THE WOLF STREET REPORT: Here’s What I’m Worried About, and It’s Not a Recession

A rout in the hyper-inflated bond market can blow up everything at this point. (13 minutes)

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  122 comments for “THE WOLF STREET REPORT: Here’s What I’m Worried About, and It’s Not a Recession

  1. William Smith says:

    We will wait to see what happens in October.

    • Trinacria says:

      My feeling – for what it’s worth – is that there will be weakness in October and even November. However, the powers that be are throwing and will throw everything they can to keep this house of cards from collapsing before next year election. Will they be successful? I wish I knew.
      Business cycles, which include downturns, are necessary as Wolf says, as they clear out the excesses. Somehow, a downturn in the business cycle is now a dirty word. In 2008/09 the central banks needed to throw some “antibiotics” at the problem. But, the central banks kept on administering dose after dose. Eventually, the antibiotics will have NO effect and the patient dies. Indeed a “pleasant” thought ! I really think this “thing” is going to get very ugly, but we are still over a year out for the simple reason that there is still too much medicine in the system.

      • TXRancher says:

        Trin: Good analogy.

        ” Eventually, the antibiotics will have NO effect and the patient dies.”

        The continued use of antibiotics causes unintended consequences on the gut flora. Then when the digestive system is hosed the immune system is altered and autoimmunity occurs where the body attacks itself. Eventually the patient dies unless drastic action is taken.

        Sounds just like the effect caused by central banks.

    • Vespa P200E says:

      Sept is the worst month followed by Oct per market stats and 1 of many potential black swans might appear/materialize on a fragile market. The Fed thanks to prodding by Trump will overreact nearing ZIRP like the rest of the world but alas the market continues to tank well into 2020.

      Been buying gold since 2014 and loading up on silver since mid Aug…

  2. SocalJim says:

    I disagree with the concept that a Treasury trading at a premium will create an incentive to sell relative to par Treasury. That is a non-starter because on a duration weighted basis, the yields are equal for premiums and par issues. Right now, nearly every note and bond in the secondary Treasury space is trading at a premium, and there is no rush to sell relative to par issues. Even if the curve rallies further, that will not create an incentive to sell a premium over a par sell. No sir.

    The incentive to sell Treasuries would likely occur with increasing inflation, or a drop in the sovereign US credit curve. In my opinion, inflation is a possibility because of the Chinese issue, but that would be an OK selloff because the inflation would roll through everyting, including incomes. No blowup here … just a resetting.

    However, if the US credit curve takes a hit, while that would be a real problem. However, if a resolution to the Chinese issue increases US GDP, and it should, then the probability of this scenario is low since the increased GDP feeds into debt servicing.

    My base case remains slowing growth with grinding inflation, regardless of Treasury issues trading at a premium.

    • raxadian says:

      Are you saying the US breaking debt records all the time wouldn’t be causing inflation even without a trade war going on?

      • timbers says:

        Why do you suggest deficits cause inflation? They dont.

        • Old-school says:

          Hussman has a good article on inflation. If what he says is true, the only thing that causes inflation is excessive government deficits, but it is a nonlinear event. When people fear the govt is going to print currency to pay the debt, then they don’t want to hold it anymore.

        • rhodium says:

          They could, but only if the deficits are large enough that enough money goes into the pockets of high propensity to spend consumers. Otherwise it’s the same story as has been going for awhile now. The rich book it all as income and it all goes to fine art, private jets, and real estate. Right now wages are the only thing driving inflation. Does it actually surprise people that median wages have basically only kept up with inflation? You tell me how budget deficits will necessarily increase wages.

        • Mean Chicken says:

          $15/hour hamburger flippers, perhaps? Sure are a lot of people living in la-la-land….

      • RagnarD says:

        I’m wondering if SocalJim is not in fact financial word salad bot generator.

      • SocalJim says:

        No … what I am saying is the video suggested that Treasuries that trade at a premium ( price way above 100, which is par ) are more likely to be sold off in a rapid fashion than bonds that trade at 100, which is par, is not logical.

        • SocalJim says:

          Typo …

          No … what I am saying is the video suggested that Treasuries that trade at a premium ( price way above 100 ) are more likely to be sold off in a rapid fashion than bonds that trade at 100, which is par, is not logical.

        • AJ says:

          Greedy elite have gutted the middle class … There is no one left to buy anything … Why is this such a big surprise
          It’s been progressing in this direction for 50 yrs

    • NARmageddon says:

      @SocalJim, I know you want to pump housing prices, but your comment is some of the worst mumbo-jumbo drivel word-salad I have read on quite some time. Do you think writing nonsensical sentences will drive up housing prices?

    • Iamafan says:

      When did Wolf (or anyone) assert that:
      a Treasury trading at a premium will create an incentive to sell relative to par Treasury.

      I think I heard that Treasury buyers are willing to pay a premium now since they believe the Fed will take the security off their hands with a higher premium when QE restarts.

      • SocalJim says:

        Wolf indicated that a negatively yielding premium Treasury would be sold rapidly because it’s priced higher than 100, which is all you get back at maturity, and that would break the market. This makes no sense at all. The demand for a Treasury would exist as long as the yield is larger than the expected inflation rate. So, market demand will exist for a negative yielding bond if inflation is significantly negative.

        • SocalJim says:

          Furthermore, a premium, or par, or discount Treasury has no bearing on anything. All that matters is the yield relative to the expected inflation rate at the same point.

        • RagnarD says:

          Wolf said that, and this is really simple, and I think you’re getting too technical worrying about par value and premium value, etc., that if someone buys a bond with the yield to maturity at a negative value, then they are going to lose money if they hold that bond to maturity. The only way they can make money is to sell it if the bond price moves high / If the yield dropped even lower before expiration / maturity.

        • SocalJim says:

          However, Wolf indicated the market would break because there would be no bid other than the Fed, and this is not the case. If inflation is running sufficiently negative, then there would be a market bid for a Treasury with a negative yield. The market would function fine.

          Now, if inflation were positive, and the Treasury yields were negative, and there was no market crisis, well that would be a problem. However, I doubt that would ever happen.

