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An unexpected systemic crisis is for sure

An unexpected systemic crisis is for sure

Downturns in bank credit expansion always lead to systemic problems. We are on the edge of such a downturn, which thanks to everyone’s focus on the coronavirus, is unexpected.

We can now identify 23 March as the date when markets stopped worrying about deflation and realised that monetary inflation is the certain outlook. That day, the Fed promised unlimited monetary stimulus for both consumers and businesses, and the dollar began to fall.

The commercial banks everywhere are massively leveraged and their exposure to bad debts and a cyclical banking crisis is now certain to wipe many of them out. In this article we look at the global systemically important banks — the G-SIBs — as proxy for all commercial banks and identify the ones most at risk on a market-based analysis.

Introduction

In these bizarre markets, the elephant in the room is systemic risk — visible to all but simply ignored. This is partly due to everyone in government and central banks, as well as their epigones in the investment industry and mainstream media, believing our economic problems are only a matter of Covid-19. In other words, when the pandemic is over normality will return. But Covid-19 has acted like a conjurer’s distraction: it has deflected us from the consequences of Trump’s trade wars with China and the liquidity strains that surfaced in New York last September when the repo rate soared to 10%.

The liquidity strains and the severe downturn in the stock markets that followed earlier this year before mid-March have been buried for the moment in a tsunami of central bank money. Liquidity problems following last September’s repo crisis and the S&P 500 index collapsing by one third between 19 February and 23 March were a clear signal that the multiyear cycle of bank credit expansion had already peaked. Ever since the last credit crisis in 2008, the banks had recovered their lending confidence and expanded bank credit, a classic expansionary phase.

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

Market Update: The Battle For Control

Market Update: The Battle For Control

Which side will prevail in the markets going forward? Reality or rescue?

As more data pours in showing the severe and worsening contraction of the global economy due to the impact of covid-19, it’s becoming increasingly clear that the only thing propping up today’s financial markets is the $trillions in rescue stimulus promised by governments across the globe.

Bloomberg estimates that flood to be in the range of $8 trillion — and counting.

Will it be enough?

Time will tell. But, for now, it has been enough to keep the markets elevated. As reported last week, the FAANG stock complex is back at an all-time high.

Here at PeakProsperity.com, we’ve long been critical of central banks’ upward influence on the financial markets, which prior to covid-19, distorted asset prices far higher than fundamentals justified and created accelerating inequity between the rich and the rest of society.

Those issues are now exacerbated by the abovementioned new $8 trillion, though there’s an important twist this time. The problems the central planners are trying to address aren’t easily solved by simply forcing liquidity into the system.

The world is experiencing one of the worst demand shocks in history. In America, more than 26 million workers have lost their jobs over just the past 5 weeks:

US new jobless claims

Bankruptcies tend to follow layoff by three to six months, so we can expect to see a tsunami of business failures over the next two quarters.

Supporting this prediction, we can already see the massive drop in demand US businesses are experiencing the initial April Purchasing Manager Index:

US PMI

The charts for Japan and the Eurozone look the same or worse.

…click on the above link to read the rest of the article…ir latest perspective.

Long Pitchforks And Water Cannons

Long Pitchforks And Water Cannons

The juxtaposition of the following two tweets is absolutely stunning and just freaking… WOW!

Potential Major Political Blowback 

Can you imagine the political blowback that is coming if the economy doesn’t snap back soon as the levered bad actor oil companies (just to name one sector)  have been bailed out while the Administration is still trying to kill Obamacare and even tried to cut food stamps to the poor earlier this year?

Nothing partisan here, we are just extrapolating the consequences and political analysis of the GFC to the current crisis.  Think about it, last week Main Street registered another 6 million-plus hit in lost jobs and junk bond investors got bailed out of their risky and dumb-ass bets.

