Silver at Less Than 19 Dollars an Ounce? Are You Kidding Me!??

The day that silver traders have been waiting for has arrived.  On Wednesday, the price of silver dropped another 5 percent.  As I write this, it is sitting at $18.55 an ounce.  On Wednesday it hit a low that had not been seen in three years.  Overall, the price of silver has declined by 34 percent this quarter.  That is the largest quarterly move in the price of silver in more than 30 years.

So what does all of this mean?  It means that we are looking at a historic buying opportunity for those that are interested in silver.  Yes, gold is undervalued right now as well, but it is absolutely ridiculous how low the price of silver is.  At the moment, the price of gold is about 66 times higher than the price of silver is.  But they come out of the ground at about a 9 to 1 ratio, and unlike gold, silver is used up in thousands of common consumer products. Those that want to invest in silver should be shouting for joy that prices have fallen this low.  If you have been waiting and waiting and waiting to "load the boat", your moment has arrived.

In my previous articles, I have warned over and over again that we would see wild swings in the prices of gold and silver.  For example, I wrote the following back in April...

As I mentioned above, gold and silver are going to experience wild fluctuations over the next few years.  When the next stock market crash comes, gold and silver are probably going to go even lower than they are today for a short time.  But in the long run gold and silver are going to soar to unprecedented heights.

Investing in gold and silver is not for the faint of heart.  If you cannot handle the ride, you should sit on the sidelines.  We are entering a period of tremendous financial instability, and holding gold and silver is going to be like riding a roller coaster.  The ups and downs are going to shake a lot of people up, but the rewards are going to be great for those that stick with it the entire time.

Right now, a lot of people that bought silver when it was 25 dollars an ounce or 30 dollars an ounce are probably feeling discouraged.

Don't be.  You will be just fine.  When the price of an ounce of silver hits 100 dollars an ounce you will be very thankful for the silver that you stored away at those prices.

We are moving into a time when we will see more volatility in precious metals prices than we have ever seen before.  That means there will be some tremendous opportunities to make money.  But in order to make money, you have to buy low and sell high.

The current decline in the price of paper silver does not have anything to do with the demand for actual physical silver.  In fact, demand for physical silver is higher than it ever has been before.

For example, sales of silver coins by the U.S. Mint have set a brand new all-time record high during the first half of 2013.

Last year, the U.S. Mint sold 33 million ounces of silver for the entire year.

This year, the U.S. Mint is on pace to sell 50 million ounces of silver for the entire year.

So don't be alarmed that the price of silver is falling.

Instead, be very, very thankful.

Hopefully it will go even lower.

And you know what?  There is a decent possibility that the price of silver may go down a bit more.  This will especially be true during the initial stages of the next financial panic.

When the price of silver does dip, it is a perfect opportunity to load the boat, because even many mainstream analysts are projecting that the price of silver is headed into the stratosphere over the long-term.  For example, the following is what Citi analyst Tom Fitzpatrick told King World News the other day...

Again, if you look at silver going back to the 2008 correction, we got down to levels below $9, then we saw the silver price multiply by a factor of over 5 times. So assuming this marks a point near the end of the correction in silver, then our bias would be one that would take silver not only to new all-time highs, but we would look for a target as high as $100 for silver

There are so many reasons to own silver (even as opposed to owning gold).  The following is an excerpt from a recent article about silver that really caught my attention...

*****

7. Silver is way below its nominal record price of $50 in 1980.  It is even further below the government inflation adjusted level of $135.  And if you use REAL inflation adjusted numbers, like Shadowstats, the REAL 1980 inflation adjusted price of silver would have to be $450!  Silver is a precious and depleting resource and when you look at the price of housing, cars, education, food, energy, taxes, insurance back in the 1980′s, it is insane to think that silver is so cheap on any level.  Especially when the uses of silver have skyrocketed since the 1980’s.  It is now used in technology on a massive scale and is even now said to cure cancer.  Heck, they did not even have Silver Eagle sales back then, or the Silver Bullet Silver Shield for that matter.

8. This time it is going to be much larger!  None of the problems from the 2008 Banking Crisis have been solved.  In fact it is orders of magnitudes worse.   What started out as an institutional  problem, is now a sovereign nation problem.  This collapse will not be a puny multi – billion dollar corporation like AIG disintegrating, it will be the Trillion dollar economies of the nations of the world and the Quadrillion dollar derivative monster markets cracking apart.  There is no financial, political or social safety net left.  We destroyed all of that in 2008 and are on a debt based junkie delusion.