          Because of the China situation, that should be inflationary, so I doubt we will ever see negative Treasury yields.

        • Nels Nelson says:

          Explain to me what “negative inflation” is? It is my understanding that you can have either steady prices or inflation i.e. rising prices or deflation i.e. falling prices. I assume you mean deflation which usually means you have either an excess supply, an absence of buyers or both and that is usually called a recession or depression.

        • Socaljim, holding ultralow and negative yielding bonds occurs if there is an expectation that yields will go lower. All part of the Greater Fool Theory. You are selling to the greater fool than you. No one will want to own a bond when rates rise. That would be…foolish. Especially, when a bond is at, say 0.25% rate. A swing from 0.5% yielding bond to 0.75% yield incurs heavier losses than say, from 5% to 5.25% market. Rates still have furthur to drop.

          If you think we are in a deflationary period (long term) you are wrong. Inflation calculated by the Federal Government is calculated in THEIR FAVOR since so many things are tied to the inflation rate especially Social Security increases.

          The deflationary period will come. But not yet. When it comes, will will all know it. And it will be devastating. NO ONE will make the off-handed remark of “The Fed Chairman doesn’t do his own grocery shopping.” Maybe you don’t either?

        • QQQBall says:

          SoCal Jim,

          You realize that paying 100 for a negative yielding bond would result in a return of <X? So absolutely, selling neg bonds at premia will happen quickly, not to mention what would happen if yield expectations increase. SoCal real estate has been in a bull market for decades to such an extent that even the most clueless investor has made over-sized returns provided they had the ability to weather the downturns.

        • JZ says:

          Give “them” 110$ to get 100$ back 10 years later because inflation “they” publish is -2%? F this! I am NOT going to bid. Fed and bond managers can bid what ever they want, I do NOT care what they think. I care about what the 300 million guns think. My fund manager will be ex military guarding the vault with paper cash in it. If “they” ban cash, that will be AWESOME and see what 300 million guns will do.

        • RagnarD says:

          Swap some of that cash in the safe for gold and silver, if u haven’t already. Don’t forget it’s the same “they” who are printing all that cash.

        • JZ says:

          Sure. The point is socaljim is using the existing framework of “financialized world” to predict what’s going to happen around zero rate bound or MMT inflation. I am just suggesting once go negative, the game changed. The true establishment (be it government or the rich)nature of mafia extorting rent out of the mass will be exposed. It is like water. when temperature drops, the mass density of water increases. But at zero temp C, the water becomes ice and the density decrease so that the ice floats on top of water. If you use the theory at 30C yo explain what will happen at 0C, you ignore the “phase change” of the system.

        • SocalJim says:


          If inflation was running at -3%, and everyone expected the -3% number to continue for 5 years, and if a 5 year Treasury was yielding -1.5%, then there would be a market bid for that Treasury. In nominal terms, investors would lose money. However, in real terms they would make money because they would beat inflation.

          As far as real estate rentals, rents would fall because of the deflation, but also because landlords would see their costs drop from the negative mortgage. One would also expect their property values fall.

          The only way negative rates work for landlords is if we get something like expected positive inflation with negative yields. That would be a goldmine for landlords, but it would not happen. Nice to dream about.

        • That’s where you lose it. Yield may have been the benchmark now its collateral. At zero yield or below the issue is sound money. The US has no claim to the sound money benefit that goes with zero rates because of insufficient revenue. Corporate bonds are better than Treasuries because corporations have revenue. A lack of new issues, spending, means the shark ain’t swimming. When Treasury needs to fund spending and they cannot afford to set yields at a fair rate the market will discount those bonds. The transition from bonds sold at a premium to bonds and no yield, to bonds sold at discount, no yield, is based on the inability of yield demand (vigilantes) to drive prices. If you allow yields to rise the loss in collateral to bonds in the secondary market would be catastrophic. The only solution is to hold yields artificially low and let the dollar take a pounding, which are twin goals of this administration. Once the currency markets join in coordinated devaluation the global market reset occurs. US needs to raise rates, as Wolf says, the recession that results is not the worry.

        • GP says:


          “So, market demand will exist for a negative yielding bond if inflation is significantly negative.”

          If I had heard that last year, I would have disagreed. I would have said instead of owning negative yielding bonds, people will just stuff money under the mattress or buy shiny metals. But after looking at all the demand for negative yield bonds in Europe, your assessment looks correct.

    • Rcohn says:

      Implied in both the 10year and the 30 year bond is an inflation rate of %1.55.

    • Jayq9 says:

      I happen to agree that the danger with the bond market is rising inflation if it were to manifest itself.

      Then those $15+ trillion dollar negative yielding sovereign bond holders would be looking at major losses. A chunk of those holders are pension funds and insurance companies that cannot are required to hold ‘safer’ assets so the repercussions would be significant.

      It’s unlikely of course because a) QE and the easy money never makes it into the hands of the masses and instead gets funneled into assets (art, real estate, VC, etc) so there’s no price inflation and b) debts worldwide are staggering and having low rates helps make payments easier.

  3. wkevinw says:

    I have been thinking (hoping?) that there would be a series of events that caused “asset” prices to depreciate with little impact in the “real economy”.

    Even though there are lots of stories about the devastation of the Great Depression, having spoken with several people that could be described as “working class” during that time- the Great Depression may have really been such an event. The center/core of the country/economy lived close to the land (think agriculture), and was fed plus made a salary based on activities feeding the ag economy (tractors and even average consumer vehicles were good to use for many activities in support of food distribution, etc.).

    I am hoping for something similar. The financial paper pushers get a taste of mean reversion while Joe Six Pack keeps a job and homes, etc., cost less.

    • Brant Lee says:

      I hope you’re right. But it seems everything is owned or tied to banks and corporations these days. Most of the knowledge and know-how of those days are lost on people.

      • Just Some Random Guy says:

        Weird how nobody had an issue with low interest rates and increasing asset prices prior to 2017. Did something important happen that year?

