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Is the Fed About to Light the Fuse on a $9 Trillion Debt Bomb?

Phoenix Capital Research's picture




 

The US Federal Reserve (Fed) and European Central Bank (ECB) have created a very dangerous situation.

 

Throughout the last six years, there has been a sense of coordination between the Fed and ECB. This was evident both in terms of where capital went as well as how it was delivered via monetary policy.

 

For instance, when the Fed released its discount window documents in 2011, it became clear that most of the funds from QE 2 actually went to foreign banks located in the EU.

 

Similarly, when the EU banking system was close to imploding in 2012, the Fed coordinated with the ECB to announce QE 3 in an effort to prop up the EU banking system and calm overseas jitters to aid the Obama administration in its re-election campaign.

 

In short, from 2008 to 20414, the Fed and ECB worked together.

 

However, at some point this relationship was set to fracture. True, global Central Banks want to work together to maintain stability… but when every Central Bank is engaged in the competitive devaluation of its currency, at some point the relationship between Central Banks would become fractured as they individually had to choose to aid themselves over each other.

 

That point is today…

 

The Euro comprises 56% of the basket of currencies against which the US Dollar is valued. As such, the Euro and the Dollar have a unique relationship in which whatever happens to the one will have an outsized impact on the other.

 

This relationship first began to run off the rails in June 2014 when the ECB cut interest rates to negative. Before this, the interest rate differential between the Euro and the US Dollar was just 0.25% (the US Dollar was yielding 0.25% while the deposit rate on the Euro was at exactly zero).

 

While significant, the interest rate differential was not enough to kick off a complete flight of capital from the Euro to the US Dollar. However, when the ECB launched NIRP, cutting its deposit rate to negative 0.1%, the rate differential (now 0.35%) and punitive qualities of NIRP (it actually cost money to park capital in the Euro) resulted in vast quantities of capital fleeing Euros and moving into the US Dollar.

 

Soon after, the US Dollar erupted higher, breaking out of a multiyear triangle pattern and soaring over 25% in a matter of nine months.

 

 

To put this into perspective, this move was larger in scope than the “flight to safety” that occurred in 2008 when everyone thought the world was ending.

 

The reason this is problematic?

 

There are over $9 trillion in borrowed US Dollars sloshing around the financial system. And much of it is parked in assets that are denominated in emerging market currencies (the very currencies that have imploded as the US Dollar rallied).

 

This is the US Dollar carry trade… and it is larger in scope that the economies of Germany and Japan… combined.

 

In short, when the ECB cut rates to negative, the US Dollar carry trade began to blow up.  The situation only worsened when the ECB cut rates even further into negative territory in September 2014 and again last week bringing the rate differential between the US Dollar and Euro to 0.55%.

 

Now, the Fed is talking of raising interest rates. Even a symbolic rate hike to 0.3% or 0.5% could trigger a complete implosion of the $9 trillion US Dollar carry trade.

 

If you think this is just fear mongering, you’re mistaken. The Treasury Dept. issued emergency kits to employees a few months ago in anticipation of systemic volatility during the rate hike. Similarly, the Fed boosted the size of its market operations department in Chicago case the NY Fed loses control of the system when rates increase.

 

In short, we could very well be on the eve of another systemic crisis. The financial elites have been preparing for this for months.

 

Smart investors are preparing now. The August-September correction was just a warm up. The REAL drop is coming shortly.

 

We just published a 21-page investment report titled Stock Market Crash Survival Guide.

 

In it, we outline precisely how the crash will unfold as well as which investments will perform best during a stock market crash.

 

We are giving away just 1,000 copies for FREE to the public.

 

To pick up yours, swing by:

https://www.phoenixcapitalmarketing.com/stockmarketcrash.html

 

Best Regards

 

Graham Summers

Chief Market Strategist

Phoenix Capital Research

 

 

 

 

 

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Mon, 12/07/2015 - 16:50 | 6889502 Wow72
Wow72's picture

From a goldbug to other gold bugs... Get a little Bitcoin because everything is "rigged" so Bitcoin will take off, the crooks love it,  Its my opinion, whether you like Bitcoin or not its going to take off because the same crooks who rig our market are rigging SHITCOIN.  I would try to ride it up... Just an opinion, they are like assholes, everyone has one.

