October 5, 2023 - 10:00am
It’s hard to resist the temptation of seasonal metaphors when talking of market crashes — the hot summer giving way to deep freezes — and the “October effect” is very much a thing among analysts. But regardless of whether it’s just a coincidence that many of history’s big sell-offs have happened in the autumn, we’ve now entered crash-watch season as the rout in bond markets deepens.
Although this problem had been brewing for years, the speed of the collapse in bond prices, and resulting rise in yields, has come as a bit of a surprise. I wrote back in August that action in bond markets would continue driving up interest rates, but reckoned then this didn’t make a crash in stocks or real estate a certainty. Now, I’m less sure. With the interest rates on US treasury bonds currently rising at a monthly pace of half a percent, we could be heading for turbulence.
Bond markets don’t function like supermarkets, where the grocer sets the price and you either take it or leave it. They operate more like village markets, where you haggle over everything. If, say, a one-year $100 bond offers $105 on maturity — a 5% return — a buyer seeking 6% can simply offer to purchase it for $99. If no other buyer beats that offer, the government has to take the lower price.
That’s what’s happening in markets just now. There’s more supply than demand, with governments issuing tons of bonds to cover the deficits they’ve built up. But it’s not the run-up in debt that’s new. It’s that central banks are no longer underwriting them. Over the last decade, to keep interest rates low, they subsidised bonds both by issuing cheap short-term credit, which institutional investors then used to buy higher-yielding bonds, and also by buying bonds outright. This added demand, known as quantitative easing, drove up the price of bonds and kept credit cheap.
Now, as they fight to bring down the inflation their easy-money policies caused, central banks have stepped back from the market. Not only have they raised short-term rates, but those which engaged in quantitative easing have switched to quantitative tightening. The US Federal Reserve, for instance, is sucking about $65 billion out of the bond markets each month by withdrawing the demand it once offered.
The resulting rise in interest rates has then created a vicious cycle in which governments that need to re-finance bonds as they mature are forced to issue yet more bonds to cover their increased payments. Goldman Sachs this week estimated that the US government’s interest bill will double in the next couple of years as a share of GDP.
With government interest rates feeding through into the rates private borrowers pay for credit, some real belt-tightening may be on the way. Moreover, investors may sell shares or real estate to buy bonds that are offering higher yields, which could cause a sharp sell-off in other asset markets.
If the bond market rout triggered a crash in other markets, central banks would want to prevent it spiralling out of control. But until they are confident that they have decisively won the war on inflation, they will not provide the sort of massive rescues they did after the 2008 crash, or at the start of the pandemic. Instead, they’ll probably use the sort of piecemeal interventions the Bank of England employed at the time of Liz Truss’s budget fiasco last year when it prevented the bond market from collapsing — but didn’t interrupt the long-term rise in interest rates.
So investors should brace themselves. This autumn could get bumpy.
John Rapley is an author and academic who divides his time between London, Johannesburg and Ottawa. His books include Why Empires Fall: Rome, America and the Future of the West (with Peter Heather, Penguin, 2023) and Twilight of the Money Gods: Economics as a religion (Simon & Schuster, 2017).
jarapley
Join the discussion
Join like minded readers that support our journalism by becoming a paid subscriber
To join the discussion in the comments, become a paid subscriber.
Join like minded readers that support our journalism, read unlimited articles and enjoy other subscriber-only benefits.
SubscribeHow did Ernest Hemingway go bankrupt? Slowly, then all at once.
Whether anyone wants to hear it or not, the west has been going broke slowly for almost 2 decades, now it is going to go bankrupt all at once and the pain is going to be enormous.
First, the economic pain. Then…the social and political pain. Both are going to be astronomical.
Western economies and the economies like China that are dependent on trade with the west (China has its own issues with debt and malinvestment) are in for a collapse. It might take a couple of years, but it could happen in months.
Bottom line? These nations are broke and they have been getting by on credit cards with low introductory rates. They are like the poor person who has too much debt but a good credit rating and keeps just rolling that debt over to a new card at the 0% introductory offer to stay above water. Well, now they have run out of new offers and the interest payments are more than they can afford, never mind paying off the principle. They may well be bankrupt but even if they are not, they are going to experience a very long period of misery with massive cuts to lifestyle trying to get healthy. If they lose a job? They are in big trouble. In the case of a nation, if they have a recession and tax receipts drop….
