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A Banking Crisis Looms

A Banking Crisis Looms

My columns have turned rather apocalyptic of late, but for a valid reason. Just this week, we got confirmation that our financial system is, again, on the brink of collapse, when the Bank of England (BOE) was forced to enact, de facto, a bailout of the pension funds of the United Kingdom.

On Sept. 28, around noon, the Bank of England stepped (back) into the gilt markets and started buying government bonds with longer maturities to stop the collapse in their value, which could have caused the financial system to become unhinged. Pension funds were faced with major margin calls, which threatened to cause a rapidly cascading run on their liabilities, as trust in their liquidity and solvency would have become questioned by a widening circle of investors and customers.

Effectively, the BOE stepped in to limit the vicious circle of margin calls faced by pension funds because of the crashing values of the gilts.

Without the BOE intervention, mass insolvencies of pension funds—and thus most likely other financial institutions—could have commenced that afternoon. It’s obvious that if one of the major financial hubs of the world, the City of London, would face a financial panic, it would spread to the rest of the world in an instant.

It looks as though the global financial system was pulled from the brink of collapse, once again, by central bankers. However, this was only a temporary fix.

It’s now clear that an outright financial collapse threatens all Western economies, because if pension funds, often considered very dull investors because of their risk-averse investing profile, face a threat to their insolvency, it can happen to any other financial institution…

…click on the above link to read the rest of the article…

Could The Fed Trigger The Next “Financial Crisis”

Could The Fed Trigger The Next “Financial Crisis”

Could the Fed trigger the next “financial crisis” as they begin to hike interest rates? Such is certainly a question worth asking as we look back at the Fed’s history of previous monetary actions. Such was a topic I discussed in “Investors Push Risk Bets.” To wit:

“With the entirety of the financial ecosystem more heavily levered than ever, the “instability of stability” is the most significant risk.

The ‘stability/instability paradox’ assumes all players are rational and implies avoidance of destruction. In other words, all players will act rationally, and no one will push ‘the big red button.’

The Fed is highly dependent on this assumption. After more than 12-years of the most unprecedented monetary policy program in U.S. history, they are attempting to navigate the risks built up in the system.

The problem, as shown below, is that throughout history, when the Fed begins to hike interest rates someone inevitability pushes the “big red button.”

Next Financial Crisis, Could The Fed Trigger The Next “Financial Crisis”

The behavioral biases of individuals remain the most serious risk facing the Fed. While they may hope that individuals will act rationally as they hike rates and tighten monetary policy, investors tend not to act that way.

Importantly, each previous crisis in history was primarily a function of extreme excesses in one area of the market or economy.

  • In the early 70’s it was the “Nifty Fifty” stocks,
  • Then Mexican and Argentine bonds a few years after that
  • “Portfolio Insurance” was the “thing” in the mid -80’s
  • Dot.com anything was a great investment in 1999
  • Real estate has been a boom/bust cycle roughly every other decade, but 2007 was a doozy

What about currently?

A Bubble In “Everything”

No matter what corner of the market or economy you look there are excesses.

…click on the above link to read the rest of the article…

Lack Of New Fossil Fuels Investment May Trigger A New Financial Crisis

I am an oilfield veteran of 38+ years. Retired from Schlumberger since 2015. My background is drilling and completion fluids. I have authored a number of technical papers on completion topics. I have worked around the world- Brazil, Russia, Scotland, and the Far East. I still maintain a training and consulting practice and am always willing to help people who want to learn.

Summary

  • As much as a trillion dollars of upstream investment has been delayed or canceled in the last few years. We discuss the reasons for this and the possible ramifications.
  • We think the parallels to the financial crisis of 2008 are very real, and the lack of upstream investing could exacerbate impacts to financial markets.
  • We recommend investors look carefully at the balance sheets of domestic shale companies vs. those of the Euro oils transitioning to green energy.
  • We’re bullish on oil and gas and believe it will continue to play a vital role in global energy security for decades to come.
  • Looking for more investing ideas like this one? Get them exclusively at The Daily Drilling Report. Learn More »

 

Shocked and surprised boy on the internet with laptop computer
BrianAJackson/iStock via Getty Images

Introduction

I’m a proponent of fossil fuels investment. I write articles on companies that engage in this activity on this site virtually daily. In this article I intend to rebut some conclusions reached recently in recent article. I consider that the global energy mix has become too skewed toward “renewables” and we’re on the path toward a rediscovery of the energy security that traditional sources bring. The very early steps of that path, to be clear. Failure to make these investments could precipitate a severe and long-lasting financial crisis. We may already be beyond the point of no return, but I will avoid speculation on that score and let you draw your own conclusions.

