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.

Farewell Bernanke – Thanks For Inflating The Biggest Bond Bubble The World Has Ever Seen

Barack Obama And Ben BernankeFederal Reserve Chairman Ben Bernanke is on the way out the door, but the consequences of the bond bubble that he has helped to create will stay with us for a very, very long time.  During Bernanke’s tenure, interest rates on U.S. Treasuries have fallen to record lows.  This has enabled the U.S. government to pile up an extraordinary amount of debt.  During his tenure we have also seen mortgage rates fall to record lows.  All of this has helped to spur economic activity in the short-term, but what happens when interest rates start going back to normal?  If the average rate of interest on U.S. government debt rises to just 6 percent, the U.S. government will suddenly be paying out a trillion dollars a year just in interest on the national debt.  And remember, there have been times in the past when the average rate of interest on U.S. government debt has been much higher than that.  In addition, when the U.S. government starts having to pay more to borrow money so will everyone else.  What will that do to home sales and car sales?  And of course we all remember what happened to adjustable rate mortgages when interest rates started to rise just prior to the last recession.  We have gotten ourselves into a position where the U.S. economy simply cannot afford for interest rates to go up.  We have become addicted to the cheap money made available by a grossly distorted financial system, and we have Ben Bernanke to thank for that.  The Federal Reserve is at the very heart of the economic problems that we are facing in America, and this time is certainly no exception.

This week Barack Obama publicly praised Ben Bernanke and stated that Bernanke has “already stayed a lot longer than he wanted” as Chairman of the Federal Reserve.  Bernanke’s term ends on January 31st, but many observers believe that he could leave even sooner than that.  Bernanke appears to be tired of the job and eager to move on.

So who would replace him?  Well, the mainstream media is making it sound like the appointment of Janet Yellen is already a forgone conclusion.  She would be the first woman ever to chair the Federal Reserve, and her philosophy is that a little bit of inflation is good for an economy.  It seems likely that she would continue to take us down the path that Bernanke has taken us.

But is it a fundamentally sound path?  Keeping interest rates pressed to the floor and wildly printing money may be producing some positive results in the short-term, but the crazy bubble that this is creating will burst at some point.  In fact, the director of financial stability for the Bank of England, Andy Haldane, recently admitted that the central bankers have “intentionally blown the biggest government bond bubble in history” and he warned about what might happen once it ends…

“If I were to single out what for me would be biggest risk to global financial stability right now it would be a disorderly reversion in the yields of government bonds globally.” he said. There had been “shades of that” in recent weeks as government bond yields have edged higher amid talk that central banks, particularly the US Federal Reserve, will start to reduce its stimulus.

“Let’s be clear. We’ve intentionally blown the biggest government bond bubble in history,” Haldane said. “We need to be vigilant to the consequences of that bubble deflating more quickly than [we] might otherwise have wanted.”

Posted below is a chart that demonstrates how interest rates on 10-year U.S. Treasury bonds have fallen over the last several decades.  This has helped to fuel the false prosperity that we have been enjoying, but there is no way that the U.S. government should have been able to borrow money so cheaply.  This bubble that we are living in now is setting the stage for a very, very painful adjustment…

Interest Rate On 10 Year U.S. Treasuries

So what will that “adjustment” look like?

The following analysis is from a recent article by Wolf Richter

Ten-year Treasury notes have been kicked down from their historic pedestal last July when some poor souls, blinded by the Fed’s halo of omnipotence and benevolence, bought them at a minuscule yield of 1.3%. For them, it’s been an ice-cold shower ever since. As Treasuries dropped, yields meandered upward in fits and starts. After a five-week jump from 1.88% in early May, they hit 2.29% on Tuesday last week – they’ve retreated to 2.19% since then. Now investors are wondering out loud what would happen if ten-year Treasury yields were to return to more normal levels of 4% or even 5%, dragging other long-term interest rates with them. They know what would happen: carnage!

And according to Richter, there are already signs that the bond bubble is beginning to burst…

Wholesale dumping of Treasuries by exasperated foreigners has already commenced. Private foreigners dumped $30.8 billion in Treasuries in April, an all-time record. Official holders got rid of $23.7 billion in long-term Treasury debt, the highest since November 2008, and $30.1 billion in short-term debt. Sell, sell, sell!

Bond fund redemptions spoke of fear and loathing: in the week ended June 12, investors yanked $14.5 billion out of Treasury bond funds, the second highest ever, beating the prior second-highest-ever outflow of $12.5 billion of the week before. They were inferior only to the October 2008 massacre as chaos descended upon financial markets. $27 billion in two weeks!