The collapse of currencies will affect every counter-party, debt based asset in the world. Your cash, stocks, bonds, Real Estate, pensions, insurance, all of it.  The collapse of financial contracts will lead to the collapse of all political and social contracts.  The Anger Phase of humanity is coming and only real assets with no counter party risk will be worth anything.  Most commodities have storage or degradation issues leaving only precious metals as a real store of wealth.

9. 1:65 Ratio makes silver the only choice.  The current gold to silver ratio is: 1 ounce of gold is worth 65 ounces of silver.  These come out of the ground at a 1:9 ratio!  That means just to get back to the natural mining ratio, silver would have to out perform gold 600%.  This is regardless what happens to the dollar value of gold.  If gold goes to $13,000 an ounce, silver at a 1:9 ratio would be $1,444 silver.

10. The historical stockpiles of silver are destroyed.  We know implicitly that gold has been treasured and kept secure.  While silver has been used and abused as a cheap, industrial metal like tin.  Since the price of silver has been under attack since the Crime of 1873, silver has been used in such small quantities that it has been destroyed.  The US government in 1950 had 5 billion ounces of silver in its strategic stockpile, now it has ZERO. So if gold and silver come out of the ground at a 1:9 ratio and gold has been treasured and silver stockpiles destroyed, logic would dictate that the end of this silver bull market will find the gold to silver ratio BELOW 1:9 and I think it will come close to a 1:1.  Either way, we are a long way away from those levels which makes silver so exciting right now.

It is the destruction of huge stockpiles like this that explains the decade long supply deficit to the growing demand of silver.  Do not forget that we are only 7 years away from the United States Geological Survey’s prediction that if we continue to consume silver at these rates, silver would be the first metal to become extinct.  When I challenged the USGS on that statement, they said that only a massive revaluation of silver to bring on more production and wiser use of silver would stop the extinction.  I don’t think we will ever run out of silver, but I do believe that the free market will crush this paper manipulation and that anyone holding physical silver on that day will then have a lottery ticket in real value.

*****

Do you want some more reasons to own silver?

The following are some excerpts from an excellent article by Mark Thomas...

*****

The amount of silver consumed annually and bought for investment exceeds currently exceeds total annual mining output and has for years. That gap has been filled by sellers willing to sell from existing inventories and as prices rise. As time passes this will naturally push prices significantly higher until this fundamental imbalance reaches a true equilibrium price where supply is closer to demand.

*****

Both industrial and investment demand for silver is growing in excess of the annual increase in mining production growth. The available inventory is low and will get even tighter over time. These two factors will lead to a continued tighter supply-demand situation going forward.

*****

Silver is an industrial metal with over 10,000 commercial applications. Because it is one of the best electrical and thermal conductors, that makes it ideal for electrical uses such as switches, multi-layer ceramic capacitors, conductive adhesives, and contacts. It is used in some brazing and soldering as well. Silver is also used in solar cells, heated automobile wind shields, DVD's and some mirrors.

*****

Silver is an essential element in the electronic gadgets that are a growing part of our digital age. It is in every cell phone, smart phone, tablet, computer keyboard, solar cells and every radio frequency if ID device (RFID). This makes it an essential element going forward as the world becomes more addicted to gadgets. The growth and rising living standards of people in the emerging economies will drive long-term growth of new customers that will demand more and more electronic gadgets.

*****

Silver's industrial demand should increase 60% to 666 million ounces per year by 2016 from 487 million ounces in 2010. Current annual mine production is only around 700 million ounces per year growing a few percent annually.

*****

Of a total of fifty billion ounces of silver that have been mined in history, only two ounces (estimate) or 5% remain in above ground inventories available to be bought and sold. This is due to silver being used up in industrial applications in very small quantities, which makes it unprofitable to recycle at today's prices. A lot of silver is used in minute quantities in industrial products which are used up and discarded without being recycled.

*****

The total amount of silver available to trade in the physical silver market is only about $70 billion versus the total gold market which now exceeds $4.3 trillion. As you can see from these numbers, the total market size of the silver market is only 1.6% of the size of the entire gold market. This lack of liquidity and use of extreme leverage in its respective futures market produces wild volatility in price fluctuations of silver.

*****

Are you starting to get the picture?

