There is one vitally important number that everyone needs to be watching right now, and it doesn’t have anything to do with unemployment, inflation or housing. If this number gets too high, it will collapse the entire U.S. financial system. The number that I am talking about is the yield on 10 year U.S. Treasuries. Here’s why. Words: 1157; Charts: 2
So warns Michael Snyder (theeconomiccollapseblog.com) in edited excerpts from his original article* entitled The Most Important Number In The Entire U.S. Economy.
[The following article is presented by Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com and www.munKNEE.com and the FREE Market Intelligence Report newsletter (sample here – register here) and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. This paragraph must be included in any article re-posting to avoid copyright infringement.]
Snyder goes on to say in further edited, and in some instances paraphrased, excerpts:
Here’s why: when the yield on 10 year U.S. Treasuries goes up,
- long-term interest rates all across the financial system start increasing…
- it becomes more expensive for the federal government to borrow money,
- it becomes more expensive for state and local governments to borrow money,
- existing bonds lose value and bond investors lose a lot of money,
- mortgage rates go up and monthly payments on new mortgages rise, and
- interest rates throughout the entire economy go up and this causes economic activity to slow down.
- On top of everything else, there are more than 440 trillion dollars worth of interest rate derivatives sitting out there, and rapidly rising interest rates could cause that gigantic time bomb to go off and implode our entire financial system.
Rising Interest Rates
We are living in the midst of the greatest debt bubble in the history of the world, and the only way that the game can continue is for interest rates to stay super low. Unfortunately, the yield on 10 year U.S. Treasuries has started to rise, and many experts are projecting that it is going to continue to rise.
On August 2nd of last year, the yield on 10 year U.S. Treasuries was just 1.48%, and our entire debt-based economy was basking in the glow of ultra-low interest rates but things are rapidly changing. On Wednesday, the yield on 10 year U.S. Treasuries hit 2.70% before falling back to 2.58% on “good news” from the Federal Reserve.
Historically speaking, rates are still super low, but what is alarming is that it looks like we hit a “bottom” last year and that interest rates are only going to go up from here. This rise in interest rates has been expected for a very long time – it is just that nobody knew exactly when it would happen. Now that it has begun, nobody is quite sure how high interest rates will eventually go but Bank of America Merrill Lynch’s head of global technical strategy, MacNeil Curry, sees yields getting back to the 2.70% level in the short term, and then some. “In the next couple of weeks to two months or so I think we’ve got a push coming up to the 2.85, 2.95 zone,” he said.. For some very interesting technical analysis, I encourage everyone to check out an article by Peter Brandt that you can find right here.
[A significant rise in interest rates]… is very bad news for stocks. The chart below…shows that stock prices have generally risen as the yield on 10 year U.S. Treasuries has steadily declined over the past 30 years…When interest rates go down, that spurs economic activity, and that is good for stock prices, so when interest rates start going up rapidly, that is not a good thing for the stock market at all.
The Federal Reserve has tried to keep long-term interest rates down by wildly printing money and buying bonds. Even the suggestion that the Fed may eventually “taper” quantitative easing caused the yield on 10 year U.S. Treasuries to absolutely soar a few weeks ago so the Fed has backed off on the “taper” talk for now.
Potential Stock Market Crash
What happens, however, if the yield on 10 year U.S. Treasuries continues to rise even with the wild money printing that the Fed has been doing? At that point, the Fed would begin to totally lose control. Bill Fleckenstein…believes that we could see the stock market suddenly plunge by 25%..[Fleckenstein has been quoted as saying that if we were to] “go through the recent highs and a month from now the 10-Year is at 3% people would start to realize…[that] the bond market is discounting the inflation we already have. [The,] at some point, the bond markets are going to say, ‘We are not comfortable with these policies’ so the bond market starts to back up and the economy gets worse than it is now because rates are rising. So the Fed says, ‘We can’t have this,’ and they decide to print more (money) and the bond market backs up (even more). All of the sudden it becomes clear that money printing not only isn’t the solution, but it’s the problem. Well, with rates going from where they are to 3%+ on the 10-Year, one of these days the S&P futures are going to get destroyed and, if the computers ever get loose on the downside, the market could break 25% in three days.”
