John Ward – Crash2 : Forming A Pyramid On The Cliff-Edge – 7 June 2013

pyramidptOne sneeze, and over we go

European bond rates are rising rapidly. Yesterday the rise spiked after Mario Draghi said the ECB was maintaining the key lending rate, and the overnight deposit rate. The ECB also cut its 2013 gross domestic product growth forecast to negative -0.6% from -0.5% as predicted in March, but boosted the 2014 outlook to 1.1% from 1%. Italian 10-year bond yields zoomed 23 basis points to 4.369%,  Spanish 10-year bond  yields rose by the same to 4.675%, and Portuguese 10-year yields climbed 24 basis points to 6.019%. Greek 10-year yields climbed 15 basis points to 9.271%.

What these reactions tell us is two things. First – as with the jittery stock movements and Bernanker QE exit hints – any sign at all that the Wily Coyote flying carpet is about to be pulled evoke dramatic pessimism. That’s because the markets know that this is just a game: they’ve known this for coming up to two years now. Any sign at all that the game-players are taking their ball home is greeted with panic. Second, Portugal above 6% and Greece back over 9% means that this is no longer a loss of faith in one Clubmed sovereign: the markets are losing faith in the eurozone. A wobble from France will be enough to destroy what’s left of the European Bond risk appetite.

The money to supply growth is draining away. Both Bloomberg and Zero Hedge ran this chart yesterday:


Confidence is falling (at last) in financial stocks, and the credit availability is becoming more profoundly negative. The Moody’s Credit Trends conference first round met in Copenhagen met yesterday. The next part is due to take place in Munich next Thursday 13 June. It may well be a propitious time for it to meet, but whether it will suggest any kind of solution is a different matter entirely.

China calls time on the Days of Wine & Roses. The Beijing leadership shuffle, confirmed by the National People’s Congress, has dropped growth targets by around 7%. The latest economic ‘book’ notes factory overcapacity, rising operational costs and slower government revenue growth. Thus there won’t be any big increases in government investment this year. The new top dog Li Keqiang, who succeeded Wen Jiabao, also wants to sort out the black hole of off-balance-sheet operations by commercial banks allied to local government debt noted here 15 months ago.

The general policy was confirmed by the remarks of Vice Premier Zhang Gaoli, a member of the Politburo, who said, “We must not put undue emphasis on the speed of growth. Instead, we must guard against risks and keep inflation under control”. He also emphasised the need to press ahead with structural reforms that will boost domestic consumption. What Mr Zhang didn’t do was explain how to boost the home market when exports are collapsing and nobody’s doing any overtime. This is, I’d imagine, because he doesn’t have the remotest clue how to square that circle.


When a borrower’s income declines, the moneylenders charge a higher risk premium. When Sovereigns whisper about quietly leaving the stage, stock markets become jittery. When manufacturing stagnates in that context, the markets start to panic.

We’ve had steadily rising and now spiking ClubMed Bond rates this week. Global stagnation is now an established fact. Stock prices have fallen. If Sovereigns fall back on more stimulation from here on, lenders will demand higher still Bond yields. If they don’t do it, stock markets will plunge. If stock markets plunge, investors will rush to safe havens. If neither stocks nor bonds are safe, there is nowhere to go except precious metals and upscale property.

What the world’s central banks face this Friday is the unthinkable: plunging stock markets = falling risk capital = recession turns to slump = lenders deserting the Bond markets in droves = unsustainable Western sovereign debt across the board. The accelerating trend I suggested yesterday morning is not only continuing, it is worsening. There is no way out of the vicious spiral any more. This is it: in weeks, months or days – who knows any more? Who knows what the Bilderberger chaps may have been cooking in southern England this week? Who knows whether summer holidays will slow down the chain reaction?

I don’t, and nobody else does either. But this is the cliff-edge. No shale gas drivel, no ‘peripheral boom coming’ crap, or Draghi upweighted 2014 forecasts or Obamite employment ‘data’ is going to cut it any more. There is no more road. The only thing left is that trick of climbing on each other’s shoulders to form a pyramid: a Ponzi pyramid wobbling about in the sea breeze on the cliff edge. Until one day, somebody sneezes….and it’s all over.

The force of gravity accelerates objects towards the Earth at 32.2 ft per second per second. As I have written here many times before, there is no such thing as a gradual panic. / link to original article


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