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12 Reasons Why The Federal Reserve May Have Just Made The Biggest Economic Mistake Since The Last Financial Crisis

Wrong Way Signs - Public DomainHas the Federal Reserve gone completely insane?  On Wednesday, the Fed raised interest rates for the second time in three months, and it signaled that more rate hikes are coming in the months ahead.  When the Federal Reserve lowers interest rates, it becomes less expensive to borrow money and that tends to stimulate more economic activity.  But when the Federal Reserve raises rates , that makes it more expensive to borrow money and that tends to slow down economic activity.  So why in the world is the Fed raising rates when the U.S. economy is already showing signs of slowing down dramatically?  The following are 12 reasons why the Federal Reserve may have just made the biggest economic mistake since the last financial crisis…

#1 Just hours before the Fed announced this rate hike, the Federal Reserve Bank of Atlanta’s projection for U.S. GDP growth in the first quarter fell to just 0.9 percent.  If that projection turns out to be accurate, this will be the weakest quarter of economic growth during which rates were hiked in 37 years.

#2 The flow of credit is more critical to our economy than ever before, and higher rates will mean higher interest payments on adjustable rate mortgages, auto loans and credit card debt.  Needless to say, this is going to slow the economy down substantially

The Federal Reserve decision Wednesday to lift its benchmark short-term interest rate by a quarter percentage point is likely to have a domino effect across the economy as it gradually pushes up rates for everything from mortgages and credit card rates to small business loans.

Consumers with credit card debt, adjustable-rate mortgages and home equity lines of credit are the most likely to be affected by a rate hike, says Greg McBride, chief analyst at Bankrate.com. He says it’s the cumulative effect that’s important, especially since the Fed already raised rates in December 2015 and December 2016.

#3 Speaking of auto loans, the number of people that are defaulting on them had already been rising even before this rate hike by the Fed…

The number of Americans who have stopped paying their car loans appears to be increasing — a development that has the potential to send ripple effects through the US economy.

Losses on subprime auto loans have spiked in the last few months, according to Steven Ricchiuto, Mizuho’s chief US economist. They jumped to 9.1% in January, up from 7.9% in January 2016.

“Recoveries on subprime auto loans also fell to just 34.8%, the worst performance in over seven years,” he said in a note.

#4 Higher rates will likely accelerate the ongoing “retail apocalypse“, and we just recently learned that department store sales are crashing “by the most on record“.

#5 We also recently learned that the number of “distressed retailers” in the United States is now at the highest level that we have seen since the last recession.

#6 We have just been through “the worst financial recovery in 65 years“, and now the Fed’s actions threaten to plunge us into a brand new crisis.

#7 U.S. consumers certainly aren’t thriving, and so an economic slowdown will hit many of them extremely hard.  In fact, about half of all Americans could not even write a $500 check for an unexpected emergency expense if they had to do so right now.

#8 The bond market is already crashing.  Most casual observers only watch stocks, but the truth is that a bond crash almost always comes before a stock market crash.  Bonds have been falling like a rock since Donald Trump’s election victory, and we are not too far away from a full-blown crisis.  If you follow my work on a regular basis you know this is a hot button issue for me, and if bonds continue to plummet I will be writing quite a bit about this in the weeks ahead.

#9 On top of everything else, we could soon be facing a new debt ceiling crisis.  The suspension of the debt ceiling has ended, and Donald Trump could have a very hard time finding the votes that he needs to raise it.  The following comes from Bloomberg

In particular, the markets seem to be ignoring two vital numbers, which together could have profound consequences for global markets: 218 and $189 billion. In order to raise or suspend the debt ceiling (which will technically be reinstated on March 16), 218 votes are needed in the House of Representatives. The Treasury’s cash balance will need to last until this happens, or the U.S. will default.

The opening cash balance this month was $189 billion, and Treasury is burning an average of $2 billion per day – with the ability to issue new debt. Net redemptions of existing debt not held by the government are running north of $100 billion a month. Treasury Secretary Steven Mnuchin has acknowledged the coming deadline, encouraging Congress last week to raise the limit immediately.

If something is not done soon, the federal government could be out of cash around the beginning of the summer, and this could create a political crisis of unprecedented proportions.

#10 And even if the debt ceiling is raised, that does not mean that everything is okay.  It is being reported that U.S. government revenues just experienced their largest decline since the last financial crisis.

#11 What do corporate insiders know that the rest of us do not?  Stock purchases by corporate insiders are at the lowest level that we have seen in three decades

It’s usually a good sign when the CEO of a major company is buying shares; s/he is an insider and knows what’s going on, so their confidence is a positive sign.

Well, according to public data filed with the Securities and Exchange Commission, insider buying is at its LOWEST level in THREE DECADES.

In other words, the people at the top of the corporate food chain who have privileged information about their businesses are NOT buying.

#12 A survey that was just released found that corporate executives are extremely concerned that Donald Trump’s policies could trigger a trade war

As business leaders are nearly split over the effectiveness of Washington’s new leadership, they are in unison when it comes to fears over trade and immigration. Nearly all CFOs surveyed are concerned that the Trump administration’s policies could trigger a trade war between the United States and China.

A decline in global trade could deepen the economic downturns that are already going on all over the planet.  For example, Brazil is already experiencing “its longest and deepest recession in recorded history“, and right next door people are literally starving in Venezuela.

After everything that you just read, would you say that the economy is “doing well”?

Of course not.

But after raising rates on Wednesday, that is precisely what Federal Reserve Chair Janet Yellen told the press

“The simple message is — the economy is doing well.” Federal Reserve Chair Janet Yellen said at a news conference. “The unemployment rate has moved way down and many more people are feeling more optimistic about their labor prospects.”

However, after she was challenged with some hard economic data by a reporter, Yellen seemed to change her tune somewhat

Well, look, our policy is not set in stone. It is data- dependent and we’re — we’re not locked into any particular policy path. Our — you know, as you said, the data have not notably strengthened. I — there’s noise always in the data from quarter to quarter. But we haven’t changed our view of the outlook. We think we’re on the same path, not — we haven’t boosted the outlook, projected faster growth. We think we’re moving along the same course we’ve been on, but it is one that involves gradual tightening in the labor market.

Just like in 2008, the Federal Reserve really doesn’t understand the economic environment.  At that time, Federal Reserve Chair Ben Bernanke assured everyone that there was not going to be a recession, but when he made that statement a recession was actually already underway.

And as I have said before, I wouldn’t be surprised in the least if it is ultimately announced that GDP growth for the first quarter of 2017 was negative.

Whether it happens now or a bit later, the truth is that the U.S. economy is heading for a new recession, and the Federal Reserve has just given us a major shove in that direction.

