As I sit here writing this, the Volatility Index is trading around 11.5, a ridiculously low level of fear or volatility for the risks that face this market.
Can you say complacency?
We have the stock market hitting all time highs, gold at ridiculously low prices while having formed a long term base technically, and UST yields at artificially low levels. At the same time, Russia is changing the map in Europe and launching ICBMs, China is building a blue water navy and sinking vessels from other countries, Iran is building a nuclear bomb with Russian help, and North Korea is constantly rattling its sabers.
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However, none of these threats are the real problem. The real problem is that the United States owes its creditors over seventeen trillion dollars and counting. The Federal Reserve is still involved in artificially setting rates in the bond market. The United States of America is paying next to nothing for this overwhelming sovereign debt, more than 100% of annual Gross Domestic Product. At some point in the future, the Fed will lose control of the bond market; and rates will be set by natural market forces.
At that point in time, America will pay interest based on her credit risk, not what the government wants to pay. She will not be able to service her debt as it will eat up a large percentage of the federal budget. And, there is no end to deficit spending in sight.
If you have a variable mortgage, car loan, student debt, credit card debt, etc., expect interest rates to spike dramatically. You could see double digit long term rates on the thirty year U.S. Treasury bond. This will have a devastating impact on the national economy. Since we no longer have a fiscal cushion, expect social transfer payments to be curtailed. The half of the country that has become dependent on the government will riot in the streets, just as they have in Europe.
In addition to all of this chaos, our adversaries overseas will take advantage of American economic weakness, as they already have started doing. It’s no coincidence that Syria has used chemical weapons fourteen times since the agreement the Russians brokered. They understand that we cannot get drawn into another expensive conflict. There is a reason Russian President Putin has annexed the Crimean Peninsula and has stirred unrest in Eastern Ukraine. There is a reason China is rising to the east. It’s because America is broke, and everyone knows it! So it’s open season to unleash pent-up territorial demands, ancient hatreds against different peoples, and just general piracy. Pax Americana is over, and the dictators know it.
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All of these consequences are the direct result of the United States being unable to control its spending. They say if you want to get out of a hole, stop digging. We are still digging to China. The only way to change the future is to stop spending money we don’t have and to get the government out of the way. We can grow our way out of the debt crisis if we create more economic transactions that generate additional tax revenue–just as they are starting to do in the United Kingdom. But alas, the future so far does not hold austerity and self-reliance in the cards.
So now let’s answer the question I posed at the beginning of the article. Are you ready for the coming interest rate shock? We cannot keep paying artificial rates. The market will not allow it forever. I speak on this subject a great deal and often get asked “What can one person do? Where should we invest?” I tell people to buy something they can touch. Because there is an old saying on Wall Street: “Interest rates are low until they’re not!”
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