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If you
are an investor, your big concern should not be about what to stocks… but
what happens when the bond bubble goes bust.
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. Today, a whopping 47% of American households receive some
kind of Government benefit. This is not temporary… this is endemic.
All of
this is spending is being financed by borrowed money… hence, the bond bubble,
the biggest bubble in financial history: an incredible $100 trillion monster
that is now growing by trillions of dollars every few months.
We do
not write that point for effect. The
US alone has issued over $1 trillion in NEW debt in the last eight weeks.
The
reasons it did this? Because it doesn’t have the money to pay off the debt
that is coming due from the past… so it simply issues NEW debt to raise the
money to pay back the OLD debt.
Sounds
a lot like a Ponzi scheme… but the US is not alone in this regard. Globally,
the sovereign debt bubble is over $100 trillion in size. Just about every
major nation on the planet is sporting a Debt to GDP ratio of 100%+ and that is just including “on the balance sheet” debts…
not unfunded liabilities like Medicare or Social Security.
This is
why the Fed and every other Central Bank on earth is terrified of interest
rates rising; because anything even resembling the normalization of interest
rates would mean entire countries
going bust.
Remember
when interest rates move, they tend to move quickly. Consider Italy. It was
considered one of the pillars of the EU since it adopted the Euro in 1999.
Because of this, the markets were happy to allow Italy to borrow at stable
rates with the yield on the ten year Italy government bond well below 5% for
most of the last decade.
Then,
in the span of a few weeks, everything came unhinged and the yields on Italy
government bonds spiked, rising over 7%: the dreaded level at which a country
is considered to be insolvent and set for default. It was only through
extraordinary lending mechanisms from the European Central bank (the LTRO 1
and LTRO 2 programs to the tune of hundreds of billions of Euros… for an
economy that is €2 trillion in size) that Italy was saved from potential
systemic collapse.
Again, Italy went from being a former pillar of Europe to insolvent
in a matter of weeks… all because interest rates spiked a mere 2% higher than
usual.
Italy
is not alone here. Western nations in general are in a similar state. This is
why QE has been such a popular monetary tool for the Central Banks (since
2008 they’ve spent $11 trillion buying assets, usually sovereign bonds). QE was never meant to create jobs or generate economic
growth… it was a desperate ploy by Central Banks to put a floor under the
bond market so rates wouldn’t rise.
It’s
also why Central Banks have kept interest rates at zero or even negative:
again, they cannot afford to have rates rise. In the US, every 1% increase in
interest rates means between $150-$175 billion more in interest payments on
our debt per year.
Forget
stocks, forget your concerns about this or that valuation metric, the REAL
issue is what happens when the Bond Bubble pops. When that happens it won’t
be individual banks going bust, it will be ENTIRE NATIONS.
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
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