…click on the above link to read the rest of the article…

The Threat Board is Looking Busy

The Threat Board is Looking Busy

Markets are never as bad as you fear, but never as good as you hope. The Threat Board has seldom looked so complex: we can try to predict outcomes, but its notoriously difficult. The list of potential ignition points seems to be expanding exponentially: Energy Prices, Oil, Inflation, Stagflation, Supply Chains, Recession, China, Politics, Consumer Sentiment, Business Confidence, Property Markets, Liquidity, Bond Yields, Stock Prices.. you name it and someone is worrying about it.

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Blain’s Morning Porridge – 28th September 2021: The Threat Board is Looking Busy

“Many people have speculated that if we knew exactly why the bowl of petunias had thought that we would know a lot more about the nature of the Universe than we do now.”

This morning – Markets are never as bad as you fear, but never as good as you hope. The Threat Board has seldom looked so complex: we can try to predict outcomes, but its notoriously difficult. The list of potential ignition points seems to be expanding exponentially: Energy Prices, Oil, Inflation, Stagflation, Supply Chains, Recession, China, Politics, Consumer Sentiment, Business Confidence, Property Markets, Liquidity, Bond Yields, Stock Prices.. you name it and someone is worrying about it.

Relax. Calm. Breathe Deep.

…click on the above link to read the rest of the article…

Former Lehman Trader On “China’s Lehman Moment”

Former Lehman Trader On “China’s Lehman Moment”

My name is Larry McDonald, that is the UK cover above. In the years before the failure of Lehman Brothers, I ran a successful distressed credit business at what was the 4th largest investment bank in the U.S. – becoming one of the most consistently profitable traders in the fixed income division. In late 2008, early 2009 – with Patrick Robinson, we penned “A Colossal Failure of Common Sense” – the Lehman Brothers inside story. At least once a month, I tell my wife while wearing a hopeful smile —“if we sell a million books — we´ll break even on our Lehman stock.” On September 15, 2008 – it all came crashing down in the largest bankruptcy in U.S. history. Known as, “the week that changed the world,” a very painful experience indeed. I was down on the mat looking up at the referee as he delivered the count. It was one of those fateful moments most of us face. Staring into the abyss, drenched in blood-curdling uncertainty, there are times in life when we must get up. Even when it looks like all is lost in a valley of no hope.  Ultimately, the lucky ones learn there are valuable lessons in re-invention. The last 13 years have been a breath of fresh air.

Life’s Lessons

One of the important lessons in our book comes down to how to use leading credit risk indicators? In the 2007-2010 period, the global credit risk epicenter was obviously inside the US. In the 2011-2013 period, Europe´s banks were the focus during the Grexit panic. In recent years, Asia has become far more interesting, a new epicenter has been formed.

…click on the above link to read the rest of the article…

Seven Possible Causes of the Next Financial Crisis

The great financial historian, Charles Kindleberger, pointed out in the 1970s that over several centuries, history showed there was a financial crisis about once every ten years. His observation still holds. In every decade since his classic Manias, Panics and Crashes of 1978, such crises have indeed continued to erupt in their turn, in the 1980s, 1990s, 2000s, 2010s, and again in 2020. What could cause the next crisis in this long, recurring series? I suggest seven possibilities:

1. What Nobody Sees Coming

A notable headline from 2017 was “Yellen: I Don’t See a Financial Crisis Coming in Our Lifetimes.” The then-head of the Federal Reserve was right that she didn’t see it coming; nonetheless, well within her and our lifetimes, a new financial crisis arrived in 2020, from unexpected causes.

It has been well said that “The riskiest stuff is what you don’t see coming.” Especially risky is what you don’t think is possible, but happens anyway.

About the Global Financial Crisis of 2007-09, a former Vice Chairman of the Federal Reserve candidly observed: “Not only didn’t we see it coming,” but in the midst of it, “had trouble understanding what was happening.” Similarly, “Central banks and regulators failed to see the bust coming, just as they failed to anticipate its potential magnitude,” as another top central banking expert wrote.

The next financial crisis could be the same—we may take another blindside hit for a big financial sack.