        • Wolf Richter says:

          Just Some Random Guy,

          Just because you didn’t read it doesn’t mean I didn’t write it. I lambasted the Fed’s low interest rates for years, but then the Fed raised rates, and I supported that, obviously, based on what I’d written before. So stop trolling this comment section with your fake partisan interpretation of everything. It gets really old. Read commenting guideline #4 about sounding like a “broken record.”

        • Just Some Random Guy says:


          I was replying to the comments above, not to you.

        • Wolf Richter says:

          Just Some Random Guy,

          You said: “nobody had an issue…” — that word (nobody) makes it a generic comment. If you reply to the commenter, and you know what the commenter said two years ago, you can write “You didn’t have an issue…”

          This fake partisan politicizing of economic issues is out of place here.

        • FromKS says:

          >This fake partisan politicizing of economic issues is out of place here.

          I want to commend Wolf’s moderation here. As we approach a US election, let’s all remember that this is an economics blog.

        • Wolf Richter says:


          Thanks. In terms of moderating the comments, I dread presidential elections for many reasons. I understand people’s anxieties about the elections – I have them too. But good lordy, this stuff descends into name-calling and screaming and hollering faster than I can blink.

      • RD Blakeslee says:

        Exactly THE REVERSE of my situation, and many others, I am sure.

        Our assets (land, timber, physical precious metal, our house, etc.. varying by opportunity, place and time) are not burdened by debt, thus NOT owned or tied to any overlord.

    • SocalJim says:

      That is not possible. Asset deflation would cause a credit crunch since loans on bank balance sheets would go bad because the assets would be worth less than the loan balances. When the loans go bad, banks have to sell assets to raise cash, and that ends their ability to make new loans. This is a little simplistic, but it hits the main points.

    • Xabier says:

      It would be nice to think so but the modern economy is structured very differently.

      Everyone lives very far from the land and its virtues of endrance, prudence, and toughness, and most people entirely lack fibre (and I’m not referring to diet!).

      Moreover, agriculture itself is now merely an industry depending on vast credit and long supply chains for machinery, fertiliser, etc, not a traditional and durable way of life. It has been thoroughly undermined.

      • RD Blakeslee says:

        Oh, boy … here we go again … “Everybody” does Not live “far from the land, etc.”

        … and many a small cow-calf farm uses debt-free old 8N Ford tractors (or the like) to make hay to feed their livestock.

        • David G LA says:

          But the farms have changed. That’s the point. You can live near a farm in 2019 and still starve.

      • Petunia says:

        My parents lived through the great depression of the 1930’s in a rented New York City apartment. It was a 5 room railroad apartment, this was before rent control, and the rent was cheap. The entire family lived together, uncles, cousins everybody. The govt was giving the men one day of paid labor a week, so whoever worked that day bought the groceries and contributed to the pot for the monthly bills. This is how they survived for years during the depression.

        My grandparents were married during the depression and my grandmother’s wedding dress was spectacular, because it was rented. The whole wedding cost $29, about a month’s wages.

        • Jack says:

          Uhh , the resilience of those generations was amazing.

          Resilience and tenacity..

          as for the current “ Avocado generation “, there is much to be desired.

        • Wolf Richter says:


          “Avocado generation?” Count me in. Avocados are a staple in California, locally grown when in season, or imported from south of the boarder when not in season in CA. One of the readers and commenters here was an avocado farmer in California until he sold the farm to retire. We use avocados instead of butter or mayonnaise. Delicious. Try it. Millennials didn’t invent it. That idea has been around for as long as avocados have been around. Which then knocks over your entire theory about the “avocado generation” :-]

    • QQQBall says:

      My mother lived through the GD. for her entire life, she lived in 3-D; Death, Doom & Destruction around every corner. My sister and I both have always worked, lived below our means and always saved and not been big on credit. We have both been FI for a long time and continue to work, save and invest. So although I have no direct experience with the GD, I know what it did to my mother.

  4. timbers says:

    The simplest Fed response to what you fear is most likely…the most likely and easiest Fed response: 1). Intensification of interest rate suppression to avert a bond route. And if that produces inflation fears (but why would it, because it hasn’t even now) then: 2). Intensification of the Fed’s application of fraud it it’s Inflation Fraud Report…see? No inflation in our report, so no inflation = Fed policy of NIRP is working = everything is awesome so no bond route.

  5. 2banana says:

    We have never been here before. A world drowning in debt (global debt now surpassing global GDP) . Most sovereign debt with negative interest rates. Central banker believing it is their god given right to upset the natural business cycle and to avoid a recession at all costs. The FED being outed as a partisan hack organization. Bubbles in nearly everything – especially stocks and housing.

    I can’t think of another time in recent history (200+ years) of this happening. Maybe the French 1795 experiment with fiat “assignats” (which led to Napoleon).

    “Gold does well when confidence in central banks fails…”

    I think we are there.

    • cheapo rico says:

      Remarkable comment or should I say remarquable?
      I was exactly at the same point in my reflection (not that the 2 are synonymous, just sayin..).
      I have, in the bedroom of my french house, a big decorative piece, which is made of real printed “assignats”, the US dollar of the day.
      And , as today, the central bankers were the smartest educated idiots of the planet . Their political meddling in society lead them to bail out “the elites” while plunging “the people” into despair.
      The path to hyperinflation was clear and is clear.
      In those days those who were smart enough to load up on “specie” (gold and silver) became millionaires (the term was coined then) and … decapitated.
      Hopefully I won’t be decapitated.

      • Petunia says:

        I live in Dixie, the southern US, so named because this is where the Dix Cent note was widely circulated. The financial history of the southern US is fascinating, too bad it is not taught as part of the lead up to the Civil War.

  6. John Taylor says:

    Interesting situation you describe – peak recession hype with near-peak highs in the stock market and a large number of institutional investors clamoring to front-run some highly anticipated fed rate cuts.

    From my vantage point (Los Angeles), I tend to agree that if there is a coming recession it will likely be a mild one, with little effect on the main service sector economy.

    If the recession hype blows over, will US equities jump like a coiled spring, or are equities less connected to the underlying economy than ever? It’s hard to say. I tend to think that since asset managers always have to put their money somewhere, it would mainly change the sector rotation charts so with high growth getting more attention again, and perhaps the risk-on trade pushing money into emerging market equities again.