Op-Ed: Get ready for the recovery of the 1%

There were two important economic events on Thursday. The government reported that 6.6 million Americans filed for unemployment, an all-time record. And the Federal Reserve announced a new program to flood the economy and financial markets with $2.3 trillion in liquidity — including buying up junk bonds from debt-laden companies.

Which one moved the market? The Fed move, driving the Dow Jones Industrial Average up 500 points by midday.

The market jump, unemployment surge and Fed rescue efforts all converged to form a new split in the economy, between the asset-rich and the rest of America.  — CNBC

Also, seeing a lot of the privileged Bailout Queens on Twitterati taking victory laps thinking they’re geniuses — and some even grotesquely posting pictures of their steak and lobster dinners like anybody gives a shit — after the Fed has saved their bacon for the umpteenth time.  Yet they have no clue of the consequences of what may be about to come. Must be the ultimate contrarian signal.

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

The Liquidity Crisis Is Quickly Becoming A Global Solvency Crisis As FRA/OIS, Euribor Soar

The Liquidity Crisis Is Quickly Becoming A Global Solvency Crisis As FRA/OIS, Euribor Soar

One month after turmoil was unleashed on capital markets, when the combination of the Saudi oil price war and the sweeping impact of the coronavirus pandemic finally hit developed nations, what was until now mostly a liquidity crisis is starting to become a solvency crisis as more companies realize they will lack the cash flow to sustain operations and fund debt obligations.

As Bloomberg’s Laura Cooper writes, cash-strapped companies are finding little relief from stimulus measures, and from Europe to the US, cash in hand has been hard to come by even as governments pledge funds for small businesses to bridge the financial gap until lockdowns are lifted:

  • US: The March NFIB survey of U.S. small businesses noted challenges in submitting loan applications and the urgent need for federal assistance
  • UK: A British Chamber of Commerce survey showed only 1% of companies reported being able to access funds dedicated for business. A complex application process for the U.K. Coronavirus Business Interruption Loan Scheme comes as 6% of U.K. firms say they have run out of cash while nearly two-thirds have funding for less than three months
  • Canada: A proposed six-week roll out of emergency funds is unlikely to prevent 1 in 3 companies from laying off workers. More than 10% of the labor force has already filedemployment claims
  • Europe: existing structures are aiding in the deployment of funds, but concerns remain that more is needed with EU leaders failing to reach agreement on further initiatives

As we have noted previously, small businesses – everywhere from China, to Europe, to the US – make up the majority of firms in advanced economies and account for a sizeable share of private sector employment. Quick delivery of stimulus measures is needed to curb widespread insolvencies. This could mean the difference between a short, yet sharp recession and a prolonged erosion to the labor market and economy regardless of containment of the health crisis.

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

Fed Launches Repo Facility To Provide Dollars To Foreign Central Bank

Fed Launches Repo Facility To Provide Dollars To Foreign Central Bank

With US dealers no longer using the Fed’s repo facilities (this morning we had another “no bid” overnight repo with just $250MM in MBS submitted for a $500 billion op) as the Fed soaks up all securities via its aggressive QE which is still buying $75BN in paper each day, perhaps Powell felt a bit unloved and at 830am this morning the Fed unveiled yet another “temporary” emergency liquidity providing facility, this time to foreign central banks, in the form of a repo facility targeting “foreign and international monetary authorities”, i.e. foreign central banks which will be allowed to exchange Treasuries held in custody at the Fed for US dollars.

In other words, just a week after the Fed “enhanced” its swap lines with central banks and included a bunch of non G-5 central banks to the list of counterparties, it has found that this is not working – perhaps due to the prohibitive rates on the facility – and is now handing out dollars outright against US denominated securities. We wonder if the central bank uptake will be any higher than the repo facility aimed at US dealers and which is now redundant. Of course, when that fails the Fed can just offer to buy all central bank securities in what even reputable FX strategists now joke is a Fed on full tilt, and intent on buying out all foreign central banks.