Major Margin Debt[Furthermore,] as I have written about previously, we have seen a huge spike in margin debt in recent months, and this could make it even easier for a stock market collapse to happen. A recent note from Deutsche Bank explained precisely why margin debt is so dangerous:…
“Margin debt can be described as a tool used by stock speculators to borrow money from brokerages to buy more stock than they could otherwise afford on their own. These loans are collateralized by stock holdings, so when the market goes south, investors are either required to inject more cash/assets or become forced to sell immediately to pay off their loans – sometimes leading to mass pullouts or crashes.”
Of much greater concern than a stock market crash is the 441 trillion dollar interest rate derivatives bubble that could implode if interest rates continue to rise rapidly….
Just imagine what would happen if a life insurance company wrote millions upon millions of life insurance contracts and then everyone suddenly died….It would go completely broke of course. Well, that is what our major banks are facing today. They have written trillions upon trillions of dollars worth of interest rate derivatives contracts, and they are betting that interest rates will not go up rapidly – but what if they do?
The truth is that interest rates have a whole lot of room to go up. The chart below shows how the yield on 10 year U.S. Treasuries has moved over the past couple of decades.
As you can see above, the yield on 10 year U.S. Treasuries was hovering around the 6 percent mark back in the year 2000. Back in 1990, the yield on 10 year U.S. Treasuries hovered between 8 and 9 percent. If we return to “normal” levels, our financial system will implode. There is no way that our debt-addicted system would be able to handle it.
Watch the yield on 10 year U.S. Treasuries very carefully. It is the most important number in the entire U.S. economy. If that number gets too high, the game is over.
[Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.]
*http://theeconomiccollapseblog.com/archives/the-most-important-number-in-the-entire-u-s-economy (Copyright © 2013 The Economic Collapse)
If yields on U.S. Treasury bonds keep rising, things are going to get very messy. What we are ultimately looking at is a sell-off very similar to 2008, only this time we will have to deal with rising interest rates at the same time. The conditions for a “perfect storm” are rapidly developing, and if something is not done we could eventually have a credit crunch unlike anything that we have ever seen before in modern times. Let me explain. Read More »
Is there going to be another crisis? Of course there is. The liberalised global financial system remains intact and unregulated, if a little battered…The question therefore becomes one of timing: when will the next crash happen? To that I offer the tentative answer: it may be imminent…[This article puts forth my explanation as to why that will likely be the case.] Read More »
Last Wednesday, Fed Chairman Ben Bernanke promised to end his bond-buying addiction – cold turkey – in mid-2014. That is, as long as the economy is strong enough. As a result, investor fortitude was pushed to the brink. Stocks sold off hard, sending the S&P 500 Index down 1.4%. Before you head for the exits, too, let’s get a little perspective. Read More »
What does it look like when a 30 year bull market ends abruptly? What happens when bond yields start doing things that they haven’t done in 50 years? If your answer to those questions involves the word “slaughter”, you are probably on the right track. Right now, bonds are being absolutely slaughtered, and this is only just the beginning. So why should the average American care about this? Read More »
The global financial system is potentially heading for massive amounts of trouble if interest rates continue to soar. So what does all this mean exactly? [Let me explain.] Read More »
The U.S. government is in what is known as a “debt death spiral”. They must borrow money to repay prior debts. It is as if they are using their Visa Card to make an American Express payment. The rate of new debt additions dwarf any rate of growth the economy can possibly achieve. The end is certain, only its timing is unknown, and, once interest rates begin to rise, and they will, it’s game over. Read More »
The financial markets were in distress lately because of Fed Chairman Ben Bernanke’s suggestion that the Fed might taper off its quantitative easing programs starting at the end of this year and ending in 2015. Here are five reasons why markets shouldn’t worry too much about the Fed leaving the stage: Read More »
