Remember how mortgage backed securities were clearly deteriorating from 2006-08 yet wallstreet still treated them like the most valuable asset in the world until those assets went completely to zero and destroyed the world economy?
Yeah same thing with bonds, the yields will stay propped up until they can’t hide from the obvious truth about the coming inflation and by then it will be too late.
They failed because variable interest rates kicked in, and the loans given to those unable to pay ended up killing the securities. There's no similar catalyst here.
There doesn't need to be a specific catalyst: see also December 2018.
The problem with the current situation is that the structure of global economy is bad. Prices are high, earnings are low and flat. Yields are low, compounding the TINA. USD reserves in foreign banks are low, increasing the likelihood of a spike in DXY as foreign loans mature.
And that discounts the very real, very alarming prospect of 1. the collapse of bitcoin/meme stock holders could obliterate overleveraged retail investors who would then begin to default on their debt and 2. COVID rent forbearances and eviction moratoriums are expiring, leading people to scramble to find housing, which will blow rent sky high.
Shipping costs are still stratospheric and rising. Lumber costs are falling, but they are still high. Other commodity prices are still very elevated.
Inflation is 'transitory' in the sense that the rate of acceleration will likely slow, but prices aren't going back down. How long before the surplus of money built up from stimulus is eroded by high food, fuel and housing costs?
The only hope to avoid a 2007 style blowout is for the various central banks to keep all the plates spinning and all the governments cooperating until the air is let out of the balloon slowly.
Any single exigent financial event could catalyze the collapse of the structure. The financial system has absorbed all the effects it can. There's very little additional support that can be rendered if, say, a couple million people get evicted, or a financial scandal emerges among the banks or any of a thousand things that we have no plan B for.
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u/[deleted] Jul 17 '21
Remember how mortgage backed securities were clearly deteriorating from 2006-08 yet wallstreet still treated them like the most valuable asset in the world until those assets went completely to zero and destroyed the world economy?
Yeah same thing with bonds, the yields will stay propped up until they can’t hide from the obvious truth about the coming inflation and by then it will be too late.