In his memoir of the 2007-09 crisis, former Secretary of the Treasury Henry Paulson wrote, “We had no choice but to fly by the seat of our pants, making it up as we went along.” If the next financial crisis is again triggered by what we don’t see coming, the government reactions will once again be flying by the seat of their pants, making it up as they go along.

…click on the above link to read the rest of the article…

Whatever happened to that “imminent” banking crisis?

Whatever happened to that “imminent” banking crisis?

akrainer's Photo

In the aftermath of the 2008 financial crisis, many of us in the hedge fund industry expected continuing fallouts from the unresolved imbalances that were papered over with monetary and fiscal stimuli by governments and central banks. These measures failed to address, let alone resolve the systemic causes of the crisis. One of their consequences was a further weakening of large western banks, particularly the European ones. A new banking crisis was widely anticipated. Last June, Alasdair Macleod wrote that the “Next significant event therefore will almost certainly be the failure of a G-SIB if not in America, then elsewhere.”  [G-SIB = global systemically important bank]. In my recollection, Deutsche Bank for one, has been on a death watch at least since 2016, but the list of banks that should have collapsed already is long and full of household names.

Indeed, things looked very bleak when the Coronavirus pandemic struck and they deteriorated sharply from there. Yet, the banking system is limping along and no crisis has yet materialized. How to explain this? Last September I gave an interview on Renegade Inc. and went out on a limb with a hypothesis that only dawned on me about that time. Namely, I grew up in former Yugoslavia in the socialist regime under a one party system (Communist party, of course). The world I grew up in was pretty much one chronic crisis of stagflation which ultimately led to hyperinflation. My ‘eureka!’ moment happened when I realized that in spite of that state of affairs, we never had a banking crisis! No major bank failed and we had no bank runs at any point.

…click on the above link to read the rest of the article…

What Interest Rate Triggers The Next Crisis?

What Interest Rate Triggers The Next Crisis?

  • The Ten-year U.S. Treasury note yields 1.61%.
  • 10-year high-quality corporate bonds yield 2.09%.
  • The rate on a 30-year mortgage is 3.05%.

Despite recent increases, interest rates are hovering near historic lows.  We do not use the word “historic” lightly. By “historic,” we refer to the lowest levels since the nation’s birth in 1776.

The graph below, courtesy of the Visual Capitalist, highlights our point.

interest, What Interest Rate Triggers The Next Crisis?

Despite 300-year lows in interest rates, investors are becoming anxious because they are rising. Recent history shows they should worry. A review of the past 40 years reveals sudden spikes in interest rates and financial problems go hand in hand.

The question for all investors is how big a spike before the proverbial hits the fan again?

Debt-Driven Economy

Over the past 40 years, debt has increasingly driven economic growth.

That statement on its own tells us nothing about the health of the economy. To better quantify the benefits or consequences of debt, we need to understand how it was used.

When debt is used productively, the interest and principal are covered with higher profits and sustained economic activity. Even better, income beyond the cost of the debt makes the nation more prosperous.

Conversely, unproductive debt may provide a one-time spark of economic activity, but it yields little to no residual income to service it going forward. Ultimately it creates an economic headwind as servicing the debt in the future replaces productive investment and or consumption.

The graph below shows the steadily rising ratio of total outstanding debt to GDP. If debt, in aggregate, were productive, the ratio would be declining regardless of the amount of debt.

interest, What Interest Rate Triggers The Next Crisis?

…click on the above link to read the rest of the article…

 

The Coming Financial Crisis of 2021

Economist Steve Keen predicts that even if the covid-19 health crisis subsides next year, a brewing financial crisis on par with the 2008 Great Recession is in the making.

He sees the pandemic as having delivered an “unprecedented shock” to the global economy, and the response from authorities as nothing less than a “catastrophe”.

With tens of millions of households having lost their income this year, personal savings becoming exhausted, government support programs on their way to drying up, and lots more company layoffs/bankruptcies/closures ahead — Steve expects a punishing recession to arrive in full force in 2021.

And on a larger scale, he sees modern neoclassical economics — which ignores the importance of natural resources and the health of our ecosystems — as completely unsuited for the reality in which we live today. He warns that if we don’t adapt a more informed approach to managing the global economy, we will only continue to make the mess we’re in worse:

The anatomy of a financial crisis

In this blog, we present the anatomy of a financial crisis. A characteristic feature of a banking crisis is that it tends to follow, more-or-less, the same path regardless of the ‘shock’ or ‘trigger’ that initiates it.

