The following post appeared 10/22/2016 at Trader Scott’s Market Blog.
This election’s outcome will certainly have huge ramifications. The outcome will be credited as the “reason” (excuse) for a rallying stock market or it will be blamed as the “reason” (excuse) for a declining market. While I remain extremely bearish on stocks intermediate term as the market has been in a distribution/topping process for 18 months, it is really the global government bond market which is the most frightening. So both candidates are touting their “economic” plans. But it’s not going to even matter. And there are three massive reasons.
#1 – When Ronald Reagan took office in 1981, the US Gross Federal Debt was around $1 Trillion. When George Bush II took office in 2001, the total was up to about $5.75 Trillion. When either Trump or Clinton takes office in 2017, the total will be around $20 Trillion. And that great American achievement of 20x in the growth of Federal Debt occurred while we (and the world) were enjoying a humongous bull market in bonds (10 year chart below for perspective). That bull market in bonds brought long term yields down from 15.21% on October 26, 1981 to around 2.5% today. So that skyrocketing debt occurred under a 35 year falling/low rate environment. What happens with the opposite environment? – (discussed in #3 below). And what about the total unfunded liabilities of the US Government, which according to the always honest Moody’s is around $20 trillion. And if Moody’s is claiming this total, we can be assured it’s much higher. As long as we’re piling on, let’s add the debt situations with the state and local governments, families, and corporations – and we haven’t even gotten out of the US yet, nor have we gotten to the catastrophe awaiting on the books of the huge hedge funds, oops I mean central banks. And what are all of these debt totals going to look like with yields at 5%, 8%, 15.21%? Truly frightening.
#2 – The total outstanding size of the derivatives market is unfathomable. That situation can only be resolved with a nuclear type of event. The international banks are a disaster. And it will be postponed as long as possible, but it doesn’t alter my view that the major lows in the short end of the US Treasury yield market were seen in 2011, and the lows in long term yields will lag by about 6 years.
#3 – This chart of the 30 year US Treasury bond is the most important chart in the world. It is a gigantic area of distribution/topping process in the US 30 year bond (inverted). I do believe next year starts the slow, but persistent multi, multi year push higher in yields. The implications for this will dwarf any supposed long term economic revitalization plans for the US and for every country on this planet. So, like I said, this is our scary future, no matter who wins this farcical election.
Source: Board of Governors Federal Reserve:
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