The Beginning Of The End
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“If The Yield Goes Significantly Higher The Market Is Going To Freak Out”

Freak Out - Photo by Alex ProimosIf yields on U.S. Treasury bonds keep rising, things are going to get very messy.  As I write this, the yield on 10 year U.S. Treasures has risen to 2.51 percent.  If that keeps going up, it is going to be like a mile wide lawnmower blade devastating everything in its path.  Ben Bernanke's super low interest rate policies have systematically pushed investors into stocks and real estate over the past several years because there were few other places where they could get decent returns.  As this trade unwinds (and it will likely not be in an orderly fashion), we are going to see unprecedented carnage.  Stocks, ETFs, home prices and municipal bonds will all be devastated.  And of course that will only be the beginning.  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.

At the moment, perhaps the most important number in the financial world is the yield on 10 year U.S. Treasuries.  A lot of investors are really concerned about how rapidly it has been rising.  For example, Patrick Adams, a portfolio manager at PVG Asset Management, was quoted in USA Today as saying the following on Friday...

"I am watching the 10-year U.S. bond," says Adams. "It has to stabilize. If the yield goes significantly higher the market is going to freak out."

If interest rates keep rising, it is going to have a dramatic effect throughout the economy.  In an article that he just posted, Charles Hugh Smith explained some of the things that we might soon see...

The wheels fall off the entire financialized debtocracy wagon once yields rise.  There's nothing mysterious about this:

1. As interest rates/yields rise, all the existing bonds paying next to nothing plummet in market value

2. As mortgage rates rise, there's nobody left who can afford Housing Bubble 2.0 prices, so home prices fall off a cliff

3. Once you can get 5+% yield on cash again, few people are willing to risk capital in the equities markets in the hopes that they can earn more than 5% yield before the next crash wipes out 40% of their equity

4. As asset classes decline, lenders are wary of loaning money against these assets; if the collateral for the loan (real estate, bonds, stocks, etc.) are in a waterfall decline, no sane lender will risk capital on a bet that the collateral will be sufficient to cover losses should the borrower default.

In addition, rapidly rising interest rates would throw the municipal bond market into absolute chaos.  In fact, according to Reuters, nearly 2 billion dollars worth of municipal bond sales were postponed on Thursday because of rising rates...

The possibility of rising interest rates rocked the U.S. municipal bond market on Thursday, with prices plunging in secondary trade, investors selling off the debt, money pouring out of mutual funds and issuers postponing nearly $2 billion in new sales.

"The market got crushed," said Daniel Berger, an analyst at Municipal Market Data, a unit of Thomson Reuters, about the widespread sell-off.

We are rapidly moving into unprecedented territory.  Nobody is quite sure what comes next.  One financial professional says that municipal bond investors "are in for the shock of their lives"...

"Muni bond investors are in for the shock of their lives," said financial advisor Ric Edelman. "For the past 30 years there hasn't been interest rate risk."

That risk can be extreme. A one-point rise in the interest rate could cut 10 percent of the value of a municipal bond with a longer duration, he said.

Many retail buyers, though, are not ready for the change and "when it starts, it will be too late for them to react," he said, adding that he was encouraging investors to look at their portfolio allocation and make changes to protect themselves from interest rate risks now.

Rising interest rates are playing havoc with other financial instruments as well.  For example, it appears that the ETF market may already be broken.  Just check out the chaos that we witnessed on Thursday...

The selling also caused disruptions in the plumbing behind several ETFs. Citigroup stopped accepting orders to redeem underlying assets from ETF issuers, after one trading desk reached its allocated risk limits. One Citi trader emailed other market participants to say: “We are unable to take any more redemptions today . . . a very rare occurrence due to capital requirements we are maxed out on the amount of collateral we have out.”

State Street said it would stop accepting cash redemption orders for municipal bond products from dealers. Tim Coyne, global head of ETF capital markets at State Street, said his company had contacted participants “to say we were not going to do any cash redemptions today”. But he added that redemptions “in kind” were still taking place.

These are the kinds of things that you would expect to see at the beginning of a financial panic.