    I think the main danger with hype changing in bonds is one that you mentioned in the past, focused on all the enormous amount of BBB corporate debt that needs to be refinanced in the next few years, combined with the fear of some of these indebted companies failing to meet a BBB debt issue threshold and thus being cut off from the big pools of cheap money they’d come to rely on.

    I guess you really have to be nimble in today’s investment world – there’s no telling whether any market can rally to crazier highs or correct significantly lower.

    Opportunities to make money are always there, but its almost a zero-sum game with little overall gains as money simply changes hands off market bets.

    • nick kelly says:

      A mild i.e. brief recession? In past recessions the Fed would cut rates by 3 -5 % or more. With fiscal policy the government could run deficits using the surplus accumulated during the boom when, like today unemployment is at a record low. Ha ha.

      OK, so no one has dreamed of a surplus since forever but now we’ve hit one trillion as the new normal deficit, can we really go to two?
      Where is the dry powder now?

      The whole point of the commentary about the huge pile of deep- junk corporate debt is that this ship is awash and is not able to withstand even a ‘mild’ wave.
      Look at the valuations. How many project even a mild recession? The wild spending and valuations of Uber, Netflix, Tesla, Wework, etc. etc. all depend on a future upside explosion in earnings. They dare not think about a possible recession of any kind because in their case it will be terminal. And their collapse will cascade into members of the herd that aren’t as weak…
      This is why the Fed is likely to cut rates even when it would normally be raising them. But such are the powerful deflationary forces it is likely to be pushing on a string. Next stop, if the inevitable recession is to be brief: some version of helicopter money.

      • John Taylor says:

        “In past recessions the Fed would cut rates by 3 -5 % or more”

        You are making the assumption that cutting the Fed rate actually helps the economy. I believe it does more harm than good after a point.

        In my view, the reason the US economy has a decent jobs number is because of expansionary policy – lower taxes with higher government spending. Places like Europe combine fiscal austerity with central bank driven asset price inflation, which does nothing more than squeeze labor.

        My main fear of the Democrats this coming election is that many of their insiders are way too fiscally conservative, with immediate plans to cut spending and raise taxes. In the antelope valley, US defense spending creates many solid career-track jobs. I’ll be excited if they talk about issues with labor and young families, and disgusted if they focus on debt and ethnic division instead.

        • nick kelly says:

          ‘I believe it does more harm than good after a point.’

          Well you are safe this time because they can’t cut as they always have before. So we get watch a unique experiment when the recession arrives. I trust that you disagree with the WH badgering the Fed for a 50 points cut.

          It has long been established that defense spending has very poor spin- off or multiplier effects and contractors overcharging the govt is a cliche. There are so many very expensive failures. One was the Sea Wolf sub that the US Navy didn’t want but had to take anyway to save jobs in a Senator’s area. It was going to have a new type of reactor (red flag!) without coolant pumps to achieve a tad more quiet.
          It proved unsatisfactory and since the sub was built around the reactor it all had to be pulled apart.

          Democrats being too fiscally conservative!
          What a knee slapper. Not because I necessarily disagree because compared to this Admin anyone is more conservative. But can you imagine Barry Goldwater or Nixon or any more recent REAL conservative reading those words? How much further through the Looking Glass can we go? As the President told former Economic Adviser Cohn when the latter expressed budget concerns: ‘just print the money’

  7. Wisdom Seeker says:

    Three points:

    (1) Every bond is going to be owned by someone at all times from issuance through maturity or default.

    (2) The only things that cause a meaningful rise in bond yields are a shortage of credit to purchase bonds, or a sudden massive change in investor preferences away from bonds and toward either cash or stocks.

    The credit-shortage option is what happens with central bank tightening, which is overdue but not anywhere on the horizon right now. The other way to get it is if a country destroys its currency so investors shun the bonds in that currency (Argentina, Turkey…).

    The investor-preference option might occur if there emerged an amazing new technology (“stock market stampede”), if the Fed Funds rate remains elevated compared to longer-term rates (“cash becomes king”), or if the government finally took steps to support wages over corporate profits (“populist revolt”) and went heavy on fiscal stimulus to drive genuine consumer-demand inflation.

    (3) Taxation affects returns from trades. Individual investors, and probably some corporations and investment funds, would have low incentive to sell bonds trading at high premium, due to capital-gains taxation on the change in premium.

    • Rcohn says:

      To cure the Treasury inversion is easy . The Treasury should announce that they will finance the deficit by selling only 10year and 30 year bonds, while letting short term paper mature

      • Iamafan says:

        That will only raise 46 billion a month. That’s nothing.

        • Rcohn says:

          I am not talking about the FED liquidating securities.
          I am suggesting that the TREASURY issue only longer term bonds. The only limit on how much they can sell is how much the market can bear

    • Petunia says:

      I read that Warren Buffet is sitting on a pile of cash $122B high, more than half of his holdings. There’s the answer to your bond question.

  8. daniel weise says:

    It’s probably nothing to get worried about but Insiders have been selling at a rate of 600 Million A DAY in August. close to the highs in 2007. at the same time of course they where going crazy with Share buy backs. it’s a wonderful time to be on Top!

    • John Taylor says:

      I’d often thought they should restrict stock buybacks within 6 months of insider transactions and restrict insider trading within 6 months of stock buybacks. That would make it difficult for insiders to use buybacks to monetize their holdings, reducing incentives to call for buybacks at market highs. Never heard anyone discuss the idea though.

  9. Rcohn says:

    To put this in perspective,
    for a 30 year bond with a coupon of 10 cents(1/10 of 1%) and a maturity value of $100, the bond must sell at 124 to yield negative (-.71).
    I can not see why anyone or entity would ever pay such a price except for trying to lay it off on some other imbecile. Some have made an argument that there are some entities who may be forced to buy government bonds for capital or regulatory purposes , but that argument does not explain buying duration.

    • Dale says:

      The recent failure of a German 30 year bond auction (neg yield) supports your point.

      The only reason to buy a negative (real) yielding bond is to sell it to a greater fool (such as a CB) in the future. Or if there is and will be no better place to put that money.

