by Egon Von Greyerz, Gold Switzerland:
2017 has just started but some longer-term trend changes already seem to develop. It is interesting how a new year combined with a new US president act as a catalyst for what will be the start of monumental events in the world economy. Not that many of these will come as a surprise to the readers of my articles but for the rest of the world, there will be one shock after the next which will create real panic.
We are now seeing the beginning of reversals in many markets. Some of these new trends will take longer to develop and some could happen surprisingly quickly. Most major markets will be affected namely: Bond & Credit Markets, Currencies, Stocks, Metals, Precious Metals Mining stocks and Property.
The law of diminishing returns
Let’s first look at the biggest bubble of all bubbles ever in history – the Global Bond Market.
This is a market which has virtually exploded from $10 trillion in 1990 to $100 trillion today. And if we look at the debt expansion in the last 10 years since the Great Financial crisis started in 2006, the global bond market has gone up by 70%.
With the 10 times increase in the global bond market since 1990, you would have expected to see a major expansion of global GDP. But this is far from the case. World GDP has gone from $20 trillion in 1990 to $74 trillion today. This is an increase of only 3.7X. For every $1 increase in GDP, the world has had to issue 2.7X as many bonds. That is what is called the law of diminishing returns. More and more debt is required to expand the global economy.
Sovereign bonds are over 50% of this market and it is governments worldwide that have been the most profligate in creating debt. No government will ever be in a position to repay this debt with real money. The problem they now have is that they can’t even afford to service the debt. This is why around $15 trillion of government bonds now carry negative interest rates. This includes over 50% of the bonds issued by Germany, Netherlands, Sweden and Finland. In Switzerland, virtually all government bonds are below 0%. (not shown).
The greatest crash ever
So we are seeing a global debt explosion combined with zero or negative interest rates. In a free market, this could never happen. If there was no intervention, record borrowings would lead to very high interest rates. A high demand for a commodity, like money, would in accordance with the laws of supply and demand lead to a high cost. Thus, what we are seeing currently is the effect of financial repression or manipulation of the interest markets, like with all other financial markets. This of course cannot hold. Therefore, the turn in the bond market which is now starting will cause the biggest collapse in world financial markets ever!
In July 2016, the 10 year US Treasury reached 1.33% which is the lowest ever recorded and below the 1945 low. The 35-year secular rise of US rates went from just under 2% in 1945 to 16% in 1981. In 1970, just before Nixon abandoned the gold standard, the rate was 6.5% and in the next eleven years, high inflation and a dollar that halved in value led to a collapse of US treasuries. During certain periods, rates moved up very quickly and between June 1980 and October 1981 for example the US 10-year went from 9.5% to 16%. I would not be surprised to see a similar magnitude of a rise starting in 2017.
10 year Treasury to exceed 16%
Eventually the 10 year is likely to reach well above the 1981 level of 16%. This would of course involve a total breakdown of the US bond market as well as most global debt markets.
US dollar on the way to new lows
A collapse of US bonds would not just cause panic in global bond markets but also in currency markets. Just as the bond market has turned down (yields up), it seems that the US dollar has now topped and will continue its long-term downtrend. The US dollar index below shows that the new correction high of the dollar is not confirmed by the technical indicators. The dollar against the Euro shows a similar picture.
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