And so, just as the financial situation was starting to stabilize, the Fed reminds everyone just how broken everything still is.

Fed launches ANOTHER temporary facility to provide $USD liquidity to foreign central banks (this time foreign central bank holdings of US Treasury’s can be exchanged for dollars).

At this rate, Fed is on course to buy out foreign central banks… and call it an M&A facility pic.twitter.com/iAXRCVoZS9— Viraj Patel (@VPatelFX) March 31, 2020

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

Brace for impact

Brace for impact

What a week we just had in the precious metals market.

From a huge drop last Friday–which in the past would have presaged further declines the following week–to a significant rebound in the gold price, coupled this time with a major drop in the US dollar–which I will argue may be the signal for a switch to inflationary conditions.

First the chart

We see the nice deflationary trend of the past 18 months looks to have been decisively broken by last week’s action. Although it will be a few weeks before we can be absolutely sure, last week suggests that we are about to embark on another bout of inflation, no doubt as carefully calibrated by the Masters of the Universe as they can fill a shot-glass of whiskey from a pool of liquidity the size of a football field. Either, like a small child pouring verycarefully, they have poured only too much, or they have sloshed out enough whiskey to fill a large swimming pool, and we are about to see what happens when it all lands in a shot glass.

Now, why the need for some liquidity?

Another chart:

This graph plots the gold-copper ratio against its rate of change. I typically interpret this ratio as an indicator of the real world preference between bricks and mortar and financials. When the ratio is low, it’s a sign that people would rather make refrigerators than chase derivatives. Rate of change is the vertical axis. Near the top of the chart means that the plot is shifting towards the right at high speed. Currently, the system is moving toward the right (ratio is increasing) at the fastest rate in the last couple of years. To me, this means the real economy is degrading very quickly.

Thus the Fed may feel pressured to pump out some liquidity.

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

Funding Freeze Getting Worse: Dealers Demand Record $216BN In Liquidity From Fed Repo

Funding Freeze Getting Worse: Dealers Demand Record $216BN In Liquidity From Fed Repo

Yesterday, when showing the sudden spike in the FRA/OIS spread – a key gauge of banking-sector risk which measures dollar shortages – we warned that liquidity in the market is virtually nil quoting a host of traders who confirmed that it was next to impossible to trade without disruptions, while more ominously, the interbank plumbing appeared to be getting clogged up agian.

Moments ago we got confirmation when the Fed reported that one day after it expanded its repo operations, there was a record demand for Fed liquidity in both the term and repo operations.

With the term repo expanded from $20BN to $45BN and the overnight repo ceiling also raised from $100 to $150BN, moments ago the Fed announced that it had received the most liquidity demand on record, as Dealers indicated some $93BN in term repo submissions (which thanks to the expanded facility size meant that the oversubscription dropped from a record 3.6x to 2.1x)…

… alongside a fully allotted $123.625BN in overnight repo (out of $150BN eligible)…

… for a total of $216BN in indicated liquidity. Of this, $168BN in liquidity was released between the overnight and fully-alloted $45BN term repo facility.

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

China Bans Selling, Plans Massive Liquidity Injection To Prevent Market Crash

China Bans Selling, Plans Massive Liquidity Injection To Prevent Market Crash

Judging by the collapse in Chinese futures and the Offshore Yuan over the past week, China’s key cash equity index – The Shanghai Composite – is set to plunge around 6-8% as the market re-opens for the first time since Lunar New Year (and the coronavorus chaos).

China stock futures have tumbled…

Source: Bloomberg

And Offshore Yuan is fighting at the 7.00/USD level…

Source: Bloomberg

Which of course will not do for the nation has to maintain the appearance of a minor flesh-wound than a catastrophic coronary. And so, as Bloomberg reports, China unveiled a raft of measures over the weekend to aid companies hit by the coronavirus outbreak and also shore up financial markets.

Quarantative easing? 