      • MC01 says:

        All German bonds issued in August were issued with a zero coupon, meaning they don’t yield a single rusty pfennig. Maturities ranged from the now infamous 30-year Bund to the now meaningless 6-month Bubill (zero coupon and negative yield -0.73%!).
        However it’s interesting to note that apart from the latest 10-year Bund issue all went underbid: in the case of the 30-year Bund only €824 were allotted out of €2 billion issuance, and even those bids were overwhelmingly (€742 million) “non-competitive”, meaning whoever bought that toxic waste agreed to buy at the average price of the accepted competitive bids. These are most likely banks, insurance companies and the like who either have to hold this stuff for regulatory purposes or are making a long-term bet the European Central Bank (ECB) will take these bonds off their hands at a premium.

        But if we want to talk greed nothing beats Italian 10-year bonds. Auctions are always on the last Thursday and Friday of the month, so data about the last issuance is just in.
        These bonds pay two coupons per year, each of 1.35%, meaning an aggregated yearly 2.7% coupon. Those issued in July pay a single yearly 3% coupon. According to my home banking software at present prices the latter now has a real yield of 1.56% and the former of just 0.96%!
        This is insanity, especially considering at the present Italy has no government, risks yet another round of early elections and needs to close a gaping €32 billion hole in the budget by the end of the calendar year.

        The media have already declared the new Lagarde-led ECB will slash interest rates by “100 to 200bps” (yet Euribor is already deep in the red) and will resume increasing its asset purchases despite (very) weak protests from a few well-meaning but powerless officials. It’s basically a sure bet.
        I have no doubt this media darling, whose IMF tenure was somehow even worse than her political career, will not disappoint, but I also have no doubt that her ECB tenure will end early once it’s realized the promised eternal 2017-style growth is a thing of the past and that fixed yield markets have been taken behind the shed and shot in the head.

  10. Sinkender Anker says:

    Stein’s Law

    Stein propounded Stein’s Law, which he expressed in 1976 as, “If something cannot go on forever, it will stop.”[5][6] Stein observed this logic in analyzing economic trends (such as rising U.S. Federal debt in proportion to GDP, or increasing international balance of payments deficits, in his analysis): if such a process is limited by external factors, there is no urgency for government intervention to stop it, much less to make it stop immediately; it will stop of its own accord.[7] A paraphrase (not attributed to Stein) is: “Trends that can’t continue, won’t.”

  11. Realist says:

    It will be interesting what the effects of Halloween will be both in the short and the long run. Boris with the Hair is apparently aiming for crashing out of the EU with no deal and it will be interesting. What will happen tonthe City of London ? They will loose their poisition in trading europapers. To allow the City to keep that trade would be for Euroland similar to if USD papers were mainly traded in Mexico City, something the US wouldn’t allow. HSBC has problems in Hong Kong etc. Trade will revert to WTO rules and what will the situation be for EU citizens in the UK ? And you can count on UK citizens in the EU to recieve similar treatment as the UK does to EU citizens.

    All this plus a lot more is bound to be felt in the global economy.

    All I can tell, is that I wish the Brits good luck negotiating a trade deal with the US.

  12. Dano says:

    An excellent commentary Wolf!

    Eventually all economies fall into recession due to economic imbalances that grow over time. Since Greenspan, and especially Bernanke, we’ve had very ‘activist’ CB’s who believe they can ‘tame the business cycle’ by acting as serial monetary arsonists — always throwing more money on the economic fire. It’s never worked before in history, but the current clown car believes their own press.

    There are lots of ways a recession can start, but once started, sentiment is as hard to turn around as a ‘run on the bank’. With our current excesses, the sky is the limit for how high this blows. CB’s have been ‘messing with the forces of nature’. Nature WILL bite back.

    Got gold?

    • RD Blakeslee says:

      “Got gold?”

      Or junk silver, in the case of us 8N Ford tractor-type peon “farmers”.

    • Marc says:


      Sorry I keep on seeing people mention a run on the bank, just how is that going to work? As from the information I can see it appears a mere 8% of all money is actually cash. So if there was to be a run on the banks just how fast would they run out of cash?
      What happens when they no longer have any cash to give anyone?

      Really like to know how this plays out.

      • Iamafan says:

        In 2007-2008 we did NOT have the classic run on the bank as we know it. The bank run was not on depositors. It was the banks that did not trust each other so the Wholesale Funding Market collapsed starting with BNP Paribas shutting their funds from withdrawals.

        If I can make a wild guess, something similar might happen when corporations cannot pay for their loans. Some might just get shut out from the credit market.

      • Dano says:

        I expect no actual ‘run on the bank’ episodes as the Fed has that one all figured out after the last crisis.

        My comment was a metaphor for how once something starts, like bad consumer sentiment (or as my example that a bank is failing) it’s hard to change people’s opinions otherwise.

        I think we’re going to see heavily indebted companies miss a few bond payments when we head south again, and that’s going to be the genesis of the next crisis. Not my original thought, got it from Raoul Pal. But I can say that I’ve personally questioned the idea of borrowing to the hilt for stock buybacks to enrich management while gutting the future of companies.

        Here’s a great interview of Raoul Pal discussing that point and several others.

  13. Bobber says:

    I’ve also seen increasing recession talk lately.

    In addition, I’ve seen lots more commenters say QE is useless or counterproductive. Even government figures like Larry Summers are starting to question the game plan of the last decade. These dolts are starting to figure out you can’t fit a square peg in a round hole, no matter how many years you try.

    Imagine what would happen if central bankers changed their tune and started forcing some discipline on markets.

    • Econ_teacher says:

      They are abandoning the plan because, unlike most people, they understand the law of diminishing marginal returns.

      Plan accordingly.

  14. David Hall says:

    I have not seen a bottom in the bond yield decline. Did I miss something? I saw a headline about Honda vehicle sales in India dropping 50% in August. I saw a headline about a six month high in US delinquent credit card debt. I have seen photos of overpriced old houses next to dying Florida citrus groves and poor sandy ranch land. I have seen reports San Francisco homes are not too cheap. People have been talking about the next recession for years.

