Right now, the situation with the markets and the financial system at large might be described comparatively as a terminally ill patient barely breathing on a life support machine while attending doctors tell the family that everything looks on the up and up. In other words, the situation is really ugly behind closed doors – but those doors are about to be swung wide open for the world to both see and experience.
Take the ongoing "bond bloodbath," as Wolf Richter calls it. Delusions about the Federal Reserve's fight with inflation are finally giving way as reality sets in that inflation is not going away. It is not transitory like notorious liar Treasury Secretary Janet Yellen kept saying, and there does not really appear to be any way to stop it.
Long-term yields are right at the point of breaking 5 percent – the last time this happened was in 2007, and we all know what happened immediately after. As explained by The Daily Doom, this represents "a huge regime change, after years of the Fed's QE (quantitative easing) and interest rate repression, and all prior assumptions are out the window."
Basically, we are entering uncharted territory as the long-term Treasury market wakes up from its delusion about inflation and interest rates normalizing before once again descending. This is simply not going to happen, no matter how much the money masters want to pretend and tell us all is the case.
"Delusion ends hard when the denial breaks up, and the Fed's financial demolition is accomplishing that destruction now," writes David Haggith. "If it doesn't, inflation will do the job for it."
(Related: Earlier in the month, we warned that the ongoing Treasury bond collapse is shaping up to be the worst in market crash history – and the situation has only worsened since we published that story.)
As the bond markets collapse, so does the housing market, the banks, and eventually everything else
As the Fed continues to tighten the system into a steep recession, there will be another dramatic plunge in the markets to correct what Haggith describes as the "everything bubble" – meaning everything is way overvalued to the point that it has to pop at some point.
"That will plunge us rapidly into recession in an all-out panic because people who have been investing based on such enormous delusions panic when they finally realize that, like Wile E. Coyote, they've run out past the edge of a mighty high cliff," he explains.
"The crash of the Big Bond Bubble was inevitable because of the Fed's QT (quantitative tightening) and the Fed's raising of interest rates and the government's massive addiction to endless and enormous deficits, requiring massive new bond issuances."
The way the government continues its deficit spending, which adds ever-more debt to the national pile, is by piling enormous amounts of Treasury securities onto the market – securities that require buyers in order to transact. The problem now is that many countries such as China and Russia are dumping their Treasury bonds at the same time that there is a dearth of new Treasury buyers.
"Yield solves all demand problems by rising until demand emerges," Haggith explains. "And that's in part what we're seeing now. All of this is happening as the Fed is unloading its balance sheet at record pace, having already shed over $1 trillion in securities in a little over a year."
The result is a housing market deep freeze as the demolition of the bond bubble takes down the housing market along with it. Bank reserves are also getting squeezed by the devaluing of their bonds, which means more banks will soon collapse as well, setting even more falling dominoes in motion that will inevitably burst the entire bubble economy.
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