welcome to the kaiser report imax keyser the bond apocalypse is upon us a new world order of ever rising interest rates will make leverage speculation and decadence thing of the past is your retirement plan to flip your house to some greater fool forget about it want to lock up your neighbor for the rest of his natural life because he dare do something in private to which you object forget about it have the sudden urge to send the troops to invade some oil rich nation you've never heard about until yesterday. forget a budget in fact just about the past thirty years of dumb luck and declining interest rates in which even a monkey could make a thing killing boeing speculating its all over you can just forget about it station or max yes well it just got

a little bit more expensive to be stupid unprecedented eighty billion dollars pulled from bond funds a record amount of money poured out of exchange traded in mutual bond funds in june according to a fresh report by trim tabs nearly double the amount pulled out of bond funds at the height of the financial crisis in october two thousand and eight yeah but i'm going to go to it's a secular movie at thirty years of rates going down now they're moving up so people are dumping their bonds were they putting that money well we saw a rise in oil even though there's been a commodity so up so that money is going to end up somewhere and but it's coming out of bonds it's actually worth turning to the start right here that i stole from karl denninger site and i felt free to steal it because i know you're interviewing him in the second half and this is the ten year treasury yields a consummate charity and you can see from one thousand nine hundred eighty basically yields have been declining for the past thirty years so most people will only have knowledge of declining rates whether they're investor or just living in

the world where they can always borrow more money and always juggle the debt roll over the debt constantly at an ever declining rate so you could always make whatever stupid misallocation of capital you wanted you know juggling debt you're trying to eat while you're juggling let me demonstrate here so you get some apples you can juggle and so the idea is can you juggle in more. juggling. not all that successful but. i think at the end. boy well so trim tabs also says that the this has basically. he wiped out seventy three percent of the hundred nine point six billion dollars that flowed into funds into bond funds in the first few months of the year so remember at as as we hit the peak bond we also saw a massive flood in from the average investor right the average investor finally got

enough courage to roll into the bond market at the absolute top and remember also it's not just individual investors but governments around the world who quantitative easing are invested in the bond market and as rates rise i mean that the the bonds in the portfolio of the federal reserve bank and corporations and other banks are going to become the most valuable well as trim tabs says of this outflow of bonds in this eighty billion dollars we were just in june they said quote until last month investors had been content to shovel huge sums into bonds with little regard for value confident that endless central bank liquidity would keep prices at ridiculous levels it was only a few weeks ago that junk bond yields dipped below five percent for the first time oh think of it also you know the basil accord they're trying to get banks to increase their reserves of course how do you classify a reserve what is the collateral on banks' balance sheet a lot of times bonds these bonds artificially high by quantitative easing and

cheaper interest rates now the interest go higher bonds are going to reduce in value so there's basil core to try to increase the reserve capital banks's a sham or some are going to happen because they are now selling into the teeth of rising interest rates collateral banks is now going to go down sharply which means another major bank failures on the way it's being p. and france like america or the side of general good big well the other problem of course is that quarterly statements are about to go out oh trim tabs does warn the rush out of bonds could be about to get even worse according to trim tabs which says that more bond investors could take flight after receiving. their quarterly statements in the coming months noticing that their quote safe bond funds are delivering losses instead of gains well this is the experience of everyone who watches the show they love what we talk about but they only really look at one thing investor monthly or quarterly statement from their bank or brokerage but as long as that number is something they're happy with then all is good but once they

open the mail they say oh my god my bond funds collapsed this month then they pat it then they watched our show more because they really should listen to us more well as i said it was easy to look brilliant for through the past thirty years in bonds if you were in the right to any anybody could look brilliant any monkey could do it so one of the biggest bond funds in the world celebrated investor is of course bill gross and pimco and they're of course meeting huge redemptions in their funds as bond market tumbles pimco seeks to reassure investors for thirty years bill gross has been seen as a genius but now nine point nine billion dollars with us drawn from his pimco total returns fund in june that's eight point five percent of all the holdings well it's not going to outperform the bond market in the face of a bond pocalypse that's just the way it goes for bill gross i mean he's

a good got a bombs on so unless he goes on a percent cash or moves into something else is going to suffer the ravages of the reversal in interest rates that we're saying now on a second the basis of continue now for ten years or more well it appears from morningstar data that he himself also was smoking his own belly button when he thought he believed that he can't do wrong for thirty years he's been right and ninety percent of pimco assets were in bond funds so alice in this article are pretty surprised that he's all in essentially on one asset. well he's front running the fed and that's been the strategy that's worked in other words the fed tells bond tells bill gross by the way we're going to be buying lots of bonds so he buy before the fed does and he makes money front running the fed but he's in a position now where is fund is so big it's like trying to maneuver an oil tanker it can't be done quickly and with an agile ety you know what she puts on the brakes

