What Happens When the Bond Markets Turn Against the US?

The following is an excerpt from the latest issue of Private Wealth Advisory. In it I outline the relationship between the Fed’s commitment to low interest rates, the scramble for high grade collateral driving the sovereign bond markets, and how the whole mess will eventually come crashing down.

Private Wealth Advisory is a bi-weekly market advisory service, providing its readers with expert insights into the global economy and the driving forces behind the financial markets’ moves. To learn more about Private Wealth Advisory Click Here Now!

The US Fed is committed to keeping interest rates low for the simple fact that if interest rates were to rise then the payments on the debt would send the US into an EU-syle debt crisis along with the commensurate intense austerity measures being implemented.

Unfortunately for the Fed, the bond markets may indeed force this in spite of the Fed’s efforts.

Weimar Germany, like most historic episodes of hyperinflation, occurred when Germany’s Central Bank began monetizing its debts. This worked until the country lost credibility in the international bond markets at which point the Central Bank was forced to monetize everything resulting in a currency collapse and one of the worst episodes of hyperinflation in history.

The US has been moving increasingly down this path which each new QE program. The two reasons the US has not yet entered an inflationary death spiral are:

1)   The fact that the US continues to maintain its credibility in the bond markets (at least compared to Europe and Japan).

2)   Large financial institutions’ needs for high-grade sovereign bond collateral.

Regarding #1, the US has never defaulted on its debt. Compared to Germany (another safe haven), which has defaulted on its debts twice in the last 100 years, the US remains one of the most credible governments in the world, regardless of how bad the country’s finances are becoming (for now at least).

Regarding the collateral situation, as I’ve explained in recent articles one of the most critical issues in the financial system is the shortage of high grade collateral to backstop the $700 trillion derivatives market.

With France and the ESM bailout fund recently losing their AAA status this issue is only getting worse. The US, despite losing its AAA rated status is still consider high grade due to its having never defaulted on its debt. With that in mind, the Fed decision to take US Treasuries at a time when more and more countries are losing their AAA rated status means that even less high grade collateral will be in the system.

Indeed, as I’ve noted before, because so much of the US debt market is already held by government controlled entities, the Treasuries shortage is even worse than the below article indicates.

Clearinghouses, run by firms such as Chicago-based CME Group (CME) and London-based LCH.Clearnet Group, make traders provide collateral, including government bonds, that can be seized and easily converted into cash to cover defaults. Traders may need from $2 trillion to $4 trillion in extra collateral to meet the new requirements, according to Timothy Keaney, chief executive officer of BNY Mellon Asset Servicing.

The trouble is finding all that high-grade debt. The U.S. had $10.8 trillion in Treasuries outstanding at the end of August. Other countries, including Japan and European nations rated AAA or AA, had about $24 trillion of debt in the second quarter of 2011, according to an April report by the International Monetary Fund. Those government securities are already in heavy demand from central banks and investors.

The solution: At least seven banks plan to let customers swap lower-rated securities that don’t meet standards, in return for a loan of Treasuries or similar holdings that do qualify, a process dubbed “collateral transformation.” The maneuver allows investors who don’t have assets that meet a clearinghouse’s standards to pledge corporate bonds or mortgage-linked securities to a bank in exchange for a loan of Treasuries. The investor then posts the Treasuries—the transformed collateral—to the clearinghouse. The bank earns fees plus interest, and the investor is obliged at some point to return the Treasuries. In effect, the collateral is being rented…

JPMorgan Chase (JPM) and Bank of America (BAC) are already marketing their new collateral-transformation desks, executives at the companies say. Other banks confirmed they’re planning to offer the service too, including Bank of New York Mellon (BK), Barclays (BCS), Deutsche Bank (DB), and State Street (STT).

http://www.businessweek.com/articles/2012-09-20/a-shortage-of-bonds-to-back-derivatives-bets

Here’s the actual amount of Treasuries available to the banks:

Total US Sovereign Debt $16 trillion
Foreign Nation holdings $5.4 trillion
Intergovernmental holdings $4.8 trillion
US Federal Reserve $1.5 trillion
Remaining $4.3 trillion

Indeed, as the below article reveals, the search for high quality collateral is one of the primary items holding up the Treasury market. The Treasury’s latest information reveals that:

Foreign ownership of U.S. Treasury securities rose to a record level in October, a sign that overseas investors remain confident in U.S. debt despite a potential budget crisis.

Total foreign holdings of U.S. Treasurys rose to $5.48 trillion in October, the Treasury Department said Monday. That was up 0.1 percent from September. Still, the increase of $6 billion was the weakest since total holdings fell in December 2011.

