The market action of the last 24 hours can be summated as thus:
The Fed didn’t raise rates, so the US Dollar fell and all risk rallied hard.
The fact the Fed didn’t raise rates is not important. Interest rates have not been at zero for six years. And the last real period of tightening ended in 2006, nearly a full decade ago.
In the simplest of terms, for the Fed not to be raising rates is not interesting. What IS interesting is WHY the Fed is not raising rates.
Of course there are many reasons why: the economy is not strong enough to handle it, the Fed missed its chance to raise rates in 2011-2012, etc.
However, there is only one REAL reason why rates remain so low:
Actually it’s $555 trillion reason: and they are derivatives based on interest rates.
That is not a typo. $555 trillion… as in an amount greater than 700% of global GDP.
The world tracks "risk" based on the yield of the 10-Yr US Treasury. This yield has generally been falling non-stop since 1983. So we've had well over 30 years of money getting cheaper.
It is not coincidence that as money got cheaper, Wall Street went nuts with leverage. And given that rates have generally been trending down for over 30 years, betting on cheap money became one of the easiest trades in the world.
And that is how you get to where we are today: with a global bond bubble with over $555 trillion in derivatives trading based on it.
This is the REAL issue with interest rates, NOT the economy. The Fed cannot and will not raise rates any significant amount without risking a Crisis that would make 2008 look like a picnic (the CDO market which caused 2008 was a mere $50-60 trillion in size by comparison).
This is why Ben Bernanke told a group of hedge fund managers behind closed doors “rates will not normalize in my lifetime.” Rates CANNOT normalize because this would instantly implode the financial system.
However, the Fed has backed itself into a corner. Globally the bond markets are already starting to plunge pushing rates higher. Spain, and Italy’s bond yields have already taken out their downtrends (meaning bonds are falling and yields are rising). Japan is fast approaching the critical point at which it does the same.
And even the US is about to have its bonds test resistance (a break above the trendline means it’s GAME OVER for the Fed).
In short: 2008 was a warm up. The REAL Crisis concerns the bond bubble which is exponentially larger in scope.
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