By Gregory Mannarino, TradersChoice.net
Over the past week, we witnessed a phenomenon play out that I had forecast: a rapidly-rising bond yield environment putting pressure on the stock market. Last Thursday and Friday, collectively, the Dow lost nearly 1,000 points as the 10-year yield, which is the benchmark, spiked.
Generally, when cash leaves the bond market yields rise, and that cash usually makes its way into the stock market. However, when rates rise rapidly, as we have seen this past week, it rattles the stock market, and equities sell off.
In the same way artificially-suppressed rates/bond yields have inflated massive bubbles in both the stock market and real estate, a rapidly rising rate/bond-yield environment will have the opposite effect, leading to a tremendous drop in the stock market and real estate prices.
Since 2008’s stock market meltdown, the Federal Reserve has been involved in quantitative easing (QE), a mechanism whereby tremendous amounts of cash are made available to the market by keeping rates suppressed. Indeed, this mechanism has worked to re-inflate stock market and real estate bubbles.
QE is also a process whereby the Fed targets what is known as the “Federal Funds Rate” (FFR), which currently sits between 0.00 and 0.25 percent. The FFR is the rate that commercial banks lend cash to each other overnight.
For many months, the Fed has floated out the suggestion of “Yield Curve Control” (YCC). YCC goes way beyond the rigging of the FFR. When a central bank utilizes YCC, it sets yield targets either on a specific part of the yield curve or the entire curve itself.
As an example, the Fed could say, “We want to keep the 10-year yield at 1.35 percent.” Once the Fed establishes a target, they buy bonds to keep the yield exactly there, or close to it, by adjusting their purchases accordingly. If the Fed chooses to target the entire curve, the number of bond purchases they would have to make would be astronomical in dollar terms.
Silent War
YCC would allow the Federal Reserve to gain complete control over the debt market, and, in doing so, would allow them to VASTLY inflate. If you have been reading my columns, you know the ultimate goal of the Fed is to “own it all.” The single product of a central bank is debt, so the more debt they issue, the exponentially more powerful they become.
Today, we are in the middle of a silent war, so to speak. A war in which world central banks are working in concert to “buy it all.”
YCC is yet another mechanism central banks can, and will, utilize to fulfill their end game: to be the buyer and lender of last resort.