China, the largest holder of U.S. government debt, increased its holdings slightly to $1.16 trillion. Japan, the second-largest holder, boosted its holdings by a smaller amount to $1.13 trillion. Brazil, the country with the third-largest holdings, increased its total to $255.2 billion.

http://hosted.ap.org/dynamic/stories/U/US_FOREIGN_HOLDINGS?SITE=AP&SECTION=HOME&TEMPLATE=DEFAULT&CTIME=2012-12-17-09-44-48

My point with all of this is that the search for collateral will drive yields lower… until the bond markets truly begin to spin out of control. In the meantime, the US Fed is playing a very dangerous game by purchasing as many Treasuries as it is. But that game can last much longer than anticipated.

How precisely these issues will finally play out is a mystery. But the consequences will be tremendous. And enormous fortunes will be made by those who get it right. The first key clues will be when Bunds and Treasuries begin to nose dive in a big way.

If you’re an individual investor looking for the means of profiting from all of this… particularly the US going over the fiscal cliff, then you NEED to check out  my Private Wealth Advisory newsletter.

Indeed, 78 out of our last 97 trades have made money for Private Wealth Advisory subscribers. That’s an incredible 84% success rate on our investments.

And we’re not getting complacent by any means. In fact, I’m just alerted Private Wealth Advisory subscribers to several trades that will all produce HUGE profits when the US debt implosion picks up steam in the coming weeks.

You’ll find out what they are the minute you subscribe to Private Wealth Advisory. You’ll also gain immediate access to my Protect Your Family, Protect Your Savings, and Protect Your Portfolio Special Reports outlining how to prepare these areas of your life for the coming Great Crisis.

These reports outline:

1) how to prepare for bank holidays
2) which banks to avoid
3) how much bullion to own
4) how much cash is needed to get through systemic crises
5) how much food to stockpile, what kind to get, and where to get it

And more…

To take out an annual subscription to Private Wealth Advisory  now… start profiting from the market’s gyrations (again we’ve made money on 78 out of 97 trades in the last 18 months)… and gain access to all my Special Reports…

Click Here Now!!!

Best Regards,

Graham Summers

 

 

 

 

 

 

 

Why Bernanke’s Terrified of 2013

On December 12, the US Federal Reserve surprised yet again by announcing QE 4: a program through which it would purchase $45 billion of US Treasuries every month.

Between this program and the Fed’s QE 3 Program announced in September, the Fed will be monetizing $85 billion worth of assets every month ($40 billion worth of Treasuries and $45 billion worth of Mortgage Backed Securities) ad infinitum.

Indeed, the Fed’s new policies are anchored to its goal of getting employment down to 6.5%. This means the Fed will buy these assets non-stop until employment gets down to 6.5%.

I’ve spoken to a number of people in the financial community as well as outside investors and no one seem to grasp the significance of this announcement.

First and foremost, QE does not create jobs. The UK has announced QE efforts equal to an amount greater than 20% of its GDP and has not seen any meaningful job growth. Similarly, Japan has announced nine rounds of QE for a combined effort equal to 20% of its GDP over the last 20 years and job growth remains dismal there.

Based on this, the Fed’s decision to anchor its QE efforts to employment is a bit hard to swallow. Indeed, I would argue that the Fed’s moves have very little to do with employment and instead are meant to address the following:

1)   The US economy is nose-diving again and the Fed is acting preemptively.

2)   The Fed is trying to provide increased liquidity going into the fiscal cliff.

3)   The Fed is funding the US’s Government massive deficits.

Regarding #1, the November ISM report indicates the US economy is again contracting. Looking at the chart, you can sense why Bernanke and the Fed are getting concerned: the similarities between the recent downturn of the last few years and that going from 2004- 2008 are striking. It’s obvious helicopter Ben doesn’t want us breaking into the mid’40s range.

Similarly, the ECRI, which has proven a far better judge of the onset of US recessions than the NBER, has stated that the US likely slipped back into recession in September. Bernanke and the Fed have close ties to the ECRI. I believe they’re moving preemptively based on this announcement.
We get additional indication of things worsening in the US economy from the NFIB’s Small Business Optimism Index. This measure has entered an absolute free-fall, posting its single largest drop in over 30 years. To put this into perspective, this indicates that Small Business Owners are becoming less optimistic about the future of the economy faster now than they were after Lehman failed.

In additional to this, small business earnings are have rolled over sharply since the beginning of 2012. Small businesses account for 70% of jobs. To see both small business owner optimism and as well as small business earnings cratering is a bad sign for the US economy.

