PONDER THIS ROBIN…$12.5 TRILLION OF DEBT PRICED AT A NEGATIVE YIELD…THE CREDITOR IS PAYING THE BORROWER…PERHAPS THE ULTIMATE BLACK SWAN EVENT

Last week, the 10-year Treasury dipped below 2% for the first time since November 2016.  Six months ago the most bullish Treasury prognosticator was predicting a 2.50% rate and the consensus view was a 3.35% yield for 2019.

As widely noted the reason for this gargantuan and historic rally is the belief the economy will slow exponentially because of trade, a claim that at this juncture is not yet occurring. The market is suggesting the Federal Reserve will lower the overnight rate by 0.75% by year end, a dramatic and radical 33% decline from current levels.

The national debt has leapt to $22 trillion from $5 trillion about 15 years ago.  Yields on the 10-year Treasury has plummeted from around 6.5% to 2%.  If there was exam question stating what would be the impact to interest rates if debt increased over 3.5x in relative quick order, every student would write higher interest rates.

According to Barron’s, today there is over $12.5 trillion of securities worldwide that are priced to yield less than nothing thus making the US Treasury at a 2% yield a great bargain.

Think about this for a moment.  This not only a free loan but one in which the creditor pays the borrower.  It is a black swan.  A massive abnormality.  Real yields (after inflation) are astoundingly negative.

There are a lot of reasons for this extreme abnormality but I believe a major one is that the world’s four largest central banks have accumulated $13.2 trillion in debt securities since 2007 by simply printing more monies.

The above makes the Weimar Republic look fiscally responsible.

How will this end?

I will continue to argue the global financial markets are awash with massive liquidity—the result of unprecedented central bank intervention–but the trading mechanics of the markets are entirely broken where the liquidity of the markets themselves is absent.

The above all is an unintended consequence of the global remedies of the 2007-08 implosion.  The response has created tomorrow’s crisis.

This week is the G-20 meeting.  What will be the outcome?  What happens if China and the US reach an agreement?  Will yields suddenly reverse themselves and global economic outlook radically changes which again creates a change in the outlook of monetary policy?

Always expect the unexpected.  Tomorrow is not today just as today is not yesterday.  The issue at hand is that it is human nature to extrapolate the current into infinity.

What will happen this week?  As stated, the G-20 meets this week and could be the event of the week or perhaps year.  The economic calendar is comprised of various inventory and manufacturing statistics as well as confidence surveys.  Will such influence trading?

Last night the foreign markets were mixed.  London was down 0.04%, Paris down 0.18% and Frankfurt down 0.61%.  China was up 0.21%, Japan up 0.13%  and Hang Sang up 0.14%.

The Dow should open nominally higher on mounting geopolitical risks and perhaps a high stakes meeting between President Trump and Xi Jinping later this week.  Oil advanced as the White House said it was planning fresh sanctions on Iran.   The 10-year is up 6/32 to yield 2.04%.

 

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