The Most Important Number to Watch This Week

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The esoteric – yet highly accurate – Hindenburg Omen we looked at Friday may suggest the probability of a market crash. But the number I'm watching this week could cause one.

As a standalone figure, of course, the yield on 10-year Treasuries is small. But the amount of money it impacts worldwide is flat-out staggering.

Out of the estimated $1.5 quadrillion dollars' worth of derivatives on the planet right now, roughly $500 trillion is specifically related to interest rates.

So you can see why the 10-year gets so much attention. But right now, I'm watching it even more carefully… for one important reason.

When the Hindenburg was sounding the alarm last week, 10-year Treasury yields spiked at the same time, up to 2.8210% before relaxing a bit in early trading last Friday as of press time. That suggests to me the Fed is losing control over interest rates.

No doubt this is a frightening scenario, which is why it's important to remember…

There's plenty you can do about this now.

First, here's why higher rates could have such a wide impact…

The 5 Side Effects of "No Control"

Many investors believe the Fed controls interest rates. That's not true – they merely influence them.

As I have long written here in Money Morning, it's the traders who have a death grip on our financial markets.

And if interest rates rise much further, the support the Fed is counting on in the bond markets may not be there. In fact, it may be running the opposite direction.

And here's why that could trigger a selloff:

  1. Foreign custody holdings of U.S. Treasuries continue to decline, which implies that our trading partners don't trust our repayment ability. So they're moving on to other assets.
  2. Money managers are seeing extremely high levels of redemption requests and withdrawals from bonds. PIMCO, for example, experienced a $7.5 billion hit last month as money headed for the exits. The presumption is that the money is rotating into stocks, but the data suggests a solid portion is simply going back under the mattress. Somebody has to make up the gap; the only one big enough is the Fed. But if $85 billion a month isn't good enough, you've got to wonder how much is. Bernanke's replacement will have his or her hands full and the stakes couldn't be higher.
  3. Loan volumes have fallen sharply as America continues to deleverage. International data suggests the same is true, generally speaking, throughout Europe and in Asia as well. So banks don't need to buy Treasuries as a means of supporting profits and corresponding balance sheet liabilities. Combine that with huge real estate mark-to-market losses that have yet to be taken, and there's a hole the size of Bernanke's printing press to dam… or damn, depending on your perspective.
  4. Institutional managers – read pension fund administrators, foreign banks, and ETFs – who would have normally been big buyers, are paring back because they don't want the exposure that comes with 10-year paper or longer-term assets in a rising rate environment.
  5. The risk the Fed thinks it's insuring here in the United States is really global. Team Bernanke and his minions have already socialized risk, so there is literally nowhere to run in the halls of big government.

Yikes!

So now what?

For one thing, people are going to come to understand what we at Money Morning have known all along: Money printing is not the solution. It's THE problem.

I don't care what Bernanke and his central banking boffins say, you cannot print money forever, nor can you expect people to tolerate doing so into perpetuity. Eventually you have to pay back what you owe… or default.

Bailouts never solve the problem. At the end of the day, they merely push them off.

As I see it, there are two possible outcomes: a) a catastrophic default or b) a controlled default. And I'm not alone in my thinking.

Legendary investor Jim Rogers has been very clear from the beginning that this will end badly. Mark Mobius believes default has to happen, especially in Europe, where he's noted that governments will "stretch out payments so that at the end of the day, as economies recover, they are gradually able to pay off these debts."

So how do you protect your portfolio?

Join the conversation. Click here to jump to comments…

About the Author

Keith Fitz-Gerald has been the Chief Investment Strategist for the Money Morning team since 2007. He's a seasoned market analyst with decades of experience, and a highly accurate track record. Keith regularly travels the world in search of investment opportunities others don't yet see or understand. In addition to heading The Money Map Report, Keith runs The Geiger Index, a reliable, emotion-free guide to making big money and avoiding losses, and Strike Force, which aims to get in, target gains, and get out clean. In his weekly Total Wealth, Keith has broken down his 30-plus years of success into three parts: Trends, Risk Assessment, and Tactics – meaning the exact techniques for making money. Sign up is free at totalwealthresearch.com.

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  1. Mike | August 19, 2013

    I do believe you are correct … the DOW will lose 8,000+ points within the next 45 to 60 days. I'm not much of a Soros fan … but he just entered into a huge Put trade … I suspect he sees the same type of opportunity that earned him over $1 billion off of the English pound years ago.

