Facts vs. Fears in 2015 Gold Forecasts

Facts vs. Fears in 2015 Gold Forecasts

The next Crisis will be THE CRISIS.... the bond bubble is THE bubble

The next Crisis will be THE CRISIS.

You might have noticed that each successive crisis over the last 15 years has been both larger and involved more senior asset classes.

1.     The 2000 Tech Bubble involved stocks.

2.     The 2007 Housing Bubble involved housing.

3.     This crisis involves Bond… as in ALL bonds.

To give some perspective regarding size here consider that the credit default swap market based on housing that nearly took down the system in 2008 was $45 trillion at its peak in 2007.

In contrast, the global bond market is well over $100 trillion today.

And it’s growing rapidly.

Indeed, US corporates are on track to issue over $1.5 TRILLION in debt this year alone. Not only will this be an all time record… it will be the third consecutive all-time record for corporate debt issuance.

Part of the reason that the bond market has become so enormous is because few entities, particularly sovereign nations, have the cash handy to pay back debt holders when their debts come due.

As a result, many of them are choosing to roll over old debts OR pay them back via the issuance of new debt. The US did precisely this in the last few months issuing over $1 trillion to cover for the payment of old debt that was coming due.

So the bond bubble is not only over $100 trillion in size…it’s actually GROWING on a month-to-month basis.

Reading all of this is no doubt concerning. However, the situation becomes much worse when you consider that over 81% of ALL derivatives trades are based on interest rates (BONDS).

Globally, the interest rates derivative market is an unbelievable $555 TRILLION in size.
These are trades based on interest rates that in turn are based on the bond bubble. Thus, the significance of the bond bubble simply CANNOT be overstated. Banks and other financial entities have literally bet an amount equal to over SIX TIMES GLOBAL GDP on interest rates.

This is why Central Banks are absolutely terrified the moment a sovereign nation comes close to defaulting. Consider that Spain’s bond market is just $1 trillion. But the derivatives trade market based on Spain’s bonds is likely well north of 10X this amount.

With this kind of leverage, even if 4% of the trades are at risk and 10% of those trades go bust, you’ve wiped out the equity at more than a handful of the large EU banks.

In simple terms, the bond bubble is THE bubble. And when it bursts, we will experience THE crisis. In comparison, 2008 will look like a joke.

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Icahn Mon Nov 17, 2014 Expects major stocks correction in 3 to 5 years

Icahn

Mon Nov 17, 2014

Expects major stocks correction in 3 to 5 years

Carl Icahn isn't forecasting a dramatic stock market drop quite yet but the billionaire investor is still bracing for a market sell-off in the next three to five years, he told Reuters on Monday.

But Icahn is more concerned and is predicting a downturn. "It's really a question of when that is going to happen, in my opinion. It could be three years, it could be three months, it could be three days. But I really do believe there will be a major correction in the next three to five years, at least."

CHRIS WOOD  

Nov 18 2014

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India best EM with 5-year view.

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RBI’s Rajan Sees Risk of Financial Markets Crash

• August 6, 2014, 7:12 AM ET

RBI’s Rajan Sees Risk of Financial Markets Crash

ByGabriele Parussini

Reserve Bank of India Governor Raghuram Rajan warned Wednesday that the global economy bears an increasing resemblance to its condition in the 1930s, with advanced economies trying to pull out of the Great Recession at each other’s expense.

The difference: competitive monetary policy easing has now taken the place of competitive currency devaluations as the favored tool for playing a zero-sum game that is bound to end in disaster. Now, as then, “demand shifting” has taken the place of “demand creation,” the Indian policymaker said.

As was the case in the 1930s, the lack of coordination between policymakers is producing spillovers that may be difficult to control, and the world’s financial system may soon face fresh turbulence at a time when central banks have yet to repair the damage that the 2008 financial crisis caused to developed economies.

“We are taking a greater chance of having another crash at a time when the world is less capable of bearing the cost,” said Mr. Rajan in an interview with the Central Banking Journal.

A sudden shift in asset prices could happen in a variety of ways, Mr. Rajan said. The most obvious route would be as a result of investors chasing higher yields at a time when they believe central bank policies will protect them against a fall in prices.

“They put the trades on even though they know what will happen as everyone attempt to exit positions at the same time – there will be major market volatility,” said Mr. Rajan.

A clear symptom of the major imbalances crippling the world’s financial market is the over valuation of the euro, Mr. Rajan said.

The euro-zone economy faces problems similar to those faced by developing economies, with the European Central Bank’s “very, very accommodative stance” having a reduced impact due to the ultra-loose monetary policies being pursued by other central banks, including the Federal Reserve, the Bank of Japan and the Bank of England.

“The exchange rate is too strong given the euro area’s economic standing,” said Mr. Rajan, who took over the RBI in September.

Mr. Rajan said economists still disregard the central role of financial systems in the economy and believe they can predict upcoming disruptions.

“They still do not pay enough attention–en passant–to the financial sector,” Mr. Rajan said. “Financial sector crises are not as predictable. The risks build up until, wham, it hits you.”