Let us hope that the price of silver stays below 20 dollars an ounce for as long as possible, because once this opportunity is gone we will probably never see it again.

It is important to realize where we are in the greater scheme of things.  The world is moving toward another major financial crisis which will usher in a brief period of deflation.  Unlike many others that are talking about the coming economic collapse, I have always maintained that we are going to see deflation first and then the response to the crisis will give us the rip-roaring inflation that so many talk about.  The following is an excerpt from one of my articles where I talk about this...

So cash will not be king for long.  In fact, eventually cash will be trash.  The actions of the U.S. government and the Federal Reserve in response to the coming financial crisis will greatly upset much of the rest of the world and cause the death of the U.S. dollar.

That is why gold, silver and other hard assets are going to be so good to have in the long-term.  In the short-term they will experience wild swings in price, but if you can handle the ride you will be smiling in the end.

During the initial stages of the next major stock market crash, gold and silver will not do very well.  But that is okay.  Dips are buying opportunities.

As the coming economic crisis unfolds, governments and central banks all over the world will desperately attempt to resuscitate the global financial system.  We are going to see money printing and "stimulus packages" on a scale that we have never seen before.  Crazy things will happen with stocks, bonds and currencies.

When the dust finally settles, those that are holding "real money" will be the ones that will be in the best shape.

The Trigger Has Been Pulled and the Slaugther of the Bonds Has Begun

What does it look like when a 30 year bull market ends abruptly?  What happens when bond yields start doing things that they haven't done in 50 years?  If your answer to those questions involves the word "slaughter", you are probably on the right track.

Right now, bonds are being absolutely slaughtered, and this is only just the beginning.  Over the last several years, reckless bond buying by the Federal Reserve has forced yields down to absolutely ridiculous levels.  For example, it simply is not rational to lend the U.S. government money at less than 3 percent when the real rate of inflation is somewhere up around 8 to 10 percent. 

But when he originally announced the quantitative easing program, Federal Reserve Chairman Ben Bernanke said that he intended to force interest rates to go down, and lots of bond investors made a lot of money riding the bubble that Bernanke created. But now that Bernanke has indicated that the bond buying will be coming to an end, investors are going into panic mode and the bond bubble is starting to burst. 

One hedge fund executive told CNBC that the "feeling you are getting out there is that people are selling first and asking questions later".  And the yield on 10 year U.S. Treasuries just keeps going up.  Today it closed at 2.59 percent, and many believe that it is going to go much higher unless the Fed intervenes.  If the Fed does not intervene and allows the bubble that it has created to burst, we are going to see unprecedented carnage.

Markets tend to fall faster than they rise.  And now that Bernanke has triggered a sell-off in bonds, things are moving much faster than just about anyone anticipated...

Wall Street never thought it would be this bad.

Over the last two months, and particularly over the last two weeks, investors have been exiting their bond investments with unexpected ferocity, moves that continued through Monday.

A bond sell-off has been anticipated for years, given the long run of popularity that corporate and government bonds have enjoyed. But most strategists expected that investors would slowly transfer out of bonds, allowing interest rates to slowly drift up.

Instead, since the Federal Reserve chairman, Ben S. Bernanke, recently suggested that the strength of the economic recovery might allow the Fed to slow down its bond-buying program, waves of selling have convulsed the markets.

In particular, junk bonds are getting absolutely hammered.  Money is flowing out of high risk corporate debt at an astounding pace...

The SPDR Barclays High Yield Bond exchange-traded fund has declined 5 percent over the past month, though it rose in Tuesday trading. The fund has seen $2.7 billion in outflows year to date, according to IndexUniverse.

Another popular junk ETF, the iShares iBoxx $ High Yield Corporate Bond, has seen nearly $2 billion in outflows this year and is off 3.4 percent over the past five days alone.

Investors pulled $333 million from high-yield funds last week, according to Lipper.

While correlating to the general trend in fixed income, the slowdown in the junk bond business bodes especially troubling signs for investment banks, which have relied on the debt markets for fully one-third of their business this year, the highest percentage in 10 years.

The chart posted below comes from the Federal Reserve, and it "represents the effective yield of the BofA Merrill Lynch US High Yield Master II Index, which tracks the performance of US dollar denominated below investment grade rated corporate debt publically issued in the US domestic market."  In other words, it is a measure of the yield on junk bonds.  As you can see, the yield on junk bonds sank to ridiculous lows in May, but since then it has been absolutely skyrocketing...

