by Chris Martenson, Peak Prosperity
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: