Juggling Dynamite

The central bank forced-yield crush continues to wreck havoc in the real world. When will we the people, and real economy, get our central banks and their finance cohorts to heel? The wreckage from this epidemic of policy hubris is inflicting lasting harm on pensions and savers everywhere. Governments do not have enough tax dollars to bail out a world of exploding deficits.  See Fears for pensions as gilt yields turn negative

British government bond yields traded in negative territory on Wednesday, compounding fears that a global collapse in government borrowing costs has tipped the UK’s pension industry into a funding crisis.

Holders of long-dated gilts resist selling, and rally in short-dated paper takes yields negative

The steep fall prompted a former pensions minister to call for a national inquiry into the impact on company pensions of the Bank of England’s new £70bn bond-buying plan, launched to stimulate the economy amid fears of a Brexit-related slowdown.

“The Bank wants to stimulate the economy by bringing down interest rates, but the Bank is not acknowledging the negative impact these measures are having on pension deficits, and neither is the government,” said Ros Altmann, the minister under David Cameron.

Pension funds are some of the largest investors in British government bonds, which they believed would offer a safe and reliable source of income that can be used to pay out future benefits to retirees.

The accelerating collapse of yields has widened already substantial gaps in many large pension funds, which use the rates to estimate how much additional funding they will need to meet benefit payments.

An article from the Wall Street Journal this morning offers some key insight about asset prices today.  The article is speaking about the garish impact that central bank herding is having in driving interest rates to zero and below in many government bond markets.  See Bonds markets: growing ever more bizarre:

Central banks have always been able to make waves in markets. But never have they had such far-reaching effects, nor so quickly. The world of bonds is being turned upside down as a result.

The WSJ then goes on to explain the absurdity of how government bonds in many countries are now priced to deliver zero and even somewhat negative income when held to maturity. All true.

What is not mentioned (conveniently overlooked by the finance-sponsored-stock-promoting media) is that income payments and maturity for government bonds are contractually prescribed. Stocks, on the other hand, have no such promises. Stocks have no maturity date and no capital guarantees or contractually prescribed income payments of any kind. Meanwhile stock valuations today are so excessive they are priced to deliver negative returns for at least the next 7 years, with breath-taking volatility along the way.

How long will today’s holders need to wait to get back their capital presently held in stocks? The answer is however many years it takes. And that does not fit well with finite human life cycles.

It took 25 years to be able to sell assets near the previous secular peak pricing reached in 1929. By then, most of the previous holders had long since died, or sold out of panic or necessity for cash. And even where some were able to hang on for 25 years, only the securities that weren’t written off in bankruptcy were still trading.

Bottom line: extremely over-valued asset prices are toxic to human finances. And the issuers and market owe stock holders nothing.

From madness to even more madness, central banks keep driving herded capital off the edge of all reason…the effect is imploding wealth, not increasing it.

The Bank of England’s expanded quantitative-easing program ran into a stumbling block on just its second day as investors proved unwilling to part with their holdings of longer-dated bonds.

The central bank failed to buy enough gilts to reach its stated goal at an operation on Tuesday — the first such failure since it initially started quantitative easing in 2009. The yield on 10- and 30-year bonds fell to records after the operation. The BOE, led by Governor Mark Carney, said on Wednesday that it will incorporate the 52 million-pound shortfall into the second half of the six-month program.  Here is a direct video link.