From the consumer side, anything associated with debt, housing, cars, college education, anything reliant on debt, will collapse in value as money is sucked out of the system and there are no buyers ready, willing and able to pay for those items.
Then, as credit gets tighter and tighter, with high interest rates, consumers will stop spending on other items like TVs, books, iPhones, streaming services. Businesses will not be able to get cheap debt to roll over their own debt. In short, a major recession or even a depression. Equities collapse. Businesses fail.
Based on that, you would think that the place to be is in CASH, but two things. First, the government will print money in a panic, devaluing the value of the currency. Second, who has cash? What we all think of as cash today is just numbers in a bank that are actually little debts the bank owes. Just digits in a spreadsheet. Banks will fail and the government will not have the funds to bail them out. Those little debts that bank owes are now legally able to be held, seized, call it what you will, but whatever you call it it will mean they are not going to be handing you hard cash for it or letting you pay for things on it. There IS a reason banks have wanted a cashless society.
The great reset is upon us. You will own nothing and be grateful for it. Those who own physical assets outright that generate a stream of income, say Black Rock and all those single family homes they have been buying, will do ok. Everyone else, unless there is some kind of revolution, will get wiped out and turned into payment slaves.
Now imagine what that is gonna mean for for politics?
Not saying you’re wrong, but we’ve been hearing that rhetoric for a long time now.
However I do not like the look of the current situation, it does all feel like there are cracks appearing in the dam.
It’s the US debt that has reached levels beyond comprehension.
I agree, we have been hearing this kind of thing for a long time.
But I really think that this time is different. You can feel it.
That example I gave of the guy that keeps rolling over CC debt to the next one with a 0% interest rate? I think we are that guy. Little panics each time things get tight and payments are due to go up, then relief when they roll it over for 12 or 18 months at 0%, then the day hits when there is no place left to roll it over to. I think that is where we are.
The Chinese and Japanese have been extending our card with the help of the fed. But now China is a net seller of our debt, as is Japan, and so is the Fed. There is nobody left that is ready, willing or able to buy our debt.
We can keep kicking at the can, but we have run out of road.
We make massive and I mean MASSIVE cuts to spending or we default. Using the analogy I used for the guy with the credit card? He moves back in with mom and dad, sells his 2 yr old Supra and gets a 15 yr old VW with 120k miles on it, and puts every extra penny he has into paying down his debt or he goes to bankruptcy court and hopes. Either way, he is gonna have to bust his but with little joy for years to come to get healthy.
There is another saying that goes alongside the above assessment.
“Never bet against the Fed”
Perhaps that needs modifying to ONLY bet against the Fed when it is clear they are stuffed. With the $ as a reserve currency working out WHEN the Fed is stuffed is for real experts. I am not one, and rather like Pascal I looked at consequences and decided, IF it is ‘Wiemar here we come’, then I’d rather miss out on some of the wealth reputedly pouring out of the Cornucopia of Central Banks and prepare to survive a Weimar. Hopefully sufficiently prepared I can save less cynical members of my family as well.
So I have no debts, no mortgages, despite being retired supplement my income with casual driving work and split my assets into shares, cash, and – well, somethingI hope more likely to feed me & survive a Weimar than any of the others.
The interesting thing is for close on 7, maybe 8 years I’ve listened to ‘doomsayers’. Watched, read and researched other sources, for what they predicted. I also watched their timescales extend as Central Bankers kept stepping up to kick the can once again. What I couldn’t do was disagree with their reasoning hence my not saying “It hasn’t happened yet, so it isn’t going to happen.” The reality of debt, inflation, etc AND particularly Net Zero insanity means that it IS going to happen AND there is a Net Zero timescale.
So far my doomsters have been spot on with 3 predictions of events IF NOT the timescales.
1 They said Merkel was toast 18 months before she left as a lame-duck. I was laughed at for mentioning that opinion.
2 They said Net Zero was impossible & renewables to run a modern power grid insane. All Greens go ballistic when I point out that reality.
