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Tuesday, January 13, 2015

555 Trillion Reasons Why Central Banks Won't Let Rates Normalize

Submitted by Phoenix Capital Research on 01/13/2015

The biggest question for most investors today is that whether or not rates will rise in 2015.

This question is focusing on the wrong issue: the economy. It should be focusing on the REAL issue: the bond bubble.

The Fed may raise rates a token amount this year, but the move will be largely symbolic. With over $100 trillion in bonds and over $555 TRILLION in interest rate derivatives trading based on interest rates, the Fed will not be normalizing rates at any point in the future.

Indeed, former Fed Chairman Ben Bernanke admitted this in private during a closed-door luncheon with several hedge funds last year. Bernanke’s exact words were that rates would not normalize anytime during his “lifetime.”

So the Fed may raise rates from 0.25% to say 0.3% or possibly even 0.5%. But we won’t be entering a hawkish period for the Fed by any means.

The reason is very simple… any normalization of rates would implode the bond market.

The fact is that much of the globe, particularly the developed west, is up to its eyeballs in debt. Mind, you, this is based solely on official public debt numbers.  If you include unfunded liabilities, then the US, most of Europe, Japan, and even China are sporting Debt to GDP ratios well over 300%.

In the US, a 1% increase in interest rates means over $100 billion more in interest rate payments. The US is already running a deficit (meaning that it spends more than it takes in via taxes) and has been for most of the last 20 years.

Of course, the deficit could become larger to service the increase in interest payments, but with the US already having to resort to issuing NEW debt to cover OLD debt that is coming due, this is a slippery slope. The US issued over $1 trillion in new debt in an 8-week period for precisely this purpose.

The reality is as follows:

1)   Bonds are the biggest bubble in history, dwarfing even the real estate bubble of the mid-2000s.

2)   This bubble also encompasses the bubble in Central bank policy. Every single Central Bank policy is focused on maintaining the bond bubble and the TBTF banks with the greatest derivative exposure to it.

3)   When the bond bubble bursts, entire nations will fail, as will the Central Banks themselves. Draghi, Yellen, Kuroda et al will do everything in their power NOT to allow the system that has put them at the top of the economic food-chain to collapse no matter what the costs for ordinary citizens.

4)   Rates will only rise significantly ONCE the bond bubble bursts. There may be symbolic raises here and there, but with over $555 trillion in derivatives based on interest rates floating in the system globally, you can bet there will NEVER be a shock and awe interest rate raise.

5)   This bubble, like all bubbles, will eventually burst no matter what the Central Banks do. When it does, everything about modern finance will prove misguided and based solely on the belief that Central Banks can control the system.

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Best Regards
Phoenix Capital Research

Source ZeroHedge