it takes miles and miles and miles but i think come to a full stop so he can have a difference of opinion on where bombs are going but to get extricate himself from multi hundred billions and trillion dollars in the bonds is not something you can do overnight so he's trapped like so many other people the roach motel called the federal reserve bank and the other interesting thing is that he has this total return fund but he also has an e.t.f. which tracks they use several each have him call has several e.t.f. tracking their other bond funds and you see that actually those investors are so-called investors are have much weaker hands they're much more frightened off by any movements because three quarters of the company's popular exchange traded funds have experienced outflows during june with two of them losing nearly forty percent of their holdings according to data from lipper yeah well they're slipping out of the bond funds but he writes nice letters though thing about bill gross he writes very entertaining monthly quarterly letters and he's a frustrated novelist when it comes right down to it isn't much of

a bond fund manager in this environment well i'll tell you what his latest newsletter is called tipping point and he ends along this line these are his words these are bill gross his words about whether or not you should flee his fund. yeah well this ship's going to make it to port said pimco and pimco co-captains willing mr gross wrote adding have a cocktail tell the band to stop playing dirge is because you're going to be just fine with him go at home and the band is laid on did you. grab yourself a lifeboat get get out of that sinking ship. well of course he's writing that now and june fourth he sent out a tweet and he wrote then keep smile and thirty years of bon bull markets have raised returns and spirits now there are doubts we're sticking with bonds as long as the fed does what's wrong with this guy he seems well you know he wrote six months ago in a moment of clarity he was buying gold and then i think he wishes you know inside

every bond ball there's a gold bug striving to get out bill and go if he were really on top of things see what immediately liquidate everything and move into a hundred percent well he also did back in april remember he did say that was the end of the bond bull market so suddenly he's changed his tune i guess he's the one playing on the titanic and he's trying to make everybody feel better but everyone's been trying to call the turn of the bond market for the last five years the only guy who actually call it within a day i believe is michael pentad who even never had him on the show but i think he's actually a guy who actually called it within a week of the bond market peaking now max correlation doesn't necessarily equal causation but i'm going to attempt to make it anyway with this chart and that is the prison population in america as you see at nineteen eighty eighty one that's when the prison population began to soar and it's gone straight up and

a stupid policy of incarcerating people for ever longer periods of time decades and decades in some cases life without parole option of parole for a minor you would think minor felonies and i thought that was. also another way that is the sort of decadence that was enabled through ever declining interest rates where people could just spend forty four thousand dollars per federal prisoner to lock people up for smoking dope you know ben bernanke is the new pinochet member of the military ones experiment in the liberal zation it should lay and they expanded the prison population exponentially of course ben bernanke he said the same in the fed heads going back this past thirty years the bombo market about the luxury of ever cheaper interest rates to fund their prison industrial complex known as america you know when they report numbers it's a zero zero we've got more people working in america they just mean that more people are now costs rated and their president duster casino complex stamping out

right license plates and playing video games to aggregate virtual gold to be sold on some chinese black market well you know the final thing about this prison story however is just showing how steep it is and how for thirty years we've been it allowed to build up debts and decadence for because it's been so cheap and we keep on rolling over this designation is i causation so you're saying that look these two charts are. a match but he's saying stuff is it which came first chicken or the egg or is it the black swan or is it a phenomenon that we don't have any rational explanation for but you're saying that perhaps cheaper interest rates cause the increase in the prison population well you know humans are in fact to like a bond they keep producing an income in their work and if you can finance more prisons or getting more people in prison doing slave labor cheaper cheaper rates then of course you would end up with the president just your complex driven by lower interest rates engineered by central bankers or in cahoots with polar up corrupt politicians of course farai station for thanks so much for being on the

kaiser report thinking right stay tuned for the second half a whole lot more. the civilized world produces more foods that it needs. while people die of hunger in other countries. millions of victims every year. where a meal is the most value trade. flood or drought to blame. it was a bad year without a train. we couldn't find anything but that. there was great hunger. it was a good help comes too late and without good intentions. charity diplomacy and

business model to. a. new. system. should. sit. still.