So why should the average American care about this?

Well, if the era of "cheap money" is over and businesses have to pay more to borrow, that is going to cause economic activity to slow down.

There won't be as many jobs, part-time workers will get less hours, and raises will become more infrequent.

Those are just some of the reasons why you should care about this stuff.

Municipal bonds are being absolutely crushed right now too.  You see, when yields on U.S. government debt rise, they also rise on state and local government debt.

In fact, things have been so bad that hundreds of millions of dollars of municipal bond sales have been postponed in recent days...

With yields on the U.S. municipal bond market rising, local issuers on Monday postponed another six bond sales, totaling $331 million, that were originally scheduled to price later this week.

Since mid-June, on the prospect that the Federal Reserve could change course on its easy monetary policy as the economy improves, the municipal bond market has seen a total of $2.6 billion in sales either canceled or delayed.

If borrowing costs for state and local governments rise, they won't be able to spend as much money, they won't be able to hire as many workers, they will need to find more revenue (tax increases), and more of them will go bankrupt.

And what we are witnessing right now is just the beginning.  Things are going to get MUCH worse.  The following is what Robert Wenzel recently had to say about the municipal bond market...

Thus, there is only one direction for rates: UP, with muni bonds leading the decline, given that the financial structures of many municipalities are teetering. There is absolutely no good reason to be in municipal bonds now. And muni ETFs will be a worse place to be, given this is relatively HOT money that will try to get out of the exit door all at once.

But, as I wrote about yesterday, the worst part of the slaughter is going to be when the 441 trillion dollar interest rate derivatives time bomb starts exploding.  If bond yields continue to soar, eventually it will take down some very large financial institutions.  The following is from a recent article by Bill Holter...

Please understand how many of these interest rate derivatives work.  When the rates go against you, “margin” must be posted.  By “margin” I mean collateral.  Collateral must be shifted from the losing institution to the one on the winning side.  When the loser “runs out” of collateral…that is when you get a situation similar to MF Global or Lehman Bros., they are forced to shut down and the vultures then come in and pick the bones clean…normally.  Now it is no longer “normal,” now a Lehman Bros will take the whole tent down.

Most people have no idea how vulnerable our financial system is.  It is a house of cards of risk, debt and leverage.  Wall Street has become the largest casino in the history of the planet, and the wheels could come off literally at any time.

And it certainly does not help that a whole host of cyclical trends appear to be working against us.  Posted below is an extended excerpt from a recent article by Taki Tsaklanos and GE Christenson...

**********

Charles Nenner Research 

Stocks should peak in mid-2013 and fall until about 2020.  Similarly, bonds should peak in the summer of 2013 and fall thereafter for 20 years.  He bases his conclusions entirely on cycle research.  He expects the Dow to fall to around 5,000 by 2018 – 2020.

Kress Cycles by Clif Droke 

The major 120 year cycle plus all minor cycles trend down into late 2014.  The stock market should decline hard into late 2014.

Elliott Wave Cycles by Robert Prechter 

He believes that the stock market has peaked and has entered a generational bear-market.  He anticipates a crash low in the market around 2016 – 2017.

Market Energy Wave 

He sees a 36 year cycle in stock markets that is peaking in mid-2013 and down 2013 – 2016.  “… the controlling energy wave is scheduled to flip back to negative on July 19 of this year.”  Equity markets should drop 25 – 50%.

Armstrong Economics 

His economic confidence model projects a peak in confidence in August 2013, a bottom in September 2014, and another peak in October 2015.  The decline into January 2020 should be severe.  He expects a world-wide crash and contraction in economies from 2015 – 2020.

Cycles per Charles Hugh Smith 

He discusses four long-term cycles that bottom roughly in the 2010 – 2020 period.  They are:  Credit expansion/contraction cycle;  Price inflation/wage cycle; Generational cycle;  and Peak oil extraction cycle.

Harry Dent – Demographics 

Stock prices should drop, on average for the balance of this decade.  Demographic cycles in the United States (and elsewhere) indicate a contraction in real terms for most of this decade.

**********

I was stunned when I originally read through that list.

Is it just a coincidence that so many researchers have come to such a similar conclusion?

The central banks of the world could attempt to "kick the can down the road" by buying up lots and lots of bonds, but it does not appear that is going to happen.

