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8/20/16

Global Economy: The $555 Trillion Derivatives Debt Implosion Is About to Begin

The BREXIT or British exit from the EU is this crisis’ Bear Stearns: an unexpected situation that Central Banks will go all out to sweep under the rug.

Whether or not they will succeed remains to be seen. But what has started cannot be undone.

For seven years, the Central Banks have maintained the illusion that all is well. Meanwhile, global leverage has exploded to record highs, with the bond bubble now a staggering $100 trillion in size.

To top it off, over $10 trillion of this is sporting negative yields in nominal terms. Indeed, globally bond yields are at levels not seen since the BRONZE AGE.

The Brexit is just the first jolt to this house of cards. It won’t be the last. Spain, Italy and other EU problem countries will soon be lining up to renegotiate their debt levels with the EU.

This is why EVERY move the Central Banks have made post-2009 has been aimed at avoiding debt restructuring or defaults in the bond markets. Why does Greece, a country that represents less than 2% of EU GDP, continue to receive bailouts instead of just defaulting?

Now that the BREXIT has happened, the restructurings will begin. Previously, the EU could always threaten the perceived financial Armageddon of leaving the EU to problem countries that wanted debt forgiveness.

Not anymore. Britain left the EU and Armageddon didn’t hit. So Spain, Italy and other nations will start threatening to leave if they don’t get debt forgiveness or a restructuring.

The derivatives markets smell this. This is why Deutsche Bank (DB) which sits on the largest derivatives book in the world, is on the verge of taking out a 20 year Head and Shoulders pattern.

This is also why financials in general (the firms sitting on large derivatives books), have taken out their post-2009 bull market trendline.

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