The 3rd Largest Bond Market Is Flashing Red… Could a Financial Crisis Be Near?


    by Chris MacIntosh, International Man:

    At a macro level it is worth understanding that for US hegemony to continue to exist it has relied on a level of global order – legal, political, and always backed up with the military.

    The Mackinder Doctrine

    The Mackinder doctrine essentially states that “who rules the World-Island -mainly the area ruled by Russia- commands the world”.

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    In order to retain this global power the US has been fueling both sides of proxy wars for decades, but these countries which have been subjugated have been relatively inconsequential in terms of global trade, like Afghanistan, Somalia, Iraq, etc. and certainly inconsequential in terms of military power.

    But this has now all changed. The issue now is that the US is fighting multiple proxy wars on a much grander scale. This means that the cost of maintaining influence among all existing vassal states rises, and as this rises, the countries on that periphery (because they’re typically most heavily impacted) seek alternatives.

    This is what we’re seeing with the BRICS becoming more and more emboldened. It is what we have been discussing with respect to OPEC+’s recent middle finger to the hegemon. It is much more a political statement than it is about oil. To highlight my point, consider that the US receives 7.5m barrels per day (bb/d) from OPEC+. That’s bugger all when the US is releasing 1m bb/d from the SPR right now. So clearly there is more at play than oil.

    So as the core (US hegemony) attempts to not only maintain its position of power but increase it, it is plagued with socialist, nihilistic, and destructive snot-nosed brats who are now at this core. No surprise then that the core is imploding. And as the destruction accelerates they see their power waning and become more desperate, more aggressive, and more frantic in their attempt to increase reach and scope.

    The most powerful financial tool available to the US is their currency, and as they’re weaponizing this the repercussions are truly massive on a global scale.

    We’ve written at length about the rising US dollar, and our belief that we’ll see a wave of emerging market sovereign defaults as a result, but it’s not just emerging markets that are in trouble.

    Which brings me to… Japan

    The land of the rising sun

    The third largest sovereign bond market in the world is kinda a big thing.

    The BOJ (Bank of Japan) has been selling dollars in order to try and prop up their bond markets. And realize this. They are not selling USDs as part of some well-calculated plan because they want to. They are selling USDs because they HAVE to.

    And it’s not working. Take a look at the Japanese 10-year bond yield.

    Now take a look at the yen.

    Sure, they’ve kept the yield relatively low but at the expense of the currency. It is so extreme that they have been trading 20X the usual volume over the last few weeks. In September they blew through 4% of their USD reserves — 4% in a month. And guess what. October was much, much worse.

    PauloMacro on Twitter referenced it like this:

    They used 7% of reserves to only keep the Yen from depreciating another 2.5% since they last intervened 4 weeks ago. If the same math holds, the BOJ will blow through the other 93% while the Yen depreciates another 33%, which is roughly what the Yen has depreciated since last December.

    Said differently, the BOJ will have to blow through all its reserves just to keep the Yen at the same depreciation rate it has incurred over the last 12 months if the math on the last 2 interventions are any guide.”

    What they’re doing is the equivalent of what the US administration is doing with the SPR and oil. Neither can hold.

    Tavi Costa pointed out that while they’re keeping the 10-year under control (sorta), the 30-year is blowing out. Whoops!

    Japan’s problem is not unique. The entirety of the Western world is in the same proverbial bind. Central banks held rates far too low for far too long (thanks go to Bernanke for beginning this), and then on each successive attempt by market forces to correct imbalances, they proceeded to intervene with stimulus, adding kindling to the eventual inferno that would engulf the whole system. That is now.

    The real issue now is that the entire system has become dependent on central banks to continue doing this and without it they will go into cardiac arrest. Their options now amount to:

    Pause on interest rate increases and let inflation rip higher, wiping out the middle class, or

    Keep raising rates, which will cause an overleveraged economy to contract massively with waves of corporate and then personal bankruptcies.

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