Bill Holter: The Great Unwind Has Finally Arrived !

• The Great Unwind Has Finally Arrived! 
  by Bill Holter, http://blog.milesfranklin.com/
  50+ years of credit creation and living beyond our means year after year is finally coming to an end.  Ben Bernanke spoke on Wednesday regarding “tapering” treasury and MBS purchases sometime next year, the market then immediately reacted.  Stocks were sold, bonds were sold, commodities were sold and so were silver and gold (much more on this shortly.) Did the Fed actually do anything?  Did they tighten at all?  Has their balance sheet shrunk or even stagnated at all?  The answer(s) are an emphatic NO!  The bloodbath last week was merely “front running” on the fear that the Fed will back away and stop administering the crack credit doses that the financial community have become accustomed to.  Basically free money and trillions of dollars of it. Can you imagine what will happen should the Fed ACTUALLY slow down or stop giving out free cash so that banks can cover up losses?
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  Last week was only a preview to what is coming.  I personally do not believe that any “tapering” will ever come about last week’s financial action. This only supports my thesis.  Last week happened only after the mention of “tapering,” Do you think the Fed may now know the end result of an ACTUAL exit strategy?  One where the markets would have to fend for itself and be self-supporting along with the economy?  They do know; the Fed knows that it will be forced again and again to not only continue QE but increase it exponentially.
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  There is one minor “problem,” the more they monetize, the less “collateral” (there’s that word again) there is available to an economy and financial market that… runs on collateral.  Can you imagine the immediate bloodbath of panic selling if the Fed not only stopped purchasing bonds but actually tried to sell some to reduce their own balance sheet?  They are now purchasing more than half of the Treasury’s new issuance, if they turned into the seller, who is left as the buyer?  What would happen should China’s current “cash crunch” cause them to turn seller?
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  As a result of the mere murmur of slowing QE the most shocking action last week was in the Treasury market.  The 10 yr. ended Friday at 2.54%, this was a rise of .40 basis points or so and nearly equal to the rise in yield for all of May.  May if you recall was the month where the Fed lost about $115 billion on their bond holdings (certainly far more if they had to mark the non-Treasuries to market).  The volatility was staggering and without a doubt there are now some dead institutions out there because of how fast and violent the move was.  There is $200 trillion outstanding in interest rate derivatives.  This past week alone, these contracts on average probably moved more than 5% in value.  This would indicate a movement of maybe $10 trillion (with a T) worth of net change from one side to the other in less than 5 days.  Do you really believe that this type of “wins and losses” could have occurred without someone, probably “many one’s” becoming insolvent?  The Fed only purports to have $65 billion of equity capital, in between May 1 and now their portfolio has dropped nearly $250 billion.  Is this “insolvent?”  Yes it is but they have the ability to run the presses so not to worry I guess?
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  Forget the stock market; the Fed has now lost control of the Treasury market.  Interest rates on the 10 year have now gone from just under 1.6% to over 2.5% in a very short period of time.  This is now a 60+% rise in rates.  Was this truly because the economy was strengthening? It would be bad enough but the selling that has come about has nothing to do with the economy.  The selling in reality started as “front running” by those smart enough to leave the party while the music was still playing.  Now, it is evolving into one gigantic and global margin call.  This will feed on itself, winners will not get paid, sovereigns will lose the ability to “fund” and ultimately the global real economy will suffer from the financial implosion.
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  read more!

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