In this week’s podcast, Michael Pento, fund manager and author of The Coming Bond Bubble Collapse, explains how the United States is fast approaching the end stage of the biggest asset bubble in history. He describes how the bursting of this bubble will cause a massive interest rate shock that will send the US consumer economy and the US government—pumped up by massive Treasury debt—into bankruptcy, an event that will send shockwaves throughout the global economy:
These are the most dangerous markets I have ever witnessed in my entire life, and I’ve been investing for over 25 years. Let’s go over some numbers to let you know exactly how tenuous this bubble is. Its membrane has been stretched so wide and so tight that it’s about to burst, and any semblance of even maybe a little sharp object, something even a hemophiliac wouldn’t be afraid of, sends the market careening downward.
Global central bank balance sheets are up from $6 trillion in 2007 to $21 trillion today and they are still being expanded at the pace of $200 billion each and every month. What’s happening is that the robotraders, the algorithms, the frontrunners on Wall Street and around the world are just gaming the system, looking for the next increase in central bank credit to take their collateral to the ECB or to the Bank of Japan or to the Fed and buy more stocks and bonds.Seth Klarman’s 2021 Letter: Baupost’s “Never-Ending” Hunt For Information
Baupost's investment process involves "never-ending" gleaning of facts to help support investment ideas Seth Klarman writes in his end-of-year letter to investors. In the letter, a copy of which ValueWalk has been able to review, the value investor describes the Baupost Group's process to identify ideas and answer the most critical questions about its potential Read More
That’s the game we’re playing. Even a hint that it might someday end sends the entire investment community scampering for the door; and that door is very, very narrow and can only fit a few people through it. So let’s go through a couple of more data points to emphasize just how big this bond bubble is and why it’s so important.
So the European Central Bank is buying corporate bonds. I hope everybody knows that. So much that there’s now 30% of investment-grade debt in Europe trading with a negative yield. This is not sovereign debt (as asinine as it is to ever be able as a sovereign nation to issue debt and get paid to do so). Investment grade bonds in Europe now trade with a negative yield.
The Bank of Japan owns 50% of all Japanese government bonds, JGBs.
About 25 percent (and this number vacillates between days where the German tenure goes north or south of the flat line) of global sovereign debt trades with a negative yield.
So what happened on September 8th? Last Thursday, Mario Draghi came out and gave a press conference after leaving rates unchanged in the European Union. The audience was asking questions like: Did you discuss helicopter money? No, we really didn’t discuss it. Did you discuss extending the QE program beyond March of 2017? No, we didn’t discuss extending the 80 billion purchases of assets beyond March. There was a stirring in the audience, the reporters were beside themselves. They couldn’t believe that Mario Draghi, even though he didn’t even hint about stopping QE, he didn’t extend its duration or its quantity. That sent markets cratering. The Dow fell 400 points. The U.S. 10-year yield jumped from 1.52% to 1.68% in one day.
Now, the market had a bounce back the next day, then was down again more than 200 points on the Dow. So you can tell, anybody with any objective, critical, independent mind can tell this is an unsustainable, very ephemeral rally in stocks that has occurred since 2009. And when the bond market breaks, when that bubble bursts, it will wipe out every asset — everything will collapse together — because everything is geared off of that so-called ‘risk free’ rate of return.
If your risk free rate of return has been warped down to 0% for 96 months, then everything — and I mean diamonds, sports cars, mutual funds, municipal bonds, fixed income, REITs, collateralized loan obligations, stocks, bonds, everything, even commodities — will collapse in tandem along with the bond bubble burst.
Click the play button below to listen to Chris’ interview with Michael Pento (27m:46s).Transcript
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