In lockstep, average 30-year fixed-rate mortgage rates jumped from 3.59% in early May to 4.15% last week. The mortgage refinancing bubble, by which banks have creamed off billions in fees, is imploding – the index has plunged 36% since early May.

If interest rates start to climb significantly, that will have a dramatic affect on economic activity in the United States.

And we have seen this pattern before.

As Robert Wenzel noted in a recent article on the Economic Policy Journal, we saw interest rates rise suddenly just prior to the October 1987 stock market crash, and we also saw them rise substantially prior to the financial crisis of 2008…

As Federal Reserve chairman Paul Volcker left the Fed chairmanship in August 1987, the interest rate on the 10 year note climbed from 8.2% to 9.2% between June 1987 and September 1987. This was followed, of course by the October 1987 stock market crash.

As Federal Reserve chairman Alan Greenspan left the Fed chairmanship at the end of January 2006, the interest rate on the 10 year note climbed from 4.35% to 4.65%. It then climbed above 5%.

So keep a close eye on interest rates in the months ahead.  If they start to rise significantly, that will be a red flag.

And it makes perfect sense why Bernanke is looking to hand over the reins of the Fed at this point.  He can probably sense the carnage that is coming and he wants to get out of Dodge while he still can.

Will The New Housing Bubble That Bernanke Is Creating End As Badly As The Last One Did?

Will The New Housing Bubble Lead To Another Housing Crash?Federal Reserve Chairman Ben Bernanke has done it.  He has succeeded in creating a new housing bubble.  By driving mortgage rates down to the lowest level in 100 years and recklessly printing money with wild abandon, Bernanke has been able to get housing prices to rebound a bit.  In fact, in some of the more prosperous areas of the country you would be tempted to think that it is 2005 all over again.  If you can believe it, in some areas of the country builders are actually holding lotteries to see who will get the chance to buy their homes.  Wow – that sounds great, right?  Unfortunately, this “housing recovery” is not based on solid economic fundamentals.  As you will see below, this is a recovery that is being led by investors.  They are paying cash for cheap properties that they believe will appreciate rapidly in the coming years.  Meanwhile, the homeownership rate in the United States continues to decline.  It is now the lowest that it has been since 1995.  There are a couple of reasons for this.  Number one, there has not been a jobs recovery in the United States.  The percentage of working age Americans with a job has not rebounded at all and is still about the exact same place where it was at the end of the last recession.  Secondly, crippling levels of student loan debt continue to drive down the percentage of young people that are buying homes.  So no, this is not a real housing recovery.  It is an investor-led recovery that is mostly limited to the more prosperous areas of the country.  For example, the median sale price of a home in Washington D.C. just hit a new all-time record high.  But this bubble will not last, and when this new housing bubble does burst, will it end as badly as the last one did?

Federal Reserve Chairman Ben Bernanke has stated over and over that one of his main goals is to “support the housing market” (i.e. get housing prices to go up).  It took a while, but it looks like he is finally getting his wish.  According to USA Today, U.S. home prices have been rising at the fastest rate in nearly seven years…

U.S. home prices in the USA’s 20 biggest cities rose 9.3% in the 12 months ending in February. It was the biggest annual growth rates in almost seven years, a closely watched housing index out Tuesday said.

In particular, home prices have been rising most rapidly in cities that experienced a boom during the last housing bubble…

Year over year, Phoenix continued to stand out with a gain of 23%, followed by San Francisco at almost 19% and Las Vegas at nearly 18%, the S&P/Case-Shiller index showed. Most of the cities seeing the biggest gains also fell hardest during the crash.

But is this really a reason for celebration?  Instead of addressing the fundamental problems in our economy that caused the last housing crash, Bernanke has been seemingly obsessed with reinflating the housing bubble.  As a recent article by Edward Pinto explained, the housing market is being greatly manipulated by the government and by the Fed…

While a housing recovery of sorts has developed, it is by no means a normal one. The government continues to go to extraordinary lengths to prop up sales by guaranteeing nearly 90% of new mortgage debt, financing half of all home purchase mortgages to buyers with zero equity at closing, driving mortgage interest rates to the lowest level in 100 years, and turning the Fed into the world’s largest buyer of new mortgage debt.

Thus, with real incomes essentially stagnant, this is a market recovery largely driven by low interest rates and plentiful government financing. This is eerily familiar to the previous government policy-induced boom that went bust in 2006, and from which the country is still struggling to recover. Creating over a trillion dollars in additional home value out of thin air does sound like a variant of dropping money out of helicopters.

