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Stocks
are bouncing today because the Fed will wrap up its monthly FOMC meeting and
make a public statement this afternoon. Stocks have been rallying into FOMC
meetings for the last three years, so traders are now conditioned to buy
stocks in anticipation of this.
The
prime focus for the markets is whether the Fed continues to state that it
will raise rates after “a considerable
time.” The reality is that the Fed cannot and will not raise rates anywhere
near normal levels at any point
because doing so would blow up the financial system.
Let’s
walk through this together.
Currently,
the US has over $17 trillion in debt. The US can never pay this off. That is
not some idle statement… we issued
over $1 trillion in NEW debt in the last eight weeks simply
because we don’t have the money to pay off the debt that is coming due from
the past.
Since
we don’t have that kind of money, the US is now simply issuing NEW debt to
raise the money to pay back the OLD debt.
This is
why the Fed NEEDS interest rates to be as low as possible… any slight jump in
rates means that the US will rapidly spiral towards bankruptcy. Indeed, every 1% increase in interest rates means between
$150-$175 billion more in interest payments on US debt per year.
So the
Fed wants interest rates low because it makes the US’s debt load much more
serviceable. This is why the Fed keeps screwing around with language like “after a considerable time” despite the
fact that rates should already be markedly higher based on the Taylor Rule as
well as the state of the US economy: it’s all a ruse to pretend the Fed has a
real choice in the matter.
However,
there’s an even bigger story here.
Currently
US banks are sitting on over $236
trillion in derivatives trades.
Of
this, 81% ($191 TRILLION) are
based on interest rates.
Put
another way, currently US banks have bet an amount equal to over 1,100% of
the US GDP on interest rates.
Guess
which banks did this?
The BIG
FIVE: JP Morgan, CitiGroup, Goldman Sachs, and Bank of America.
In other words… the Too Big To Fails… the very banks that the Fed has
bailed out, and done everything it can to prop up.
What
are the odds that the Fed is going to raise rates significantly and risk
blowing up these firms? Next to ZERO.
Forget about the Fed’s language and its FOMC meeting. The real story
is the $100 trillion bond bubble (more like the $200 trillion interest rate
bubble based on bonds). When it breaks, it doesn’t matter what the Fed says
or does.
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