And when there is fear in the marketplace, credit can dry up really quickly.

So are we headed for a major liquidity crisis?  Well, that is what Chris Martenson believes is happening...

The early stage of any liquidity crisis is a mad dash for cash, especially by all of the leveraged speculators. Anything that can be sold is sold. As I scan the various markets, all I can find is selling. Stocks, commodities, and equities are all being shed at a rapid pace, and that's the first clue that we are not experiencing sector rotation or other artful portfolio-dodging designed to move out of one asset class into another (say, from equities into bonds).

The bursting of the bond bubble has the potential to plunge our financial system into a crisis that would be even worse than we experienced back in 2008.  Unfortunately, as Ambrose Evans-Pritchard recently noted, the bond market is dominated by just a few major players...

The Fed, the ECB, the Bank of England, the Bank of Japan, et al, own $10 trillion in bonds. China, the petro-powers, et al, own another $10 trillion. Between them they have locked up $20 trillion, equal to roughly 25pc of global GDP. They are the market. That is why Fed taper talk has become so neuralgic, and why we all watch Chinese regulators for every clue on policy.

This is one of the reasons why I write about China so much.  China has a tremendous amount of leverage over the global financial system.  If China starts selling bonds at about the same time that the Fed stops buying bonds we could see a shift of unprecedented proportions.

Sadly, most Americans have absolutely no idea how vulnerable the financial system is.

Most Americans have absolutely no idea that our system of finance is a house of cards built on a foundation of risk, debt and leverage.

Most Americans have complete and total faith that our leaders know what they are doing and are fully capable of keeping our financial system from collapsing.

In the end, most Americans are going to be bitterly, bitterly disappointed.

Chaos

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  • Syrin

    Meanwhile the band in the ballroom of the Titanic led by Chrissy “Leg Thrill” Matthews and Jon Stewart continues to play “Happy Days are Here Again” 30 seconds before impact.

    • markthetruth

      You know your personally in trouble when you emptied your children’s Piggy Banks.

      the end…

  • Tim

    This is why the Federal Reserve will not stop buying bonds. This talk of tapering by the Fed is nothing but prevarication.

    • Rodster

      The Fed is beyond the point of no return. If they continue to print money then the system will collapse albeit into the future by kicking the can down the road.

      If they pull back the money printing this will cause interest rates to rise and the economy crashes. Either way it’s a bad scenerio made worse by careless and stupid decisions back in 2008-09. TPTB could have allowed the too big to fail, fail but they chose to keep them alive and nothing was fixed. In fact things have been made worse.

      • Tim

        I agree, Rodster. There is no way out of the situation the Fed is in. But I think that they’ll be able to stabilize the system (i.e. buy more time) by continuing to purchase Treasuries.

        On the other hand, the problems we’re seeing today go back much farther than 2008-09. They extend all the way back to 1913. ;-)

        • Shmeggle Marxist

          sounds like we are done, only Q is how long before the bird is completely cooked.

          • GSOB

            For the time being, we are better off than Austin Tice

        • Douglas M. Green

          Absolutely right. Yields are likely to come down soon. Faber, Schiff, Lira and others have said QE will be ramped up, not dialed back because kicking the can is less immediately painful.

      • 007

        They will kick the can down the road of course, it is the only play they have. Bernanke is just running his mouth. It is hard to believe the market believed him.

        He will print money until inflation and bursting bubbles stop him

      • markthetruth

        It’s Called ” Return to Earth ”

        the end…

  • Troy

    Micheal what do you think of the credit markets in china freezing up on Thursday?

    • MichaelfromTheEconomicCollapse

      I think that is another very ominous sign. I almost mentioned that in this article.

      Michael

      • Not afraid… I know GOD

        Michael… I would like to thank you for all of your excellent truthful articles that I get in my possession every time you write. You are the best of the best. Thank you so much.

  • GSOB

    You know,

    It bugs me time and again when things don’t turn out as expected. I mean, something else is propping this doomed system up, which should have collapsed a log time ago.

    I must not be seeing something because it is illogical that it’s still standing.., that is our economy.

