By: Mathew Turner 06/25/2013
Sources in links below: The Huffington Post, Forbes, Money Week, The Financial Times.
Some might arrogantly claim that what happened in 2008 could not possibly repeat itself. I would venture most people don’t have their heads that far buried in the sand but most people may not understand where to sniff out market irregularities on their own either. That is, they may not know when the tidal wave is about to hit them from behind and pound their collective faces into the sea. That time is just about now.
The Federal Reserve’s recent signal that it will end its strategy of monetary easing (better known as QE3) has spooked investors the world over… many of whom realize that the markets have been artificially inflated since 2008 without any real recovery. In fact, US GDP and job growth have been abysmal at best. Even publications that are known to be bastions of the left have come out with scathing reviews (such as The Huffington Post; see two previous links) of the current economic situation; flatly warning that realistically; the situation will not improve.
Though poor and burdensome government policy is in large part to blame for the economic largesse, the greater evil lies within the methodology undertaken by the Federal Reserve to pull off its ambitious money printing operation. Without trying to sound all too shady (tough to do when describing something this inherently deceitful and crooked), I will sum up the Fed’s operation simply with the following sentence. The US Treasury has issued an infinitude of bonds which have been eagerly gobbled up by the Federal Reserve, thereby allowing the US Treasury to print an infinitude of money. But, the question remains (as recently posed by Forbes Magazine), who will buy up the remainder of bonds once the money printing presses come to a stop? And now we have a signal that the presses will indeed come to a stop sometime during 2014 from Fed Chairman Bernanke; and now absolute hell ensues within the bond market as bond holders seek to exit an artificially manipulated marketplace in which their holdings have only inflated… but in actuality, due to the surplus of bonds issued, very little hopes of yielding much value. In other words, bond investors may be willing to exit the marketplace and take a loss rather than being tied up in worthless bonds that won’t yield anything in return. When inflation increases faster than a bond’s yield, investors start looking for the exit… and demanding higher rates of return to hold the same amount of government debt; which unlike the sometimes “disconnected from Main St” stock market; has the very real effect of making it more difficult for local and national governments to issue bonds, thereby denigrating a government’s ability to secure funding for public improvements etc. An equally dangerous ramification includes the negative effect on bond investors and pension funds, mutual funds, and other financial products heavily invested in bonds- historically seen as a safe place to invest. A bond market crash would be truly an ugly sight in terms of real money lost for individual investors, pension funds, and governments the world over. This could be far more serious than what occurred in 2008 within the stock market, so much so that well respected publications like the Financial Times of London have warned that banks have been told to abandon the continuation of pumping money to save the global economy and focus on making an exit plan; otherwise, don’t look back and run for the door!
If you don’t hold investments in the bond market, you may be tempted not to care, but the reality is that this could effect you. It could effect your mutual funds, the company you work for (depending on that company’s involvement in the bond market- especially through its pension fund(s)), the bank you hold your accounts with, and your local and national government’s ability to issue debt. I would argue a hit to the bond market would have more of a resounding effect negatively on Main Street than a similar hit to the stock market would muster; at least in the short term.
It is also important to remember that a crash in the bond market will be the result of intentionally engineered policy by bankers and those in government who have sold out to their plans. Remember that as this all unfolds and you lose more real wealth- and everyone who is “too big to fail” gets bailed out with more of your increasingly worthless money. Conservatively, I see this crash scenario playing out in full by late October of this year. You have been warned.