The recent French riots is but the tip of the iceberg in
what could spiral out of control in the 2nd largest economy in the EU, as we
have aluded to for some time now. The next big crisis will be from sovereign
bonds, and France is indeed leading the charge (see here). More graphically, the debt pile is now much higher
than even the USSR at the time it broke up:
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Europe faltering on all fronts
The woes in Europe does not stop at the English Channel - as
indicated in the how HSBC may be caught in a rising tax trap (see Article 7),
UK is also facing some severe fiscal challenges and tax hikes may be the only
solution, which will surely weaken the tax base even further.
And Germany's continuous decline in manufacturing output (Article
1) could further undermine investor confidence when any bad statistic hits
the wires next. All major economies are now in a spiralling interest cycle, and
any default by a weak payer could trigger the next contagion:
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On top of all this, when more central banks next hike policy
rates, the momentum could accelerate in long bond yield increases:
Fed – further 50bp of Fed hikes expected
RBA – risk of further tightening this year
ECB - 25bp hike expected by year end
BoE – a 25bp hike by year end
BoC - expect to lift 25bp in both December and March
While some banks may be advocating long bonds at this
juncture (below chart shows massive long bets on bonds right now), may
be due to myopic focus of very short term trading patterns, the mega
multi-decade turning point upon us could swiftly sweep all longs into big
losses, so beware of who you listen to...
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Other factors to exacerbate rate pressures
There are some truly worrying developments all over the
place that suggest inflationary pressures will not ease, for example,
Supertanker Rates Soaring To Near Record $1 Million A Day, adding cost of oil
and bulk commodities being shipped (Article 2), and even in the US,
diesel prices are reaching new highs:
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Deglobalisation / trade fragmentation add headwinds
As govts lose people's confidence (eg Scottish, Welsh and
Northern Irish leaders meet to plan break-up of United Kingdom, Article 3),
separatist movements is now clearly on the march, increasing trade and
investment friction, further adding to inflationary pressures. The next one to
watch will be the Alberta vote to leave Canada:
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Meanwhile increasing temptation to add sanctions will
further disrupt global supply chains, as Trump signed the Russia and Iran
Sanctions Bill (Article 4)...
US should be safer, private sector in better shape, but
hyperscalers...
Although the US debt situation is severe (most of 2026
rollover is already on short duration, and likely see some coupon inflation
soon, see chart below), the likely blow up first shot will be fired in
Europe or Japan, or some other fringe economies.
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We continue to see the pandemic to be centred on public
sector, as for the first time in the past 70 years, govt debt is by far the
biggest elephant in the room:
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Also worth staying vigilant is how the new bubble of AI may
be pricked given how extended the euphorial rises have become, and of course
with it all the hundreds of billions of AI related debt issued of late:
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Risk of false flags rising
When govts lose control, the temptation rises to create
false flags to divert attention to 'external enemies'; the institution of
emergency conditions may also conveniently defer or cancel elections in which
current politicians in power could dodge the unavoidable losses facing them.
The telltail signs are now becoming quite obvious:
- Poland's prime minister warns of Russian 'accidental'
attacks on Ukraine's allies (Article 5);
- Moscow Sends Nuclear Warning to NATO as Tensions Rise in
the Baltic (Article 6)
So many things can go wrong, and some of them
catastrophically... all we can hope is to be prepared and safeguard our own
immediate circle of care. Hope our fears of the bad outcomes are overly
pessimistic, it still does not make the case for preparation invalid.
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Article 1: Who backstops the backstop?
https://bondvigilantes.com/blog/2026/09/who-backstops-the-backstop/
Article 2: Mideast Chaos Sends Supertanker Rates
Soaring To Near Record $1 Million A Day
https://www.zerohedge.com/energy/mideast-chaos-sends-supertanker-rates-soaring-800000-day
Article 3: Scottish, Welsh and Northern Irish leaders
meet to plan break-up of United Kingdom
https://www.telegraph.co.uk/politics/2026/09/13/irish-scots-and-welsh-leaders-meet-to-plot-break-up-uk/
Article 4: Trump Signs Russia and Iran Sanctions Bill
https://www.theepochtimes.com/us/trump-signs-russia-and-iran-sanctions-bill-6089946
Article 5: Poland's prime minister warns of Russian
'accidental' attacks on Ukraine's allies
https://www.npr.org/2026/09/18/nx-s1-5973265/poland-nato-russia
Article 6: Moscow Sends Nuclear Warning to NATO as
Tensions Rise in the Baltic
https://www.themoscowtimes.com/2026/09/30/moscow-sends-nuclear-warning-to-nato-as-tensions-rise-in-the-baltic-a93828
Article 7: 滙控恐要進貢倫敦 再非收息首選
https://www.hkej.com/dailynews/article?id=4535013
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