This page has been archived and commenting is disabled.
The Fed is Now Cornered
Another Fed FOMC meetings has come and gone and interest rates remain at zero.
The investing world is obsessed with guessing when the Fed will raise rates and by how much. The Fed has been dangling the “rate hike” over the markets since the beginning of the year.
First we were lead to believe a rate hike was coming in April, then it was June, then September, and now it might possibly be well into 2016.
The fact of the matter is that no one knows when the Fed will raise rates nor by how much. However, one thing is clear: the Fed cannot and will not allow rates to normalize (meaning the 10-year Treasury yields 5% or more).
The reason for this is that it would implode the bond bubble.
As you know, I’ve been calling for a bond market crisis for months now. That crisis has officially begun in Greece, a situation that we addressed at length other articles.
This crisis will be spreading in the coming months. Currently it’s focused in countries that cannot print their own currencies (the PIIGS in Europe, particularly Greece).
However, China and Japan are also showing signs of trouble and ultimately the bond crisis will be coming to the US’s shores.
However, it’s critical to note that crises do not unfold all at once. The Tech Bubble, for instance, which was both obvious and isolated to a single asset class, took over two years to unfold.
As terrible as the bust was, that crisis was relatively small as far as the damage. At its peak, the market capitalization of the Tech Bubble was less than $15 trillion. Moreover, it was largely isolated to stocks and no other asset classes.
By way of contrast, the bond bubble is now well over $100 trillion in size. And if we were to include credit instruments that trade based on bonds, we’re well north of $600 trillion.
Not only is this exponentially larger than global GDP (~$80 trillion), but because of the structure of the banking system the implications of this bubble are truly systemic in nature.
Modern financial theory dictates that sovereign bonds are the most “risk free” assets in the financial system (equity, municipal bond, corporate bonds, and the like are all below sovereign bonds in terms of risk profile).
The reason for this is because it is far more likely for a company to go belly up than a country.
Because of this, the entire Western financial system has sovereign bonds (US Treasuries, German Bunds, Japanese sovereign bonds, etc.) as the senior most asset on bank balance sheets.
Because banking today operates under a fractional system, banks control the amount of currency in circulation by lending money into the economy and financial system.
These loans can be simple such as mortgages or car loans… or they can be much more complicated such as deriviative hedges (technically these would not be classified as “loans” but because they represent leverage in the system, I’m categorizing them as such).
Bonds, specifically sovereign bonds, are the assets backing all of this.
And because of the changes to leverage requierments implemented in 2004, (thanks to Wall Street lobbying the SEC), every $1 million in sovereign bonds in the system is likely backstopping well over $20 (and possibly even $50) million in derivatives or off balance sheet structured investment vehicles.
Globally, the sovereign bond market is $58 trillion in size.
The investment grade sovereign bond market (meaning sovereign bonds for countries with credit ratings above BBB) is around $53 trillion. And if you’re talking about countries with credit ratings of A or higher, it’s only $43 trillion.
This is the ultimate backstop for over $700 trillion in derivatives. And a whopping $555 trillion of that trades based on interest rates (bond yields).
With that in mind, the bond bubble has already begun to burst. The fuse was lit by Greece, but it is already spreading. The Federal Reserve is well aware of this situation, which is why it continues to hem and haw about raising rates, despite the fact that we are now six years into the “recovery.”
True, the Fed could raise rates this year, but the fact that it is so concerned about how the markes will react to a measly 0.1% rate hike after SIX YEARS of ZIRP only confirms the scope of the bond bubble.
Moreover, any rate hike that the Fed initiates would likely be largely symbolic as the US is already teetering on the verge of recession (if not already in one). The Fed could raise rates to 0.35% this year, but doing so would only accelerate the US’s economic contraction and trigger a flight of capital into quality sovereign bonds (pushing yields even lower).
In this regard the Fed is truly cornered. If it fails to hike rates it will have no ammo for when the next crisis hits the US. But it if hikes rates now while the economy is so weak (more on this in a moment), it’s likely to kick off or deepen a recession.
A second, larger than 2008, Crisis is approaching. Smart investors are preparing in advance.
