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:
- 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.
- 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.
- 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.
- 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.
- 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.
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?
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 High Velocity Profits, 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.