How Higher Interest Rates Could Trigger Another 2008-Type Event

Phoenix Capital Research's picture

Higher
interest rates are coming and coming fast. The Fed has spent Trillions trying

to lower
interest rates (more on this in a moment), and it’s now officially lost control
of the long-end of the Treasury market.

 

This will
have ENORMOUS implications for the US housing market and financial system.
Housing prices will be collapsing in the coming months as interest rates soar.
We could also very well see another 2008-type event (a collapse of the US
Financial System) as well.

 

Why?

 

Derivatives.

 

In 2008, the
entire financial system nearly went under due to the Credit Default Swap market
which was $50-60 Trillion in size. In contrast, the interest-rate based
derivatives market is $196 TRILLION in size: more than THREE times larger than the credit default swap market at
hits peak.

 

At this size
you only need a very small percentage of these derivatives to be “at risk”
(meaning real money is bet on them), say 5% to get $10 trillion in potential
losses. To put that number into perspective, the entire WORLD STOCK MARKET is
only $36 trillion in size.

 

See the
potential risk here?

 

To say that the US financial system is in
danger would be a HUGE understatement. It is the derivatives market, NOT the
housing market that has the Fed concerned.

 

Sure, the
Fed claims it’s engaging in QE and other tactics to help housing, but this is
just a political move aimed at quelling the US public’s growing outrage. You
can tell this because of the fact that interest rates have in fact JUMPED every
time the Fed engaged in QE:

 

 

There is no
way any human being could claim that QE is about helping housing prices. It is
aimed entirely at funneling TRILLIONS of Dollars to the Wall Street banks. Why?

 

Because
these are the banks with the GREATEST derivatives exposure.

 

 

Trust me,
Ben Bernanke is well aware of this situation. Even his predecessor, Alan
Greenspan, knew about it as far back as 1999. At that time he told Brooksley
Borne that attempting to rein in the derivatives market and forcing it to pass
through a public clearinghouse would “implode” the market.

 

Remember, QE
is all about the Fed buying Treasuries FROM the Wall Street banks. In this
sense it’s nothing more than an effort to remove assets from their balance
sheets in exchange for cash. And that’s exactly what it’s supposed to be: an
attempt to shore up the Wall Street banks MASSIVE derivative exposure.

 

This is why
the Fed keeps launching more and more QE programs despite the clear fact that
it has failed to accomplish any of its publicly stated goals: boosting
employment, lowering interest rates, etc. Bernanke knows if he doesn’t keep the
billions in weekly capital infusions to the Wall Street banks that the entire
system will come crashing down.

 

Be aware,
the issues that caused 2008 are still in play. If Bernanke loses control of
interest rates on the short and long end its GAME. SET. MATCH. for the US
Financial System.

 

Prepare
Accordingly,

 

Graham
Summers

 

PS. If
you’re getting worried about the future of the stock market and have yet to
take steps to prepare for the Second Round of the Financial Crisis… I highly
suggest you download my FREE Special Report specifying exactly how to prepare
for what’s to come.

 

I call it The Financial Crisis “Round Two” Survival
Kit
. And its 17 pages contain a wealth of information about portfolio
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on the stock market (this “insurance” paid out triple digit gains in the Autumn
of 2008).

 

Again, this
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and click on FREE REPORTS.

 

PPS. We ALSO
publish a FREE Special Report on Inflation detailing three investments that
have all already SOARED as a result of the Fed’s monetary policy.

You can
access this Report at the link above.