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The Central Bank Crisis on the Immediate Horizon

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Posted by Martin Armstrong - Armstrong Economics

on Wednesday, 18 April 2018 05:56

Draghi-CrisisWhile the majority keep bashing the Federal Reserve, other central banks seem to escape any criticism. The European Central Bank under Mario Draghi has engaged in what history will call the Great Monetary Experiment of the 21st Century – the daring experiment of negative interest rates. A look behind the scenes reveals that this experiment has been not just a failure, it has undermined the entire global economic structure. We are looking at pension funds being driven into insolvency as the traditional asset allocation model of 60% equity 40% bonds has failed to secure the future with negative interest rates. Then, the ECB has exceeded 40% ownership of Eurozone government debt. The ECB realizes it can not only sell any of its holdings ever again, it cannot even refuse to reinvest what it has already bought when those bonds expire. The Fed has announced it will not reinvest anything. Draghi is trapped. He cannot stop buying government debt for if he does, interest rates will soar. He cannot escape this crisis and it is not going to end nicely.

When this policy collapses, forced by the free markets (no bid), CONFIDENCE will collapse rapidly. Once people no longer believe the central banks can control anything, the end has arrived. We will be looking at the time at the WEC (Singapore – June 15-16, 2018 Orlando – November 16-17, 2018). We will be answering the question – Can a central bank actually fail?

....also from Martin: Market Talk- April 17, 2018

and:

The Sovereign Debt Crisis has Spread to 119 Countries (The Sovereign Debt Crisis is on schedule to be noticed starting here in 2018)



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Bonds & Interest Rates

Bundesbank Warns German Banks Rates are Moving Higher

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Posted by Martin Armstrong - Armstrong Economics

on Tuesday, 27 March 2018 08:31

Martin Armstrong reports the latest movements on the interest rate front as well as the remarkable move by Germany which will convince the world the European project is authoritarian (Germany arrested a Catalonian politician enforcing Spain's dictatorship) - R. Zurrer for Money Talks

QUESTION: Mr. Armstrong; It appears that now the Bundesbank has adopted your view of rising interest rates. How fast do you see rates rising?

ANSWER: Yes, the Bundesbank President Jens Weidmann has come out and warned that banks should start to make provisions for interest rate risks associated with rising interest rates. The normalization of the interest rates is essential and as always, it is now too little too late. The economic environment is changing much more rapidly than most suspect. It is true that the German banks have increased their equity significantly since the financial crisis. While the central banks are warning that rates are rising, they misjudge the fact that banks are by no means as resilient as they were before the 2007-2009 crisis.

GERM10YR-RATES-Y-2018-ARRAY

  

German 10-year rates will start to rise rapidly following a monthly closing above 0.79%. The next stop will be 2% and thereafter, we will see a test of the 4% level. Once we exceed the 2007 high of 4.67%, we will see a rapid rise to the 5.6% area and an annual closing above that will warn of a test of the 8.5%-11% zone and that can be easily by 2020.

....related from Martin: The Fed is Raising Rates Because of the Pension Crisis

...also breaking: Germany Arrests Former Head of Catalonia for Spain Confirm the Spanish Constitution Violates Human Rights



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Bonds & Interest Rates

How Can the Majority Be Wrong if they ALL Expect Interest Rates to Rise?

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Posted by Martin Armstrong - Armstrong Economics

on Tuesday, 20 March 2018 06:40

Right now, most analysts think higher interest rates are on the way. Given the majority is always wrong when it comes to markets, Martin makes two predictions on how that will play into the expectations for higher interest rates. - R. Zurrer for Money Talks

WorldIntRates-2012

MARTIN'S ANSWER: With the Federal Reserve stating they must “normalize” interest rates since 2014, of course, the majority will view that will be the trend. We are at a 5,000 low in rates historically. Naturally, the only direction is now UP, UP, and AWAY! There are two ways that they will be wrong and that has to do with their interpretation.

First, they will not comprehend just HOW fast rates will rise or WHY!

Second, they will interpret higher rates as BEARISH for equities, as they traditionally do.

Therefore, the way the MAJORITY will be wrong is not in the mere fact that rates will rise, they read the statement of the central banks. It is the interpretation of what will follow from the simple trend. In equities, every new high was to be the last from 2009 right up to 2018.

....also an update on Martin's "Interbank Rates Starting to Rise – Monetary Crisis is Beginning":

Eurozone Banking Crisis – ECB Delays Rules for Bad Loans until 2021

...more trouble for Europe: Will US Companies Repatriating Cash Home Create Banking Crisis Outside USA?

