Is Britain heading towards another Black Monday?

Bond markets are collapsing around the world, just as they did in the run-up to the 1987 crisis. Debts have increased. Stock markets are overloaded and, in many cases, company values ​​are stretched to breaking point. A seemingly indestructible bull market is coming to an end. It is not difficult to see how this could end in a gale of destruction that devastates the markets.

If it occurred, a market crash on the scale of 1987 would prove a catastrophic political and economic event. It would cause interest rates to skyrocket, increasing costs for mortgage holders and highly indebted businesses, especially in the real estate sector. Businesses would fail and pension funds would be in trouble.

Perhaps most important of all is that The already high cost of servicing the national debt would increase even further. It would force profligate politicians to finally face the consequences of their unbridled spending.

There is a lot about financial markets in recent weeks that looks a lot like it did in the late 1980s. However, there is one important difference. Authorities still had fiscal room to respond to the Black Monday collapse. After two decades of easy money and constant protection of markets with quantitative easing to avoid a crisis, that no longer exists.

It remains to be seen if we see a repeat of 1987. However, one thing is certain: if we do, it will be much worse this time.

Bond Market Bombing

Investors are starting to worry about a repeat of Black Monday mainly due to a sell-off in the bond market, where companies and governments issue debt and promise a guaranteed rate of return. The bond market, usually a quiet corner of financial markets, has been hit by a wave of selling in recent weeks.

If you want a vivid example of the bond market crash, the place to look is Vienna. At the height of the government debt bull market, Austria very cleverly launched a 100-year bond, and then reissued it in 2020. With a coupon of just 0.85 percent, investors would have to wait an entire century to get their money back, and despite all that risk and patience, they would earn a return of less than 1 percent.

Amazingly, in retrospect, the issue was oversubscribed 16 times as investors rushed to give away their money for virtually nothing until long after his death. And today? Perhaps it’s not too surprising that the bond’s value has plummeted. If you sell it, you will recover only 33 euros for every 100 invested.

Why anyone wanted to lend money to the Austrian government for 100 years is perhaps a question that only psychologists can answer. What is certain is that The value of the bond market has fallen on a spectacular scale in recent months. The Austrian 100-year bond is an extreme example, but the value of most major bonds has fallen by 40% to 50% over the past year, and losses have accelerated over the past month.