Elite funds prepare for reflation and a bloodbath for bonds

The Telegraph ^ | 11-24-2015 | Ambrose E Pritchard

[NRx]

One by one, the giant investment funds are quietly switching out of government bonds, the most overpriced assets on the planet.

Nobody wants to be caught flat-footed if the latest surge in the global money supply finally catches fire and ignites reflation, closing the chapter on our strange Lost Decade of secular stagnation.

The Norwegian Pension Fund, the world's top sovereign wealth fund, is rotating a chunk of its $860bn of assets into property in London, Paris, Berlin, Milan, New York, San Francisco and now Tokyo and East Asia. "Every real estate investment deal we do is funded by sales of government bonds," says Yngve Slyngstad, the chief executive.

It already owns part of the Quadrant 3 building on Regent Street, and bought the Pollen Estate - along with Saville Row - from the Church Commissioners last year. But this is just a nibble. The fund is eyeing a 15pc weighting in property, an inflation-hedge if ever there was one.

The Swiss bank UBS - an even bigger player with $2 trillion under management - has issued its own gentle warning on bonds as the US Federal Reserve prepares to kick off the first global tightening cycle since 2004. UBS expects five rate rises by the end of next year, 60 points more than futures contracts, and enough to rattle debt markets still priced for an Ice Age.

[cuban leaf]

What did a lot of us say? Deflation followed by inflation, followed by hyperinflation. This is why PM’s have always been my fallback (other than real estate and durable goods). And I mean PM’s of which I have physical possession.

[aimhigh]

. . rotating a chunk of its $860bn of assets into property in London, Paris, Berlin, Milan, New York, San Francisco and now Tokyo and East Asia.

With Global Warming, they should be buying property in Canada and Siberia. /sarc/

[Georgia Girl 2]

We are likely headed into a deflationary depression. The BDI has collapsed. its a global slowdown. The Fed is like a hamster on a wheel. They can’t get off. As soon as they raise rates the stock market tanks and the fragile housing market collapses again. Not to mention now they are paying the national debt at a higher rate. Its all bad. I predict they either don’t raise or try to raise one time and when the SHTF they have to lower again.

[Mr. Jeeves]

We are likely headed into a deflationary depression.

That would wipe out the big players, so central banks will engage in every irrational behavior imaginable to stave it off. If it happens anyway, it will likely be due to the breakout of nuclear war - no Brussels nor London nor New York will be left to intervene.

[Thibodeaux]

amen

[Nervous Tick]

>> central banks will engage in every irrational behavior imaginable to stave it off

Like dropping money from helicopters?

[Retain Mike]

Thanks for the post. I will add it as a link to my fiscal essay; a portion of which is attached. However, I am with Georgia Girl 2 about deflation also. The idea that central banks will engineer a soft landing is pure fantacy.

Remember the U.S. unilaterally abrogated the Bretton Woods agreement in August 1971 and allowed the dollar to float in relation to the trading whims involving all paper currencies. When the Treasury in 1964 began producing dimes through dollars without silver, silver coins disappeared from circulation. Until about 1968 people could still trade their Federal Reserve notes for Silver Certificates and trade those for packets of silver from a Federal Reserve Bank. At this time the working careers of a single generation comprise the totality of comprehension for how the international community was to function economically without currencies emerging from things people can touch and see. We are toast.

One analogy to explain the looming inflation might be to consider a flood control dam. The water that builds up behind it during the winter and spring could be considered QE1, QE2, QE3, etc. The face of the dam would be the current moribund economic activity indicating a very low velocity of money as exampled by such questions as “Why do I want to borrow if no one wants to buy? or “Why do I want to buy when I don’t have a job?” Now stagflation happens when the reservoir gets so full with QE’s that some water just has to go over the top, even though economic activity remains anemic.

But when the economy picks up money begins to circulate actively. Now the increased velocity of money because of our fractional lending system exponentially multiplies the money created by the QE’s. The increased economic activity fueled by huge quantities of money becomes erratic, excessive and unsustainable with price inflation affecting all sectors and providing an appearance of prosperity. It would be like water by its inordinate pressure intruding into the face of the earthen dam agitating the rock and soil causing the face swell and heighten as water intrudes ever further into the dam face. The intrusive water (money) reduces the ability to withstand the increased pressure which shatters the face of the dam. Just as a wall of water scours out the stream bed and washes all before it, inflation now rages through the economy and destroys people’s financial asset values and their purchasing power.

This may seem fairly insane, until you realize that every member of the G-20 behaves in much the same way, and do understand their precarious situation. With the recent debt ceiling deal the accumulated obligations of this country exceed our GDP, allowing us to share the dilemma Greece presently faces. By 2037 the CBO reports national debt will become 200% of GDP. Since all currencies have about this same connection to reality, finding one or several of sufficient magnitude and viability to replace the dollar as a worldwide medium of exchange and store of value becomes perplexing.

