding speculator.

It’s completely uncoupled from economic and financial fundamentals. Common sense itself was long ago sacrificed.

But it rambles on, fed a constant stream of easy money. Bond pits and equity bourses are horrific accidents just waiting to happen – bubbles… bubbles everywhere…

And there are myriad potential catalysts, from all points on compasses literal and figurative, to trigger the next crisis.

But there’s no longer any institution capable of containing the contagion(s) about to be unleashed.

A Toxic Combination

The most destructive global Trade War imaginable and the recent yield-curve inversion are potent reminders of two critical points.

No. 1, the Oval Office is occupied by a half-baked 17th century mercantilist/madman.

And, No. 2, our monetary central planners have destroyed any semblance of honest price discovery in the $90 trillion global bond market. Indeed, bond prices and yields have both gone from ridiculous to absurd.

It’s a toxic combination, and it’s taking a toll. The global financial system is a tinderbox.

Up until a couple weeks ago, the U.S. Treasury market was the only sovereign debt market in the world left with a positive integer – a number greater than 1 – in front of the yield.

Just Look at the Numbers

But, then, on August 23, the entire UST yield curve – all the way out to 30 years – traded below 2% for the first time in history. That’s because the best trend measure of inflation – the 16% trimmed-mean CPI – has been running right around the arbitrary and capricious 2% target the Federal Reserve adopted in January 2012 for more than seven years now.

The average year-over-year increase has been 1.96%. We’ve seen short-run undulations above and below the 2% demarcation line. But the trend is clear. The year-over-year rate in July 2012 was 1.99%. In July 2012, it was 2.20%. There is no deceleration. There is no shortfall.

That’s 2% inflation over any reasonable stretch of time you might wish to examine.

What 2% domestic trend inflation means is that now even the entire $16 trillion U.S. Treasury has gone underwater in real terms.

For crying out loud, with the 10-year U.S. Treasury yielding 1.62% as of midday, versus the year-over-year trimmed mean inflation rate at 2.20%, the benchmark security of the global financial system is trading at negative 58 basis points.

If this isn’t the Mother of All Bond Bubbles, what else could be?

Yields are in the Toilet

There’s nary a major government bond left in the world that sports a positive real yield.

Now, it’s not the case that trillions of bonds now trading at negative nominal and/or real yields were issued with negative coupons.

Yields are in the sh**ter because bond prices have soared to massive premiums over par.

In other words, algorithms, day-traders, and speculators – we can include benchmark-driven portfolio managers and plain-old fools – are buying or holding bonds because their price is going up.

They’re not buying because these bonds are doing what an investment-grade bond is supposed to do.

For a refresher, an investment-grade bond’s purpose is to provide a modest spread after inflation and taxes as well as safety of principal in the form of a high probability of getting 100 cents on the dollar at redemption time. None of that is material.

That’s because they’re trading trillions of dollars of off-the-run securities that were issued at far higher coupons than today’s new issues at 110%, 130%, even 200% of par, depending upon issue date and duration.

And, folks, those are guaranteed losses at redemption of 9%, 23%, and 50%, respectively. That’s because nobody but nobody pays off bonds at more than 100 cents on the dollar.

It’s Market Mania

As I recently explained for what’s supposed to be Bubblevision’s “conservative” forum for sound money and free market principals, algorithms/day-traders/speculators aren’t stepping up for these huge guaranteed losses because they’re rationally pricing in a global savings glut or a weak economy around the bend.

First, the “savings glut” is just a monetary central planner’s fabrication.

And, second, interest rates don’t automatically fall in today’s world because of a weak economy. (Massive counter cyclical government borrowing more than offsets any decline in household and business borrowing. When incomes fall, the absolute level of real money savings in the private sector falls, too.)

Nope, they’re lining up for guaranteed losses of principal because they assume the world has an unlimited supply of Greater Fools – chief among them our monetary central planners.

They’re buying regardless of yield or fundamentals because they think they can cop a pop of capital gains and dump their positions before the market turns.

It’s the very definition of “market mania.”

It’s Like Tom Paine Said…

Desperate times call for… “common sense” measures.

And these are desperate times… Markets are corrupted by monetary central planning. They’re confused. And the road back is going to be treacherous.

We’re looking at a major re-pricing for all financial assets. And thousand-point intraday or day-to-day swings are part of that equation. Those can be frightening… for “buy and hold” investors.

I have a different approach, one that combines strategy and tactics into a plan flexible enough for you to survive and thrive amid the coming chaos. It’s called “The Stockman Model.”

All we’re after is a little stability, perhaps a chance to pocket a windfall when opportunity presents…

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David Stockman

David Stockman is the ultimate Washington insider turned iconoclast. He began his career in Washington as a young man and quickly rose through the ranks of the Republican Party to become the Director of the Office of Management and Budget under President Ronald Reagan. After leaving the White House, Stockman had a 20-year career on Wall Street.MORE FROM AUTHOR