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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.
All of the biggest problems in the financial world revolve around the bond
markets today:
1) Greece’s sovereign debt crisis
2) The Bank of Japan is purchasing ALL new debt issuance in
Japan.
3) The Fed is terrified of higher interest rates because ever
1% change means over $100 billion more in interest payments on the US debt.
For 30+ years, sovereign nations 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. Look at the vertical ramp
in US debt. Over the last five years.
Indeed, the US issued a total of $1 trillion in new debt over an 8
week period in late 2014 alone.
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.
The below chart from Societe General illustrates this nicely.
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 portfolio from a
market downturn, but actually produce profits.
You can pick up a FREE copy at:
http://www.phoenixcapitalmarketing.com/roundtwo.html
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