    In the meantime, we prepare and look like idiots.

    Remember Noah?

    Talk about chaos.

    • Tim

      I was saying the same thing back in 2008. I told an acquaintance back then “it must be supernatural.”

    • Ralfine

      There is a momentum of 300 million Americans. And billions more elsewhere.

      What you see as “new crisis” is daily occurrence elsewhere, and they keep going on as if nothing new has happened.

      What you see as apocalypse, with marauding gangs in the street, is daily occurrence in Somalia. Afghanistan has seen war since 1979. Most of their population don’t know “normal life”.

      A hair dryer is produced in China for $1.50. Then sold in the West for $20.

      When the price falls to $15 and even $10, the trading companies are whining about declining economic power and requesting pay freezes in America. In the meantime they put pressure on the Chinese to cut corners and use inferior components to produce for $0.50, while the Chinese workers stay away from those factories because wages elsewhere are higher.

      Eventually the sheer number of products coming from China lead to market saturation in everything.

      Now to sell anything, you get consumer credits and “buy now, pay later”. Selling anything against this saturation is harder and harder.

      Americans still live in wood sheds that blow away in tornadoes and hurricanes, and they need to replace their household goods every other year.

      Now imagine people who would start building storm resistant housing, employing local craftsmen, using sun and wind and biogas from sewage, manure, landfills to help cover heating and cooling …

      Just imagine they’d use energy from wind and solar power plants to separate water (H2O) to oxygen (O2) and hydrogen (H2) and then add carbon dioxide (CO2) to create methane (CH4) to put into pipes for use anywhere in the country.

      Would that be a threat to the military-industry-complex who “sell” the navy to the government as protection for oil tankers and energy security?

      • GSOB

        Yes.

      • markthetruth

        Why do you think Dollar Stores exist !

        the end…

  • http://karmaeconomics.blogspot.com/ lavista4u

    Seriously guys, it does not concern us whatsoever. 99% of all bonds and more than 90% of stocks, ETF, Derivatives, Futures are all owned by the few elites, corporations like Goldman saacks and Banks.

    Market crash is another giant scam for consolidation of power. Its a racket.

    BUY OR SELL>> THEY WIN.

    The whole economic jargon’s like Bonds, ETF, Stocks, Derivatives, Futures are one gigantic scam words for control of power.

    Remember this. They own both side of the equation.

    • GSOB

      willful ignorance

  • markthetruth

    China has a big Real estate issue to deal with as they built Ghost towns and now the investors are Losing Money because no one could afford to live in them.So there going to force suburban people to move into them even though they can’t afford them , some 250,000 people . The thing is they could end up as slums and probably will . So they will create a whole other problems that will cost them money. They followed what we did.

    the end…

  • saintmatty

    Yeah, it is super natural. The bible mentions that there is a force holding back the power that will usher in the man of perdition, or The Anti-Christ. The force is the Christians on the Earth. As long as the Spirit filled Christian is on Earth, the Holy Spirit is holding back patiently calling all to repent and be saved. Watch out when putting down the Jewish people. Yeah, they are not perfect, but they are God’s chosen people. God promised them things that we as Christians enjoy. You’ll know when the SHTF when CNN reports that millions of people have disappeared.

  • Sorry soon

    you all wanted to see a collapse now you are complaining.

    • Mondobeyondo

      I don’t WANT to see a collapse.

      • squashpants

        I tell those who will listen that I am prepping, but that I hope I won’t end up needing the stuff I am stockpiling. I really will miss electricity, running water, and the Internet. Seriously.

    • chris87654

      I wanted to see a correction … equity markets should NOT be higher than they were when money was circulating because “everyone” was working and using home equity like an ATM.

    • GSOB

      Troll

    • El Pollo de Oro

      I’ve said many times that I keep hoping I’m wrong and that there is a major economic recovery in The Banana Republic of America as well as in Europe. I want to be proven wrong, and I hope that Gerald Celente, Alex Jones, Chris Hedges and Peter Schiff are proven wrong as well. But the more I analyze the facts, the more convinced I become that they are absolutely right and that things are going to get considerably worse.