The Federal Reserve may not listen to the American people, but there is one institution that the Fed listens to very carefully - the Bank for International Settlements.  It is the central bank of central banks, and today 58 global central banks belong to the BIS.  Every two months, the central bankers of the world (including Bernanke) gather in Basel, Switzerland for a "Global Economy Meeting".  At those meetings, decisions are made which affect every man, woman and child on the planet.

And the BIS has just come out with its annual report.  In that annual report, the BIS says that central banks "cannot do more without compounding the risks they have already created", and that central banks should "encourage needed adjustments" in the financial markets.  In other words, the BIS is saying that it is time to end the bond buying...

The Basel-based BIS - known as the central bank of central banks - said in its annual report that using current monetary policy employed in the euro zone, the U.K., Japan and the U.S. will not bring about much-needed labor and product market reforms and is a recipe for failure.

"Central banks cannot do more without compounding the risks they have already created," it said in its latest annual report released on Sunday. "[They must] encourage needed adjustments rather than retard them with near-zero interest rates and purchases of ever-larger quantities of government securities."

So expect central banks to start scaling back their intervention in the marketplace.

Yes, this is probably going to cause interest rates to rise dramatically and cause all sorts of chaos as the bubble that they created implodes.

It could even potentially cause a worse financial crisis than we saw back in 2008.

If that happens, the central banks of the world can swoop in and try to save us with their bond buying once again.

The 441 Trillion Dollar Interest Rate Derivatives Time Bomb

Do you want to know the primary reason why rapidly rising interest rates could take down the entire global financial system?  Most people might think that it would be because the U.S. government would have to pay much more interest on the national debt.  And yes, if the average rate of interest on U.S. government debt rose to just 6 percent (and it has actually been much higher in the past), the federal government would be paying out about a trillion dollars a year just in interest on the national debt.  But that isn't it.  Nor does the primary reason have to do with the fact that rapidly rising interest rates would impose massive losses on bond investors.  

At this point, it is being projected that if U.S. bond yields rise by an average of 3 percentage points, it will cause investors to lose a trillion dollars.  Yes, that is a 1 with 12 zeroes after it ($1,000,000,000,000).  But that is not the number one danger posed by rapidly rising interest rates either.  Rather, the number one reason why rapidly rising interest rates could cause the entire global financial system to crash is because there are more than 441 TRILLION dollars worth of interest rate derivatives sitting out there.

This number comes directly from the Bank for International Settlements - the central bank of central banks.  In other words, more than $441,000,000,000,000 has been bet on the movement of interest rates.  

Normally these bets do not cause a major problem because rates tend to move very slowly and the system stays balanced.  But now rates are starting to skyrocket, and the sophisticated financial models used by derivatives traders do not account for this kind of movement.

So what does all of this mean?

It means that the global financial system is potentially heading for massive amounts of trouble if interest rates continue to soar.

Today, the yield on 10 year U.S. Treasury bonds rocketed up to 2.66% before settling back to 2.55%.  The chart posted below shows how dramatically the yield on 10 year U.S. Treasuries has moved in recent days...

Right now, the yield on 10 year U.S. Treasuries is about 30 percent above its 50 day moving average.  That is the most that it has been above its 50 day moving average in 50 years.

Like I mentioned above, we are moving into uncharted territory and this data doesn't really fit into the models used by derivatives traders.

The yield on 5 year U.S. Treasuries has been moving even more dramatically...

Last week, the yield on 5 year U.S. Treasuries rose by an astounding 37 percent.  That was the largest increase in 50 years.

Once again, this is uncharted territory.

If rates continue to shoot up, there are going to be some financial institutions out there that are going to start losing absolutely massive amounts of money on interest rate derivative contracts.

So exactly what is an interest rate derivative?

The following is how Investopedia defines interest rate derivatives...

A financial instrument based on an underlying financial security whose value is affected by changes in interest rates. Interest-rate derivatives are hedges used by institutional investors such as banks to combat the changes in market interest rates. Individual investors are more likely to use interest-rate derivatives as a speculative tool - they hope to profit from their guesses about which direction market interest rates will move.

They can be very complicated, but I prefer to think of them in very simple terms.  Just imagine walking into a casino and placing a bet that the yield on 10 year U.S. Treasuries will hit 2.75% in July.  If it does reach that level, you win.  If it doesn't, you lose.  That is a very simplistic example, but I think that it is a helpful one.  At the heart of it, the 441 TRILLION dollar derivatives market is just a bunch of people making bets about which way interest rates will go.