Bernanke firmly believes that the single biggest reason the Great Depression lasted as long as it did was because the Federal Reserve didn’t do enough to fight it at the time. This is the driving thesis behind his life’s work and his tenure at the Fed.

With the above information making it clear that things started to get quite ugly in September, QE 4 should be seen as his attempt to act preemptively to stop another 2008-type economic plunge.

In addition to this, we know that Bernanke has stated point blank that the Fed does not have the tools to deal with the fiscal cliff.

The U.S. economy is already being hurt by the “fiscal cliff” standoff in Washington, Federal Reserve Chairman Ben Bernanke said Wednesday. But Bernanke said the Fed believes the crisis will be resolved without significant long-term damage.

The steep tax increases and spending cuts can be avoided with a successful budget deal, Bernanke said during a news conference after the Fed’s final meeting of the year. The Fed’s latest forecasts for stronger economic growth next year and slightly lower unemployment assume that happens…

Bernanke repeated his belief that if the scheduled tax hikes and spending cuts do take effect in January, they will have a significantly adverse effect on the economy, regardless of what the Fed might do.

We cannot offset the full impact of the fiscal cliff. It’s just too big,” Bernanke said.

http://news.yahoo.com/bernanke-says-fiscal-cliff-already-hurting-economy-201018687–finance.html

Given Bernanke’s extensive connections on capital hill, the move to implement QE 4 should also be seen as a warning that we will very likely be going over the fiscal cliff; not having the tools to deal with the aftermath of this mess, the Fed is moving preemptively to prepare the system for what’s coming.

Finally, and most critically, the Fed’s implementation of QE 4 represents the Fed’s full commitment to finance the US’s deficits.

In 2011, the Fed bought over 70% of US debt issuance. Based on the projections for QE 4, the Fed will buy upwards of $480 billion of the $918 billion in new US debt to be issued next year: roughly 52% of all new debt issuance.

Between this and the Fed’s monthly monetization of $45 billion worth of Mortgage Backed Securities, the Fed will be soaking up 90% of all net new dollar-denominated fixed-income assets next year.

There are several implications to this.

1)   The US will be lurching ever closer to an EU-style debt crisis.

2)   There will be an even greater shortage of high quality collateral in the financial system going forward.

3)   Inflation will continue to rise.

Regarding #1, by soaking up so much of the US’s new debt issuance, the Fed is permitting the US Government to continue overspending at a time when the bond market would normally begin raising interest rates.

Last year the US paid $454 billion in interest payments on its debt. This was at a time when the average interest rate was only slightly above 2%.

During the same year, the US only took in about $2.3 trillion in tax revenue.  So, even with interest rates at historic lows, we’re spending about 20% of tax receipts on interest payments.

Now let’s suppose that interest rates rise to an average of 4%. At that rate, the US would owe nearly $900 billion in interest payments: enough to soak up nearly 40% of all US tax receipts. And this is assuming tax receipts don’t fall as the economy contracts (historically taxes do fall during times of contraction).

This is why the Fed is committed to keeping interest rates low: if interest rates were to rise then the payments on the debt would send the US into an EU-style debt crisis along with the commensurate intense austerity measures being implemented.

Having said that, the bond market may force the Fed’s hands, at which point it’s Checkmate for Bernanke.

If you’re an individual investor (not a day trader) looking for the means of profiting from all of this… particularly the US going over the fiscal cliff, then you NEED to check out  my Private Wealth Advisory newsletter.

Indeed, 78 out of our last 97 trades have made money for Private Wealth Advisory subscribers. That’s an incredible 84% success rate on our investments.

And we’re not getting complacent by any means. In fact, I’m just alerted Private Wealth Advisory subscribers to several trades that will all produce HUGE profits when the US debt implosion picks up steam in the coming weeks.

You’ll find out what they are the minute you subscribe to Private Wealth Advisory. You’ll also gain immediate access to my Protect Your Family, Protect Your Savings, and Protect Your Portfolio Special Reports outlining how to prepare these areas of your life for the coming Great Crisis.

These reports outline:

1) how to prepare for bank holidays
2) which banks to avoid
3) how much bullion to own
4) how much cash is needed to get through systemic crises
5) how much food to stockpile, what kind to get, and where to get it

And more…

To take out an annual subscription to Private Wealth Advisory  now… start profiting from the market’s gyrations (again we’ve made money on 78 out of 97 trades in the last 18 months)… and gain access to all my Special Reports…

Click Here Now!!!

Best Regards,

Graham Summers

 

 

 

 

 

How to Play the Fiscal Cliff Failure

Tonight between 7:30-9:30PM, the House will vote on Boehner’s “Plan B” for the fiscal cliff.