  • bout time to raise more taxes

    economy is so weak and pathetic that even a 1% rise in rates would trigger a market collapse of 25%. the fed will be forced to pack it’s vault with trillions more of worthless treasury notes in a desperate attempt to avoid stagflation and another round of bailouts and bank failures

  • Mondobeyondo

    Treasury yields going up… Bernanke’s indicating QE3 or QE4 or QEWhatever It Is Now, may be curtailed… interest rates may be on the rise. The good times, such as they were, may be coming to an end very soon.

    May be getting close to time to activate the METWS (Mondo Economic Tsunami Warning System). Forget all that “supermoon” talk. There’s a bad moon on the rise.

  • chris87654

    Michael, I’ve been reading your articles after searching for some on derivatives. First I’d heard of them was when a (I believe) southern California city went broke because of them.

    Some questions:
    1) is there any way there could be an orderly exit from this mess? (don’t banks realize there’s no way they could get bailed out from this? if they can’t, it will be the end of some [though individual players have likely prepared for it] )

    2) how does the situation now compare with derivatives in 2008? (seems the housing/MBS crash would affect it more than interest rates going up).

    3) will this force US companies to repatriate profits from overseas? (it was interesting to learn that Apple borrows cash at low rates, while deducting the interest, because it’s better than pulling in some cash/paying 35% tax on profit)

  • Jimbo

    What confuses the fvck out of me is the use of GDP as the primary indicator of an economies strength? Do we measure a companies performance by GDP? Turnover is not profit. My friend at work earns the same as me. He has a big mortgage whilst mine is paid off. He has a big car loan while I bought used for cash. He has two cards maxed out and I don’t even own a credit card.. He spends way more than me. His GDP is massive, mine is not.

    • Nexusfast123

      GDP is a very poor measure of ‘well-being’. The individual that created the concept of GDP in the 30′s warned against its use. It leads to perverse outcomes as all transactions are counted as positive, They are not as your example illustrates.

      There are other measures but politicians ignore them as perversely GDP gives the impression that the economy is fine even thought it is tanking.

      • Jimbo

        If the world was a small town and countries were families within that town, who would come out best after a bad harvest? My guess is that it would not be the family that produces less than it consumes and spends more than it earns. That is basic economics and everything else is smoke and mirrors. Expanding a family into a village and a village into a town and a town into a city and a city into a country does not change the fundamentals. To survive you need to eat. To eat you need to either grow crops or hunt or pass that responsibility to someone else while you do other things (like build houses etc). At a point in history, some people woke up to the fact that they could spend their lives in luxury by trading the services and goods of others whilst doing nothing productive themselves. They created trade and debt and since that day debt has been traded as though it were grain or milk by people who never milked a cow or harvested a field in their lives.

        • GSOB

          “To survive you need to eat. To eat you need to either grow crops or hunt or pass that responsibility to someone else while you do other things (like build houses etc).

          That makes me think of this verse: 1 Tim 5:8

          “But if anyone does not provide for his own, and especially for those of his household, he has denied the faith and is worse than an unbeliever.”

          It’s wonderful to realize that verses pop up in my thoughts often while
          blogging here.

          Thanks Jimbo

          • Jimbo

            I work in manufacturing for a profitable company so although I don’t grow grain or milk cows, I am happy that the FIAT I am given for my work can be exchanged fairly for goods and services to keep my family. I do not play the markets with my FIAT because for every dollar I could make on the markets, someone else will lose a dollar. With or without a god, profit made on the loss of another person is immoral. The collapse of FIAT will not be caused by me or people like me. It will be caused by governments and speculators who have come to believe that a chicken can lay 10 eggs a day next year or the year after when the rest of us know that they can’t.

          • theblues77

            “FIAT because for every dollar I could make on the markets, someone else will lose a dollar”

            I like your post but its not entirely true. The pie that is called the economy is not fixed but can grow so there can be winners without losers. When you buy stock at the most basic level you are loaning the company money. If they do good with this money and make profits the economy grows. The stock price also grows and you earn dividends based on this relationship, or sharing in the profits. The company you work for may do this.