    The only way to prosper with what is coming is to invest for the downside or the new "gold" (OIL) and there isn't much time left.

    • kyle | August 22, 2013

      how do i do a put on the dow for theses next few weeks. i have 5000 to my name and nothing else. i know nothing about trading im disabled, have a small pension and just got married and have one daughter and one on the way. i make 1700 gross a month an have 1900 in my rrsp after losing 16000 in investing in biofuels in bedford biofuels that went bust.

  2. Roozbeh | August 19, 2013

    Keith,
    Good point by saying "Get ready for Shopping". Probably we all knew by this point that money in our valets/bank accounts is shrinking and it's better to buy consumables we/world will need in the future (for much higher price).
    But how about House Market?

  3. Doris Kelsey | August 19, 2013

    You presume, "The presumption is that the money is rotating into stocks, but the data suggests a solid portion is simply going back under the mattress." You were right in the previous paragraph, "So they're moving on to other assets." The asset they are moving to is land. Land prices (farm land) increased 18% last year in my area and almost the same the year before, despite the drought. I don't think smart money is putting it in their mattresses.

    • H. Craig Bradley | September 15, 2013

      FARMERS ARE TRADITIONALLY "LAND RICH AND MONEY POOR"

      Farmland in the U.S. is overpriced compared to Latin America. The return on an investment in a ranch in Montana, for example, is only about 3.5% gross (before taxes). Its o.k. provided you do your own farming and have no debt. Otherwise, it may not offer the kind of returns desired for the amount of money tied-up in (farm) land.

      In comparison, countries like Chile offer much better deals for prime farmland and you can hire an experienced farm manager down there for only $1,000/ month. In addition, the produce you grow and sell can be exported for income in U.S. dollars.

      If we have a global melt-down, then you have a secure place to live and food on the table. During a collapse, people living in U.S. cities stand to suffer huge losses. Many could even starve or die from the chaos (riots and looting).

  4. Robert in Canada | August 19, 2013

    The USA won't default on it's debt obligations. But it will pay it's debt with devalued Dollars and keep printing gazillions more of them.

    That is what will make debt holders pull the plug – they won't want to be re-paid in Dollars that are worth much less than when they lent the money to the USA.

    There is no way out for the US Gov't. If they do what's required to solve the problem, they will get thrown out of office by an ignorant electorate (same problem in all democracies). So their only viable option is to keep printing.

  5. Keith Fitz-Gerald | August 20, 2013

    Thanks for reading and for taking the time to comment. I appreciate the kind words and the thinking. I'm watching real estate very carefully at the moment and will be reporting on that in upcoming columns. In the meantime, it looks as if the "bond BBQ" we've all seen coming may be finally beginning in earnest.

    Best regards for a great day and greater investing,

    Keith

  6. Brad M | August 21, 2013

    If foreign investors flock from US treasuries, and some domestic investors do as well, it will become impossible for our government to turnover the massive debt without simply just printing currency. The dollar will lose value, and should the world then also deny our dollar the reserve currency status it holds now, things could get very ugly here in the USA. We truly live in interesting times… so much potential, so many problems.

  7. H. Craig Bradley | September 15, 2013

    IRRESISTIBLE

    By the way, the phrase "interesting times" is an old Chinese curse. They should know about those things from experience. Now its our turn to get such "experience". I am looking forward to seeing other voters squirm like a worm for being so stupid all these years ( 2000-2013).

    The Federal government won't just sit there and print Zimbabwe Billion dollar bills. Nope. Instead, I expect them to force private pension account holders (401- K and IRA) to buy long dated T-Bonds. Its the patriotic thing to do, after all. There are reportedly $ 6 Trillion sitting there in tax-deferred retirement accounts waiting for the taking.

    If we get anywhere close to a real default, immediate or "controlled", the authorities (pols) are going to feel an irresistible urge to in effect, take control of your IRA. ( Just like President Bill Clinton felt when Monica L. showed-up after hours in the Oval Office).

  8. H. Craig Bradley | September 15, 2013

    THE NEW PROSPECTORS

    Now, like gold, you see ads for property in Belize. You know that you missed the boat when there are T.V. ads to buy land abroad.

    The wealthy first pioneered this trend and started jumping-in right after the tech stock wreck in 2000-2001. The best deals ("easy money") on the most well known assets abroad may have already been taken by such early investor demand.

    Still, with more careful footwork ("boots on the ground") there still may be some overlooked bargains in places like Latin America. It just takes more work nowadays. Nothing is easy anymore- except of course, losing money.

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