3 They said QE/Low interest rates would explode into inflation if a ‘Black Swan’ inflation event appeared.
As usual, the Swans arrived as a pair. The first the ‘renewables’ black swan in 2021 when Windmills failed to deliver, just as the Golden Child of renewables, Hydro, also failed
(*** Correction **** perhaps the down vote was because I failed to point out the other Black Swan was Lock down insanity and QE – which meant it appeared that the 2 items mentioned originally were the black swans, rather than one being the Net Zero Black Swan which sent Gas(Energy) Prices interstellar and the second was the West’s stupid response to it when sanctioning Russia.
Then again the down vote maybe because someone objected to my realistic assessment of the Ukraine/Russia war over Soviet drawn borders in a post Soviet world – one of a series of such wars from the Balkans to the Caucasus (Azerbaijan/Armenia) though curiously we don’t get to hear much about those other ones much anymore.)
https://www.rigzone.com/news/wire/brazil_needs_more_lng_amid_worst_drought_in_decades-03-jun-2021-165594-article/
https://www.theportugalnews.com/news/2022-02-28/dam-electricity-down-73-this-year/65524
https://oilprice.com/Latest-Energy-News/World-News/Europes-Energy-Crisis-Worsens-As-Wind-Stops-Blowing.html
To be followed by taking sides in a long running war. A fight in which we have no dog. Though NATO has been intent on starting it for a decade. As a consequence the West ‘sanctioned Russia’ – If ever you want to know how stupid Western Leaders are, read this on HOW to sanction Russia, NOT the Kamikaze sanctioning of ourselves.
https://doomberg.substack.com/p/the-peter-principle
It isn’t over yet. Last winter was very warm, so Germany survived with the help of Nuclear. They closed them down BUT Friday IIRC announced they were opening up lignite (they call it Coal) fuelled power stations to ‘save gas’.
Net Zero is the thing that is going to destroy the economies & societies of the West. Sunak is simply a sound bite. IF it isn’t scrapped, then this is ‘reputedly’ what to expect in 27 years time.
https://www.icax.co.uk/pdf/Absolute_Zero_Report.pdf
The Graphic on Page 6 is interesting. 3 Horizontal rows decrease from now until Net Zero. Where they arrive at ZERO – then somehow they start to rise again. Really?
The 3 Horizontal rows are
a) Shipping
b) Flying
c) Fossil Fuels
Here is my ‘non-magical’ take on the consequences of that for the UK.
a) The UK is NOT self-sufficient in food (the Kaiser and Adolf seemed to think so anyway, as did Kipling – more on Kipling later. History may NOT repeat, but BOY does it rhyme in this case!)
b) Flying – though it only brings in exotic out of season foods technically
c) Fossil Fuels.
So, forgetting (b) for now. This is basically saying the Island of Great Britain is linked to the rest of the world by the Channel Tunnel rail links. Fortunately I believe the trains are electric.
Unfortunately 60% still of our power is from fossil fuels. Replacing that in 27 years with? What exactly? Drax’s woodburner is stuffed. What are they going to do? Chuck the US trees in the Atlantic, make a giant raft and get someone to sail them Kon-Tiki style to Yorkshire?
Build masses on Nuclear Power stations? Anyone who believes a politician committed to Net Zero can build Nuclear plants in sufficient quantities without an HS2 style c**k-up, contact me with you bank details. I know a man who has $25 Million of yours in a bank account and if you pay me up front £10K I’ll send you his details.
Then, finally. The population of the UK is 70m+ (I could provide circumstantial evidence Govt would deny that is quite a few million larger) So we are going to bring into the UK enough food to feed that 70m+ via the Channel Tunnel? I can see they MIGHT get enough protein in IF it was the EU’s insect protein, but meat? Refrigertion dear boys and girls, refrigeration Where is all that specialist rolling stock EVEN if the tracks don’t melt?
Next let us assume the Magical Greens magic up super rails that never melt, super signalling that trains run a second apart, and ALL the engines and rolling stock to get the food into the UK.