Is the Fed really so clueless about the true state of the economy, or could it be possible that they are raising rates just to hurt Donald Trump?

I don’t know the answer to that question, but clearly something very strange is going on…

How The Federal Reserve Is Setting Up Trump For A Recession, A Housing Crisis And A Stock Market Crash

Janet Yellen - Public DomainMost Americans do not understand this, but the truth is that the Federal Reserve has far more power over the U.S. economy than anyone else does, and that includes Donald Trump.  Politicians tend to get the credit or the blame for how the economy is performing, but in reality it is an unelected, unaccountable panel of central bankers that is running the show, and until something is done about the Fed our long-term economic problems will never be fixed.  For an extended analysis of this point, please see this article.  In this piece, I am going to explain why the Federal Reserve is currently setting the stage for a recession, a new housing crisis and a stock market crash, and if those things happen unfortunately it will be Donald Trump that will primarily get the blame.

On Wednesday, the Federal Reserve is expected to hike interest rates, and there is even the possibility that they will call for an acceleration of future rate hikes

Economists generally believe the central bank’s median estimate will continue to call for three quarter-point rate increases both this year and in 2018. But there’s some risk that gets pushed to four as inflation nears the Fed’s annual 2% target and business confidence keeps juicing markets in anticipation of President Trump’s plan to cut taxes and regulations.

During the Obama years, the Federal Reserve pushed interest rates all the way to the floor, and this artificially boosted the economy.  In a recent article, Gail Tverberg explained how this works…

With falling interest rates, monthly payments can be lower, even if prices of homes and cars rise. Thus, more people can afford homes and cars, and factories are less expensive to build. The whole economy is boosted by increased “demand” (really increased affordability) for high-priced goods, thanks to the lower monthly payments.

Asset prices, such as home prices and farm prices, can rise because the reduced interest rate for debt makes them more affordable to more buyers. Assets that people already own tend to inflate, making them feel richer. In fact, owners of assets such as homes can borrow part of the increased equity, giving them more spendable income for other things. This is part of what happened leading up to the financial crash of 2008.

But the opposite is also true.

When interest rates rise, borrowing money becomes more expensive and economic activity slows down.

For the Federal Reserve to raise interest rates right now is absolutely insane.  According to the Federal Reserve Bank of Atlanta’s most recent projection, GDP growth for the first quarter of 2017 is supposed to be an anemic 1.2 percent.  Personally, it wouldn’t surprise me at all if we actually ended up with a negative number for the first quarter.

As Donald Trump has explained in detail, the U.S. economy is a complete mess right now, and we are teetering on the brink of a new recession.

So why in the world would the Fed raise rates unless they wanted to hurt Donald Trump?

Raising rates also threatens to bring on a new housing crisis.  Interest rates were raised prior to the subprime mortgage meltdown in 2007 and 2008, and now we could see history repeat itself.  When rates go higher, it becomes significantly more difficult for families to afford mortgage payments

The rate on a 30-year fixed mortgage reached its all-time low in November 2012, at just 3.31%. As of this week, it was 4.21%, and by the end of 2018, it could go as high as 5.5%, forecasts Matthew Pointon, a property economist for Capital Economics.

He points out that for a homeowner with a $250,000 mortgage fixed at 3.8%, annual payments are $14,000. If that homeowner moved to a similarly-priced home but had a 5.5% rate, their annual payments would rise by $3,000 a year, to $17,000.

Of course stock investors do not like rising rates at all either.  Stocks tend to rise in low rate environments such as we have had for the past several years, and they tend to fall in high rate environments.

And according to CNBC, a “coming stock market correction” could be just around the corner…

Investors are in for a rude awakening about a coming stock market correction — most just don’t know it yet. No one knows when the crash will come or what will cause it — and no one can. But what’s worse for most investors is they have no clue how much they stand to lose when it inevitably happens.

“If you look at the market historically, we have had, on average, a crash about every eight to 10 years, and essentially the average loss is about 42 percent,” said Kendrick Wakeman, CEO of financial technology and investment analytics firm FinMason.

If stocks start to fall, how low could they ultimately go?

One technical analyst that has a stunning record of predicting short-term stock market declines in recent years is saying that the Dow could potentially drop “by more than 6,000 points to 14,800”

But if the technical stars collide, as one chartist predicts, the blue-chip gauge could soon plunge by more than 6,000 points to 14,800. That’s nearly 30% lower, based on Friday’s close.

Sandy Jadeja, chief market strategist at Master Trading Strategies, claims several predicted stock market crashes to his name — all of them called days, or even weeks, in advance. (He told CNBC viewers, for example, that the August 2015 “Flash Crash” was coming 18 days before it hit.) He’s also made prescient calls on gold and crude oil.

And he’s extremely concerned about what this year could bring for investors. “The timeline is rapidly approaching” for the next potential Dow meltdown, said Jadeja, who shares his techniques via workshops and seminars.

Most big stock market crashes tend to happen in the fall, and that is what I portray in my novel, but the truth is that they can literally happen at any time.  If you have not seen my recent rant about how ridiculously overvalued stocks are at this moment in history, you can find it right here.  Whether you want to call it a “crash”, a “correction”, or something else, the truth is that a major downturn is coming for stocks and the only question is when it will strike.

And when things start to get bad, most of the blame will be dumped on Trump, but it won’t primarily be his fault.

It was the Federal Reserve that created this massive financial bubble, and they will also be responsible for popping it.  Hopefully we can get the American people to understand how these things really work so that accountability for what is coming can be placed where it belongs.

We Are Being Set Up For Higher Interest Rates, A Major Recession And A Giant Stock Market Crash

bear-market-bull-market-public-domainSince Donald Trump’s victory on election night we have seen the worst bond crash in 15 years.  Global bond investors have seen trillions of dollars of wealth wiped out since November 8th, and analysts are warning of another tough week ahead.  The general consensus in the investing community is that a Trump administration will mean much higher inflation, and as a result investors are already starting to demand higher interest rates.  Unfortunately for all of us, history has shown that higher interest rates always cause an economic slowdown.  And this makes perfect sense, because economic activity naturally slows down when it becomes more expensive to borrow money.  The Obama administration had already set up the next president for a major recession anyway, but now this bond crash threatens to bring it on sooner rather than later.

For those that are not familiar with the bond market, when yields go up bond prices go down.  And when bond prices go down, that is bad news for economic growth.

So we generally don’t want yields to go up.

Unfortunately, yields have been absolutely soaring over the past couple of weeks, and the yield on 10 year Treasury notes has now jumped “one full percentage point since July”

The 10-year Treasury yield jumped to 2.36% in late trading on Friday, the highest since December 2015, up 66 basis point since the election, and up one full percentage point since July!