            I understand where you are coming from, though.

            God Bless.

          • Jimbo

            I understand where you are coming from. Growth requires investment. I invest in my kids. I want them to grow. My point was aimed more at speculative investment where the only motive of the investor is to profit. The exchanges are not just places where people can invest in business. They have become places where people can profit on the rise and fall of share values. The investors care not for the welfare of the company they invested in. They only care about their margin. You can bet on anything nowadays and if betting on a falling share value is seen as normal market practice, then I will have nothing to do with it. We are all good people on here and I appreciate your educated response to my comment. God Bless.

          • Jimbo

            I lived in London in 1990 when Britain was locked into the ERM (european exchange rate mechanism). The British economy was raped by currency speculators who knew that Britain was obligated to take whatever measures it could to stay within the ERM window. Sadly, a great number of those speculators were in the City of London. I personally witnessed drunken 20 something currency speculators cracking open magnums of expensive champagne because they had made a killing on Britains 6 billion pound loss. That is so not right.

    • Rufus T Firefly

      As Archie Bunker once told the meathead, America is the greatest country on earth because we have the grossest national product.

      It is going to be so much fun watching the sheeple get trampled like they deserve.

      • Johnny Brainetree

        Karma will see that you get yours too, and all the more because of your glee at the sufferings of others.

    • markthetruth

      Correct amongo ! The car companies count cars given to dealers as sales, meanwhile they sit in parking lots, the dealer sells a car for 0% down 0% interest 0 payments for six months. Don’t care if they can’t make the payments, just as long as they get it off the lot it’s a sale.

      the end…

      • Sick of your fancies….

        stop using “the end….,” please! You are not the last word, the conversation is evidentially NOT at an end, and the finial is both redundant and rather supine.

  • Anti Chriss

    @25580d02eb3f2be52fd909b720d4e2a7:disqus
    The people of God are going to be bitterly disappointed too. All those who believe that have only faith. Good luck with that.

    • GSOB

      “Luck is the pagan’s language towards the extinguishment of professed faith.”

      GSOB

      • DDuana

        You are assuming the “pagans” believed in your Jesus in the first place. They do not.

        • GSOB

          no, i’m not assuming what you assume that i am.

  • Graham

    Some get it, some don’t… yet.

    Once you identify all the “cogs” in the system, it is far easier to determine how it functions. Some cogs are far harder to find than others, and that is not by accident.

    When you know how the “Matrix” operates, you have a far better idea of what to expect. You can then “plan ahead” as best as you can for what has yet to come. Their “Agenda” is relentless. Learn to identify the underlying “energy” that runs it. Many are unconsciously “complicit” and this supports it.

    Learn who the major players are (by name) and you will know what subjects to research further. You will then identify the “Groups” and how they interact. By design, you are not supposed to see the “wood for the trees”. Eyes Wide Shut!

    Their system is “occultic” in nature, thereby “supernatural” in appearance to some. The key is to change your “energy” and focus on the “NOW”. Anything else creates “fear” and keeps the mind bound, just the way they need the majority to remain for them to succeed in their plans. Noticed all the “terrorist” attacks that don’t stand up to full and proper scrutiny?

    Consider “waking up” as a fundamental energy change, which in return changes the conditioned and programmed nature of the mind. Reprogram it, as the ability lies in the genes (DNA).

    Even then, they use gross technologies to affect the awakened mind. Be strong! Your enemies are Vaccines, Chemtrails, GM Food, Fluoride, Aspartame, RF, Microwaves… and countless others.

    They even monitor everything you do. Gosh. Talk about watching over their flock. Get out of their pen (wherever possible) and stay out. Only a fundamental change of (their mass induced) lifestyle will leave people with any hope.

    Things are about to get very “serious”. Don’t “energise” their plans as it helps to bring them about. If you want to change your world my friends, you must change your thinking.

  • Matt

    Insurance companies are vulnerable to rapidly rising interest rates. People leave insurance products when rates start rising which forces the insurance company to sell its investment at a loss. Too much of this becomes a big problem.

