The Bond Market Is Warning of Huge Trouble Ahead
By Anthony Mirhaydari
Fri, Jan 16, 2015, 11:11AM EST
Something odd is happening in the government bond market: Interest rates are pricing in a debt-deflation cataclysm.
- The evidence is building that the global economy is slowing, led by weakness in Asia and Europe. The JPMorgan Global Manufacturing PMI, which measures factory activity, last month dropped to its lowest level since August 2013. Activity is declining outright on a month-over-month basis in China, Greece, Austria, Italy and France.
- This comes as the developed world governments, reacting to the blowup of private sector debts (mostly real estate), recession and the risk to the financial system in 2008-2009, have piled on public debt. China is in the mix here too, with local government and private credit exploding higher, fueling fixed-asset investment bubbles, overcapacity and now an unresolved bad debt problem that we got a quick taste of in early 2014. In Italy, the government debt-to-GDP ratio has grown from 104 percent in 2008 to 133 percent, with no signs of slowing.
- All this is occurring at a time of low global inflation, tipping into outright deflation in some areas. Prices at Chinese factory gates have been dropping for months. The Eurozone is expected to have fallen into outright deflation in December. Capital Economics expects consumer price deflation in the United States for January.
The combination of all three trends forms a potent economic poison that has ensnared Japan for decades: A debt-deflation depression.