The 10-year yield is at a critical juncture. In terms of reality, the first thing that might happen is a rate increase by the Fed in December, after a year of flip-flopping. A slew of post-election pronouncements by Fed heads – including Yellen’s “relatively soon” – have pushed the odds of a rate hike to 98%.

As I noted the other day, so many things in our financial system are tied to yields on U.S. Treasury notes.  Just look at what is happening to mortgages.  As Wolf Richter has noted, the average rate on 30 year mortgages is shooting into the stratosphere…

The carnage in bonds has consequences. The average interest rate of the a conforming 30-year fixed mortgage as of Friday was quoted at 4.125% for top credit scores. That’s up about 0.5 percentage point from just before the election, according to Mortgage News Daily. It put the month “on a short list of 4 worst months in more than a decade.”

If mortgage rates continue to shoot higher, there will be another housing crash.

Rates on auto loans, credit cards and student loans will also be affected.  Throughout our economic system it will become much more costly to borrow money, and that will inevitably slow the overall economy down.

Why bond investors are so on edge these days is because of statements such as this one from Steve Bannon

In a nascent administration that seems, at best, random in its beliefs, Bannon can seem to be not just a focused voice, but almost a messianic one:

“Like [Andrew] Jackson’s populism, we’re going to build an entirely new political movement,” he says. “It’s everything related to jobs. The conservatives are going to go crazy. I’m the guy pushing a trillion-dollar infrastructure plan. With negative interest rates throughout the world, it’s the greatest opportunity to rebuild everything. Ship yards, iron works, get them all jacked up. We’re just going to throw it up against the wall and see if it sticks. It will be as exciting as the 1930s, greater than the Reagan revolution — conservatives, plus populists, in an economic nationalist movement.”

Steve Bannon is going to be one of the most influential voices in the new Trump administration, and he is absolutely determined to get this “trillion dollar infrastructure plan” through Congress.

And that is going to mean a lot more borrowing and a lot more spending for a government that is already on pace to add 2.4 trillion dollars to the national debt this fiscal year.

Sadly, all of this comes at a time when the U.S. economy is already starting to show significant signs of slowing down.  It is being projected that we will see a sixth straight decline in year-over-year earnings for the S&P 500, and industrial production has now contracted for 14 months in a row.

The truth is that the economy has been barely treading water for quite some time now, and it isn’t going to take much to push us over the edge.  The following comes from Lance Roberts

With an economy running at below 2%, consumers already heavily indebted, wage growth weak for the bulk of American’s, there is not a lot of wiggle room for policy mistakes.

Combine weak economics with higher interest rates, which negatively impacts consumption, and a stronger dollar, which weighs on exports, and you have a real potential of a recession occurring sooner rather than later.

Yes, the stock market soared immediately following Trump’s election, but it wasn’t because economic conditions actually improved.

If you look at history, a stock market crash almost always follows a major bond crash.  So if bond prices keep declining rapidly that is going to be a very ominous sign for stock traders.

And history has also shown us that no bull market can survive a major recession.  If the economy suffers a major downturn early in the Trump administration, it is inevitable that stock prices will follow.

The waning days of the Obama administration have set us up perfectly for higher interest rates, a major recession and a giant stock market crash.

Of course any problems that occur after January 20th, 2017 will be blamed on Trump, but the truth is that Obama will be far more responsible for what happens than Trump will be.

Right now so many people have been lulled into a sense of complacency because Donald Trump won the election.

That is an enormous mistake.

A shaking has already begun in the financial world, and this shaking could easily become an avalanche.

Now is not a time to party.  Rather, it is time to batten down the hatches and to prepare for very rough seas ahead.

All of the things that so many experts warned were coming may have been delayed slightly, but without a doubt they are still on the way.

So get prepared while you still can, because time is running out.

Prepare For Tough Times If Your Job Has Anything To Do With Real Estate Or Mortgages

Housing Crash 2013If you have a job that involves building homes, buying homes, selling homes or that is in any way related to the mortgage industry, you might want to start searching for alternate employment.  Seriously.  Interest rates are starting to rise dramatically, and mortgage lenders such as Bank of America, Wells Fargo and JPMorgan Chase are all cutting thousands of mortgage-related jobs.  Last week, mortgage refinance activity plunged to the lowest level that we have seen since June 2009 and total mortgage activity dropped to the lowest level since October 2008.  Unfortunately, this is only the beginning.  Mortgage rates closely mirror the yield on 10 year U.S. Treasuries, the the yield on 10 year U.S. Treasuries has nearly doubled since early May.  But it is still only sitting at about 3 percent right now.  As I have written about previously, it has a ton of room to go up before it hits “normal” historical levels, and so do mortgage rates.  As I noted the other day, some analysts believe that the yield on 10 year U.S. Treasuries is going to hit 7 percent eventually.  If that happens, mortgage rates will be more than double what they are today.  And we have already seen the average rate on a 30 year fixed rate mortgage go from 3.35 percent in May to 4.57 percent last week.  If interest rates continue to rise we could be heading for a “housing Armageddon” that will make the last housing crash look like a Sunday picnic.

The mini-housing bubble that we have been enjoying for the last couple of years is coming to an abrupt end.  It doesn’t matter what the mainstream media is telling you about a “sustainable” housing recovery.  Just look at how the big mortgage lenders are behaving.  They know the gig is up.  According to Bloomberg, Bank of America has just announced that they will be eliminating 2,100 mortgage-related jobs…

Bank of America Corp., the second-largest U.S. lender, will eliminate about 2,100 jobs and shutter 16 mortgage offices as rising interest rates weaken loan demand, said two people with direct knowledge of the plans.

Would they be doing that if we were really heading into a “sustainable housing recovery”?

And Wells Fargo and JPMorgan Chase are also both eliminating thousands of mortgage-related jobs

Mortgage lenders are paring staff as higher interest rates discourage refinancing and cast doubt on how long the housing market rebound will last. Wells Fargo & Co., the biggest U.S. home lender, plans more than 2,300 job cuts, and JPMorgan Chase & Co. may dismiss 15,000.

Would they be doing this if they thought that brighter days were ahead?

Of course not.

In fact, Well Fargo just announced that it expects to make 30 percent fewer home loans this quarter because of rapidly rising interest rates.

It’s over folks.

The mini-housing bubble that the mainstream media has been hyping so much is over.

If your job has anything to do with real estate or mortgages, it is time to start thinking about a career change.

