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The
biggest question for most investors today is that whether or not rates will
rise in 2015.
This
question is focusing on the wrong issue: the economy. It should be focusing
on the REAL issue: the bond bubble.
The Fed
may raise rates a token
amount this year, but the move will be largely symbolic. With over $100 trillion in bonds and over $555 TRILLION
in interest rate derivatives trading based on interest rates, the Fed will
not be normalizing rates at any point in the future.
Indeed,
former Fed Chairman Ben Bernanke admitted this in private during a
closed-door luncheon with several hedge funds last year. Bernanke’s exact
words were that rates would not normalize anytime
during his “lifetime.”
So the
Fed may raise rates from 0.25% to say 0.3% or possibly even 0.5%. But we
won’t be entering a hawkish period for the Fed by any means.
The
reason is very simple… any normalization of rates would implode the bond market.
The
fact is that much of the globe, particularly the developed west, is up to its
eyeballs in debt. Mind, you, this is based solely on official public debt numbers. If
you include unfunded liabilities, then the US, most of Europe, Japan, and
even China are sporting Debt to GDP ratios well over 300%.
In the
US, a 1% increase in interest rates means over $100 billion more in interest
rate payments. The US is already running a deficit (meaning that it spends
more than it takes in via taxes) and has been for most of the last 20 years.
Of
course, the deficit could become larger to service the increase in interest
payments, but with the US already having to resort to issuing NEW debt to
cover OLD debt that is coming due, this is a slippery slope. The US issued over $1 trillion in new debt in an
8-week period for precisely this purpose.
The
reality is as follows:
1)
Bonds are the biggest bubble in history, dwarfing even the real estate bubble
of the mid-2000s.
2)
This bubble also encompasses the bubble in Central bank policy. Every single
Central Bank policy is focused on maintaining the bond bubble and the TBTF
banks with the greatest derivative exposure to it.
3)
When the bond bubble bursts, entire nations will fail, as will the Central
Banks themselves. Draghi, Yellen, Kuroda et al will do everything in their
power NOT to allow the system that has put them at the top of the economic
food-chain to collapse no matter what the costs for ordinary citizens.
4)
Rates will only rise significantly ONCE the bond bubble bursts. There may be
symbolic raises here and there, but with over $555 trillion in derivatives
based on interest rates floating in the system globally, you can bet there
will NEVER be a shock and awe interest rate raise.
5)
This bubble, like all bubbles, will eventually burst no matter what the
Central Banks do. When it does, everything
about modern finance will prove misguided and based solely on the belief that
Central Banks can control the system.
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