March Market Update
As of March 2021 the bond market is imploding. Some gurus and economists predicted there would be fear and blood on the streets after what happened in 2020 with the lockdown.
That never happened as the central bank turned on the printers and everything has been inflated. Cars and food, toys, tech, everything has gone up over the last 12 months due to inflation.
Not convinced? Here’s one example:
Raw materials that went into making a car in the start of 2019 were $1800. The cost of the same goods is now $2900. That’s 50% more in the cost of creating the same vehicle, so something’s wrong and it’s not getting better any time soon.
So when we say the bond market is starting to implode, what does that mean?
When the central banks around the world exercise YCC – yield curve control – they keep interest rates low by purchasing bonds in the marketplace.
The market imploded the other week as yields went all the way up. The 10-year treasury yield is what they base the interest rate on. Generally, when we see the 10-year yield go up, we see interest rates go up, but now we are at the point where if interest rates go up there will be a lot of people in financial trouble.
What happens next?
The central banks around the world have now got two options, either let interest rates go up, or keep purchasing the bonds and exercise YCC. If they keep purchasing that will increase inflation, but if they don’t, interest rates will go up with dire implications for financial markets.
Banks have already shown their hand in 2020 and printed trillions of dollars. This is why we are starting to see inflation in all these markets, it’s just awash with currency.
Will rates rise?
There has been a lot of talk about interest rates going up, but if they do there is going to be a lot of people who are negatively affected. A few different things are happening. JobKeeper and JobSeeker payments are ending, so are mortgage moratoriums. We have new bills being passed making it easier for liquidity to flow and increase the velocity of money. There is a bill being passed to change the rules around responsible lending, meaning that people have easier access to credit.
The debt bubble is getting bigger from cars to household appliances to mortgages. Even food, where ZipPay and AfterPay can now be used for groceries. People will get financially wiped out if interest rates go up.
What history tells us
In the past decade we have not seen one interest rate increase. The chance of them going up is a possibility, but according to Binvested founder Nathan Birch, Australia should be headed towards a negative 2 to negative 3 per cent interest rate position. He believes there is a 30-40 per cent chance interest rates will go up once or twice in 2021, but will then come crashing back down.
Looking at 10 year bonds in the US prior to 2020, the yield was going up and rates went up a few times, But then the market crashed all the way back down to zero because it could not support anything greater than zero. We are at this point where we have a debt bubble around the world and need to go negative with interest rates.
Printers firing up
The central bank hasn’t pulled the yield curve control or bought up bonds to keep the interest rate suppressed so it is hard to predict what they will do next, but they have shown their hand.
They have made it impossible for people to go bankrupt with mortgage holidays, deferred interest payments, stimulus cheques from the government, all put in place to stop and remove the potential recession. There is a very good chance that they will print their way through this and all signs say the winner will be inflation and perhaps even hyperinflation.