At this point the entire exercise is one of looking busy for appearance’s sake: it wouldn’t bode well if the US were to go over the fiscal cliff because members of Congress were already on vacation. So the political class needs to appear to be working on this problem even if no one is actually incentivized to come up with an actual solution.

My point is that the likelihood of an actual solution being presented and worked through at this point is less than 1%. The various plans that have been put on the table all propose items like reducing the deficit by $1 trillion over multiple years. This doesn’t really accomplish much when you consider that we’ve run a $1+ trillion deficit for four years now.

The fact remains, if we want to balance the budget, we need spending cuts and tax raises that add up to over $1 trillion. That’s simple math, but neither side of the political aisle is going to propose anything resembling this because it would be political suicide.

After all, what incentive is there to solve anything? US political leaders must have noticed that Greece, a country whose economy is only 2% that of the US’s, has managed to draw out its problems for over two years and the proposed “solutions” there remain as absurd as getting the country’s Debt to GDP levels down to 120% by 2022.

If this is what a country as small as Greece can get away with, why can’t the US, the single largest economy and owner of the world’s reserve currency draw out its fiscal problems far longer, must be the thinking process for Washington.

And why not? The US Federal Reserve has committed to fund the US’s bloated deficits. The Fed will buy 50% of new debt issuance next year. And interest rates will be kept at next to nothing for the foreseeable future.

There’s a reason for this: roughly half of the US’s debt outstanding matures in less than a year or so. Every point increase in interest rates means another $150 billion in interest payments. So Bernanke has to keep us at ZIRP forever.

This will “work” until it doesn’t. The problem is that when it doesn’t work anymore, the financial system will implode. Until then, there are little to no incentives for the political class to address the US’s financial problems. The Fed’s giving them a free lunch.

Unfortunately, these folks are ignoring the human toll Greece has had on its citizens. Today, 20% of Greek households are living below the poverty line. Five Greek children at hospitalized for malnutrition every week. This is the real cost of the crisis in Greece. And it’s the situation most analysis ignores.

Which is why the US is playing a dangerous game by hemming and hawing about the fiscal cliff: numbers wise the situation may not look apocalyptic, but with incomes down and the cost of living rising in the US, there will be a lot of suffering going forward.

So buckle up because we’re going over the cliff. And unlike the debt ceiling talks of 2011, the Fed is already pumping money into the system (in 2011, there was no official QE program in place when the debt ceiling talks took place).

If you’re an individual investor (not a day trader) looking for the means of profiting from all of this… particularly the US going over the fiscal cliff, then you NEED to check out  my Private Wealth Advisory newsletter.

Indeed, 76 out of our last 90 trades have made money for Private Wealth Advisory subscribers. That’s an incredible 84% success rate on our investments.

And we’re not getting complacent by any means. In fact, I’m about to alert Private Wealth Advisory subscribers to several trades that will all produce HUGE profits when the US debt implosion picks up steam in the coming weeks.

You’ll find out what they are the minute you subscribe to Private Wealth Advisory. You’ll also gain immediate access to my Protect Your Family, Protect Your Savings, and Protect Your Portfolio Special Reports outlining how to prepare these areas of your life for the coming Great Crisis.

These reports outline:

1) how to prepare for bank holidays
2) which banks to avoid
3) how much bullion to own
4) how much cash is needed to get through systemic crises
5) how much food to stockpile, what kind to get, and where to get it

And more…

To take out an annual subscription to Private Wealth Advisory  now… start profiting from the market’s gyrations (again we’ve made money on 76 out of 90 trades in the last 18 months)… and gain access to all my Special Reports…

Click Here Now!!!

Best Regards,

Graham Summers

 

 

 

 

 

Even US-Based Investors Need to Know About This

The markets in Europe continue to rally hard despite the fact that Europe’s financial system is totally insolvent.

At the center of this mess is Spain, which now barely functions as a country. Spanish pharmacies, owed $500 million by the government, are running out of medicine in Valencia. Strikes have resulted in trash not being collected for 20 days in Jerez. Over 2.2 million children live in poverty in Spain (the countries entire population is just 47 million). In the region of Andalusia some government workers haven’t been paid in eight months and are working for free while begging for food.

The banking system is in even worse shape. Having experienced a housing boom that made the US’s look small in comparison, Spain’s banks are packed to the brim with garbage debts which are worsening by the month.

Spanish housing prices saw their biggest quarterly drop since the crisis began, falling an average of 15% in the third quarter. Spain’s number of bad loans has hit a new record, moving up at the fastest pace since June 2012 when the entire Spanish system almost imploded. The default rate on real estate loans is an astounding 30%.