This is especially true if your job is related to refinancing mortgages.  All of the smart people have already refinanced.  As rates continue to rise rapidly, the only ones that will be refinancing are really stupid people.  According to Zero Hedge, mortgage refinance activity has already dropped by a whopping 70 percent since early May…

For the 16th of the last 18 weeks, mortgage refinance activity plunged (dropping 20% this week alone). Since early May, when the dreaded word “Taper” was first uttered, refis have collapsed over 70%. With mortgage servicers and providers large and small laying people off, it seems hard for even the most egregiously biased bull to still suggest that the housing recovery is sustainable.

And this rise in interest rates is just getting started.  The Federal Reserve has not even begun to “taper” yet.  Once that starts happening, the consequences could be quite dramatic

“In early 1994, when the U.S. recovery gained strength, the Fed started a tightening cycle and bond markets crashed not only in the U.S. but also around the world,” European Central Bank Executive Board member Joerg Asmussen said on Tuesday.

“If spillovers were large in 1994, we can expect them to be even larger today in an even more deeply interconnected world,” he added in the text of a speech for delivery in Brussels.

Of course when the Federal Reserve “tapers” their quantitative easing it won’t really be “tightening” as much as it will be slowing down the pace at which they are recklessly creating tens of billions of dollars out of thin air.  But the effect will be similar to what we saw back in 1994.

As interest rates rise, it will become much more expensive to buy a home and much more difficult to sell a home.  To give you an idea of how dramatically interest rates can affect housing affordability, I wanted to share some numbers from one of my previous articles

A year ago, the 30 year rate was sitting at 3.66 percent.  The monthly payment on a 30 year, $300,000 mortgage at that rate would be $1374.07.

If the 30 year rate rises to 8 percent, the monthly payment on a 30 year, $300,000 mortgage at that rate would be $2201.29.

Does 8 percent sound crazy to you?

It shouldn’t.  8 percent was considered to be normal back in the year 2000.

Are you starting to get the picture?

As interest rates go up, home prices will have to fall.  Otherwise, nobody will be able to afford them.

In the end, we could end up with tens of millions more homeowners that are substantially “underwater” on their mortgages.

So who is to blame?

The Federal Reserve of course.

They created this bubble by forcing interest rates down to record low levels.

At some point it was inevitable that interest rates would start reverting back to more “normal” levels, and that “adjustment” is going to be immensely painful for the U.S. economy.

As we saw back in 2008 and 2009, when the housing industry suffers the entire economy suffers.

And the higher that interest rates go, the more suffering there will be.

So let us hope and pray that interest rates do not go any higher, but let us also start preparing for the very worst.

Why Another Great Real Estate Crash Is Coming

ForeclosureThere are very few segments of the U.S. economy that are more heavily affected by interest rates than the real estate market is.  When mortgage rates reached all-time low levels late last year, it fueled a little “mini-bubble” in housing which was greatly celebrated by the mainstream media.  Unfortunately, the tide is now turning.  Interest rates are starting to move up steadily, even though the Federal Reserve has been trying very hard to keep that from happening.  A few weeks ago, when Federal Reserve Chairman Ben Bernanke suggested that the Fed may start to “taper” the rate of quantitative easing eventually, the bond market had a conniption and the yield on 10 year U.S. Treasuries shot up dramatically.  In an attempt to calm the market, the Fed stopped all talk of a “taper” and that helped settle things down for a brief period of time.  But now the yield on 10 year U.S. Treasuries is starting to rise aggressively again.  Today it closed at 2.71 percent, and many analysts believe that it will go much higher.  This is important for the housing market, because mortgage rates tend to follow the yield on 10 year U.S. Treasuries.  And if mortgage rates keep rising like this, another great real estate crash is inevitable.

This wasn’t supposed to happen.  Federal Reserve Chairman Ben Bernanke said that he could use quantitative easing to control long-term interest rates.  He assured us that he could force mortgage rates down for an extended period of time and that this would lead to a housing recovery.

But now the Fed is losing control of long-term interest rates.  If this continues, either the Federal Reserve will have to substantially increase the rate of quantitative easing or else watch mortgage rates rise to absolutely crippling levels.

Three months ago, the average rate on a 30 year mortgage was 3.35 percent.  It has shot up more than a full point since then…

Mortgage buyer Freddie Mac said Thursday that the average on the 30-year loan rose to 4.39% from 4.31% last week. Rates are a full percentage point higher than in early May.

And as the chart below shows, mortgage rates have a lot more room to go up…

30-Year Fixed Rate Mortgage Average in the United States

As mortgage rates go up, so do monthly payments.

And monthly payments are already beginning to soar.  Just check out this chart.

So what happens if mortgage rates eventually return to “normal” levels?

Well, it would be absolutely devastating to the housing market.  As mortgage rates rise, less people will be able to afford to buy homes at current prices.  This will force home prices down.

To a large degree, whether or not someone can afford to buy a particular home is determined by interest rates.  The following numbers come from one of my previous articles

A year ago, the 30 year rate was sitting at 3.66 percent.  The monthly payment on a 30 year, $300,000 mortgage at that rate would be $1374.07.

If the 30 year rate rises to 8 percent, the monthly payment on a 30 year, $300,000 mortgage at that rate would be $2201.29.

Does 8 percent sound crazy to you?

It shouldn’t.  8 percent was considered to be normal back in the year 2000.

And we are already seeing rising rates impact the market.  The number of mortgage applications has fallen for 11 of the past 12 weeks, and this has been the biggest 3 month decline in mortgage applications that we have witnessed since 2009.

Rising interest rates will also have a dramatic impact on other areas of the real estate industry as well.  For example, public construction spending is now the lowest that it has been since 2006.

And I find the chart posted below particularly interesting.  As a Christian, I am saddened that construction spending by religious institutions has dropped to a stunningly low level…

Total Construction Spending Religious

So what does all of this mean?

Well, unless interest rates reverse course it appears that we are in the very early stages of another great real estate crash.

Only this time, it might not be so easy for the big banks to swoop in and foreclose on everyone.  Just check out the radical step that one city in California is taking to stop bank foreclosures…

Richmond is the first city in the country to take the controversial step of threatening to use eminent domain, the power to take private property for public use. But other cities have also explored the idea.

Banks, the real estate industry and Wall Street are vehemently opposed to the idea, calling it “unconstitutional” and a violation or property rights, and something that will likely cause a flurry of lawsuits.

Richmond has partnered with San Francisco-based Mortgage Resolution Partners on the plan. Letters have been sent to 32 servicers and trustees who hold the underwater loans. If they refuse the city’s offer, officials will condemn and seize the mortgages, then help homeowners to refinance.