The next phase of the crisis is likely to be a global financial crisis, as we have been anticipating for quite some time (see, e.g., Q-Review 4/2017). However, few understand what a financial crisis is, though it is probably among the most feared economic phenomena of mankind.

So, let’s dive in.

The initiation

If a banking system is sound and robust, it can usually withstand financial and economic shocks.

But a banking system may be fragile. Usually this is due to high leverage levels, where banks have either lent aggressively or carry risky financial investments on their balance sheets—usually both. Banks can also have a weak financial position, with chronically low profitability and insufficient reserves. As we have explained earlier, this is exactly the state the European banking sector finds itself in.

The onset of a financial crisis requires a trigger. The most common is a recession or the expectation of recession among consumers and investors.

Recession leads to diminished income and defaults by both corporations and households. This increases the share of non-performing loans in bank loan portfolios, reducing the value of loan collateral and increasing bank risks and capital needs. As write-downs and losses increase, mistrust among other banks and depositors and investors does as well. The bank’s share price will usually start to reflect this.

A ‘bank run’

If suspicion spreads, banks will be apprehensive about counterparty risk and will be unwilling to lend to one another even on an overnight basis.  If allowed to continue, this will have a calamitous impact on liquidity in money markets.

…click on the above link to read the rest of the article…

The COVID Bait & Switch

QUESTION: Do you really think that the Democratic leadership is trying to hurt people?

FD

ANSWER: It is not just the Democrats. We are looking at politicians around the world. It makes no sense with such a low death rate that is equivalent to the flu and all the forecasts of Neil Ferguson have proven false that they would continue these lockdowns. It makes no sense. They are either deliberately hurting people or they have been bribed by the consortium to further the Great Reset.  I am open to any other explanation. Even moderate Democrats are not comfortable with what is taking place. This is a deliberate agenda to destroy the economy to rebuild it GREEN. The serious mistake here is that they think they can recreate the economy in their vision. They do not even know how it works.

Let us not forget that the entire justification for these lockdowns was the forecast of Ferguson who claimed 3 million Americans would be killed. The justification for masks, social distancing, and lockdowns was to save lives because the curve had to be flattened because there would be a shortage of bed space in hospitals. That NEVER took place. So why do we still have lockdowns?

This has been a bait & switch. You have an elite group cheering the destruction as an opportunity to rebuild the world economy the way they think it should run. They are threatening fund managers to divest from China in hopes of bringing them to their knees to accept their agenda. That is NOT going to succeed. We are staring in the eyes of absolute ruthless tyranny and the markets are starting to perform in anticipation of a major financial crisis.

…click on the above link to read the rest of the article…

 

Turkey’s 2nd Financial & Currency Crisis in 2 Years Blossoms. Heavily Invested European Banks Look for Exit. But Not the Most Exposed Bank

Turkey’s 2nd Financial & Currency Crisis in 2 Years Blossoms. Heavily Invested European Banks Look for Exit. But Not the Most Exposed Bank

Big Gamble that was hot for years has gone sour after Turkish lira’s plunge and surge of defaults on bank debts denominated in foreign currency.

As the Turkish lira logged fresh record lows against both the dollar and the euro on Friday, and is now down 19% this year against the dollar, attention is turning once again to the potential risks facing lenders. They include a handful of very big Eurozone banks that are heavily exposed to Turkey’s economy via large amounts in loans — much of it in euros — through banks they acquired in Turkey. And the strains are beginning to replay those of the last currency/financial crisis in 2018.

When the Money Runs Out…

Subordinate bonds of Turkiye Garanti Bankasi AS, which is majority owned by Spanish lender BBVA, together with two other local banks — Turkiye Is Bankasi AS and Akbank TAS — are trading at distressed levels (yields of over 10 percentage points above U.S. Treasuries), even though the banks are still profitable and said to be highly capitalized. This is an indication of the amount of confidence investors have in the ability of these companies to repay their obligations.

Three weeks ago, when the lira was trading within a tight band against the dollar — the result of the Central Bank of the Republic of Turkey (CBRT) pegging the lira to the dollar by burning through billions of dollars of already depleted foreign-exchange reserves and dollars borrowed from Turkish banks — no corporate bonds in Turkey were trading at these levels. Now that the CBRT has stopped propping up the lira, which has since fallen 7% against the dollar, the average risk premium demanded by investors to hold dollar-denominated notes of Turkish businesses has soared.

