US Dollar

17
Sep
2015

Why What’s About to Begin Will Dwarf 2008

Earlier this week I outlined how the next Crash will play out.

Today we’ll assess why this Crisis will be worse than the 2008 Crisis.

By way of explanation, let’s consider how the current monetary system works…

The current global monetary system is based on debt. Governments issue sovereign bonds, which a select group of large banks and financial institutions (e.g. Primary Dealers in the US) buy/sell/ and control via auctions.

These financial institutions list the bonds on their balance sheets as “assets,” indeed, the senior-most assets that the banks own.

The banks then issue their own debt-based money via inter-bank loans, mortgages, credit cards, auto loans, and the like into the system. Thus, “money” enters the economy through loans or debt. In this sense, money is not actually capital but legal debt contracts.

Because of this, the system is inherently leveraged (uses borrowed money).

The Structure of the Financial System

Consider the following:

  • Total currency (actual cash in the form of bills and coins) in the US financial system is little over $1.2 trillion.
  • If you want to include money sitting in short-term accounts and long-term accounts the amount of “Money” in the system is about $10 trillion.
  • In contrast, the US bond market is well over $38 trillion.
  • If you include derivatives based on these bonds, the financial system is north of $191 trillion.

Bear in mind, this is just for the US.

Again, debt is money. And at the top of the debt pyramid are sovereign bonds: US Treasuries, German Bunds, Japanese Government Bonds, etc. These are the senior most assets used as collateral for interbank loans and derivative trades. THEY ARE THE CRÈME DE LA CRÈME of our current financial system.

So, this time around, when the bubble bursts, it won’t simply affect a particular sector or asset class or country… it will affect the entire system.

The Bond Bubble is Exponentially Larger Than Stocks

So…. the process will take considerable time. Remember from the earlier pages, it took three years for the Tech Bubble to finally clear itself through the system. This time it will likely take as long if not longer because:

  • The bubble is not confined to one country (globally, the bond bubble is over $100 trillion in size).
  • The bubble is not confined to one asset class (all “risk” assets are priced based on the perceived “risk free” valuation of sovereign bonds… so every asset class will have to adjust when bonds finally implode).
  • The Central Banks will do everything they can to stop this from happening (think of what the ECB has been doing in Europe for the last three years)
  • When the bubble bursts, there will very serious political consequences for both the political elites and voters as the system is rearranged.

First of all, this bubble is larger than anything the world has ever seen. All told, there are $100 trillion in bonds in existence.

A little over a third of this is in the US. About half comes from developed nations outside of the US. And finally, emerging markets make up the remaining 14%.

The size of the bond bubble alone should be enough to give pause.

However, when you consider that these bonds are pledged as collateral for other securities (usually over-the-counter derivatives) the full impact of the bond bubble explodes higher to $555 TRILLION.

To put this into perspective, the Credit Default Swap (CDS) market that nearly took down the financial system in 2008 was only a tenth of this ($50-$60 trillion).

Moreover, you have to consider the political significance of this bubble.

For 30+ years, Western countries have been papering over the decline in living standards by issuing debt. In its simplest rendering, sovereign nations spent more than they could collect in taxes, so they issued debt (borrowed money) to fund their various welfare schemes.

This was usually sold as a “temporary” issue. But as politicians have shown us time and again, overspending is never a temporary issue. This is compounded by the fact that the political process largely consists of promising various social spending programs/ entitlements to incentivize voters.

In the US today, a whopping 47% of American households receive some kind of Government benefit. This type of social spending is not temporary… this is endemic.

Most Western Nations Are Bankrupt

The US is not alone… Most major Western nations are completely bankrupt due to excessive social spending. And ALL of this spending has been fueled by bonds.

This is why Central Banks have done everything they can to stop any and all defaults from occurring in the sovereign bonds space. Indeed, when you consider the bond bubble everything Central Banks have done begins to make sense.

  • Central banks cut interest rates to make these gargantuan debts more serviceable.
  • Central banks want/target inflation because it makes the debts more serviceable and puts off the inevitable debt restructuring.
  • Central banks are terrified of debt deflation (Fed Chair Janet Yellen herself admitted that oil’s recent deflation was economically positive) because it would burst the bond bubble and bankrupt sovereign nations.

So how will all of this play out?

The bond markets have already begun a revolt in the Emerging Market space. There we are on the verge of taking out the bull market trendline dating back to 2009.

GPC 9-16-15When this hits, capital will fly to high quality bonds particularly US treasuries. However as the bond market crisis accelerates eventually it will envelope even safe haven bonds (including Treasuries).