If more communities around the nation start using eminent domain to stop foreclosures, that is going to change the cost of doing business for mortgage lenders and it is likely going to mean more expensive mortgages for all the rest of us.

In any event, all of this talk about a “bright future” for real estate is just a bunch of nonsense.

You can’t buy a home if you don’t have a good job.  And as I wrote about the other day, there are about 6 million less full-time jobs in America today than there was back in 2007.

You can’t get blood out of a stone, and you can’t buy a house on a part-time income.  The lack of breadwinner jobs is one of the primary reasons why the homeownership rate in the United States is now at its lowest level in nearly 18 years.

And we aren’t going to produce good jobs if our economy is not growing.  And economic growth in the U.S. has been anemic at best, even if you believe the official numbers.

We were originally told that the GDP growth number for the first quarter of 2013 was 2.4 percent.  Then it was revised down to 1.8 percent.  Now it has been revised down to 1.1 percent.

So precisely what are we supposed to believe?

Overall, since Barack Obama has been president the average yearly rate of growth for the U.S. economy has been just over 1 percent.

That isn’t very good at all.

But remember, the government numbers have been heavily manipulated to look good.

The reality is even worse.

According to the alternate GDP numbers compiled by John Williams of shadowstats.com, the U.S. economy has continually been in a recession since 2005.

And now interest rates are rising rapidly, and that is very bad news for the U.S. economy.

I hope that you have your seatbelts buckled up tight, because it is going to be a bumpy ride.

The Most Important Number In The Entire U.S. Economy

WatchingThere 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.  When that number goes up, long-term interest rates all across the financial system start increasing.  When long-term interest rates rise, 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.  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 now 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.  In fact, according to CNBC many experts believe that we will soon be pushing up toward the 3 percent mark…

Round numbers like 1,700 on the S&P 500 are well and good, but savvy traders have their minds on another integer: 2.75 percent

That was the high for the 10-year yield this year, and traders say yields are bound to go back to that level. The one overhanging question is how stocks will react when they see that number.

“If we start to push up to new highs on the 10-year yield so that’s the 2.75 level—I think you’d probably see a bit of anxiety creep back into the marketplace,” Bank of America Merrill Lynch’s head of global technical strategy, MacNeil Curry, told “Futures Now” on Tuesday.

And Curry sees yields getting back to that 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.

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.  For some very interesting technical analysis, I encourage everyone to check out an article by Peter Brandt that you can find right here.

And all of this is very bad news for stocks.  The chart below was created by Chartist Friend from Pittsburgh, and it shows that stock prices have generally risen as the yield on 10 year U.S. Treasuries has steadily declined over the past 30 years…

CFPGH-DJIA-20

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, and 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, but what happens 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 over the situation.  And if that happens, Bill Fleckenstein told King World News the other day that he believes that we could see the stock market suddenly plunge by 25 percent…

Let’s say Ben (Bernanke) comes out tomorrow and says, ‘We are not going to taper.’ But let’s just say the bond market trades down anyway, and the next thing you know we go through the recent highs and a month from now the 10-Year is at 3%. And people start to realize they are not even tapering and the bond market is backed up….

They will say, ‘Why is this happening?’ Then they may realize the bond market is discounting the inflation we already have.

At some point the bond markets are going to say, ‘We are not comfortable with these policies.’ Obviously you can’t print money forever or no emerging country would ever have gone broke. 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.

And 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.

But 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.

Deutsche Bank is the largest bank in Europe, and at this point they have 55.6 trillion euros of total exposure to derivatives.

But the GDP of the entire nation of Germany is only about 2.7 trillion euros for a whole year.

We are facing a similar situation in the United States.  Our GDP for 2013 will be somewhere between 15 and 16 trillion dollars, but many of our big banks have exposure to derivatives that absolutely dwarfs our GDP.  The following numbers come from one of my previous articles entitled “The Coming Derivatives Panic That Will Destroy Global Financial Markets“…

JPMorgan Chase

Total Assets: $1,812,837,000,000 (just over 1.8 trillion dollars)

Total Exposure To Derivatives: $69,238,349,000,000 (more than 69 trillion dollars)

Citibank

Total Assets: $1,347,841,000,000 (a bit more than 1.3 trillion dollars)

Total Exposure To Derivatives: $52,150,970,000,000 (more than 52 trillion dollars)

Bank Of America

Total Assets: $1,445,093,000,000 (a bit more than 1.4 trillion dollars)

Total Exposure To Derivatives: $44,405,372,000,000 (more than 44 trillion dollars)

Goldman Sachs

Total Assets: $114,693,000,000 (a bit more than 114 billion dollars – yes, you read that correctly)

Total Exposure To Derivatives: $41,580,395,000,000 (more than 41 trillion dollars)

That means that the total exposure that Goldman Sachs has to derivatives contracts is more than 362 times greater than their total assets.

And remember, the biggest chunk of those derivatives contracts is made up of interest rate derivatives.

Just imagine what would happen if a life insurance company wrote millions upon millions of life insurance contracts and then everyone suddenly died.

What would happen to that life insurance company?

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?

And 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…

10 Year Treasury Yield

As you can see, 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.

So 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.

A Nightmare Scenario

NightmareMost people have no idea that the U.S. financial system is on the brink of utter disaster.  If interest rates continue to rise rapidly, the U.S. economy is going to be facing an economic crisis far greater than the one that erupted back in 2008.  At this point, the economic paradigm that the Federal Reserve has constructed only works if interest rates remain super low.  If they rise, everything falls apart.  Much higher interest rates would mean crippling interest payments on the national debt, much higher borrowing costs for state and local governments, trillions of dollars of losses for bond investors, another devastating real estate crash and the possibility of a multi-trillion dollar derivatives meltdown.  Everything depends on interest rates staying low.  Unfortunately for the Fed, it only has a certain amount of control over long-term interest rates, and that control appears to be slipping.  The yield on 10 year U.S. Treasuries has soared in recent weeks.  So have mortgage rates.  Fortunately, rates have leveled off for the moment, but if they resume their upward march we could be dealing with a nightmare scenario very, very quickly.

In particular, the yield on 10 year U.S. Treasuries is a very important number to watch.  So much else in our financial system depends on that number as CNN recently explained…

Indeed, since May, just before Bernanke announced a probable end to QE3, the yield on 10-year Treasuries has jumped around almost one percentage point, to 2.6%, wiping out more than two years of interest payments. The markets clearly fear that far higher long-term rates are lurking in the absence of exceptional policies to rein them in.

