Trump And The Markets, The Next Four Years

President-elect Donald Trump’s White House victory was a surprise, and so is the ripping sell-off in global bond markets, which has quickly driven US interest rates to the highest levels in a year. The rout has wiped out an estimated $1 trillion from global bond markets - CNBC 11/13/2016

The election of Donald Trump has put added pressure upon already pressured markets. The next four months are going to be extremely consequential. But the next four years are going to be even more so, i.e. the cataclysmic resolution of capitalism’s end game is now in sight.

In free markets, the most important dynamic is supply and demand. In capital markets, the most important factor is the cost of credit; and in capitalism’s end game, the cost of credit is even more important because it’s the cost of credit that determines when the end game will end—and, today, the cost of credit, i.e. the interest rate, is now moving higher, a trend exacerbated by Trump’s recent victory which threatens market stability.

In 2012, I discussed the significance of higher interest rates, bond markets and the end game in my article, Gold Versus Bonds:

THE ENDGAME AND THE COMING PANIC IN THE BOND MARKETS

We are moving into the end game, the grand denouement of credit and debt-based markets, the grand finale of the debt super-cycle, the crack-up boom, the blow-off Ludwig von Mises predicted would happen as a result of constantly expanding credit.

David Stockman, author of The Emperor is Naked and Reagan’s former budget director, is an outstanding observer of America’s problems in the end game. Recently, Stockman was asked by the editors of The Gold Report, what catalyst could bring the end game to a final resolution.

The Gold Report: If we are in the final innings of a debt super-cycle, what is the catalyst that will end the game?

David Stockman: I think the likely catalyst is a breakdown of the U.S. government bond market. It is the heart of the fixed income market and, therefore, the world's financial market.

Because of Fed management and interest-rate pegging, the market is artificially medicated. All of the rates and spreads are unreal. The yield curve is not market driven. Supply and demand for savings and investment, future inflation risk discounts by investors—none of these free market forces matter. The price of money is dictated by the Fed, and Wall Street merely attempts to front-run its next move.

As long as the hedge fund traders and fast-money boys believe the Fed can keep everything pegged, we may limp along. The minute they lose confidence, they will unwind their trades.

On the margin, nobody owns the Treasury bond; you rent it. Trillions of treasury paper is funded on repo: You buy $100 million (M) in Treasuries and immediately put them up as collateral for overnight borrowings of $98M. Traders can capture the spread as long as the price of the bond is stable or rising, as it has been for the last year or two. If the bond drops 2% [i.e. when rates rise], the spread has been wiped out.

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