  15. John says:

    Thank You Wolf!

  16. Andre says:

    Just a short while ago, on this site there was an article arguing that the FED currently achieved much more with a lot less than around 2007/2008. This report is quite a change of opinion isn’t it?
    The greed hypothesis is interesting, thought-provoking and well laid out, but it is still a hypothesis.

    • RD Blakeslee says:

      “The greed hypothesis is interesting, thought-provoking and well laid out, but it is still a hypothesis.”

      Not to me! It ISN’T just a hypothesis. Not particularly oriented toward money, I am downright astonished at the lengths some folks will go to acquire it.

      • Wisdom Seeker says:

        People are brainwashed into seeking money, fame and power over others. The reality is that happiness comes from being free, independent from hype, and productive.

        Fame is of little value.
        Money is of little value beyond a certain level.
        (Consider how many rich and/or famous people end up with terribly spoiled and useless children…)
        And people may be tribal, but they aren’t meant to be in master/servant relations. Free trade via contracts and agreements is all the power anyone really needs.

        • The Brainwashed says:

          Dear Chattel, Your birth certificate is my trading tool and I get credit because you were born on my land and not at sea. I love it when the pregnant arrive from another land. Your brain washing ensures you go to work, pay your taxes and participate in activities where I can skim more money from you in tax on life events and transactions. The hype served up by media binds you to this position. I never handle money and I live quite nicely so I agree money is of little value. Banks on the other hand hold a number against my name which allows me to live a spoiled and useless life where again this serves to bind you to this position of paying tax. Tribal beliefs are fine so long as you pay your tax. My servants of the law will arrest you if you do not. Free trade will reduce my income so I will likely have a war if amicable trade agreements are expected. My continued existence in this privileged immoral position depends solely on you accepting the above and not challenging the status quo. My servants of the land will remove you if you do. And so we all live happily ever after, some under threat and some threatening. Yours The Ruler.

          Change it and see.

  17. breamrod says:

    Europe is a basket case. Money is flowing to the U.S. for positive yield. A blow off in the bond market for sure but who knows how low yields can go. A lot of traders are talking about the 10 year going to 1%. I think it all depends on inflation and confidence in the currency. If inflation starts to rise which I think starts next year and confidence goes south then the snapback in yields could be fast. This could then send the stock market through the roof in a final blow off.

    • Dano says:

      The ten year will probably go BELOW 1%.

      And when it reverses at some point it will be a true “rip your face off” event of epic proportions.

  18. Just Some Random Guy says:

    What if the MSM throws a recession party but nobody shows up? This is what’s happening right now. Every news outlet is wetting itself with recession talk. Meanwhile consumers are shrugging as they live their lives, buying cars, houses, vacations, etc.

    The real story here is how the MSM has lost all its power to influence Americans.

    • Nicko2 says:

      Consumer debt is has surpassed 2008 highs. What could go wrong?

      • SocalJim says:

        Consumer Debt is higher, but GDP is also higher. The ratio is what is important.

        • Heff says:

          GDP is higher due to nose bleed debt levels. We’re in the process of hitting a debt wall. Total debt cannot double every 9 years to prop GDP up. It’s going to stop.

        • nick kelly says:

          If consumer debt is higher, GDP is automatically higher. The fake word in GDP is ‘product’ The old term Gross Domestic Expenditure was more honest. Whenever money is spent on ANYTHING, GDP increases by that amount. There doesn’t have to be a product. If stressed consumers put groceries on credit, GDP gets a double boost. The expenditure on food and the interest paid to buy it.

          A favorite illustration: a few years ago the UK narrowly missed a predicted recession. The reason: it was a colder winter and the fuel bills were just enough to push the GDP slightly positive. So increasing GDP is easy: just leave the windows open in winter.

          But in reality this diminished the amount of usable wealth and the UK was worse off than if the winter had been warm and the predicted recession had occurred.

    • Wisdom Seeker says:

      Outside of their true believers, the MSM’s overt political agenda has made them the laughingstock of America.

    • MC01 says:

      This scaremongering is not aimed at the general public, no matter how poor or wealthy. It’s aimed straight at decision makers, whether their office, who use the media to get a feeling of the public opinion and especially gauge their popularity. Lyndon Johnson was literally obsessed with it.

      Nobody cares about the farming sob stories newspapers have been publishing for centuries, but they are useful to pressure politicians into voting an increase of the ethanol mandate, suspend new legislation on waste management and perhaps launch another tax cut masquerading as a “farm relief bill”. ;-)

      If the last decade taught us anything is that we live in a time of dangerously weak leadership, which has been reinforced by the media leonizing weak and corrupt characters such as Mario Draghi and Christine Lagarde who are the exact opposite of what a leader should be: easily influenced, quickly swayed from their goals and even more critical incapable of saying no. Or we want to talk about Janet Yellen, who was praised for debasing her august office by keep on jawboning stock markets and soothing frayed nerves when the S&P500 failed to raise 5% a week?
      Let’s all be very grateful large scale wars are a thing of the past because with such leadership one had better learn the enemy’s language.

      • Weak leadership says:

        MC01 the bit you are missing is the bit behind weak leadership. Rats in the dark can’t see the exit and blindly follow smells hoping for a good outcome. Rats living in the light get to pick and choose which smells to follow to suit them.

        The Internet. It is the bringer of light. The underminer of Leaders. The crippler of democracy. The window of wisdom. The hall of records. The host of viruses. The challenge to power.

  19. DR DOOM says:

    Thanks for the end game explanation. I would love to know what would a WR guess be on interest rates after the “snap back ” of a bond bubble pop ?

  20. Yes, this bond-buying mania is the biggest bubble of our day, or maybe history. I have a meglomaniac friend who is cock-sure that US bonds will keep rising in price on the way to below zero. I warned him last Friday, that it’s dangerous and there could be a violent reversal. He scoffed in his supreme confidence! I said, that’s exactly what I mean!!

    It’s mindboggling to think about the chain of events that could unfold. This is how “excess” money goes “poof”. And, in our fiat world, far too much money/credit has been created and will likely go “poof”.