That’s a crucial issue, because those rates are highly influential in determining the future performance of stocks, bonds, and real estate. Investors grant equities higher multiples when long-term rates are lower; both longer-maturity Treasuries and corporate bonds jump when rates decline; and developers pocket more cash flow from their projects when they borrow cheaply, raising the values of office and apartment buildings. When rates reverse course, so do all of those prices the Fed has been endeavoring to swell as a tonic for the economy.

Even though the yield on 10 year U.S. Treasuries has risen substantially, it is still very low.  It has a lot more room to go up.  In fact, as the chart posted below demonstrates, the yield on 10 year U.S. Treasuries was above 6 percent back in the year 2000…

10 Year Treasury Yield

And the yield on 10 year U.S. Treasuries should rise substantially.  It simply is not rational to lend the U.S. government money at less than 3 percent when the real rate of inflation is about 8 percent, the Federal Reserve is rapidly debasing the currency by wildly printing money and the federal government has been piling up debt as if there is no tomorrow…

National Debt

Anyone that lends the U.S. government money at current rates is being very foolish.  You will end up getting back money that has much less purchasing power than you originally invested.

Why would anyone do that?

But if interest rates rise, the U.S. government could be looking at some very hairy interest payments very rapidly.  For example, if the average rate of interest on U.S. government debt just gets back to 6 percent (and it has been far higher than that in the past), the federal government will be shelling out a trillion dollars a year just in interest on the national debt.

State and local governments all over the nation could also very rapidly be facing a nightmare scenario.

Detroit is already on the verge of formally declaring the largest municipal bankruptcy in the history of the United States, and there are many other state and local governments from coast to coast that are rapidly heading toward financial disaster even though borrowing costs are super low right now.

If interest rates start rising dramatically, it would cause a huge wave of municipal financial disasters, and municipal bond investors would lose massive amounts of money

“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.

In fact, bond investors of all types could be facing monstrous losses if interest rates go up dramatically.

It is being projected that if U.S. Treasury yields rise by an average of 3 percentage points, it will cause bond investors to lose a trillion dollars.

And already we have started to see a race for the exits in the bond market.  A total of 80 billion dollars was pulled out of bond funds during the month of June alone.  If you want a visual of the flow of money out of the bond market, just check out the chart in this article.

We are witnessing things happen in the financial markets that have not happened in a very, very long time.

And junk bonds will be hit particularly hard.  About a decade ago, the average yield on junk bonds was about twice what it is right now.  When the junk bond crash comes, there is going to be mass carnage on Wall Street.

But of much greater importance to most Americans is what is happening to mortgage rates.  As mortgage rates rise, it becomes much more difficult to sell a house and much more expensive to buy a house.

According to CNBC, there is an increasing amount of concern that the rise in mortgage rates that we are witnessing could throw the real estate market into absolute turmoil…

The housing recovery is in for a major pause due to higher mortgage rates. It is not in the numbers now, and it won’t be for a few months, but it is coming, according to one noted analyst. The market has seen rising rates before, but never so far so fast; there is no precedent for a 45 percent spike in just six weeks. The spike is causing a sense of urgency now, a rush to buy before rates go higher, but that will be short term. Home sales and home prices will both come down if rates don’t return to their lows, and the expectation is that they will not.

We have seen the number of mortgage applications fall for four weeks in a row, and at this point mortgage applications have declined by 28 percent over the past month.

That is an absolutely stunning decline, but it just shows the power of interest rates.

Let’s try to put this into real world terms.

A year ago, the 30 year rate was sitting at 3.66 percent.  The monthly payment on a 30 year, $300,000 mortgage at that rate would be $1374.07.

If the 30 year rate rises to 8 percent, the monthly payment on a 30 year, $300,000 mortgage at that rate would be $2201.29.

Does 8 percent sound crazy to you?

It shouldn’t.  8 percent was considered to be normal back in the year 2000…

30 Year Mortgage Rate

This is what we are talking about when we talk about the “bubbles” that the Federal Reserve has created.  The housing market is now completely and totally dependent on these artificially low mortgage rates.  If rates go back to “normal”, the results would be absolutely devastating.

But of course the biggest problem with rapidly rising interest rates is the potential for a derivatives crisis.

There are several major U.S. banks that have tens of trillions of dollars of exposure to derivatives.  The following is from one of my previous articles entitled “The Coming Derivatives Panic That Will Destroy Global Financial Markets“…

JPMorgan Chase

Total Assets: $1,812,837,000,000 (just over 1.8 trillion dollars)

Total Exposure To Derivatives: $69,238,349,000,000 (more than 69 trillion dollars)

Citibank

Total Assets: $1,347,841,000,000 (a bit more than 1.3 trillion dollars)

Total Exposure To Derivatives: $52,150,970,000,000 (more than 52 trillion dollars)

Bank Of America

Total Assets: $1,445,093,000,000 (a bit more than 1.4 trillion dollars)

Total Exposure To Derivatives: $44,405,372,000,000 (more than 44 trillion dollars)

Goldman Sachs

Total Assets: $114,693,000,000 (a bit more than 114 billion dollars – yes, you read that correctly)

Total Exposure To Derivatives: $41,580,395,000,000 (more than 41 trillion dollars)

That means that the total exposure that Goldman Sachs has to derivatives contracts is more than 362 times greater than their total assets.

The largest chunk of those derivatives contracts is made up of interest rate derivatives.

I have mentioned this so many times before, but it bears repeating that there are approximately 441 trillion dollars worth of interest rate derivatives sitting out there.

If rapidly rising interest rates suddenly cause trillions of dollars of those bets to start going bad, we could potentially see several of the “too big to fail” banks collapse at the same time.

So what would happen then?

Would the federal government and the Federal Reserve somehow come up with trillions of dollars (or potentially even tens of trillions of dollars) to bail them out?

The Federal Reserve has created a giant mess, and when this current low interest rate bubble ends our financial system is going to slam very violently into a very solid brick wall.

As Graham Summers recently pointed out, entrusting Federal Reserve Chairman Ben Bernanke with control of our financial system is like putting a madman behind the wheel of a speeding vehicle…

Imagine if you were in the car with a driver who was going 85 MPH down a road with a speed limit of 35 MPH (this isn’t a bad metaphor as there is absolutely no evidence that QE creates jobs or GDP growth so there is no reason for the Fed to be doing it in the first place).

The guy is obviously out of control. The dangers of driving this fast are myriad (crashing, running someone over, etc.) while the benefits (you might get where you want to go a little faster assuming you don’t crash) are minimal.

Now imagine that the driver turned to you and said, “I’m thinking about slowing down.” Seems like a great idea doesn’t it? But then a mere two minutes later he says “ we need to continue at 85 MPH for the foreseeable future.”