…click on the above link to read the rest of the article…

Paper Assets And Promises Often End In Default

Paper Assets And Promises Often End In Default

During times of financial disruptions defaults rise in importance and move front and center. The term financial crisis is applied broadly to a variety of situations in which some financial assets suddenly lose a large part of their nominal value, a default falls into this area. In the last decade, debt has soared across the globe. With this in mind, you never want to be caught on the wrong side of a debt default. That is the place where you don’t get paid or are paid with a less valuable currency that has seen its value eroded by inflation. A debt default can take many forms but what they have in common is they all can be considered as reneging on financial obligations. Generally, we make a distinction between public and private debt but even that may become blurred when a government in need of funds has to seize or take over assets or institutions.

Relationship Of Tangibles To Intangibles (click to enlarge)

An area of great concern should be the growth in non-recourse loans, this includes unsecured personal loans. The fact these are particularly dangerous has not discouraged many investors from becoming seduced into thinking the yield justified rolling the dice and putting at least some money at risk. The chart to the right shows how intangible assets have grown, be cautious if you are owed money, that falls into the area of an intangible asset. The problem is that lenders will find little help in recovering their money from an expensive legal system that has become overwhelmed by the complexity of modern life.

…click on the above link to read the rest of the article…

Europe’s Bailouts Risk a Full-Blown Financial Crisis

EUROPE’S BAILOUTS RISK A FULL-BLOWN FINANCIAL CRISIS

The measures implemented by governments in the eurozone have one common denominator: a massive increase in debt from governments and the private sector.

Loans lead the stimulus packages from Germany to Spain. The objective is to give firms and families some leverage to pass the bad months of COVID lockdowns and allow the economy to recover strongly in the third and fourth quarters. This bet on a speedy recovery may put the troubled European banking sector in a difficult situation.

Banks in Europe are in much better shape than they were in 2008, but that does not mean they are strong and ready to take billions of higher-risk loans. European banks have reduced their nonperforming loans, but the figure is still large at 3.3 percent of total assets according to the European Central Bank. Financial entities also face the next two years with poor net income margins due to negative rates and a very weak return on equity.

The two most important measures that governments have used in this crisis are large loans to businesses partially guaranteed by the member states and significant jobless subsidy schemes to reduce the burden of unemployment.

Almost 40 million workers in the large European nations are under a subsidized jobless scheme according to Eurostat and Bankia Research. Loans that add up to 6 percent of the eurozone’s GDP have been granted to allow businesses to navigate the crisis. So, what happens if the recovery is weak and uneven and the third and fourth quarter growth figures disappoint, as I believe will happen? First, the rise in nonperforming loans may elevate the total figure to 6 percent of total assets in the banking sector, or €1.2 trillion. Second, up to 20 percent of the subsidized unemployed workers will probably join full unemployment, which may increase the risk in mortgage and personal loans significantly.

…click on the above link to read the rest of the article…

Underneath the Surface Trouble Is Brewing Once Again

Underneath the Surface Trouble Is Brewing Once Again

Larry McDonald, publisher of the investment research service The Bear Traps Report, warns that this crisis is far from over. He spots growing tensions in the credit markets and thinks that large public borrowers like Italy and New York State are in need of massive bailouts.


Stocks have staged an impressive comeback. Since the lows of March, the S&P 500 has gained almost 30%. Despite that, Larry McDonald would not be surprised if new turmoil soon arose.

“In March 2008 for instance, after the failure of Bear Stearns, the Fed acted aggressively and we had a big relief rally. But then came Lehman,” says the renowned investment strategist.

Mr. McDonald knows what he’s talking about. As a former vice-president of distressed debt trading at Lehman Brothers he witnessed the meltdown of the global financial system first hand. Today, he runs the The Bear Traps Report, an independent investment research service for institutional investors.

In this in-depth interview with The Market/NZZ, Mr. McDonald warns of rising defaults in the credit markets and points out that large public borrowers such as Italy and New York State are going to need bailouts of historic proportions. However, he spots opportunities in the metals and mining sector.

Mr. McDonald, despite a grim economic picture, investors are getting confident that the worst of the pandemic is behind us. What’s your take on the financial markets?

Equity markets have priced in a lot of love from the Federal Reserve. The Fed has done a lot to ease financial conditions, and the amount of liquidity is amazing. Since late February, they’ve done more in terms of balance sheet expansion than nearly two years of action in 2008 to 2010. They’ve clearly pumped up asset prices.

…click on the above link to read the rest of the article…

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