Next time you travel on a motorway, OR even visit a supermarket look out for an Articulated Lorry. The Tractor Unit is ‘diesel’ powered. It can haul 44 tonne hundreds of miles without stopping. They often deliver twice daily to supermarkets to keep the shelves full (they also come in refrigerated versions where diesel ultimately powers the compressors for the fridges).
So far (and Dyson didn’t pull out of his EV car on a fad, he and his company KNOW batteries, it as soon evident to him and his company an EV Car was uneconomic) we haven’t seen a serious EV artic on long haul.
Because an EV Artic tractor required to pull 44 tonne loads hundreds of miles ‘stopping only for the ‘Tacho’ rest periods is not possible with current technology.
They haven’t got anything near possible to replace those artics*. So ALL that food (IF it got into the country, which it won’t) would start to pile up and rot in warehouses. The shelves of supermarkets would start to empty very rapidly and after I’d say, 2 weeks. The Hunger Riots would begin.
* FYI On a recent CPC course “Be Green Be Safe’.
Aside:- (anyone who has a Tacho Card and a CPC card knows what that is but for those who may not know. You are NOT allowed to drive anything from 7.5 tonne and above without an appropriate licence, the licence not only requires a test BUT it requires 37 hours of courses to obtain appropriate “Certificates of Professional Competence’ once you have both licence and CPC you get your Tacho card and you can drive. You have to renew your CPCs every 5 years. So courses have some VERY experienced drivers on them, which is great for a Grandfather like me as you learn more from their experiences and stories.)
Be Green Be Safe is ONE of a range of CPC courses. Taken online – only the fact the course is run by professional drivers and the students are either experienced pro’s or hoping to be make many of the bearable. On this course the tutor asked about a dozen drivers to put up their hands if they thought they’d be driving electric artics in 10 years. NOT ONE driver put up his hand. They’ve probably watched in wry amusement the ‘charging areas’ for EVs on Service Stations.
SO IF a Stock Market Crash is ALL you are worried about, the do what Unherd says.
“Think again.”
and don’t vote in the UK for any current Westminster Party as you’ll still get Net Zero..
As for History Rhyming
https://mainlynorfolk.info/peter.bellamy/songs/bigsteamers
play the video from 2 minutes 30 seconds in.
Really good summary. This has been going on since 2008 and I think the writing is on the wall. Neil Howe’s book the Fourth Turning predicts that we will end up with a major world crisis (global war or global financial crisis before 2030) However things will then start to perk up!!
On Point! Excellent analysis and analogies.
It is truly a black swan event; yet by its gargantuan nature, everyone sees it coming from miles away! This, to be clear, has been orchestrated by the establishment, in a true as ever class war, that will either result in the establishment being slaughtered (Eat the Rich) or a total change in human life (servitude).
Be ready, prepare yourselves and your families.
Fight for your lives! (And that is no exaggeration)
Best of luck to All!
They are going to keep it just about afloat via QE as you suggest, because the CBDCs are not ready.
The Bank of England didn’t prevent the bond market collapsing this time last year, it was the cause of the problem.
https://www.washingtonpost.com/business/markets-didnt-oust-truss-the-bank-of-england-did/2022/10/26/dd92c4d2-54eb-11ed-ac8b-08bbfab1c5a5_story.html
So, the Modern Monetary Theory only works during low interest rates?
Well, yes and no.
MMT assumes that the government does not take out debt, but that it simply prints what it needs above tax receipts. So, interest rates then mean nothing to the budget.
The flip side of that is that you get direct money printing by the Treasury and the obvious risks to inflation and the dollar.
It doesn’t work, it’s created the problems we’re seeing now, that anyone with half a brain could see coming…..but not the central
wbankers.Many people assume that, because we’ve been engaged in deficit spending for a long time, we can continue doing so forever. But deficit spending for a long time doesn’t prove it can go on forever; all it proves is that we’ve been deficit spending for a long time.
In Herbert Stein’s immortal words, “If something cannot go on forever, it will stop”.
It’s an interesting article (which does not justify its ‘clickbait’ headline – Unherd, consider your knuckles rapped).