And the Obama administration has been pushing very hard to get lenders to give mortgages to those with “weaker credit”.  In other words, the government is once again trying to get the banks to give home loans to people that cannot afford them.  The following is from the Washington Post

The Obama administration is engaged in a broad push to make more home loans available to people with weaker credit, an effort that officials say will help power the economic recovery but that skeptics say could open the door to the risky lending that caused the housing crash in the first place.

President Obama’s economic advisers and outside experts say the nation’s much-celebrated housing rebound is leaving too many people behind, including young people looking to buy their first homes and individuals with credit records weakened by the recession.

We are repeating so many of the same mistakes that we made the last time.

But surely things will turn out differently this time, right?

I wouldn’t count on it.

Right now, an increasingly large percentage of homes are being purchased as investments.  The following is from a recent Washington Times article…

Much of the pickup in sales and prices has been powered by investors who, convinced that the market is bottoming, are scooping up bountiful supplies of distressed and foreclosed properties at bargain prices and often paying with cash.

With investors targeting lower-priced homes that they intend to purchase and rent out, they have been crowding out many first-time buyers who are having difficulty getting mortgage loans and are at a disadvantage when competing with well-heeled buyers. Cash sales to investors now account for about one-third of all home sales, according to the National Association of Realtors.

And as we have seen in the past, an investor-led boom can turn into an investor-led bust very rapidly.

If this truly was a real housing recovery, the percentage of Americans that own a home would be going up.

Instead, it is going down.

As I mentioned above, the U.S. Census Bureau is reporting that the homeownership rate in the United States is now the lowest that it has been since 1995.

In particular, homeownership among college-educated young people is way down.  They can’t afford to buy homes due to crippling levels of student loan debt

For the average homeowner, the worst news is that these overleveraged and defaulting young borrowers no longer qualify for other kinds of loans — particularly home loans. In 2005, nearly nine percent of 25- to 30-year-olds with student debt were granted a mortgage. By late last year, that percentage, as an annual rate, was down to just above four percent.

The most precipitous drop was among those who owe $100,000 or more. New mortgages among these more deeply indebted borrowers have declined 10 percentage points, from above 16 percent in 2005 to a little more than 6 percent today.

“These are the people you’d expect to buy big houses,” said student loan expert Heather Jarvis. “They owe a lot because they have a lot of education. They have been through professional and graduate schools, but their payments are so significant, they have trouble getting a mortgage. They have mortgage-sized loans already.”

And the truth is that there simply are not enough good jobs in this country to support a housing recovery.  In a previous article, I used the government’s own statistics to prove that there has not been a jobs recovery.  If we were having a jobs recovery, the percentage of working age Americans with a job would be going up.  Sadly, that is not happening…

Employment-Population Ratio 2013

And as I mentioned above, the “housing recovery” is mostly happening in the prosperous areas of the country.

In other areas of the United States, the devastating results of the last housing crash are still clearly apparent.

For example, the city of Dayton, Ohio is dealing with an estimated 7,000 abandoned properties.

As I wrote about the other day, there are approximately 70,000 abandoned buildings in Detroit, Michigan.

And all over the nation there are still “ghost towns” that were created when builders abruptly abandoned housing developments during the last recession.  You can see some pictures of some of these ghost towns right here.

So the truth is that this is an isolated housing recovery that is being led by investors and that is being fueled by very reckless behavior by the Federal Reserve.  It is not based on economic reality whatsoever.

In the end, will the collapse of this new housing bubble be as bad as the collapse of the last one was?

Please feel free to post a comment with your thoughts below…

Federal Reserve Chairman Ben Bernanke

Record Low Mortgage Rates, A Record Low Federal Funds Rate And Obscene Economic Stimulus Spending Have All Failed – Will Nothing Stimulate This Dead Horse Of An Economy?

Over the past several years, the Federal Reserve and the U.S. government have tried everything that they can think of to stimulate this dead horse of an economy but nothing has worked.  The Fed has slashed the federal funds rate to record low levels, mortgage rates have been pushed to all-time lows and the U.S. government has spent hundreds of billions of dollars in an effort to get the economy going.  But despite all these of these extraordinary efforts, the U.S. economy continues to just lie there like a dead corpse.  Never before have the Federal Reserve and the U.S. government done more to try to stimulate the economy and never before have their efforts produced such poor results.  Home sales continue to set new record lows, more than 14 million Americans continue to be unemployed, foreclosures continue to soar, personal bankruptcies continue to soar and an increasing number of Americans continue to sign up for food stamps and other anti-poverty programs.  All of the things that once worked so well to stimulate the U.S. economy seem to be doing next to nothing here in 2010, and the American people are becoming increasingly frustrated by economic problems that just keep getting worse.

