With continued volatility in global markets, today one of the greats in the business sent King World News a powerful piece about the global bond market rout, China, central banks losing control and Jim Rogers warning about manias. He also discussed what is happening in the metals and currency markets.
By Bill Fleckenstein President Of Fleckenstein Capital
May 12 (King World News) – The worldwide bond mini-rout continued last night, with German 10-year bunds now yielding 67 basis points and even JGBs have joined the downside party with their yields rising to a "massive" 44. I think it is probably too soon to suggest that the world's bond markets are actively taking the printing press away from the central banks because the policies they pursue are bad for bond holders (if not everyone, except for those who already have a lot of wealth and are willing to bet on the mania continuing, or don't understand that it is a mania).
The big news Monday was the announcement of another rate cut by the Chinese. That saw the stock market there rally by about 3%.
On The Subject Of China
On the subject of China, over the last few years from time to time people have asked me if I was worried about something terrible going wrong there, and my response has always been if it does they can always cut rates, which is exactly what is occurring. The question is, how far will they go, how big of a bubble might result, and what are the ramifications? The Chinese have always had the rate cut card to play, and now that they are playing it we just have to see how it all sorts out.
Jim Rogers Warning About Manias
Regarding the bubble underway here in stocks, bonds, and to some degree real estate, a friend of mine reminded me of a great quote from Jim Rogers: "A mania first carries out those that bet against it, and then those that bet with it." That is about the most succinct and accurate statement one could ever make regarding bubbles.
Central Banks Are Finally Losing Control
More likely, the central banks are just losing control of the markets to some degree simply because they have pushed rates and equity prices around the world so high that those respective market caps can't be supported with the amount of speculation and money printing that we have. Besides, who wants to own a bond yielding next to nothing when you can make so much more money so easily and so fast in the stock markets? Thus, to some degree, the central banks are being undermined by their own "success" in getting people to speculate.
In terms of the action here in America, initially the action in the bond market was heavy, which precipitated a selloff in stocks, and that led to a bit of a rally in the bond market. Thus, it is hard to get too excited at this point by the decent-sized selloff we've seen in U.S. bonds, as it hasn't really mattered to the equity market, and most likely the first time it does matter to equities (by causing them to get spanked), we'll see a kneejerk reaction in bonds — as we did today to some degree.
Global Bond Markets Have Already Seen Their Highs
It is probably safe to say that bonds have seen their high — which is not a small statement — but it is probably too early to think that bond weakness is actionable, certainly regarding equities.
Turning back to the action, the early losses of 0.75% were nearly eradicated by midday, and from there the indices just ground away close to unchanged into the close. Away from stocks, green paper was weaker. As mentioned, fixed income started out weak and then managed to rally. Oil added 2% and the metals were higher, as gold gained 1% to silver's 1.5%.
Required Reading
Today's Wall Street Journal carried an absolutely magnificent op-ed headline: "The Federal Reserve Asset Bubble Machine." I encourage everyone to read it. You may not learn anything new, but it will help you keep the current lunacy in perspective. ***To subscribe to Bill Fleckenstein's fascinating Daily Thoughts CLICK HERE.
***ALSO JUST RELEASED: Are Global Stock Markets About To Crash Or Is This Just Another False Alarm? CLICK HERE.
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