By Brian Maher
This post A Hero Returns to Wall Street appeared first on Daily Reckoning.
He has risen from the grave… with a thirst for blood.
The scourge of Washington, the fiend of Wall Street, this boogeyman’s return has markets wriggling in exquisite torture…
Rumors of his return were at least partly responsible for Monday’s record 1,175 point bloodletting.
His stomping footsteps were heard again yesterday afternoon… and stocks sold off violently.
The footsteps grew louder today.
Who is this creature?
And what does he want?
Answers to follow…
After a roaring 567-point spree Monday, the Dow Jones rattled off another 381 by late morning yesterday.
It was on pace for a two-day blitz of nearly 1,000 points.
Then came the footsteps… the market shrieked… and the Dow closed the day 19 points in the red.
What was the trigger?
Senate leaders announced late yesterday afternoon they agreed on a two-year budget deal.
The deal strikes the fiscal handcuffs from politicians’ wrists… and liberates them to do what they do best — spend other people’s money.
If it passes, the deal raises federal spending $300 billion over the next two years — while taxes are being cut.
The hawks will get their guns…
The doves will get their butter…
And fiscal responsibility will get the shaft.
Spiraling deficits could follow.
And inflation, long dormant, could retake the stage.
Enter now the protagonist of our ghoulish tale…
The bond vigilante.
Wikipedia defines a bond vigilante thus:
A bond market investor who protests monetary or fiscal policies he considers inflationary by selling bonds, thus increasing yields.
Economist Ed Yardeni coined the term in 1983.
“If the fiscal and monetary authorities won’t regulate the economy,” said Yardeni, ”the bond investors will. The economy will be run by vigilantes in the credit markets.”
The Federal Reserve overheated the printing presses in the ’70s.
Inflation had America by the snout — reaching 11% by 1979.
Inflation gnaws at the value of bonds.
And no bondholder wants to see inflation reduce his bonds to sawdust.
In protest, they threatened to sell their bonds en masse.
But Paul Volcker entered the scene in 1981 and raised interest rates so dramatically he licked inflation by 1983.
The bond vigilantes sank into hibernation.
But they re-emerged in the early to mid-1990s.
A certain fellow from Hope, Arkansas planned to spend the economy into prosperity.
But the vigilantes stuck a gun in his ribs…
Ten-year yields spiked from 5.2% to 8% between October ’93 and November ’94.
As a result, the bond vigilantes forced Clinton “to scale back an ambitious domestic agenda,” in Yardeni’s words.
Such was their power, Clinton henchman James Carville adjusted his reincarnation plans:
I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everyone.
But massive central bank bond purchases, especially since the financial crisis, have hammered bond yields down and down.
By July 2016, 10-year Treasury yields sank to a record low 1.37%.
Inflation was reduced to a ridiculous rumor.
And the bond vigilante was laid away for good.
Or so it was thought…
The bond vigilante is out of his grave… and back on the prowl.
Former …read more
Source:: Daily Reckoning feed
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