A crisis illustrated through charts is playing out real-time, so here is what history in the making looks like through charts. A crisis illustrated through charts, the panic in the financial market, showing US 10 Year Treasury Note yield tumbling below 1%, which is lower than the 2008 financial crisis when yields fell to 2.31%. Moreover, during Europe’s sovereign debt crisis between 2010 and 2012 yields fell to around 1.5% as demand for haven assets soared, bearing in mind the inverse relationship between sovereign yields and treasury prices.
But the surge in U.S. Treasury yield occurred in 2013 where yields surged to 2.9% due to the Fed’s taper tantrum phase, also known as quantitative tightening. During the Fed’s tapering, which was intended to reduce balance sheet assets below 4 trillion USD, 10 Year Treasury Note prices tumbled and the yields surged to almost 3%. So the Fed’s attempt to normalize monetary policy, in other words, cut its quantitative easing, its monthly bond purchase program sent 10 Year Treasury Note prices tumbling and its corresponding yields soaring.
The Current 10 Year Treasury Note yield is hovering at an all-time low of 0.78 and it underscores a panic-stricken market where a demand for risk-off assets is in play at any price.
“A crisis illustrated through charts is playing out real-time”
A crisis illustrated through charts shows tumbling yields as capital flows into haven assets, such as 10 Year Treasury Notes, despite low yields because investors are more concerned about the return of their capital rather than the return on their capital
But a relentless bull market in the 10 Year Treasury can also create a USD liquidity crisis, bearing in mind demand for treasuries and USD are complementary.
Moreover, as the USD appreciates against a basket of currencies that makes servicing USD denominated loans outside the dollar region more expensive. The dollar credit to emerging market economies EME is breaking records. Total Credit to EME non-financial borrowers (excluding China) has surged, (trillions of US dollars), according to the BIS quarterly report.
“relentless bull market in the 10 Year Treasury can also create a USD liquidity crisis, bearing in mind demand for treasuries and USD are complementary”
A crisis illustrated through charts also shows emerging market currencies collapsing in value against the king dollar and that too is in play
But perhaps the crisis illustrated through charts would also include widening peripheral sovereign yield spreads. Indeed, lockdowns in Europe’s southern countries (curfews) a hysterical response to COVID-19 is widening peripheral sovereign yield spreads.
Sovereign investors fear that draconian measures are taken by Italy and now Spain is putting their countries in complete lockdown (which is producing no reductions in the death rate) will be suicidal for their economies.
Europe’s sovereign debt crisis of 2013 isn’t too far away from investors’ radar.
The peripheral economies were the weakest link already being cited for uncompetitive economies and oversized bureaucracies which were a burden on their spiraling budget deficits.
“show me a sovereign investor who would willingly buy peripheral debt with current yields of 1.5%” – Win Investing
So with peripheral countries now in lock-down which will cause immense damage to their economies you can bet that every sovereign investor and his dog will demand higher yields to reflect the heightened risk of sovereign default as a result of the state going belly-up. Put simply, the Greece sovereign crisis multiplied many times could be now what lies ahead. Daft policies always lead to failure.
A pending sovereign debt crisis in Europe’s peripherals is a story within a story.
So when this ship goes down it will take everyone with it, even passengers in first class. The real fear is that a sovereign debt crisis in Europe could blow the collateral changes off the banking system, thereby causing financial contagion.
But show me a sovereign investor who would willingly buy peripheral debt with current yields of 1.5%? Why would an investor Jump in front of a steam roller only to be flattened, bearing in mind the risk of sovereign default in the peripherals is now real. The risk-reward just doesn’t work out.
What’s more ECB’s have already bought peripheral debt sending yields tumbling, which has made it unattractive for investors. You can have socialism or you can have capitalism, but you can’t have both. The ECB can’t keep buying worthless sovereign debt without risking the German Weimar republic currency crisis.
Perhaps other central banks will continue to buy peripheral sovereign debt, or maybe that is wishful thinking.
So widening peripheral sovereign debt with the German 10 year is a crisis illustrated through charts.
“despite cutting rates to zero and announcing a $700 billion quantitative easing program stocks are in free fall this morning” – Win Investing
WTI Crude price chart is yet another crisis illustrated through charts
The global economy was already sputtering before COVID 19 rear its ugly head.
But the pandemic is a double whamming for the global economy because it is a demand and supply shock.
Demand for WTI Crude is a good yardstick of global economic activity and it is showing the collapse of global economic activity. This chart shows prices falling off the cliff due to an epic demand collapse. Moreover, the Fed panic 50 basis point cut on March 3 following another 50 basis point cut on March 15 means to zero has done nothing to stem the fear of a global economic collapse.
The chart showing recent Fed rate cuts points to a crisis illustrated through charts
Emergency monetary policy, zero interest rate policy has emptied the Fed’s rate cutting rounds.
Fed chair Powell has shot his load with little or no impact on the market.
Despite cutting rates to zero and announcing a $700 billion quantitative easing program stocks are in free fall this morning.
The market’s reaction is “fool me once, shame on you. Fool me twice, shame on me”
So grab your popcorn because this could very well be “the Emperor has no clothes moment”.
The VIX index volatility index shows a crisis illustrated through charts
VIX index volatility index is up 322.73% in the last year alone.
Put simply greed has given way to fear, the bears are in control and the longest Fed-induced secular bull market in living memory is now history.