Once upon a time, a big drop in mortgage rates would get Americans running out to buy homes in big numbers.  But that is just not happening this time. 

As you can see from the chart below, mortgage rates are at ridiculously low levels right now.  The average rate for a 30-year fixed mortgage was 4.32 percent this week.  That is the lowest it has ever been since Freddie Mac began tracking mortgage rates back in 1971.

These low rates have motivated millions of Americans to refinance their existing home loans, but sales of new and existing loans remain at record low levels.  In fact, the number of Americans refinancing their homes is now at its highest level since May 2009, but the U.S. housing crisis just continues to get worse.  Despite these record low mortgage rates, existing home sales declined 27 percent during the month of July and new homes sales dropped to the lowest level ever recorded in July.

So if Americans are not buying houses when mortgage rates are this ridiculously low, what in the world is going to cause a turnaround in the U.S. housing market?

The Federal Reserve has sure been trying to do what it can to resuscitate the U.S. economy.  For decades, a drop in the federal funds rate could always be counted on to give the economy a jump start.  But the Fed has dropped the federal funds rate almost to zero for quite some time now and it has done next to nothing to get things moving again. 

So is the Federal Reserve out of ammunition?  Well, let’s just say that they have used up all of their “best” ammunition.  The Fed has been telling us since March 2009 that the federal funds rate will remain between zero and 25 basis points “for an extended period” of time, but the U.S. economy doesn’t seem to care. 

Of course Ben Bernanke insists that the Fed is not out of ammunition and that everything is going to be okay, but at this point there is just not a lot left of Bernanke’s fading credibility.

The U.S. government tried to do their best to help the economy by passing stimulus bill after stimulus bill, but it just has not helped much.  The government spent hundreds and hundreds of billions of dollars on some of the most wasteful things imaginable, and while the massive injection of cash may have helped temporarily stabilize the economy, it has not brought about the “recovery” that our politicians were hoping for.

Now the pendulum has swung the other way in Congress and there is very little appetite for more economic stimulus spending.  But if the economy was not recovering when the government was throwing giant piles of money at it, what is going to happen as the economic stimulus totally dries up?

Already there are signs that the U.S. economy is in big, big trouble.  General Motors announced this week that U.S. sales in August fell 24.9% to 185,176 vehicles from 246,479 vehicles in August 2009.

But don’t let up and down sales reports fool you.  One month they may be down and the next month they may be up a bit.  The important thing is to keep your eyes on the truly disturbing long-term trends.

Thanks to the nightmarish U.S. trade deficit, far more wealth leaves the United States each month than enters it.  That means that the United States is getting significantly poorer each month.  As I noted yesterday, the United States spends approximately $3.90 on Chinese goods for every $1 that the Chinese spend on goods from the United States.  That is not sustainable and China is going to continue to bleed us dry for as long as we allow it to continue.

In addition, the United States continues to go into more debt every single month.  Each month the U.S. national debt gets bigger, state governments go into more debt and local governments go into more debt.

So what we have is a nation that is getting poorer and that is going into more debt month after month after month.

We are on the road to economic hell, and the American people don’t even realize it because things are still relatively good – at least for now.

But as the economy continues to unravel, is there anything that the folks over at the Federal Reserve can do?

Well, yes there is.  It is called “quantitative easing” and the Fed has already indicated that they are going to start doing it again.  Essentially, quantitative easing is when the Federal Reserve creates money out of thin air and starts buying things like U.S. Treasuries, mortgage-backed securities and corporate debt.

But isn’t there a good chance that this could cause inflation?

Well, yes.

But “Helicopter Ben Bernanke” seems determined to live up to his nickname.  Anyone who thinks that Bernanke is going to just sit there and do nothing is delusional.  At some point he is going to fire up his helicopter and start showering the economy with money. 

And the reality is that feeding massive quantities into the economy will create more economic activity.  However, it will also come with a price.

Someday soon, you may wake up to newspaper headlines that declare that our economy is growing at a 10% annual rate, but what they won’t tell you is that the real rate of inflation will be running about 15 or 20 percent at the same time.  In fact, the U.S. government will probably try to convince us that the “official” rate of inflation is only about 5 or 6 percent.

The cold, hard truth is that the U.S. economy is going to continue to get worse.  Whether it will be a deflationary decline or an inflationary decline depends on the boys over at the Fed.  But it is going to be a decline.

Meanwhile, millions of American families are hanging on by their fingernails and are hoping in vain for the great economic recovery which is never going to come.

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