If you've yet to take action to prepare for this, we offer a FREE investment report called the Financial Crisis "Round Two" Survival Guide that outlines simple, easy to follow strategies you can use to not only protect your portfolio from it, but actually produce profits.
We made 1,000 copies available for FREE the general public.
As we write this, there are less than 10 left.
To pick up yours…
Best Regards
Graham Summers
Chief Market Strategist
Phoenix Capital Research
Our FREE daily e-letter: http://gainspainscapital.com/
- advertisements -


i knew from the headline that this was a phoenix capital piece. sad really.
So much turmoil in the markets..you could be scared by this..but if you hear thunderstorms and see lightning in the distance ..probably means rain...which can be a good thing....do not listen to the doomsayers..they offer a gloom and doom scenario and then want to sell you something so you can escape the impending disaster..they so very much want to help you..
NO AMMO
This is a really dumb thing to say considering the Fed has a printing press. What's even dumber, is to suggest the FED should raise rates now (and cause the market to crash) so they can cut rates and "cure" the market in the future.....which is what AMMO means in the first place.
They created a room with no doors 7 years ago and have been painting themselves into a corner ever since.
Here is a novel idea. Produce goods and services domestically which will create jobs, incentivise investment, create profits which could be reinvested and, oh never mind, that is so twentieth century.....
The mechanics to make this happen is simple and controversial. Begin an import tariff as the primary source of government funding. Cut all personal income tax to ZERO and begin with a corporate tax of 10%. You will see manufacturers flock back to the US immediately. Part of this plan includes reducing government expenditures. Eliminate unconstitutional departments like HUD & Education, and stop all "entitlement" programs, including foreign "aid". This will have the added benefit of shutting off illegal immigrants and providing city riot centers for elimination of bad elements. Looters & rioter will be shot on site. Survivors will be exported to nation of origin.
some parts of the world which are now relatively peaceful will experience anarchy, but where????
When the EBT stops working you had better not be ith in 5 miles of Dr. Martin Luther King Jr Drive.
Thas raycissistsessesist
The Fed isn't cornered, Mr. and Mrs. Ordinary Person is cornered.
And the debt-saturated middle class is set up to learn that they went extinct about 2 decades ago and have been running on debt fumes ever since... once the debts are called in.
And.
They.
Will.
Be.
Called.
In.
Denial is only running 40%? That's an improvement.
With all the money the Fed handed out to the bankster mob to try and keep the economy afloat they could have just sent every adult american a check for $2000 every week minus taxes of course so that their sugar daddy can still build bombs.
Then everyone would be out shopping, bag carrying, and eating which apparently is what these dinosaurs see as a successful economy.
Even before the Long Depression 2.0 ( see Long Depression https://en.wikipedia.org/wiki/Long_Depression ) the Fed was backed into a corner if for no other reason but the Age Wave that is coming and is already beginning to break on the global shores.
All the old pharts retiring and needing high interest rates to fund their "Golden Years" sipping Mai Thais on the beach or smoking stogies on the 18th green before their last putt.
Plus, the debt. We can't service even the interest on the debt now, mush less the premium. What's a hike in interest rates going to do for that? That's right....blow it to hell.
Now we have deflation coming and is already here. Peak Debt EVERYWHERE. The Too Big To Fail Banks and Corporations. Shale Oil and its easy debt funding model. We have a SUPER CONFLUENCE of reasons that interest rates CAN NEVER BE RAISED AGAIN THIS ENTIRE CENTURY !!
Well...not until the whole ediface implodes.....simply because of all the reasons we CAN NOT raise rates.
The entire world is in a corner......and night is coming. And it's very.....very....hungry
It seems that we are getting ready to have a long and nasty night when the world economy implodes under it's own weight. They don't dare raise rates, and them finding any little reason to not raise it shows how bad the economy is.
If the only thing that can get rid of the banksters is a massive crash of the system, then I say
BRING IT ON
I am with you on that but I still want to know how in the fuck that queer son of a communist bitch Obama got elected while he was taking Reggie all up in his punk ass.
three words.....SOCIALIST JEW MEDIA
wow the newbie Jew / Homo / Negro baiting on this site has gotten really thick