If anyone’s interested (and if you have reasonably substantial savings or a pension, you should be), consider the benchmark UK 10 year gilt yields (here: https://tradingeconomics.com/united-kingdom/government-bond-yield), and alter the X-axis from 1Y to All. This puts the selloff in gilts into a half-century perspective.
I would say that you argue one of two things. Either you can say that yields have broken out of a 50 year trend, so yields could go a lot higher (and therefore prices go a lot lower). Or you can say that yields have reverted to stability of the period 1998-2008 (ie before global financial crisis of 2008).
If you switch to US 10Y treasury yields (by clicking on ‘United States’, to the right of the graph), you can make the same assertions. Switch to Japan, France, Germany, Switzerland – the pattern is (more or less) the same. Only Italy bucks the trend because, well, Italy is Italy.
So which of the two arguments is correct? Ask me again in six months!
I suppose under this scenario inflation will decrease and the Fed will lower rates – will that stop this scenario?
Not likely. The fed can control the overnight rate. It can control if it engages in QE or QT.
What it cannot do is control the bond market directly. Unless it buys up and essentially monetizes the debt, creates artificial demand for government debt, then the market will determine the price of bonds and therefore yields. That in turn will impact the cost of consumer and corporate credit and how much of that is available.
The major sources of demand for our debt are drying up. The Chinese are now net sellers of our debt as are the Japanese. They are cutting off our credit line if you will. They are not alone.
Bottom line, the demand for government debt is drying up and those who do buy it want a higher rate of return to lend it.
Now, if the equity markets tank, either globally or domestically, there will be a big rush to buy treasuries but that will be short lived.
There is going to be a massive amount of money destruction. Oh yes, that will kill inflation driven by the enormous amount of cash that has been created, BUT it will not correct for supply driven inflation. If something like oil gets more and more scarce then the inflation is driven by not just an oversupply of money but by a lack of supply in a key input. Think anything that is a must have but is in short supply. Think rents. Think food. Think medical care and drugs. If it is a must have then it will be bought but that does not mean that there is enough of it being produced or made available. Look at what happened to food prices during Covid. Oil is the big one. It is a major input to every single good out there since it is tied to transportation.
We could potentially end up with moderate to high inflation for most things people need while also getting higher unemployment and deflation for optional items like the latest iPhone or TV.
Some great posts here Daniel. There was a symposium on various aspects of global tyranny at the weekend in Sweden:
https://childrenshealthdefense.eu/doctors-appeal-symposium-sep-30-2023/
In there, unusually, is a finance thread. There are a couple of really interesting presentations.
The first is from Prof Richard Werner (who invented QE, and popularised ‘money as debt’). It begins at 5:26 in.
There is another from John Titus at 6:57
He thinks they are planning for the Fed to buy the bonds (disastrously). He discusses a paper by Darrell Duffie called ‘Resilience Redux in the US Treasury Market’ that he thinks they’re going to follow. A plan for massive inflation.
It’s a fascinating talk.
Net Zero artificially reduces the supply of oil. That is it’s very aim. Though IF the latest papers suggesting that CO2 follows temperatures AND not the other way around aren’t cancelled, the Net Zero lobby is going to prove even harder to support at high levels than it is already with an increasing ground swell of voter opposition.
As I mentioned in an earlier post, in the UK Net Zero is a guarantor of starvation. What markets for shares or bonds do simply won’t compare with hunger, most people not experiencing bond/share prices in such an immediate manner as lack of food. We are ruled by morons and even now there may be time to prepare for the consequences of their stupidity, and I suspect their intransigence. The effort put into denying the disasters heaped upon us in the name of the COVID cult is a sign of things to come I suspect when it comes to all the other chickens heading for home and the roost.
This time I hope we peasants get to chop the heads off the bankers.
It is Politician’s heads that should roll first.
They should leave it all alone. I think it was Gorbachev (though I can’t find the quote now) who said the only thing the West took from the Soviet Union was Central Planning, the very thing that destroyed it.
Mind you, Net Zero is going to destroy everything anyway, and despite all the ‘hype’ from Sunak he hasn’t scrapped it. So Gas Boiler Companies and Car makers face ‘sales quotas’ for the very unpopular Green Heat Pumps and EVs.
Truly we are ruled by Morons