 

Just listen to some of the SHITCOIN talking heads and JPM is involved I wouldnt bet against it at this point... The scum that is coming out of the woodwork is unreal.  They will all hop on BItcoin like a magic carpet when the dollar collapses.

Mon, 12/07/2015 - 16:51 | 6889518 silverer
silverer's picture

You may have a good point.  Assholes don't evaluate on something solid, trustworthy or ethical.  It makes perfect sense. 

Mon, 12/07/2015 - 17:51 | 6889630 Wow72
Wow72's picture

I understand exactly what gold and silver is that’s why I like them so much.  Im just fucking a bit paranoid right now.  People cant be thinking ahead enough right now.   Believe me I dont believe in shitcoin at all, I dont like the scum that took it over, I dont like the scum that pushes it,  it is what it is, a tool of scum.    Unless the people rise up, these same people control the economy? I dont believe in it as money, only currency.  I really think its shit.    I just wouldn’t bet against it, there are way to many stupid people out there  and some big people are behind it, so there is no stopping it unless we do something other than sit around on our hands, this is their market till people take it back??

JPM also has plenty of silver.

Mon, 12/07/2015 - 16:15 | 6889323 Flying Wombat
Flying Wombat's picture
The Fed Has To Hike Rates Now; Here’s Why Stocks/Gold Spiked Up - Dave Kranzler
http://thenewsdoctors.com/?p=557164
Mon, 12/07/2015 - 16:07 | 6889276 PoasterToaster
PoasterToaster's picture

"The Euro comprises 56% of the basket of currencies against which the US Dollar is valued."

If shit is valued against shit, how much is dat shit worth?

Mon, 12/07/2015 - 16:52 | 6889522 silverer
silverer's picture

The citizens of Zimbabwe found out a while back.

Mon, 12/07/2015 - 15:57 | 6889213 Herdee
Herdee's picture

What Schiff and others don't want to admit is that the Fed wants a strong U.S. Dollar in order to keep commodity prices low.It's the only way to keep a shit economy afloat and at least keep the prices down for all the 50 million poor on food stamps.

Mon, 12/07/2015 - 14:24 | 6888744 83_vf_1100_c
83_vf_1100_c's picture

  A rate hike would make a great incoming gift for Trump from the Blue team.

Mon, 12/07/2015 - 14:19 | 6888723 Insurrexion
Insurrexion's picture

"Smart investors are preparing now. The August-September correction was just a warm up. The REAL drop is coming shortly.

We just published a 21-page investment report titled Stock Market Crash Survival Guide.

In it, we outline precisely how the crash will unfold as well as which investments will perform best during a stock market crash.

We are giving away just 1,000 copies for FREE to the public."

 

Who reads this shit?

 

I guess I did...shit.

Mon, 12/07/2015 - 13:54 | 6888587 ms8173
ms8173's picture

What will the USD do when this carry trade blows up?

Mon, 12/07/2015 - 13:52 | 6888577 mccvilb
mccvilb's picture

Looser, duh? Okay, maybe literally, if you're saying you wear hats three sizes too small. "They" don't pick winners and losers, they invent them for your consumption and their entertainment.

Mon, 12/07/2015 - 13:12 | 6888363 VWAndy
VWAndy's picture

They will simply pull out the liquidity. They love the debt. It gives them control of everything. Pulling out the operating capitol allows them to margine call in a selective manner. Cuz they intend to pick all winners and loosers. Duh!

Mon, 12/07/2015 - 12:13 | 6888029 hungrydweller
hungrydweller's picture

Tick-Tock goes Graham's broken clock.

Mon, 12/07/2015 - 13:07 | 6888335 Bear
Bear's picture

Ironically he will be right one day. I have been expecting the shake up for five years and have a difficult time understanding why it's taking so, so long. Graham is a modern day Noah ... the sky will be falling, it will rain. Noah had to wait a hundred years; we'll not have to wait that long.

Mon, 12/07/2015 - 11:36 | 6887834 InnVestuhrr
InnVestuhrr's picture

WOW, guess I better exchange my soon-to-be worthless USD for that free-falling gold before the price falls too much for me to lose all my savings.

Mon, 12/07/2015 - 13:08 | 6888339 Bear
Bear's picture

That's right.

Mon, 12/07/2015 - 10:54 | 6887572 NoBillsOfCredit
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