And normally the betting stays very balanced and our financial system is not threatened.  The people that run this betting use models that are far more sophisticated than anything that Las Vegas uses.  But all models are based on human assumptions, and wild swings in interest rates could break their models and potentially start causing financial losses on a scale that our financial system has never seen before.

We are potentially talking about a financial collapse far worse than anything that we saw back in 2008.

Remember, the U.S. national debt is just now approaching 17 trillion dollars.  So when you are talking about 441 trillion dollars you are talking about an amount of money that is almost unimaginable.

Meanwhile, China appears to be on the verge of another financial crisis as well.  The following is from a recent article by Graham Summers...

China is on the verge of a “Lehman” moment as its shadow banking system implodes. China had pumped roughly $1.6 trillion in new credit (that’s 21% of GDP) into its economy in the last two quarters… and China GDP growth is in fact slowing.

This is what a credit bubble bursting looks like: the pumping becomes more and more frantic with less and less returns.

And Chinese stocks just experienced their largest decline since 2009.  The second largest economy on earth is starting to have significant financial problems at the same time that our markets are starting to crumble.

Not good.

And don't forget about Europe.  European stocks have had a very, very rough month so far...

The narrow EuroStoxx 50 index is now at its lowest in over seven months (-5.4% year-to-date and -12.5% from its highs in May) and the broader EuroStoxx 600 is also flailing lower. The European bank stocks pushed down to their lowest in almost 10 months and are now in bear market territory - down 22.5% from their highs. Spain and Italy are now testing their lowest level in 9 months.

So are the central banks of the world going to swoop in and rescue the financial markets from the brink of disaster?

At this point it does not appear likely.

As I have written about previously, the Bank for International Settlements is the central bank for central banks, and it has a tremendous amount of influence over central bank policy all over the planet.

The other day, the general manager of the Bank for International Settlements, Jaime Caruana, gave a speech entitled "Making the most of borrowed time".  In that speech, he made it clear that the era of extraordinary central bank intervention was coming to an end.  The following is one short excerpt from that speech...

"Ours is a call for acting responsibly now to strengthen growth and avoid even costlier adjustment down the road. And it is a call for recognizing that returning to stability and prosperity is a shared responsibility. Monetary policy has done its part. Recovery now calls for a different policy mix – with more emphasis on strengthening economic flexibility and dynamism and stabilizing public finances."

Monetary policy has done its part?

That sounds pretty firm.

And if you read the entire speech, you will see that Caruana makes it clear that he believes that it is time for the financial markets to stand on their own.

But will they be able to?

The U.S. financial system is a massive Ponzi scheme that is on the verge of imploding.  Unprecedented intervention by the Federal Reserve has helped to prop it up for the last couple of years, and there is a lot of fear in the financial world about what is going to happen once that unprecedented intervention is gone.

So what happens next?

Well, nobody knows for sure, but one thing seems certain.  The last half of 2013 is shaping up to be very, very interesting.

If Yields on U.S. Bonds Keep Rising, the Market Is Going to Freak Out

If yields on U.S. Treasury bonds keep rising, things are going to get very messy.  As I write this, the yield on 10 year U.S. Treasures has risen to 2.51 percent.  If that keeps going up, it is going to be like a mile wide lawnmower blade devastating everything in its path.  Ben Bernanke's super low interest rate policies have systematically pushed investors into stocks and real estate over the past several years because there were few other places where they could get decent returns.  As this trade unwinds (and it will likely not be in an orderly fashion), we are going to see unprecedented carnage. 

Stocks, ETFs, home prices and municipal bonds will all be devastated.  And of course that will only be the beginning.  What we are ultimately looking at is a sell off very similar to 2008, only this time we will have to deal with rising interest rates at the same time.  The conditions for a "perfect storm" are rapidly developing, and if something is not done we could eventually have a credit crunch unlike anything that we have ever seen before in modern times.

At the moment, perhaps the most important number in the financial world is the yield on 10 year U.S. Treasuries.  A lot of investors are really concerned about how rapidly it has been rising.  For example, Patrick Adams, a portfolio manager at PVG Asset Management, was quoted in USA Today as saying the following on Friday...