welcome back to the kaiser report imax keyser time now to go to karl denninger of market hyphen ticker dot org karl denninger welcome back to the kaiser report. thank you for having me on max all right the bond market what is going on carl denham there well it's really rather simple we've had a thirty year generally downward trend in interest rates if you look at the constant maturity ten year note yield you'll see that the chart goes from the upper left to the lower right it's been doing that since about one thousand nine hundred and this is now out changing to one of two scenarios because you can't go below zero so you're either going to have a flat bond market much like what japan has had for the last couple of decades or it's going to reverse and start trending back upwards and this is very important because in a declining yield environment you can print money by increasing your leverage every

time you turn the crank you not only make more money for yourself but you put more liquidity into the system for everybody else and so everyone else makes money and so your options if you hold your leverage constant or you don't have any is that you make money because your assets go up in price because the leverage cost of them decreases and if you turn the crank you not only help yourself you help everybody else the same time well in a rising yield environment the exact opposite is true if you don't turn the crank you lose money if you do turn the crank not only to use money but you make everybody else lose money at the same time so this is the shift in paradigm that is happening it's not a short term thing it's not something that's going to instantaneously reverse in result and everything collapsing and exploding all at once but this is a secular shift and there is nobody in the investment in business world younger

than fifty that is ever lived in an environment is an adult where this you know the world that we've been in for the last thirty years is not the case right now carl let's look at this end. political terms for a second because over that period of time the past twenty five or thirty years federal deficit seven crace governments have got increasingly more in debt and the way they've been able to do this is by riding this bond bull market they simply extend the maturity and they simply add on more debt and they get bailed out especially by the market because interest rates have gone down over this period of time so what happens to all this government debt if the trend is change in interest rates start ticking up what happens on karl. well there are at a lot of trouble because in a in a flat to rising environment being having any leverage on it all is death the only way that you have weight this is not to be levered of course it's rather difficult

to turn yourself from being levered into on levered when you have taken on in the case the united states a fifteen trillion dollars worth of debt and so how do you get out of that hole and the answer is you have to reduce your spending by dramatic kemal it's because you have to be able to cover the ever increasing coupon cost i curled during the clinton administration there was a species of money manager called the bond vigilante bill clinton made a remark he said i want to come back as a bond trader because they have all the power that's in other words the bond market was sold off because clinton's program and health care programs are considered to be too expensive and there was some pressure what happened what happened the bond vigilantes where do they go you know mix rather amusing when you when you talk about dad and then you do there were there was a bunch of chatter at the loop the other day from a couple of bank analysts there talking about how we had you know we had generally rising interest rates in the early two thousand into the mid two thousand and yet

house prices continue to go up and i look at that chart i see yeah ok there were short term moves that were countertrend same thing during clinton's term but look at what happened with just those little short term moves the one from two thousand and four ation till two thousand and seven is what blew up b.i.g. and lehmann brothers but you know and then you look at the other ones are going to so she was long term capital with the asian debt crisis but the secular trend remained intact on a downward basis so you know that clinton was right but clint was looking at this from a micro level as opposed to a macro level you have to pull a lens back and look at the thirty year trend and say well could shift the other way then there will be short term periods where increasing leveraged. well work but in general you can't have any on at all because if you do you're going to continually get hurt as asset prices decline so what you see is the gap between price and value in assets narrow and assets become valued on their utility as

opposed to being valued on their speculative premium and that is a collapse the dude is going to get all areas of the economy you know housing people think of it as well you know this is how we get wealthy used average americans we buy a house it goes up in value no no no housing is a depreciating capital asset you buy a house because you need a place to sleep now let's talk about the secular trends for a second to put this in a context because you're talking about a thirty year trend if you go back thirty years what happened well you had ronald reagan was in office and you had paul volcker as fed chairman and to rectify the excesses in the economy that came through the stagflation of the seventy's when the oil embargo was in place prices are skyrocketing but the economy was shrinking volcker raised rates and i believe the short term rates got up to fourteen or fifteen percent lot of people don't remember that and then inflation was wiped out

i believe was a frank raise at the time under one of the presidents and then you had this long secular downtrend in rates with the occasional bump in of course in one thousand nine hundred four was another blonde sell off with a rise in rates along the way but what you're saying karl denninger is that on a secular basis we've gone from a thirty year bull market in bonds now answering into a protracted at least ten to fifteen year period of rising interest rates is that a fair characterization. yeah there's only two possibilities max you can either have the bond market that flattens out and essentially doesn't move at all in terms of yield over the next couple of decades or you can have one that rises in rates if you want to see what happens deseret prices when you have a flat bond market look at japan twenty years they've been trying to stimulate their economy and play their money printing gains and the nikkei is trading at a quarter where it was at the peak so where's the success i certainly don't see it

