World Sovereign Debt Risk Front and Center

Courtesy of Read the Ticker

The BOJ is naked, and they still think they look good. We are NOW at start of pricing in a world wide sovereign debt crisis. Think ‘Bear Sterns 2007’.

The Emperor’s New Clothes Plot

Two swindlers arrive at the capital city of an emperor who spends lavishly on clothing at the expense of state matters. Posing as weavers, they offer to supply him with magnificent clothes that are invisible to those who are stupid or incompetent. The emperor hires them, and they set up looms and go to work. 

A succession of officials, and then the emperor himself, visit them to check their progress. Each sees that the looms are empty but pretends otherwise to avoid being thought a fool. 

Finally, the weavers report that the emperor’s suit is finished. They mime dressing him and he sets off in a procession before the whole city. The townsfolk uncomfortably go along with the pretense, not wanting to appear inept or stupid, until a child blurts out that the emperor is wearing nothing at all. 

The people then realize that everyone has been fooled. Although startled, the emperor continues the procession, walking more proudly than ever.

Now, the BOJ is buying all their own debt, or in other words never ending quantitative easing (QE), this has forced the Yen down hard. The BOJ begged the FED/Treasury to lower the US dollar, for now Yellen said ‘No’. This is surprising as it also means the Japanese will now not be in the market to buy US debt. This is the beginning of world wide sovereign debt blow up. 



Also think about the world wide car business, Toyota cars just got much cheaper, German BMW will not be happy about that. This imbalance will be deflationary. The falling Yen will break something.





Chart 1 – The YEN is now in free fall. 

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While the BOJ has fallen into never ending QE the FED thinks it can do quantitative tightening (QT), this blog calls ‘bullshit’ on this FED forecast, just like the 2018 QT plans which failed. The markets tend to agree with this blog as gold has refused to sell off while the US dollar screams higher.



Chart 2 – FED QT Plans

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Here is a major reason why the FED QT forecast is doomed to fail. The ICE BofAML Move index is alerting the world to the stress in the US bond market

The MOVE Index: The MOVE Index is a well-recognized measure of U.S. interest rate volatility that tracks the movement in U.S. Treasury yield volatility implied by current prices of one-month over-the-counter options on 2-year, 5-year, 10-year and 30-year Treasuries. The VIX for bonds.

The problem. The Treasury has to sell approx $1T of new UST issuance and $1T from the FED QT program (a total $2T) in 2022.



Japan is not going to be a buyer. Where are the balance sheets around the world to buy US debt? Belgium, Fiji, UK? US Commercial banks are loaded full of US bonds. Are we going to see marketing to the public to ‘buy bonds’ just like during WW2 with the selling of war bonds, or will the FED expand its own balance sheet and buy the debt itself (a pivot back to QE). 



All this while the US 10 year is near 3% and the US Dollar (DXY) is over $100. Yeah right!



Gold is going over $2100 USD.

POINT: For the very uniformed, the FED and US Treasury can NOT allow the US Treasury market to break. Never! The bond market is God! The Move Index is a measure of bond market stress, and this index is saying to Yellen and Powell stop with the ‘bullshit’ and fix me [FYI a repeat of March 2020]. Biden/Yellen ordering the FED to fight inflation does not override bond market well being. A ‘Whos your daddy?’ moment is coming to the Biden White House.

Chart 3 – Move index stress and FED balance sheet.

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