The Fed Rate Hike Will Trigger a $9 Trillion Meltdown
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By Graham Summers
Yesterday, the Fed has hiked interest rates from 0.25% to 0.5%.
It is the first rate hike in 10 years. And it is now clear that the Fed is not only behind the ball in terms of raising rates… but that it has now primed the financial system for another 2008-type meltdown.
By way of background we need to consider the relationship between the US Dollar and the Euro.
The Euro comprises 56% of the basket of currencies against which the US Dollar is valued. As such, the Euro and the Dollar have a unique relationship in which whatever happens to the one will have an outsized impact on the other.
Here’s why the Fed’s decision to raise rates will implode the financial system.
In June 2014 the ECB cut interest rates to negative. Before this, the interest rate differential between the Euro and the US Dollar was just 0.25% (the US Dollar was yielding 0.25% while the deposit rate on the Euro was at exactly zero).
While significant, the interest rate differential was not enough to kick off a complete flight of capital from the Euro to the US Dollar. However, when the ECB launched NIRP, cutting its deposit rate to negative 0.1%, the rate differential (now 0.35%) and punitive qualities of NIRP (it actually cost money to park capital in the Euro) resulted in vast quantities of capital fleeing Euros and moving into the US Dollar.
Soon after, the US Dollar erupted higher, breaking out of a multiyear triangle pattern and soaring over 25% in a matter of nine months.
To put this into perspective, this move was larger in scope than the “flight to safety” that occurred in 2008 when everyone thought the world was ending.
The reason this is problematic?
There are over $9 trillion in borrowed US Dollars sloshing around the financial system. And much of it is parked in assets that are denominated in emerging market currencies (the very currencies that have imploded as the US Dollar rallied).
This is the US Dollar carry trade… and it is larger in scope that the economies of Germany and Japan… combined.
In short, when the ECB cut rates to negative, the US Dollar carry trade began to blow up. The situation only worsened when the ECB cut rates even further into negative territory in September 2014 and again last week bringing the rate differential between the US Dollar and Euro to 0.55%.
Now, the Fed has raised interest rates to 0.5%. This has made the interest rate differential between the Euro and the US Dollar 0.75%. This will trigger a complete implosion of the $9 trillion US Dollar carry trade.
This is a long-term, multi-decade chart of the US Dollar.
As you can see it has just broken out of the largest falling wedge pattern in monetary history. The chart predicts that during the next leg up, the US Dollar will rally to 120 or even 130.
At that point, the $9 trillion US Dollar carry trade will implode triggering a 2008-type event. Our timeline for this is within the next 12 months.
Smart investors are preparing now.
Best Regards
Graham Summers
Chief Market Strategist
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Whistler Blowers, Insiders
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it invented freedom
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In a nut shell. Perfect.
Good info and maybe true if traditional market fundamentals were still in place. However I’ve been following the markets for about three years and have noticed everything works the opposite of how it should. For example, we raise interest rates, which essentially weakens the U.S. dollar versus other currencies. It should. But no, the dollar gets ‘stronger’ and the Dow goes up. Gold and silver went up a little yesterday, but got hammered today. Why? The demand for physical G and S has been record breaking all year. When interest rates go up, precious metals should also and the bond market suffer because yields are adversely impacted.
Physical gold has been artificially manipulated the past few years and by the Big 12 global investment banks. They hammer its price down, and that of silver, every day with paper futures trades. Paper gold contracts are now leveraged 325 to 1 versus physical gold held in vaults. Let that sink in. If you can’t hold it you don’t own it. The banks are not watched nor regulated by the COMEX officials. They look the other way. Derivatives contracts have reached over a QUADRILLION U.S. dollars in value. Remember 2007-08 and how the mortgage backed securities tanked, sending the globe into a financial emergency overnight? Those were derivatives credit default swaps and were illegal until Bill Clinton revoked Glass Steagal during his first term. The Big 12 banks now have hedged on every commodity sold on this planet and are leveraged way beyond their held assets.
Banking laws changed but not to benefit us, the average saver. If there is another collapse, YOUR banks accounts, 401K’s, money market funds etc. will be frozen and then a bank holiday declared. During that holiday, when you will not be able to withdraw any of your own cash, a tax to bail out the banks will be assessed. It happened in Cypress and also Greece. It will happen here. Your bank accounts are now considered, under Federal and International law, as ‘unsecured debt’; i.e. money loaned out to others. The FDIC is in on this, along with the U.S. Congress, Bank of England and all G20 countries.
Oh you say that the FDIC will bail us out? That’s funny. They might have $10 billion on hand. There is an estimated $10 TRILLION deposited in U.S. banks currently. The banks will be bailed out by you. It’s sad people, but the greed of the world’s banking system and Wall Street is coming crashing down. Get your money out of the bank and stock up on physical precious metals. At some point they won’t be able to manipulate the prices down any longer.
You are absolutely right! The normal rules of economics no longer apply. The machinations behind the World Economy has set up new rules advantageous to those who control it. The only rule that applies now is that the 1% will win and the rest will get screwed. Game over.
I don’t think this 0.25% rise will do much and i think you will be waiting another ten years for another rise, it’s just a game of bluff because the boy kept calling wolf.
Do not try to use logic when looking at the paper price of gold or oil, it no longer works but having oil below $40 p.p from $120 is more than enough to compensate from this small rise in rates.
The bigest cost in extracting gold is energy costs so cheap oil should push prices down and money in the bank bearing interest of 0.25% extra if we have low inflation should also push gold down accordiing to logic
logic also says that being close to war should push oil prices sky high but it’s not, it’s going down which only goes to show how these markets are fixed beyond all reason.
if you want to make money then go long on oil using future contracts and hope the government does not take them off you if WWIII starts but for now hold fire on buying physical gold or silver is my advise
Global Resource Bank shareholders settle national debt. – http://Www.GRB.net
Hi