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Published On: Thu, Nov 3rd, 2016

Larry Summers’ Worst Nightmare: Trillion Dollar Infrastructure Programs a Slow Motion Black Swan to Break 500+ Year Low Rate Bubble – Eric Dubin

 

Plans for trillion dollar plus infrastructure programs will pop the trillion dollar bond market bubble and people like Larry Summers are clueless and desperate for policy options to address the mess our dear “leaders” have created.

TND Market Brief:  Eric Dubin
During my podcast interview with Kennedy Financial (click here), I made a brief comment about how bond yields are backing up.  Hours later, Bloomberg published a worthwhile article (click here) that attempts to explain why yields are rising – and they make a number of accurate points.  However, the authors go astray when they attribute the change to the U.S. election and rising odds of a Trump victory because yields have been rising at a somewhat steady rate for months, through ups and downs of the Trump/Clinton sh*t-show.

 

free moneyThe authors discuss how inflation is starting to percolate through the global system.  What they fail to see is something that I suspect even bright golden boys like Larry Summers might not even give sufficient attention:  the potential for crowding out of the credit market in the future should giant infrastructure programs be announced and, the resulting huge shift in inflation expectations that WILL come over subsequent quarters.

 

Inflation expectations are mercurial.  They can change rather quickly.  A multi-government, multi-trillion dollar program will be announced and debt financing will take place over quarters and years, but inflation expectations are not as polite and patient.  The global credit market will tighten in the wake of the announcement of these programs.  We could see 150 basis points added to the 10 year US Treasury within a year, for example, and I’m being conservative.  The shocks that will likely come on the back of a reasonably fast and large shift in interest rates will be problematic for debt service obligations.  It could cause fireworks in the interest rate derivatives market.  But ultimately, what is most likely to happen as a baseline scenario concerns the translation of inflation expectations into a demand for higher yield compensation.  The bond vigilante is not dead.  He’s just been slumbering with the safe knowledge that central banker policies would keep things together, as has been the case.  In 2017 through 2018, the bond market is going to teach Mr. Summers a painful lesson.

 

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Mr. Dubin is the Managing Editor of TheNewsDoctors.com. He has 25 years of experience as an independent buyside securities and global macro analyst. He has well over a decade of experience as a financial journalist, editor and political analyst. He’s primarily an autodidact, but his formal education includes degrees in economics, international relations and MBA. He welcomes feedback on his articles and will make an effort to respond to comments. Email Eric by sending to “Eric” and then @TheNewsDoctors.com. He can also be “followed” on Facebook: https://www.facebook.com/EricDubin

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About the Author

- Mr. Dubin is the Managing Editor of TheNewsDoctors.com. He has 25 years of experience as an independent buyside securities and global macro analyst. He has well over a decade of experience as a financial journalist, editor and political analyst. He's primarily an autodidact, but his formal education includes degrees in economics, international relations and MBA. He welcomes feedback on his articles and will make an effort to respond to comments. Email Eric by sending to "Eric" and then @TheNewsDoctors.com. He can also be "followed" on Facebook: https://www.facebook.com/EricDubin

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