 



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Bonds & Interest Rates

Yet Another Chart That Screams “Look Out!”

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Posted by John Rubino - Dollarcollapse.com

on Monday, 19 March 2018 06:32

Another chart that bolsters Martin Armstrongs case that a Monetary Crisis is Beginning, though in this case it involves U.S. corporate debt. A monetary crisis will change everything with both banks and debtors facing rapidly rising rates. Prepare yourself - R. Zurrer for Money Talks

So many patterns that have held for decades seem to have broken down, leading to one of two conclusions: Either this time really is different in ways that appear to violate what used to be seen as iron-clad laws of finance, or those laws have been bent but will reassert themselves with a vengeance sometime in the future. 

The latest example is the relationship between corporate debt and default rates on that debt. Historically they’ve moved in the same direction, with higher debt levels leading to higher default rates. That makes intuitive sense because rising debt implies that borrowing is easier for less creditworthy companies who should be expected to default at a higher rate. 

But not this time: 

Here’s why default rates are subdued even as corporate debt levels hit records

(MarketWatch) – U.S. corporate debt levels stand above crisis highs even as default rates among the most leveraged firms remain subdued.

With an economy hitting its stride, it’s perhaps no surprise that the high-yield bond market is placid. The extent of the divergence between debt levels and defaults, however, is worrying to some analysts who feel rising corporate indebtedness will eventually catch out unwary investors and deflate the junk-bond market.

But beyond complacency John Lonski, chief economist at Moody’s Capital Market Research, argued that globalization and the tendency of U.S. businesses to hoard cash as reasons why corporate debt levels may no longer move in sync with default rates and credit spreads.

The high-yield default rate in the fourth-quarter of 2017 fell to 3.3%, even as U.S. nonfinancial-corporate debt ended in 2017 at 45.4% of GDP. This compares with a much higher default rate of 11.1% in the second quarter of 2009, with corporate debt levels at 45% of GDP. Granted, the current levels come with the economy in the eighth year of an expansion, while the second quarter of 2009 marked the final quarter of the longest and deepest U.S. recession since the Great Depression.

The yield spread between high-yield bonds and safe government paper, as represented by the 10-year Treasury note narrowed to an average 3.63 percentage points in the fourth quarter of 2017, from an average 12.02 percentage points in the second quarter of 2009. The tight credit spreads reflects that borrowing costs are still close to historic lows, and that investors are demanding minimum compensation for holding arguably the riskiest debt in the bond market.

default

Moody’s Analytics



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Bonds & Interest Rates

Interbank Rates Starting to Rise – Monetary Crisis is Beginning

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Posted by Martin Armstrong - Armstrong Economics

on Thursday, 15 March 2018 05:40

Martin Armstrong reports that Interest Rates are rising significantly in several important European Markets. With Libor at its highest level since 2008 both banks and debtors face rapidly rising rates. He reports it is the beginning of his Monetary Crisis Cycle - R. Zurrer for Money Talks

Screenshot 2018-03-15 08.03.53

Extremely reliable sources from Behind the Curtain in Europe are becoming deeply concerned that Draghi at the ECB has created a monumental economic disaster he is just praying to holding off until he leaves next year. Interest rates are already starting to rise significantly in several important money and interbank markets. Both banks and debtors are facing a rapid rise in interest expenditures that will shock the world. This is going to blow-out budgets around the globe and both private and public debtors face higher costs of funds.

The Libor (London Interbank Offered Rate), the most important reference rate for the global interbank market, is currently at its highest level since 2008. We elected a Yearly Bullish Reversal on the close of 2016. Once we see the rate close above 213 on a monthly basis, LIBOR rates will be poised to jump to 510. When the Libor price rises, the short-term borrowing for banks becomes more expensive, and for borrowers in the financial market, such as sellers of bonds or buyers of mortgages, debt service becomes more difficult. The demand for debt is exceptionally high. We are looking at LIBOR rates rising sharply. The dollar-lending rate for dollar loans has been rising steadily in all maturities since about the end of 2014. The dollar-Libor for three-month loans in March 2017 were trading at around 1.1%. Currently, this dollar-Libor rate stands at around 2%.

This year’s WEC will be focused on the next major crisis and how all the markets will interact. This is the beginning of the Monetary Crisis Cycle. Our Yearly Models on LIBOR are already in a bullish posture on both short-term indicators. A closing on an annual basis above 208 will signal rates will rapidly more than DOUBLE into 2020. A closing above 510 on an annual basis will warn of a MAJOR financial crisis hitting just about every economy.

...also from Martin on March 15th:

The Resistance to Change is Why We have Panics

 



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