The People’s Bank of China announced that the total injection announced was 1.2 trillion yuan, the largest single-day addition of its kind in data going back to 2004.

The money will be supplied using reverse repurchase agreements to ensure liquidity is “reasonably ample” during the outbreak, according to the PBOC.

The new measures follow the announcement last week that China’s biggest banks will lower interest rates for firms in Hubei, the center of the outbreak.

However, as Tommy Xie, an economist at Oversea-Chinese Banking Corp notes, the net effect of this admittedly huge liquidity injection is much lower as there are more than 1 trillion yuan of short-term funds scheduled to mature on Monday.

The amount of the net injection isn’t huge. The PBOC may want to retain some flexibility, which means it can add more liquidity in the rest of the week if the sentiment is too bad.”

Source: Bloomberg

Finally, we wonder if even this additional liquidity injection will be big enough as judging by Dr.Copper, the Chinese economy is about to be hit by the biggest shock in recent history…

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

The Cannibalization Of The Financial System Will Force Investors Into Silver

The Cannibalization Of The Financial System Will Force Investors Into Silver

Day in and day out, the global financial system continues to cannibalize itself.  Clear evidence of this points to the massive “Artificial” liquidity and asset purchase policy instituted by the Federal Reserve.  While financial analysts provided several theories why the Fed was forced to inject liquidity via the Repo Market and also purchase $60 billion a month in U.S. Treasuries, the real reason has to do with the falling quality of oil and its impact on the value of assets and collateral.

It’s really that simple.  However, there is no mention of it (energy) by any of the leading financial or precious metals analysts.  For example, in Alasdair Macleod’s recent Goldmoney.com article titled, How To Return To Sound Money, he states the following:

This article provides a template for an enduring sound money solution that will deliver economic progress while eliminating destructive credit cycles. It posits that a properly constructed gold and gold substitute monetary system, which also includes the removal of bank credit inflation as a means of providing investment capital, is the only way that lasting stability and prosperity can be achieved.

Alasdair Macleod, who I have a great deal of respect, doesn’t mention “Energy” once in his entire article suggesting that returning to sound money, through gold, is the only way for lasting stability and prosperity can be achieved. The majority of economic prosperity has come from the burning of oil, natural gas, and coal, not from gold or silver. The precious metals act as money, a store of value, or economic energy, but are not the ENERGY SOURCES themselves.  While this is self-evident, it is very important to understand.

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

The Bank of England’s Governor Fears a Liquidity Trap

The Bank of England’s Governor Fears a Liquidity Trap

The global economy is heading towards a “liquidity trap” that could undermine central banks’ efforts to avoid a future recession according to Mark Carney, governor of the Bank of England. In a wide-ranging interview with the Financial Times (January 8, 2020), the outgoing governor warned that central banks were running out of ammunition to combat a downturn:

If there were to be a deeper downturn, more than a conventional recession, then it’s not clear that monetary policy would have sufficient space.

He is of the view that aggressive monetary and fiscal policies will be required to lift the aggregate demand.

What Is a Liquidity Trap?

In the popular framework that originates from the writings of John Maynard Keynes, economic activity is presented in terms of a circular flow of money. Spending by one individual becomes part of the earnings of another individual, and spending by another individual becomes part of the first individual’s earnings.

Recessions, according to Keynes, are a response to the fact that consumers — for some psychological reasons — have decided to cut down on their expenditure and raise their savings.

For instance, if for some reason people become less confident about the future, they will cut back their outlays and hoard more money. When an individual spends less, this will supposedly worsen the situation of some other individual, who in turn will cut their spending. A vicious cycle sets in. The decline in people’s confidence causes them to spend less and to hoard more money. This lowers economic activity further, causing people to hoard even more, etc.

Following this logic, in order to prevent a recession from getting out of hand, the central bank must lift the growth rate of the money supply and aggressively lower interest rates. Once consumers have more money in their pockets, their confidence will increase, and they will start spending again, reestablishing the circular flow of money, so it is held.