An individual country might think they have a solution, but they know they must also survive during the resulting chaos as all countries seek similar solutions. They see the daunting specter of disaffected holders sending 10’s of billions of dollar denominated bonds to the marketplace when there are no buyers unless prices are severely discounted. They are also frightened by the image of a devastated U.S. economy, because feeding the insatiable desires of U.S. consumers has been a mainstay of their prosperity. I imagine something like the final scene in “The Good The Bad and The Ugly”. The members of the G-20 are standing in a circle with open graves behind them. They are all contemplating how they are going to successfully outdraw the other nineteen members and survive the resulting mayhem, which Lee Van Cleef’s character did not. The only thing needed now is a typical expression of human frailty to commence the cascade to catastrophe.

The Good, The Bad and the Ugly: http://www.youtube.com/watch?v=sXldafIl5DQ
Tax Rate to Balance Budget: http://www.taxfoundation.org/research/show/25985.html
Fy2010 Spending by Category/Department: http://en.wikipedia.org/wiki/File:Fy2010_spending_by_category.jpg
FY2010 Spending by Function: http://en.wikipedia.org/wiki/United_States_federal_budget
Policy Basics: Where Do Our Federal Tax Dollars Go? http://www.cbpp.org/cms/index.cfm?fa=view&id=1258
U.S. Funding for Future Promises Lags by Trillions http://www.usatoday.com/news/washington/2011-06-06-us-owes-62-trillion-in-debt_n.htm
What if the Treasury Defaults: http://online.wsj.com/article/SB10001424052748703864204576317612323790964.html?mod=WSJ_Opinion_LEADTop
CBO outlook on long-term debt worsens: http://thehill.com/blogs/on-the-money/budget/167781-cbo-outlook-on-long-term-debt-worsens
U.S. Debt Clock: http://usdebtclock.org/

Understanding the Budget Control Act: http://keithhennessey.com/2011/08/01/bca-understanding/

S&P Downgrades the U.S. Debt Rating: http://www.housingwire.com/2011/08/06/full-text-sp-downgrades-the-u-s-debt-rating
Cut, Cap and Balance: http://conservativedailynews.com/2011/07/cut-cap-and-balance-full-text/
Federal Budget History: http://www.whitehouse.gov/omb/budget/Historicals
S&P Downgrades U.S. Debt Rating — Press Release
http://blogs.wsj.com/marketbeat/2011/08/05/sp-downgrades-u-s-debt-rating-press-release/

Baseline Budgeting
http://en.wikipedia.org/wiki/Baseline_(budgeting)

ADDED 8/9/13
Fed Balance Sheet vs. Stock Market; Will QE Cause Inflation? US in a Minsky Bubble?
http://globaleconomicanalysis.blogspot.de/2013/08/fed-balance-sheet-vs-stock-market-will.html

Some thoughts on ‘international reserves’
http://www.plata.com.mx/Mplata/articulos/articlesFilt.asp?fiidarticulo=216

Disconnected Central Banks Can’t Last Forever
http://finance.townhall.com/columnists/mikeshedlock/2013/08/09/reflections-on-paper-reserves-of-central-banks-n1660091?utm_source=thdaily&utm_medium=email&utm_campaign=nl#

Money Morning Interview with Jim Richards
http://www.bing.com/videos/search?q=money+morning+interview+with+jim+rickards&FORM=VIRE1#view=detail&mid=696ACDBB0651B4D766F2696ACDBB0651B4D766F2

Unemployment

Alternate Unemployment Charts
http://www.shadowstats.com/alternate_data/unemployment-charts

Table A-15. Alternative measures of labor underutilization (U-1 through U-6)
http://data.bls.gov/pdq/SurveyOutputServlet

Table A-1. Employment status of the civilian population by sex and age (Total)
http://www.bls.gov/webapps/legacy/cpsatab1.htm

Wonkbook: The real unemployment rate is 11 percent
http://www.washingtonpost.com/blogs/ezra-klein/post/wonkbook-the-real-unemployment-rate-is-11-percent/2011/12/12/gIQAuctPpO_blog.html

Can America regain most dynamic labour market mantle?
http://www.ft.com/intl/cms/s/0/6327a7f4-21bb-11e1-8b93-00144feabdc0.html#axzz1hD2P3dzq

Business 50 Facts About The U.S. Economy That Will Shock You
http://www.theblaze.com/stories/50-facts-about-the-u-s-economy-that-will-shock-you/

Central Banks Have Become A Corrupting Force — Paul Craig Roberts and Dave Kranzler
http://www.paulcraigroberts.org/2015/08/23/central-banks-become-corrupting-force-paul-craig-roberts-dave-kranzler/

[Georgia Girl 2]

As long as Barack Obama is the President of the United States he will continue to destroy our economy. 14 more months to do his damage. He could and likely will fuel the depression and economic collapse. Its his plan.

If something really unlucky happens like the grid gets hacked and taken down. Which is a good possibility then we are all just going to be worrying about whats for dinner and how many candles do we have left.

[Pagey]

Great Post!

[Retain Mike]

Thank you.

[cuban leaf]

This is why I’ve said over and over - for YEARS - tha5 they can’t raise rates. All they have left is to attempt to stimulate the economy by THREATANING to raise rates. They are the boy who cried wolf.

We will test my theory next month. And yes; if they really do it things will get even more “interesting.”