    One can quickly see that Central Banks will not survive these losses, especially the ECB. So, with CBs knocked out of the game, the forces of financial repression released, price discovery will be a b*tch. Anyway, this is how $Trillions of fiat money get wiped-out. Then, for a real scare, there is a real possibility that once the bond rout gets going, you’ll wake up one morning and the stock futures markets are halted limit down! And then stock markets stay limit down for days or weeks and don’t or can’t re-open! When they reopen, they are down 85%. This is not an insane concept. The entire CB bubble can get wiped-out within months. Scary stuff.

    This could type of event could start/happen if one or more EU members leaves the EU. If Italy left, their bonds would drop ~70% overnight to yield some fair value like 5%. That alone could trigger a EU bank crisis. It’ll be interesting to see where British bonds trade after a “no-deal” Brexit as an indication.

    Anyway, it boggles the mind to ponder this stuff.

  21. Iamafan says:

    I see this differently. The current high prices of Treasuries are a sign of High Quality Pledged Collateral shortage or scarcity and therefore they are getting more expensive. If you need it, you pay a premium.

    Some of these Treasury Securities are stuck at the Fed (or at Central Banks), because of QE, just waiting to mature and rollover. They are not used for pledged collateral unless the Fed lends them.

    This is another explanation to the willingness of primary dealers in keeping larger quantities of Treasury Securities. If you are a bank or financial organization, you’ll need good collateral and today 87% of good collateral is Treasury and Agencies. Pledged Collateral ain’t cheap.

    By the way, all bonds aren’t equal. US Treasuries are on top of the heap.

    • Dano says:

      This is an example of:

      1) forced buyers chasing yield (like pension funds)


      2) global investors seeking ANY yield as EU and Japan are negative.

      This could go on for some time as we’re really not into ‘safe haven’ fear buying yet.

      $USD up, up, and awaaayyyyyyyyy!

  22. Bobber says:

    The 10-year rate went from around 3.0% to around 1.5% rather quickly and without much immediate financial impact, so would a quick reversal back to 3% cause any harm?

    It’s hard to say. The Fed’s game plan has promoted irrational behavior and financial imbalance for a long time, so things are highly unpredictable.

    It reminds me of my younger days when we’d light a firecracker fuse and nothing would happen for while. Just when we thought it was dead, and we were ready to light it again, the fuse would disappear in an instant and it would go BANG!

    • Iamafan says:

      I think the better question is WHY? Why will it (10Y Yield) go Up or Down?

      If forward inflation expectation rates drive long term rates, then that does not explain the fall of 10Y Yield by half from ~3.2% in November 2018 to 1.5% in August 2019. Both 5 and 10Y inflation expectation rates did NOT fall that fast and furious.

      Harm? Of course the obvious gain is the US pays LESS to service its ballooning debt. Zombie companies, too.

      Closer to home would be to use the yield on the 2Y Treasury. Many savers actually buy this and rely on its yield for income. It was 2.98% last November, now it’s down to 1.53%. If you are retired like me living off Treasuries, it is like your income fell about half. For what it’s worth, I stopped my monthly buy of 2Ys last April. It was getting too low for comfort.

      Of course, we can always shift to short term 4-week and 13-week T bills to limit the loss to half a percent. But who knows how long that will last? If you are looking for a firecracker, don’t look farther. This shenanigans is hurting savers.

      • Rcohn says:

        There are two components of interest rates, the expected inflation rate for the life of the bond and the “real “ return .
        Nominal 10 year rates were 3.24 last fall and are now 1.50.
        Forward inflation estimates have gone from 2.10 to 1.55.
        The bulk of decline in 10 year rates has been the decline in the “real”return on Treasuries , which has declined from 1.14 to negative -.05 .

        • Iamafan says:

          You are making a huge assumption here – that the data given to us to use is correct or right.

          As a retired person with bills to pay, I can’t make any sense with these numbers. Life goes on.

    • Rcohn says:

      I will go back to my previous point, that corporations will not make new investments unless they can make an acceptable rate of return NO MATTER what they pay for money.
      The intellectual reasoning of the ECB has atrophied to such an extent that they continue with policies that have only benefitted the rich
      The good thing about any further escalation in dovish policies is that such actions will mark the end of the ECB .

  23. People who buy Treasuries don’t buy them to hold and collect the interest. Trillions were issued to China through the BIS as dollar equivalent, and effectively sterilized. Pre-orphaned bonds were sold to SSN, etc. Just before the 87 crash traders were buying Treasury bonds on margin at a fraction of the cost (and collateralizing them to buy stocks). UST has a long and sordid past much of it buried in the secondary market. Treasuries are a pass through investment with a long long shelf life. Problem one you bought a 30 yr 29 years ago for $1000 and you are ready to collect, collect what? The amplification since 2008 in the loss of purchasing power in the currency makes holding bonds more onerous. Sure you margined those bonds and made sweet profits in the stock market now you have to pay. Or we all have to pay and that takes another round of QE. It’s a game of ‘cold’ potato.The only assets USG has is their ability to raise revenue.

  24. Sporkfed says:

    I no longer invest new monies beyond the employer
    match in the 401k . Low rates on bonds and a squirrelly stock market have convinced me to pay
    down the 3.5 % mortgage faster. Sure I can put money in a Roth and the proceeds will be tax free but so will the proceeds from selling the house.
    I’m guessing that paying down or refinancing mortgage debt is at this point deflationary.

    • QQQBall says:

      Your yield will be in excess of 3.5%, b/c a greater portion of the base payment will go to principal reduction. People under-estimate the satisfaction of having a home F&C. When I calculated mine many years ago at much higher rates, my yield was 2% greater than the mortgage interest rate.

  25. Iamafan says:

    Less than 0.04% of 30Y Bond and less than 0.06% of 10Y Note AUCTIONS are bought by NON-COMPETITIVE Buyers, about half of that through Treasury Direct (Individuals).

    We (ordinary people) may have money but we are not crazy enough to commit it for 10-30 years at these low yields. I don’t think we are traders, too. I think that is where the disconnect is. Unless you are a fund manager for a very large too-big-to-fail institution, you can’t possibly understand why you have to do this.