It seems that the past few years of falling interest rates have lulled a big part of theInterest-Rates global economy into financing with variable-rate debt…[As such,] when interest rates go up (as they did last week), there’s a world-wide reset in interest costs that, best case, amounts to a tax increase on individuals and businesses and, worst-case, threatens to blow up the whole system. Read More »
Fearing that the flow of nourishing mother milk from the Fed could dry up, a resolutely unweaned Wall Street threw a hissy fit and the dummy out of the pram last Thursday. The end of QE is seen as the beginning of the end of super-easy policy and potentially the first towards normalization. There is only one problem: it won’t happen. Here’s why. Read More »
Just the mere suggestion that this round of quantitative easing will eventually end if the economy improves is enough to severely rattle Wall Street. U.S. financial markets have become completely and totally addicted to easy money, and nobody is quite sure what is going to happen when the Fed takes the “smack” away. When that day comes, will the largest bond bubble in the history of the world burst? Will interest rates rise dramatically? Will it throw the U.S. economy into another deep recession? Can the Fed fix this mess without it totally blowing up? Read More »
At some point we are going to see another wave of panic hit the financial markets like we saw back in 2008. The false stock market bubble will burst, major banks will fail and the financial system will implode. It could unfold something like this: Words: 660 Read More »
Wall Street has been transformed into a gigantic casino where people are betting on just about anything that you can imagine. This works fine as long as there are not any wild swings in the economy and risk is managed with strict discipline but, as we have seen, there have been times when derivatives have caused massive problems in recent years – the government bailout because of derivatives at AIG; the failure of MF Global because of bad derivatives trades; and the 6 billion dollar loss that JPMorgan Chase recently suffered because of derivatives – [but the next] derivatives panic that comes will destroy global financial markets, and the economic fallout from the financial crash that will happen as a result will be absolutely horrific. [Let me explain my contention.] Words: 1485 Read More »
History shows that when investors experience a rapid decline in the amount of available cash in their brokerage account to spend/invest quickly such “negative net worth” leads to major corrections in the stock market. Currently such is the case so can we expect another such decline or will it be different this time?
Don’t get too worked up over interest on the national debt or what will happen when interest rates rise because, by then, we’ll likely be talking about ways to cool down the economy. [Why?] Because interest rates on US government debt are really a function of economic growth. If the economy is weak the Fed will pin short rates to stimulate the economy and if rates rise it’s going to be a function of better days ahead. Words: 525
The derivative market has blown a galactic bubble…and since there is literally no economist in the world who knows exactly how the derivative money flows or how the system works,…we really don’t know what will trigger the crash, or when it will happen, but considering the global financial crisis this system is in for tough times. [If, and when, it happens it] will be catastrophic for the world financial system. If you ever wanted a tool to help yourself or others visualize the staggering magnitude of US debt and derivatives, the infographic below is a good one to share. It visualizes who those 9 too-big-fail banks are, what their derivative exposures are, and what scandals they’ve been lately involved in. Words: 1915
The term “derivative” has become a dirty, if not evil word. So much of what ails our global financial system has been laid-at-the-feet of this misunderstood, mischaracterized term – derivatives. The purpose of this paper is to outline the origin, growth and ultimately the corruption of the derivatives market – and explain how something originally designed to provide economic utility has morphed into a tool of abusive, manipulative economic tyranny. Words: 3355
To achieve the EW target of $4,500/ozt. on the next upward move [in gold that I laid out in my article Alf Field: Correction in Gold is OVER and on Way to $4,500+!] will require something to trigger substantial new buying of gold. What could that event be? By definition, it will be a surprise to all market participants, a “black swan” event. That doesn’t prevent us from making a guess [and] one likely area from which problems could emerge…[would be] derivatives. [Let me explain why that might well be the case.] Words: 591