At this point any sane person would scream, “STOP.” The driver is clearly a madman and shouldn’t be let anywhere near the driver’s seat. Moreover, he’s totally lost all credibility and isn’t to be trusted.

That’s our Fed Chairman.

Sadly, most Americans do not understand any of this.

Most Americans have no idea about the immense economic pain that is going to hit us when interest rates go back to normal levels.

All of this could have been avoided, but instead the American people let the central planners over at the Federal Reserve run wild.

When the bubble finally bursts, the official unemployment rate is going to rocket well up into the double digits, millions of families will lose their homes and America will find itself in the middle of the worst economic crisis in modern U.S. history.

Please share this article with as many people as you can.  We need to help people understand what is coming so that they will not be blindsided by it.

10 Reasons Why The Global Economy Is About To Experience Its Own Version Of “Sharknado”

SharknadoHave you ever seen a disaster movie that is so bad that it is actually good?  Well, that is exactly what Syfy’s new television movie entitled “Sharknado” is.  In the movie, wild weather patterns actually cause man-eating sharks to come flying out of the sky.  It sounds absolutely ridiculous, and it is.  You can view the trailer for the movie right here.  Unfortunately, we are witnessing something just as ridiculous in the real world right now.  In the United States, the mainstream media is breathlessly proclaiming that the U.S. economy is in great shape because job growth is “accelerating” (even though we actually lost 240,000 full-time jobs last month) and because the U.S. stock market set new all-time highs this week.  The mainstream media seems to be absolutely oblivious to all of the financial storm clouds that are gathering on the horizon.  The conditions for a “perfect storm” are rapidly developing, and by the time this is all over we may be wishing that flying sharks were all that we had to deal with.  The following are 10 reasons why the global economy is about to experience its own version of “Sharknado”…

#1 The financial situation in Portugal continues to deteriorate thanks to an emerging political crisis.  It all began last week when Portuguese finance minister Vitor Gaspar resigned

“Mr. Gaspar’s resignation on July 1 has opened a Pandora’s box,” says Nicholas Spiro, managing director of Spiro Sovereign Strategy. “Portuguese politicians from the President down are treating the exit of Mr. Gaspar, the architect of the fiscal and structural reforms demanded by the troika, as a green light for a public debate about the bail-out programme. Yet the manner in which this debate is taking place, with the President undermining the prime minister and the opposition leader seeking to renegotiate the terms of the programme, is spooking markets.”

The general population is becoming increasingly restless as the nation plunges down the exact same path that Greece has gone.  Nobody seems to have any solutions as the economic problems continue to escalate.  According to Reuters, the president of Portugal has added fuel to the fire by calling for early elections next year…

Portugal’s president threw the bailed-out euro zone country into disarray on Thursday after rejecting a plan to heal a government rift, igniting what critics called a “time bomb” by calling for early elections next year.

Due to all of this instability in Portugal, the yield on Portuguese bonds shot up to 7.51% this week.  That is a very bad sign.

#2 The economic depression in Greece continues to deepen, and it is being reported that Greece will not even come close to hitting the austerity targets that it was supposed to hit this year…

A leaked report from the European Commission confirms that Greece will miss its austerity targets yet again by a wide margin. It alleges that Greece lacks the “willingness and capacity” to collect taxes. In fact, Athens is missing targets because the economy is still in freefall and that is because of austerity overkill. The Greek think-tank IOBE expects GDP to fall 5pc this year. It has told journalists privately that the final figure may be -7pc.

Another 7 percent contraction for the Greek economy?

It has already been contracting steadily for years.

At this point, it would be hard to overstate how bad economic conditions inside Greece are.  The following is from a recent article by Simon Black

My friend Illias took a drag of his cigarette as he contemplated my question.

“Our government tells us that this will be a better year. No one really believes them. But all we can do is be optimistic. Too many people are committing suicide.”

His statement probably best sums up the situation in Greece right now. It’s as if the hopelessness has gone stale, and the only thing they have to replace it with is desperate, misguided, faux-optimism. And anger.

There are roughly 11 million people in this country. 3.4 million of them are employed, of which roughly one third work for the government.

1.34 million people are ‘officially’ unemployed. To put this in context, it would be as if there were 36 million officially unemployed in the US.

More startling, if you add the number of ‘inactive’ workers (i.e. those who gave up looking), the total number of unemployed is roughly 57% of the entire Greek work force.

#3 The economic crisis in the third largest country in the eurozone, Italy, has taken another turn for the worse.  The unemployment rate in Italy is up to 12.2 percent, which is the highest in 35 years.  An average of 134 retail outlets are shutting down in Italy every single day, and the debt of the country has been downgraded again to just above junk status

Italy’s slow crisis is again flaring up. Its debt trajectory has punched through the danger line over the past two years. The country’s €2.1 trillion (£1.8 trillion) debt – 129pc of GDP – may already be beyond the point of no return for a country without its own currency.

Standard & Poor’s did not say this outright when it downgraded the country to near-junk BBB on Tuesday. But if you read between the lines, it is close to saying the game is up for Italy.

#4 There are rumors that some of the biggest banks in the world are in very serious trouble.  For example, Jim Willie (a financial writer who usually puts out really solid information) is insisting that Deutsche Bank is on the verge of collapse…

The best information coming to my desk indicates that three major Western banks are under constant threat of failure overnight, every night, forcing extraordinary measures to avoid failure. They are Deutsche Bank in Germany, Barclays in London, and Citibank in New York. Judging from the ongoing defense from prosecution and cooperation (flipped) with Interpol and distraction of resources, the most likely bank to die next is Deutsche Bank. They are caught with accounting fraud and outright financial fraud over collateral shell games, pertaining to USTreasury Bonds, other sovereign bonds in Southern Europe, and OTC derivatives linked to FOREX currency contracts. D-Bank is a dead man walking.

Time will tell if he is right.  But without a doubt the global financial system is extremely vulnerable right now.

Most Americans assume that the problems that caused the financial crash of 2008 were fixed, but that is most definitely NOT the case.  In fact, our financial system is far more shaky today than it was just before the last financial crisis.  When one major bank goes down, we could start to see others fall like dominoes.

#5 Just before the financial crisis of 2008, the price of oil spiked dramatically.  Well, it is starting to happen again.  The price of oil hit $106 a barrel on Friday.  If the price of oil continues to rise at this pace, it is going to mean big trouble for economies all over the planet.

And as I wrote about recently, every time the average price of a gallon of gasoline in the United States has risen above $3.80 during the past three years, a stock market decline has always followed.

The average price of a gallon of gasoline in the United States reached $3.55 on Friday.  This is a number to keep a close eye on.

