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July 10 – Financial Times (Tommy Stubbington): “In the bizarro world of global debt, even bonds from Europe’s emerging markets are spewing out negative yields. Sky-high bond prices… are increasingly spilling into what was once considered risky territory. All of the Czech Republic’s euro-denominated debt, for example, now trades at sub-zero yields… Short-dated Hungarian bonds and a growing slice of Poland’s debt are following suit, with Warsaw’s 10-year yields just fractionally above zero. Emerging market investors, who traditionally viewed these markets as their domain, are being forced to look further afield for returns, fueling a debt rally from Croatia to Kazakhstan.”
Bizarro World, indeed. Why is financial history strewn with markets succumbing to bouts of end-of-cycle insanity? The obvious answer is greed – greed that became deeply ingrained after a protracted period of being richly rewarded (with fear and caution punished mercilessly). The longer the cycle the more intense and resilient the greed dynamic. The more of the “house’s” money available to gamble, the more extravagant the bets. I would add that prolonged cycles typically have some type of underlying government support that over time comes to underpin confidence and risk-taking (playing an especially critical role late in the cycle).
The great late-twenties Bubble doesn’t inflate if not for confidence that the Federal Reserve possessed both the will and capacity to sustain the boom. The mortgage finance Bubble doesn’t inflate without implicit Treasury mortgage debt guarantees and the prevailing view “Washington will never allow a housing bust.” The ongoing historic Chinese Credit Bubble deflates years ago without faith that Beijing will backstop virtually the entire financial system. Confidence that global central bankers will do “whatever it takes” to sustain the boom is fundamental to the ongoing inflation of the all-encompassing “global government finance Bubble.”
But greed and governmental support are insufficient to inflate Bubbles. Bubbles are fueled by Credit. I would add that “money” is also key. Credit booms can’t survive to become “protracted” without the expansion of perceived safe and liquid (money-like) Credit instruments (enjoying insatiable demand). Some monetary disturbance that takes root. A self-reinforcing expansion of “money” and Credit foments Monetary Disorder and, if not contained, culminates in a parabolic spike in the prices of speculative assets.