As shown in the chart below, the Fed has literally buried the bond market in false economics. That is, ultra-low nominal yields which cannot possibly withstand the inflationary gales coming down the pike.
There is nothing comparable in the last 60-years to the February 2022 real yield of -6.08% on a regular CPI basis. Even at the peak of the 1980s inflation blow-off the real yield only reached -4.18% and -4.70% at the top of the first oil crisis in December 1974.
As it happens, moreover, this lowest real yield in 60 years is not the end of the story. It can actually be well and truly said that the biggest bond bubble in 800 years is now deflating, and that will make all the difference in the world.
Moreover, the global bond market bubble is deflating at a fearsome pace. The value of global bonds dropped by another $754 billion just last week, bringing total loss from the recent all-time high in mid-2021 to a staggering $4.8 trillion or 7%.
Needless to say, when this utterly distorted bond market heads south, the global stock market won’t be far behind. After all, current nosebleed levels and out of this world PE ratios are predicated on ultra-low yields and the specious theory of TINA (there is no other alternative to stocks).
Indeed, the global stock market capitalization level as computed by Bloomberg is off from its $122 trillion mid-2021 peak by $9 trillion or nearly an identical 7%. And the plunge has just gotten started.
After all, even at the current $113 trillion, global equity capitalization stands at 133% of global GDP, which is double the ratio that prevailed before the central banks jumped the shark with financial repression and stock market price-keeping after the turn of the century.
Looked at differently, recall when there were $18 trillion of negative yielding debt trading in world bond markets?
That number is already down to $3 trillion and heading vertically toward positive territory—-the only rational place for bond yields to stand. And as it corrects, there will be a world of hurt among corporate, household and government borrowers who had foolishly assumed that free money was a permanent condition.
The benchmark yield, of course, does not exist in a vacuum—just the opposite. The Fed’s post-March 2020 printathon caused a radical plunge of mortgage rates, triggering a speculative run-up in housing prices. Now its reversing violently, and housing prices can’t be too far behind.
But here’s the thing. In just the last two quarters, the 30-year rate has rebounded by 175 basis points to 4.42% from the 2021 low, thereby already cancelling 50% of the 350 basis point drop from the Q1 2007 level. So tumbling housing prices are surely next in line.
Nor is housing the only victim of the unfolding bond bear market. For the past 20 years the corporate sector has been systematically shrinking its equity base. That was the result of either applying cash flow that could have otherwise gone into productive investments or debt pay-downs into stock buybacks and dividend payments or actually borrowing to fund the same.
As the bond bear gathers girth it will become increasingly obvious that we are early stages of a much larger, seismic shift not only in monetary policy, but in the state of the US economy.
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