The next Crisis will be THE CRISIS.
You might have noticed that each successive crisis over the last 15 years has been both larger and involved more senior asset classes.
1. The 2000 Tech Bubble involved stocks.
2. The 2007 Housing Bubble involved housing.
3. This crisis involves Bond… as in ALL bonds.
To give some perspective regarding size here consider that the credit default swap market based on housing that nearly took down the system in 2008 was $45 trillion at its peak in 2007.
In contrast, the global bond market is well over $100 trillion today.
And it’s growing rapidly.
Indeed, US corporates are on track to issue over $1.5 TRILLION in debt this year alone. Not only will this be an all time record… it will be the third consecutive all-time record for corporate debt issuance.
Part of the reason that the bond market has become so enormous is because few entities, particularly sovereign nations, have the cash handy to pay back debt holders when their debts come due.
As a result, many of them are choosing to roll over old debts OR pay them back via the issuance of new debt. The US did precisely this in the last few months issuing over $1 trillion to cover for the payment of old debt that was coming due.
So the bond bubble is not only over $100 trillion in size…it’s actually GROWING on a month-to-month basis.
Reading all of this is no doubt concerning. However, the situation becomes much worse when you consider that over 81% of ALL derivatives trades are based on interest rates (BONDS).
Globally, the interest rates derivative market is an unbelievable $555 TRILLION in size.
These are trades based on interest rates that in turn are based on the bond bubble. Thus, the significance of the bond bubble simply CANNOT be overstated. Banks and other financial entities have literally bet an amount equal to over SIX TIMES GLOBAL GDP on interest rates.
This is why Central Banks are absolutely terrified the moment a sovereign nation comes close to defaulting. Consider that Spain’s bond market is just $1 trillion. But the derivatives trade market based on Spain’s bonds is likely well north of 10X this amount.
With this kind of leverage, even if 4% of the trades are at risk and 10% of those trades go bust, you’ve wiped out the equity at more than a handful of the large EU banks.
In simple terms, the bond bubble is THE bubble. And when it bursts, we will experience THE crisis. In comparison, 2008 will look like a joke.
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