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The
2008 crash was a warm up.
Many
investors think that we could never have a crash again. The 2008 melt-down
was a one in 100 years episode, they think.
They
are wrong.
The
2008 Crisis was a stock and investment bank crisis. But it was not THE
Crisis.
THE
Crisis concerns the biggest bubble in financial history: the epic Bond
bubble… which as it stands is north of $100 trillion… although if you include
the derivatives that trade based on bonds
it’s more like $500 TRILLION.
The Fed
likes to act as though it’s concerned about stocks… but the real story is in
bonds. Indeed, when you look at the Fed’s actions from the perspective of the
bond market, everything suddenly becomes clear.
Bonds
are debt. A bond is created when a borrower borrows money from a
lender. And at the top of the financial food chain are sovereign bonds like
US Treasuries.
These
bonds are created when someone lends the US money. Why would they do this?
Because the US SPENDS more money than it TAKES IN via taxes. So it issues
debt to cover its extra expenses.
This
cycle continued for over 30 years until today, when the US has over $11
TRILLION in size. Because we never actually pay our debt off (or rarely do),
what we do is ROLL OVER debt when it comes due, so that investors continue to
receive interest payments but never actually get the money back…
because the US Government doesn’t have it… because it’s still spending more
money than it takes in via taxes.
This is
why the Fed cut interest rates to zero and will likely do everything in its
power to keep them low: even a small raise in interest rates makes all of
this debt MORE expensive to pay off.
This is
also why the Fed had the regulators drop accounting standards for
derivatives… because if banks and financial firms had to accurately value
their hundreds of trillions of derivatives trades based on bonds, investors
would be terrified at the amount of leverage and the margin calls would
begin.
The
bond bubble is also why the Fed started its QE programs. Because by buying
bonds, the Fed put a floor under Treasuries… which made investors less likely
to dump bonds despite bonds offering such low rates of return.
This is
also why the Fed is terrified of deflation. Deflation makes future debt
payments more expensive. So the Fed prefers inflation because it means the
dollars used to pay off debt down the road will be cheaper than Dollars today.
Again,
when look at the Fed’s actions through the perspective of the bond market… everything becomes clear.
The
only problem is that by doing all of this, the Fed has only made the bond
market even BIGGER. In 2008, the bond market was $82 trillion. Today it’s
over $100 trillion. And the derivatives market, of which 80%+ of all trades
are based on interest rates (Treasury yields), is at $700 TRILLION.
The
REAL Crisis will be when the bond bubble bursts. When this happens, it will
be clear that real standards of living have been falling since the ‘70s and
that sovereign nations have been papering over this through social spending
and entitlements (a whopping 47% of US households receive Government benefits
in some form).
Imagine
what will happen to the markets when the Western welfare states finally go
broke? It will make 2008 look like a picnic.
If
you’ve yet to take action to prepare for the second round of the financial
crisis, we offer a FREE investment report Financial Crisis
"Round Two" Survival Guide that outlines
easy, simple to follow strategies you can use to not only protect your
portfolio from a market downturn, but actually produce profits.
You can
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