March 19, 2018

The insanity of Central Bankers knows no bounds.

The latest indication of just how far “down the rabbit hole” the financial world has gone comes from Japan where it was announced that the Bank of Japan bought 75% of Japanese Government Debt issuance in FY17.

That is not a typo. Japan’s Central Bank bought $3 out of every $4 in debt Japan issued in fiscal year 2017. And it now owns 40% of Japan’s total debt outstanding.

Things have gotten so out of control that on Tuesday this week not a single 10-Year Japanese Government Bond was traded. Put another way, the daily volume on the 10-Year Japanese Government Bond was ZERO for an entire day.

There's an expression for this kind of investment behavior: it's called "cornering the market."

Astonishingly, the BoJ is STILL beginning to lose control of its bond market. Currently the BoJ is targeting a 0% yield on the 10-Year Japanese Government Bond. Despite this, the yield on the 10-Year Japanese Government Bond has remained above this level for the better part of the last year.

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Japan is not alone here. Globally bond yields are rising in most of the major debt markets including Germany, the UK, and the US.

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Rates are rising once again.

Over 90% of investors focus almost exclusively on stocks. This is a mistake. The reality is that everything happening in stocks since 2008 has been the direct result of Central Banks creating a bubble in bonds.

Because our current financial system is debt-based in nature (meaning sovereign debt, not gold or some other asset is the bedrock of the financial system) when Central Banks did this, they effectively created a bubble in everything (including in stocks).

Put simply, it is BONDS, not stocks, that concern Central Banks the most. If stocks collapse, it’s a big deal for investors. If bonds collapse, it’s a big deal for entire countries/ the financial system.

With that in mind, consider that bonds have begun to collapse, with US Treasury bond yields rising sharply above their downtrends.

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THIS is what triggered the February meltdown.

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And by the look of things, we're not done yet. Instead of falling hard, rates have found support and are preparing to breakout to the upside again.

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This is a MAJOR warning for stocks. Despite spending over $14 TRILLION trying to corner the bond markets, Central Banks are STILL beginning to lose control.

Regards.

Deo Talaverano.

Chief Market Strategist DHF.