and yet this is you know people say well you know we could have a two year treasury bond that ten year treasury yield in the two percent range for the next ten or twenty years well sure you could but then what's going to happen to stock market prices they're going to collapse by seventy five percent. ok so here in the u.k. it's a very similar situation interest rates are starting to tick up and here in the u.k. they've already imposed austerity even thou there hasn't really been significant cutback in public spending they call it austerity in america they've gone down the path of stimulating by doing more money printing etc but that hasn't stopped the ills from ticking higher and of course in japan they're able to do this for twenty years because they were eating into their savings account which they had accumulated after world war two a massive savings account but now that's been wiped out so let me ask you this if the u.s. the u.k. and japan all seem to be facing a similar situation a secular shift in interest rates moving higher means that they're going to high

find it because truly difficult to finance that government debt as it rolls over going forward so you're saying that these governments are going to have to they have only one choice right they just have to stop spending that and it's austerity becomes just basically that stop spending right karl well it's not austerity you know that you people talk about it like being mysterious some bad thing spending no more than you take in is a good thing not a bad thing and you don't put americans people around the world in the western economies they're not used to this the idea is that you can have anything you want you want you cadillac go buy what you want to do flat screen t.v. go buy what oh you don't have any money that's ok we'll just finance it over the next ten twenty thirty years people do the same thing with college educations they do same thing with houses it's nonsense we have to look at this is you know everyone's trying to play wimpy to you will popeye cartoons think i'll pay you next tuesday for a hamburger today well guess what it's tuesday that's course you can forget wimpy

the classic character from the early popeye cartoons now girl didn't just talk about timing for a second because this idea that there's a secular shift in bond markets and interest rates going to start rising has been talked about now for several years so the question i have in a lot of people would have is well what stop. ups the central bank staff are coming in and launching a massive global quantitative easing like program to stop this reversal from happening or are we saying or are you saying that basically all the bullets in the guns of the central banks have been fired and we just there is no recourse at this time your thoughts. well how do you stop it from happening max if you flatten out to yield curve and prevent the reversion by continuing to q.e. at ever greater amounts know who won the amount that's necessary in order to continue to keep that from happening goes up exponentially this is what we've seen this is why despite what the fed has done you have not continued to fall secondly

there's a zero bond re problem what are you going to do when you get to their debt point you're going to try to drive negative rates well for how long is that going to work you know mariel tragi seems to think he can get away with this but even if he does for a short period of time what does it buy him another couple years and then what we're right back where we started but with more economic damage it's been compounded into the system this is a fool's game these people need to would you wake up and it listen to not only what the bank of international settlements has said which is basically guys time's up the clock is wrong but in addition they need to listen to the conversation that has been repeatedly had during over iraq and steps to moni with ben bernanke and the u.s. congress were better said look there are limits to what i can do congress has to do its job and what congress has repeatedly told him is we're just functional we can't do it you have to well guess what when there's a child in the room that's eating all that candy eventually he has to stop eating

the candy because either he dies from them from getting no nutrition and eating only candy or the candy runs out those are the two choices. all right now ben bernanke you mentioned of course now he is talking about tapering what should be going to stop ease off on the quantitative easing the markets immediately react with an immediate rise in ayles bond market sold off he's talking about the rise in jobs in the housing market as a reason are the signs that he's looking at saying that there's a recovery there's a recovery in the reason rates are going up and because economies are coming karl denninger is that true. employment participation ratio max. that's all that matters to the long term sustainability of any so-called recovery that hours worked every hourly earnings excreted expansion the chart that i put up throughout

a repeated basis the reality of the situation is that from one thousand and eighty to two thousand and nine there was not one three month period where the economy expanded by more than the amount of credit the system expanded we had a couple of quarters where it happened during decreased the depths of the crash now we're back to the same game and quantitative easing is the tonic because the private economy is to ebert and on able to take on any more and to be i s's come out said you guys squander the five years that central banks gave you to take this leverage down sorry time's up you run into this zero boundary now take your medicine finally caught under tempo over the largest bond fund in the world suffered a pretty sizable all multibillion dollar drawdown in funds last month because interest rates are moving higher when and we only have about ten seconds left but what would you are you a bond bear i guess you would if you're selling out of bonds

aren't were you going cash yeah because i'm in an area of declining asset prices i want to hold our capital i want to buy things from people when they're over levered him a lot but i have to sell them to be cheap i found all right karl denninger thanks so much for me on the kaiser report thank you. all right that's all the time we have for this episode of kaiser report with me max geyser and stacy everett i'd like to thank our guests karl denninger of market hyphen secor dot org if you'd like to get in touch tweet us at kaiser report and so next time i got to say by all . what defines a country's success. faceless figures of economic growth. for a factual standard of living.

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