At that point the bad debts in the financial system will finally clear and we can begin to see real sustainable growth.

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…

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Best Regards

Graham Summers

Chief Market Strategist

Phoenix Capital Research

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Posted by Phoenix Capital Research in It's a Bull Market
14
Sep
2015
Could the Fed Implement a “Carry” Tax on Physical Cash?

Could the Fed Implement a “Carry” Tax on Physical Cash?

The Fed meets this week on Wednesday and Thursday.

Many in the investment world believe the Fed will finally raise interest rates during this meeting.

If it does, this will be the first rate hike since 2006. And it will represent the first time in six years that rates are not effectively at zero.

Will the Fed raise rates or won’t it? Honestly, I don’t know and neither does anyone else.

The Fed Has a History of Moving Its “Targets”

Back in 2012, the Fed claimed it would start to raise rates when unemployment fell to 6.5%. We hit that target in April 2014.

Here we are a full 17 months later with the unemployment rate at 5.1% and the Fed has yet to raise rates even once.

Indeed, projecting a rate hike at some point in the future, only to hit that point and offer some other excuse to not raise rates has become something of a pattern for the Fed.

Everyone was convinced the Fed would raise rates in April 2015.

It didn’t.

Then everyone became certain a rate hike would come in June 2015.

It didn’t.

It’s now September and less than half of private economists believe a rate hike is coming this week.

Bottomline: no one has a clue when the Fed will raise rates.  This includes Fed officials who continue to make various arguments for not raising rates this week.

However, one thing is relatively certain, whenever the Fed does raise rates, the tightening will be short-lived.

Why the Fed Won’t Let Rates Normalize

With over $555 trillion derivatives trading globally based on interest rates, the Fed cannot normalize rates without triggering a crisis that would make 2008 look like a picnic.

This is not just idle talk either.

Consider that as early as 1998, soon to be chairperson of the Commodity Futures Trading Commission (CFTC), Brooksley Born, approached Alan Greenspan, Bob Rubin, and Larry Summers (the three heads of economic policy) about derivatives.

Born said she thought derivatives should be reined in and regulated because they were getting too out of control. The response from Greenspan and company was that if she pushed for regulation that the market would “implode.”

So Greenspan knew about the derivatives problem in 1998. Bernanke, knows about it as well. This is why he admitted that rates would not normalize anytime during his “lifetime” during a closed-door luncheon with several hedge funds last year.

Janet Yellen is also aware of the derivatives issue. This is why she has continued to refuse to raise rates for months after hitting the Fed’s unemployment “target.”

The fact of the matter is that the Fed has backed itself into a corner. It should have raised rates in 2012 or 2013 so that it would have some dry powder now. Instead, it continued to ease and now it has nothing left in its arsenal.Well, almost nothing…

Is a Carry Tax Coming For Physical Cash?

More and more outlets have begun to call for imposing a “carry” tax on cash.

The idea here is that since it costs relatively little to store physical cash (the cost of buying a safe), the Fed should be permitted to “tax” physical cash to force cash holders to spend it (put it back into the banking system) or invest it.

The way this would work is that the cash would have some kind of magnetic strip that would record the date that it was withdrawn. Whenever the bill was finally deposited in a bank again, the receiving bank would use this data to deduct a certain percentage of the bill’s value as a “tax” for holding it.

For instance, if the rate was 5% per month and you took out a $100 bill for two months and then deposited it, the receiving bank would only register the bill as being worth $90.25 ($100* 0.95=$95 or the first month, and then $95 *0.95= $90.25 for the second month).

It sounds like absolute insanity, but I can assure you that Central Banks take these sorts of proposals very seriously. QE sounded completely insane back in 1999 and we’ve already seen three rounds of it amounting to over $3 trillion.

No one would have believed the Fed could get away with printing $3 trillion for QE in 1999, but it has happened already. And given that it has failed to boost consumer spending/ economic growth, I wouldn’t at all surprised to see the Fed float one of the other ideas in the coming months.

This is just the start of a much larger strategy of declaring War on Cash.

Indeed, we’ve uncovered a secret document outlining how the Fed plans to incinerate savings to force investors away from cash and into riskier assets.

We detail this paper and outline three investment strategies you can implement right now to protect your capital from the Fed’s sinister plan in our Special Report Survive the Fed’s War on Cash.

We are making 100 copies available for FREE the general public.

To lock in one of the few remaining…

Click Here Now!

Best Regards

Phoenix Capital Research

 

 

 

Posted by Phoenix Capital Research in It's a Bull Market