The Spanish Government’s response during the crisis has been to merge one totally insolvent regional bank or caja with another. Bankia, the large bank that had to be nationalized last June was in fact the product of a merger of seven bankrupt cajas.

Spanish banks are drawing over €365 billion from the ECB to keep the system afloat. The entire market cap of the Spanish banking system is only a little over €100 billion. We’re talking about an entire banking system that is bust and on life support from the ECB.

And yet, somehow, the investment world is convinced that there is a way out of this mess. Spanish yields are falling. The Spanish Ibex rallies. Spanish bank stocks are up over 10% in the last month and a half. Why? Because of more money from the ECB and EU? Short-covering? Who knows. But there is absolutely no fundamental improvement to Spain’s finances, its economy, or its banking system.

And sometime down the road, this whole mess will come crashing down.

If you’re looking for someone who can help protect yourself from this mess and even profit from it, I can show you how. My clients made money in 2008. And we’ve been playing the Euro Crisis to perfection, with our portfolio returning 34% between July 31 2011 and July 31 2012 (compared to a 2% return for the S&P 500).

All told, 77 out of our last 93 trades have made money. In fact we just closed our 77th this morning: a 6% gain in just TWO DAYS. We’re now positioning ourselves for the next round of the Crisis with several targeted investments that will explode higher as the EU crumbles. Already three of our picks are up more than 4% in the last week.

To find out what they are, and take steps to protect your portfolio from the inevitable collapse…

Click Here Now!

Graham Summers

Three Reasons the Fed Announced QE 4

Do you find the Fed’s announcement of QE 4 confusing? After all, why would the Fed engage in more QE when it just announced QE 3 three months ago? In this excerpt from my latest issue of Private Wealth Advisory I outline the real reasons the Fed announced more QE (virtually no one I’ve spoken to understands this).

I also explain which investments will profit from this monetary madness and how to best go about preparing for 2013.

To find out more about Private Wealth Advisory as well as its incredible track record (76 of out last 92 trades made money)…

Click Here Now!!!

Last week the US Federal Reserve surprised yet again by announcing QE 4: a program through which it would purchase $45 billion of US Treasuries every month.

Between this program and the Fed’s QE 3 Program announced in September, the Fed will be monetizing $85 billion worth of assets every month ($40 billion worth of Treasuries and $45 billion worth of Mortgage Backed Securities) ad infinitum.

Indeed, the Fed’s new policies are anchored to its goal of getting employment down to 6.5%. This means the Fed will buy these assets non-stop until employment gets down to 6.5%.

I’ve spoken to a number of people in the financial community as well as outside investors and no one seem to grasp the significance of this announcement.

First and foremost, QE does not create jobs. The UK has announced QE efforts equal to an amount greater than 20% of its GDP and has not seen any meaningful job growth. Similarly, Japan has announced nine rounds of QE for a combined effort equal to 20% of its GDP over the last 20 years and job growth remains dismal there.

Based on this, the Fed’s decision to anchor its QE efforts to employment is a bit hard to swallow. Indeed, I would argue that the Fed’s moves have very little to do with employment and instead are meant to address the following.

  1. The US economy is nose-diving again and the Fed is acting preemptively.
  2. The Fed is trying to provide increased liquidity going into the fiscal cliff.
  3. The Fed is funding the US’s Government massive deficits.

To continue reading this you need to take out a trial subscription to Private Wealth Advisory: my bi-weekly investment  newsletter designed specifically to help individual investors cut through the noise and profit from the market’s gyrations.

Indeed, 76 out of our last 92 trades have made money for Private Wealth Advisory subscribers. That’s an incredible 82% success rate on our investments.

And we’re not getting complacent by any means. In fact, I’m about to alert Private Wealth Advisory subscribers to several trades that will all produce HUGE profits when the US debt implosion picks up steam in the coming weeks.

You’ll find out what they are the minute you subscribe to Private Wealth Advisory. You’ll also gain immediate access to my Protect Your Family, Protect Your Savings, and Protect Your Portfolio Special Reports outlining how to prepare these areas of your life for the coming Great Crisis.

These reports outline:

1) how to prepare for bank holidays
2) which banks to avoid
3) how much bullion to own
4) how much cash is needed to get through systemic crises
5) how much food to stockpile, what kind to get, and where to get it

And more…

To take out an annual subscription to Private Wealth Advisory  now… start profiting from the market’s gyrations (again we’ve made money on 76 out of 92 trades in the last 18 months)… and gain access to all my Special Reports…

Click Here Now!!!

Best Regards,

Graham Summers