The clip below is entertaining due to the fact that everyone involved in the segment most likely believed that they were going to have another regular panel discussion, similar to the endless stream of other panel discussions they have throughout the day, where they discuss how stocks go up forever and the economy is sound.
That was until Peter Schiff began to lob grenades into their myopic fantasy world.
A concept I like to focus on here is that the world we see, touch, smell, and taste around us every day is artificial for a very simple reason: interest rates are currently being held artificially low. While that concept is so simple in thought, most dismiss it immediately for two main reasons:
1. They either do not understand why interest rates are currently at artificial levels
2. If they begin to work through the process of what would occur should interest rates rise it becomes so uncomfortable that their mind immediately begins to justify reasons why it will not happen
The entire 2013 Outlook was dedicated to this concept not only here in the United States but in the entire bond market throughout the world.
I tried to walk through step by step to first show why interest rates were nearing the end of the current debt super cycle, and then look at what some of the ramifications will be when they reverse course.
It is amazing to me how much the panel "experts" on the segment below remind me of those that were on the network just before home prices collapsed. Ironically, I believe their view on why home prices could not fall back then were the same reasons just listed above. They either didn't understand why home prices were overpriced, or the thought of prices actually reversing course and the consequences of that occurring made them justify reasons in their mind why it could not happen.
Schiff also mentions that there are many nations that do not have an FDIC like guarantee on their depositor accounts which strengthens the quality of their banking sector. Why? Because their citizens have to make intelligent decisions on which banks to hold their money. Responsible banks are awarded with a larger base of deposits which they can then lend out at a profit. This is how a free market works. On his site, MISH recently looked at the example of New Zealand.
Before you move on with your day, just take a few minutes to think about what would occur if interests rates were to just normalize: move up 3 to 4 % from their levels today. To get you started his is just a small list:
- Many bond funds (that the average investor has recently flooded into) would take tremendous losses
- Banks loaded with debt would take massive losses on their positions
- The assets on the Fed's balance sheet would be underwater - not allowing them to sell assets back into the market and execute their "exit strategy" that we have heard so much about
- The derivatives market, laced with hundreds of trillions of dollars in interest rate swaps, could begin a daisy chain implosion
- Commercial real estate purchased at ultra low cap rates and mortgage rates would see their values collapse
- The cost to borrow for residential home buyers would rise
- Many governments (U.S., Japan, Europe, U.K.) would see their annually cost of interest overwhelm their incoming tax receipts
Billionaire Wilbur Ross was asked this week what has him worried? His answer: the potential for interest rates to normalize. Click here for his full discussion.