  26. brokencups7 says:

    Either the bond mkt is broken or the Fed??

    Also ponder from Yardeni:

    The two-year yield curve: So instead of trying to calculate the Fed study’s near-term spread, we will focus on the 12-month forward futures for the federal-funds rate, which is available daily (Fig. 5). The two-year Treasury note yield tracks this series closely, suggesting that it is also a good proxy for the market’s prediction of the federal-funds rate a year from now.

  27. c1ue says:

    Dean Baker has a writeup on how there is a slowdown, but no clear cause for it to escalate into a recession in 2020.
    In particular, there isn’t an obvious bubble that will pop.

  28. Iamafan says:

    The headline is on the money –
    Here’s What I’m Worried About, and It’s Not a Recession”

    While a Recession is not yet visible on the radar, the risk for credit market to get stuck again is. And, that might bring with it a recession.

    • Rat Fink says:

      We know that the US govt lies about numbers. Take for instance the REAL unemployment rate, you know, the one that counts all people who are not working including those who have given up.

      So who says they are not lying about the real state of the economy?

      Recall what Jean Claude Juncker said about lying when things get serious.

  29. Mean Chicken says:

    I believe Europe is THE concern, they really need to get with the plan, roll out $15/hr hamburger flipping as key to get the ball rolling, $1,000 haircuts will help as well.

  30. Kerry says:

    Looks like the Fed is now back to QE…

  31. oee says:

    Your analysis is incorrect. Advanced the economies have not defaulted on their bonds. thus, they are as good as Au. the reason that we negative rates is that failure of economic policy. The Eu have unnecessarily cut spending causing a recession. Thus, the Eu govt’s have room to spend money.

    The economy is in the recession. The Ism index is now 49.10 per its published figures today. the manufacturers will cut back on employment and services. we had a recession in 2001 when consumers kept spending.

    • Wolf Richter says:

      Before you write something like this — “Your analysis is incorrect. Advanced the economies have not defaulted on their bonds” — listen to the report because there was NOTHING about a default by the US or any other advanced economy in it. It was about a very different topic. Listen to it find out.

  32. SimonFunk says:

    Well where does this end? Look to Japan near zero for 30+ years, but actually I think the place is getting better.

    Sure everybody is miserable, and sure nobody is getting married or having kids, or seeking relationships, other than ‘very cheap prostitution’, but in general live by the day, seek solitude, work; I think sort of a perfect ‘brave new world’.

    The USA is a cesspool ( think Seattle/SF ), but everyone in Japan is clean, nobody shit’s on the sidewalk.

    Beyond all of our control here, the ‘system’ seems to want to continue 20% rates for the banks ( merchant card services ) and zero percent for savers, corporations will continue to seek 15% ROI, and use it to buy shares.

    The NewWoldOrder is here, work, get drunk(japan)/high(portland), sleep, … work, live alone, cause no problems for the “Order”.

    Using the Japan model ( sleep in an urban coffin, aka ‘capsule hotel’), print infinite fiat, and pay everybody to be an urban janitor. Uptopia is here.

    Back to US folks sitting on lots of cash? Sit on it, turn it into tangible(gold) buy farmland, buy cryptos?

    I would say get out of the Matrix with your fiat while you still can, find a place with no expense, and grow your own food, and live. The life of the future in the city’s is not life,

    ‘Money’ value is going to zero, land is over-priced, gold cannot be eaten, and all crypto originated from NSA.

  33. Rat Fink says:

    When the recession does arrive the Fed will no doubt have used up all of its ammunition so there will be no way to escape the downward trajectory.

    1. The Fed will push rates lower in an effort to fend off the recession so we’ll be at record lows when the run of the mill recession hits

    2. The other concern would be what is happening outside of the US. The numbers are tanking and we are seeing desperation in the form of negative interest rates. When the global recession hits, that will crush the US and the Fed will be powerless to do anything.

    This is the reason we are seeing extreme policies out of the central banks. They know – including the Fed – that when this economy heads south, it will keep heading south.

    And we’ll end up revisiting the GFC but without any tools to rescue the economy. And instead of a Global Financial Crisis, we will get a Global Financial Collapse

  34. WSKJ says:

    I continue to try to reach some basic ideas about the crash of 2008; and the global economy in the decade since. I’m talking very simple general ideas.

    Wolf, I understand your remarks above to conclude with the likelihood that a “normal” recession, though painful, can be weathered; but the huge amount of VLIRPs, ZIRPs, and NIRPs that have been taken on in the last decade-plus, are in danger of the sort of collapse that we associate with houses of cards, etc.. This would be much worse than a recession.

    A good time for an update of the Cod Index, methinks.

    The Cod Index reflects my observations on the price of cod fillets over about the last 12 years. Where I shop for groceries (a grocery store under the Kroger umbrella, in the inland Northwest of the U.S.), the price of cod was fairly stable from 2007, until say about 3 years ago. I paid attention because I buy cod fairly often; it is “always” available; and it has been the good quality, easy to prepare, affordable fish.

    Despite an occasional blip to a higher price, the price during those years has reliably been $4.99 per pound. There have been more excursions to higher prices in the last about 3 years.

    The update: on August 4, 2019, I paid $7.99 per pound for several pounds of cod. I calculate that to be 60% above my initial base price of $4.99 per pound.

    Admittedly, this is a very crude index. If you want compounding, and hedonic adjustments, and so on, a number of government agencies will give you those, and lots of other corrections as well. How much of your 5% increase in consumer spending in the past year is due to unadmitted inflation, Wolf ?

    But for me, my big moment in recent puzzling over the world economic/financial picture has been the realization that IF negative interest rates were a brilliant idea that governments could/should impose on their citizens for the benefit of all:

    the ancient Greeks would have come up with it. You know, the civilization that brought you Pythagoras, Archimedes, Eratosthenes…the list goes on. That’s good enough for me: it’s not a brilliant idea, and some of its harm is beginning to be perceived, and the harmful effects will be playing out for many years to come. With or without catastrophic collapse.

    Thx, Wolf.

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