"I am watching the 10-year U.S. bond," says Adams. "It has to stabilize. If the yield goes significantly higher the market is going to freak out."

If interest rates keep rising, it is going to have a dramatic effect throughout the economy.  In an article that he just posted, Charles Hugh Smith explained some of the things that we might soon see...

The wheels fall off the entire financialized debtocracy wagon once yields rise.  There's nothing mysterious about this:

1. As interest rates/yields rise, all the existing bonds paying next to nothing plummet in market value

2. As mortgage rates rise, there's nobody left who can afford Housing Bubble 2.0 prices, so home prices fall off a cliff

3. Once you can get 5+% yield on cash again, few people are willing to risk capital in the equities markets in the hopes that they can earn more than 5% yield before the next crash wipes out 40% of their equity

4. As asset classes decline, lenders are wary of loaning money against these assets; if the collateral for the loan (real estate, bonds, stocks, etc.) are in a waterfall decline, no sane lender will risk capital on a bet that the collateral will be sufficient to cover losses should the borrower default.

In addition, rapidly rising interest rates would throw the municipal bond market into absolute chaos.  In fact, according to Reuters, nearly 2 billion dollars worth of municipal bond sales were postponed on Thursday because of rising rates...

The possibility of rising interest rates rocked the U.S. municipal bond market on Thursday, with prices plunging in secondary trade, investors selling off the debt, money pouring out of mutual funds and issuers postponing nearly $2 billion in new sales.

"The market got crushed," said Daniel Berger, an analyst at Municipal Market Data, a unit of Thomson Reuters, about the widespread sell-off.

We are rapidly moving into unprecedented territory.  Nobody is quite sure what comes next.  One financial professional says that municipal bond investors "are in for the shock of their lives"...

"Muni bond investors are in for the shock of their lives," said financial advisor Ric Edelman. "For the past 30 years there hasn't been interest rate risk."

That risk can be extreme. A one-point rise in the interest rate could cut 10 percent of the value of a municipal bond with a longer duration, he said.

Many retail buyers, though, are not ready for the change and "when it starts, it will be too late for them to react," he said, adding that he was encouraging investors to look at their portfolio allocation and make changes to protect themselves from interest rate risks now.

Rising interest rates are playing havoc with other financial instruments as well.  For example, it appears that the ETF market may already be broken.  Just check out the chaos that we witnessed on Thursday...

The selling also caused disruptions in the plumbing behind several ETFs. Citigroup stopped accepting orders to redeem underlying assets from ETF issuers, after one trading desk reached its allocated risk limits. One Citi trader emailed other market participants to say: “We are unable to take any more redemptions today . . . a very rare occurrence due to capital requirements we are maxed out on the amount of collateral we have out.”

State Street said it would stop accepting cash redemption orders for municipal bond products from dealers. Tim Coyne, global head of ETF capital markets at State Street, said his company had contacted participants “to say we were not going to do any cash redemptions today”. But he added that redemptions “in kind” were still taking place.

These are the kinds of things that you would expect to see at the beginning of a financial panic.

And when there is fear in the marketplace, credit can dry up really quickly.

So are we headed for a major liquidity crisis?  Well, that is what Chris Martenson believes is happening...

The early stage of any liquidity crisis is a mad dash for cash, especially by all of the leveraged speculators. Anything that can be sold is sold. As I scan the various markets, all I can find is selling. Stocks, commodities, and equities are all being shed at a rapid pace, and that's the first clue that we are not experiencing sector rotation or other artful portfolio-dodging designed to move out of one asset class into another (say, from equities into bonds).

The bursting of the bond bubble has the potential to plunge our financial system into a crisis that would be even worse than we experienced back in 2008.  Unfortunately, as Ambrose Evans-Pritchard recently noted, the bond market is dominated by just a few major players...

The Fed, the ECB, the Bank of England, the Bank of Japan, et al, own $10 trillion in bonds. China, the petro-powers, et al, own another $10 trillion. Between them they have locked up $20 trillion, equal to roughly 25pc of global GDP. They are the market. That is why Fed taper talk has become so neuralgic, and why we all watch Chinese regulators for every clue on policy.

This is one of the reasons why I write about China so much.  China has a tremendous amount of leverage over the global financial system.  If China starts selling bonds at about the same time that the Fed stops buying bonds we could see a shift of unprecedented proportions.

Sadly, most Americans have absolutely no idea how vulnerable the financial system is.