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The Bond Bubble
The Bond Bubble
Central banks have artificially lowered interest rates, making bonds attractive. And since bonds are historically safe havens, it’s hard to even comprehend a bond bubble.
But as interest rates start to rise, the concern over bonds rises too. Adding some gasoline to the fire is the fact that the largest buyers of government bonds have been governments themselves. When they stop this buying spree, there will be more bonds than buyers.
This will likely to lead to a default or something equally painful.
Simply, US Treasuries are in a bubble.
Of course, many are confident that the US central bank, the Federal Reserve, won’t continue hiking rates much longer. That higher short-term interest rates are a short-term strategy that will be abandoned soon.
Bond markets aren’t expecting interest rates to return to normal levels. Why?
For one, the US economy is addicted to cheap credit and this has only gotten worse since the last financial crisis.
Therefore, with higher interest rates, people go bankrupt. And not just mortgage borrowers, but consumers and corporations face dire consequences if interest rates go higher.
Since the price of stocks, bonds, and real estate are all inflated to the nth degree, higher interest rates will likely correct these prices and send them downward.
Since expected future cash flows would be discounted at a higher interest rate, present values (and thus market prices) would deflate. Deflation of assets won’t change the amount of debt, but it will wipe out equity capital.
Meanwhile, the yield curve has become “flatter” recently, suggesting banks’ profit opportunities from lending are diminishing, which in turn decreases the inflow of new credit into the system.
Further declines in yield spread essentially mean a severe economic recession and most certainly a stock-market crash.
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The Bank of Canada Should “Cease and Desist”
The Bank of Canada Should “Cease and Desist”
“Beneath the symbol
We’ll all assemble
Oh how we’ll fly
Oh how we’ll tremble”
— Captain Beefheart, “Ice Cream for Crow”
If interest rates are the symbol beneath of which we all assemble, then there are some bad times ahead.
But Canada’s “leading economists,” say interest rates are “too blunt a tool” to cool the housing market.
Tomorrow the Bank of Canada will deliver a rate decision and an accompanying monetary policy report. Governor Stephen Poloz isn’t expected to raise rates anytime soon, but he’ll likely face some tough questions about the connection between low rates and the “hot” housing market.
Of course, he deserves every hard question thrown at him. And it’s nice that journalists are actually starting to question the obvious connection between low-interest rates and the housing bubble.
With Canadians across the country locked out of their local housing markets, and with foreign buyers using Canadian property to protect their wealth from destructive communist dictatorships, frustration needs an outlet and it looks as if Poloz and the BoC are, finally, in the crosshairs.
But that doesn’t mean Poloz will listen. After all, the central bank is supposed to remain “independent” from democratic government and popular opinion. Poloz is making his decisions based on his misunderstanding of the economy, not the will of the mob.
As Avery Shenfeld, CIBC Capital Markets’ chief economist, told BNN in an email, “The Bank of Canada will likely stick to its view that house prices are best dealt with through macro-prudential policies particular to that market, with the interest rate setting used to steer the economy overall,
Meaning, let the banks and federal government deal with the issue. The BoC will do what it can, but it will not include raising rates.
…click on the above link to read the rest of the article…
Canada Flagged for Recession by BIS
Canada Flagged for Recession by BIS
This can’t be good…
As if Canadians needed more proof that the country’s real estate is in a bubble, and that this misallocation has spread to other sectors of the economy, the Bank of International Settlements released its latest quarterly confirming what any critical observer can see: binging on debt is rarely a good idea.
Canada’s debt-to-GDP gap is widening and even the central bank of central banks is concerned.
The BIS uses its credit-to-GDP analysis as an indicator and predictor of troubling economic waters. They claim successes in predicting financial crises in the United States, England and a few other economies. Generally speaking, according to the BIS, when a country’s credit-to-GDP gap is higher than 10% for more than a few years, a banking crisis emerges which is followed by a recession.
Canada entered that territory in 2015, warmly welcomed by the Chinese who’s debt-to-GDP gap has put them in the danger zone for at least the last five years.
In another parallel universe, perhaps Canadian authorities took the correct measures to counteract this high credit-to-GDP gap or to even prevent it from getting this out of control. But in our reality, we kept trudging across the tundra, mile after mile, pushing our credit-to-GDP gap up to 17.4%.
China’s “basic dictatorship” means they can turn their economy around on a dime, or so goes the thinking. Perhaps they will better absorb the economic slap in the face compared to Canada’s relatively freer market and less dictatorial government.
Still, both countries have a massive real estate bubble. In China, entire cities are centrally planned and built by government-connected contractors only to house absolutely nobody.
Wealthy Chinese families, witnessing the crony-capitalist chaos and subsequent malinvestments, have taken their hard-earned cash and moved it overseas. Enter stage-right the true north strong and free enough. Foreign speculation has helped drive up real estate prices in places like Vancouver and Toronto.
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