  • piccadillybabe

    What is really scary is that there will be no more QE going on according to Ben B. He feels that the economy is doing well and that QE is no longer needed. Hopefully, the derivative markets on the Wall Street casino will deliver high yeilds. If not, the too big to fails will be on their own this time around and hopefully what happened in Cyprus will not happen here. I don’t think they have learned their lesson as they continue on as they did before.

  • jokyjo

    Trouble is a brewing. Yikes!

  • GSOB

    If it gets as bad as I anticipate, debt would be a long forgone issue for everyone.

  • Caution

    Is the comments section a place where the corp./govt. can trap you? Careful what you write.

    • GSOB

      Well, if the govt. is going to trap me for something I write, then what I write is what I write. I don’t live in that kind of fear yet.

      Do you?

  • markthetruth

    Let me sum it up !

    Jesus the son of God.

    Jesus was a Jewish teacher from Galilee, was baptized by John the Baptist, and was crucified in Jerusalem on the orders of the Roman prefect, Pontius Pilate.

    the end…

    • Graham

      Incomplete!

      We need to know about his “missing years” that are not reported in the bible.

      Where did he go, what groups did he mingle with and what name was he known as to them?

      The evidence exists.

      an end creates a new beginning…

      • GSOB

        Why do you need to know these things? Bottom line is this, are you a child of God or a child of the Devil?

        Jesus said that unless your born of water and spirit, you can not see the kingdom of God.

    • GSOB

      Jesus is a carpenter.

  • markthetruth

    Close but it was the SuperMoon !

    the end…

  • El Pollo de Oro

    According to the BRA government’s bogus figures, The Banana Republic of America had an unemployment rate of 7.5% in April 2013.

    According to a much more reliable source (John Williams of Shadow Statistics), the REAL unemployment rate (when you factor in all the Americans who the BRA government pretends no longer exist), in the BRA is 23%.

    In 1932, it was also 23%.

    So in other words, the BRA is experiencing Great Depression-level unemployment. Despite all the money printing, bailouts, so-called “stimulus,” currency debasement, record low interest rates, etc., the BRA is experiencing 1932-level unemployment. Ouch.

    And this is only Phase 1 of the Greatest Depression, as Gerald Celente calls it.

    • El Pollo de Oro

      “We’re worse than Depression-level housing slump, worse than Depression-level job
      losses. They’ve been cooking the numbers. There never was a recovery.”—Alex
      Jones

      “Our dollar is going down rapidly as we speak.”—Ron Paul

      “The American labor force has, in effect, been turned into a Third World labor
      force, where the only jobs available are in lowly paid domestic services.” —Dr.
      Paul Craig Roberts

    • Shmeggle Marxist

      60% means the only people left working are gov’t employees (well almost). the rest of us can live large like gary knowing that their contribution ($0) is doing the Lord’s work…………………..

  • 2Gary2

    US-based coffee giant Starbucks said on Sunday it had paid £5 million in
    British corporation tax and will pay another £15 million by next year
    after facing a backlash from lawmakers and customers over non-payment.

    Good for the UK we need to all tax these scum bag corporations and MAKE THEM PAY
    their fair share. No more BS moving profits around. We also need to
    tax the rich HARD and spread the wealth. The USA is the least equal in
    income distribution of all developed countries. Tax and redistribute
    from the haves to the have not’s and have little’s.

    • Shmeggle Marxist

      and now a word from our commie anti-USA ‘friend’…………

      Gary, lets ‘print’ all the money we need and stop taxing people. Makes sense to a brain-trust like you, doesn’t it?

      do you get hard thinking of taxing the rich hard?

    • Ayn Rand

      Gary, I would love it if we could trust government with that sorta money. Well… we can’t. They will just abuse it like they abuse everything else. More and more I support Anarcho-capitalism or minarcho-capitalism. The less government the better.

  • GSOB

    Yes.

  • squashpants

    Just a note re:this article. I read on AP online that 10-Year Treasury Bonds interest rate have topped 2.6 % “for the first time since August 2011″. So it doesn’t sound like it is stabilizing. Wondering if Michael will comment on this.

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