#6 Mortgage rates are absolutely skyrocketing right now…

The average U.S. rate on the 30-year fixed mortgage rose this week to 4.51%, a two-year high. Rates have been rising on expectations that the Federal Reserve will slow its bond purchases this year.

Mortgage buyer Freddie Mac said Thursday that the average on the 30-year loan jumped from 4.29% the previous week. Just two months ago, it was 3.35% — barely above the record low of 3.31%.

This threatens to throw the U.S. real estate market into a slowdown worse than anything we have seen since the last recession.

#7 This upcoming corporate earnings season is shaping up to be an extremely disappointing one.  In fact, the percentage of companies issuing negative earnings guidance for this quarter is at a level that we have never seen before.

So is this a sign that economic activity is starting to slow down significantly?

#8 U.S. stocks are massively overextended right now.  In fact, according to Graham Summers, this is the most overextended stocks have been in the past 20 years…

Today, the S&P 500 is sitting a full 30% above its 200-weekly moving average. We have NEVER been this overextended above this line at any point in the last 20 years.

#9 Rapidly rising interest rates are causing the bond market to begin to come apart at the seams.  There is concern that the 30 year bull market for bonds is now over and investors are starting to pull their money out of the market at a staggering rate.  In fact, 80 billion dollars was pulled out of bond funds during June alone.

#10 Rapidly rising interest rates could cause an implosion of the derivatives market at any moment.  As I am so fond of reminding everyone, there are approximately 441 trillion dollars worth of interest rate derivatives out there.

If interest rates continue to soar, we could potentially see a financial disaster that is absolutely unprecedented, and the too big to fail banks would be the most vulnerable.

As USA Today recently reported, there are just five major banks that absolutely dominate derivatives trading in the United States…

Five of the biggest U.S. banks — JPMorgan, Goldman Sachs Group Inc., Bank of America Corp., Citigroup Inc. and Morgan Stanley — account for more than 90% of derivatives contracts. Regulators estimate that nearly half of derivatives are traded outside the United States.

Could you imagine the financial devastation that we would see if several of those banks started to collapse at the same time?

When you hear the mainstream media begin to talk about a “derivatives crisis” involving major banks, that will be a sign that disaster is upon us.

Most Americans don’t realize that Wall Street has been transformed into the largest casino in the history of the world.  Most Americans don’t realize that the major banks are literally walking a financial tightrope each and every day.

All it is going to take is one false step and we will be looking at a financial crisis even worse than what happened back in 2008.

So enjoy this little bubble of false prosperity while you can.

It is not going to last for too much longer.

Soaring Mortgage Rates Are Going To Make It Far More Difficult To Buy Or Sell A House

Home For SaleDid you actually think that mortgage rates were going to stay at all-time lows forever?  Federal Reserve Chairman Ben Bernanke was able to grossly distort the market for a while by buying up massive amounts of government bonds and mortgage-backed securities, but there was no way in the world that the market was going to stay that distorted forever.  It simply does not make sense to give American families 30 year mortgages at a fixed interest rate of less than four percent when the real rate of inflation is somewhere around eight to ten percent and the mortgage delinquency rate in the United States is 9.72 percent.  If we actually did have “free markets” and they were behaving rationally, mortgage rates would be far, far higher.  Well, now that the Fed has indicated that they are going to be starting to “taper” QE at some point, bond yields have skyrocketed and this is rapidly pushing up mortgage rates.  According to Freddie Mac, we just witnessed the largest weekly increase in mortgage rates in 26 years.  Sadly, this is only just the beginning.  Unless the Federal Reserve intervenes, mortgage rates are going to continue to try to revert to normal.

When mortgage rates go up, so do monthly payments.  All of a sudden, families that could afford the monthly payments on a $300,000 mortgage are no longer able to do so.  This is why when mortgage rates rise, it tends to push housing prices down.

If rates continue to go up, it is going to become increasingly difficult to sell your house.  Less people will be able to afford the monthly payments as rates rise.  Many families will have to end up reducing their selling prices.

And right now we are watching rates rise at a rate that we have not seen since the 1980s.  According to Freddie Mac, the average rate of interest on a 30 year fixed-rate mortgage jumped by more than half a percentage point just last week…

The average 30-year fixed-rate mortgage rose from 3.93 percent last week to 4.46 percent this week; the highest it has been since the week of July 28, 2011. This represents the largest weekly increase for the 30-year fixed since the week ended April 17, 1987.

A year ago, the 30 year rate was sitting at 3.66 percent.

The monthly payment on a $300,000 mortgage at that rate would be $1374.07.

Currently, the 30 year rate is sitting at 4.46 percent.

The monthly payment on a $300,000 mortgage at that rate would be $1512.93.

If the 30 year rate rises to 7 percent, the monthly payment on a $300,000 mortgage would be $1995.91.

Does 7 percent sound crazy to you?

It shouldn’t.

As the chart posted below demonstrates, a 7 percent mortgage was considered “normal” a decade ago…

30 Year Mortgage Rate

As you can see, mortgage rates have nowhere to go but up.

And as they go up, they are going to absolutely crush any semblance of a “housing recovery”.

Meanwhile, Americans continue to get poorer.

This week we learned that real per capita disposable income plunged at an annualized rate of 9.21 percent in the first quarter of 2013.

That is absolutely astounding.  We haven’t seen anything like that since the darkest days of the last recession.

If Americans do not have money to spend, that is going to hurt every industry – including housing.

And already we are seeing pain in the housing market.  For example, the number of mortgage applications has fallen by 29 percent over the last eight weeks.

And rising rates are also causing a lot of families to turn to adjustable rate mortgages.

Remember those?

They played a major role in the last housing crash, and according to CNBC they are now making a comeback…

After hovering around record lows for the past few years, mortgage rates are rising dramatically. That has consumers not only shopping more but also considering adjustable rate mortgages, which offer lower rates and lower monthly payments.

These ARMs, many requiring interest payments only, were popular during the latest housing boom but quickly fell out of favor when safer, fixed-rate loan rates fell to record lows.

So what does all of this mean?

It means that the tiny little “mini-bubble” that we have seen in housing this year is rapidly coming to an end.

It also means that it is going to become far more difficult to buy or sell a house.  Monthly payments are going to go up substantially, and many homeowners are going to find that they are not going to be able to sell their homes for what they had anticipated.

If you are already in the process of buying a house, hopefully you locked in a really good rate while you could.  Those record low mortgage rates sure were nice, and we will probably never see them again.

Now we are headed for a very painful “adjustment” thanks to Ben Bernanke and the Federal Reserve.  They should never have distorted the housing market so much, and now we are all going to suffer the consequences.

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