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

Understanding The Keys To Power

Understanding The Keys To Power

Will be a survival requirement for the coming decade

The past decade was undoubtedly shaped by the policy adopted by the global central banking cartel to flood the world with massive amounts of liquidity (over $15 trillion) to “rescue” markets following the Great Financial Crisis.

It’s becoming increasingly clear who benefitted most from this: the ultra-rich

US wealth gap

As $trillions flowed into financial assets pushing them higher every year throughout the twenty-teens, those who owned those assets — disproportionately the very rich — saw their wealth soar.

We’re now at the point where the richest 1% owns nearly half of the world’s assets, while the bottom 60% have (often much) less than $10,000 to their name:

Global Wealth Pyramid

How has the distribution of wealth become this distorted?

Distribution of family wealth

The harsh simple truth is that those who run the system manipulate it to their benefit.

This is true in both government and industry. Those in power do ‘whatever it takes’ to remain in power and enjoy the fruits of their advantage. Any sort of social ‘duty’ is secondary (at best), and will be sacrificed if necessary.

Perhaps one of the best analyses and explanations of this is put forth by the book The Dictator’s Handbook, by Bruce Bueno de Mesquita and Alastair Smith. For politicians and CEOs alike, maintaining control of the “keys to power” — those who support and enable your rule — is essential.

This is why we’ve ended up with the bastardized crony form of capitalism now in place. Those running the system work hard to reward/punish anyone who aids/threatens their power base.

Like it or not, this is the world in which we live. And it’s critical to understand its nature if we want to avoid becoming unwitting serfs to it.

The most important tenets to be aware of are laid out very effectively in this short video called The Rules For Rulers, created under the supervision of Bueno de Mesquita and Smith:

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

Global Financial System Is A Big Rube Goldberg Machine

Global Financial System Is A Big Rube Goldberg Machine

While pondering the current economy that is becoming more of a conundrum every day, I stumbled upon an analogy I would like to share. The global economy is like a giant “Rube Goldberg” machine. It is a ridiculously complicated contraption built to perform what should normally be a simple task. Rube Goldberg machines often mimic the real world in that they are goal-oriented with many parts coming together to complete a task.

In the real world, things are usually not intentionally designed to be complicated but the reality is that they just are. It is an understatement to say the global financial system is not a well-oiled machine. More often than we would like to admit various systems and parts are thrown or “cobbled together” in a haphazard way to get the job done. We tend to try and explain events in terms of cause and effect but in doing so the bigger picture has a way of getting lost. Often hidden away is the nature of the risk that results from complexity and systems becoming codependent upon others. Bestselling author Nassim Taleb who wrote, “The Black Swan” detailed in his book how when something is highly complicated highly improbable and unpredictable events can and do occur.

Some of this is playing out right now and can be seen in the Fed’s key reversal in policy. In an effort to avoid a crisis the Fed has been forced to deal with a liquidity issue in repo rates since a sudden and dramatic surge began in September. While it is difficult to see the difference between QE and an injection aimed at maintaining liquidity, in this case, several reasons exist to believe this is not QE but something far more disturbing. 

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

Prelude to Crisis

Prelude to Crisis

Simple Conceit
Radical Actions
Ballooning Balance Sheet
Merry Christmas and the Happiest New Year

Ignoring problems rarely solves them. You need to deal with them—not just the effects, but the underlying causes, or else they usually get worse. The older you get, the more you know that is true in almost every area of life.

In the developed world and especially the US, and even in China, our economic challenges are rapidly approaching that point. Things that would have been easily fixed a decade ago, or even five years ago, will soon be unsolvable by conventional means.

There is almost no willingness to face our top problems, specifically our rising debt. The economic challenges we face can’t continue, which is why I expect the Great Reset, a kind of worldwide do-over. It’s not the best choice but we are slowly ruling out all others.

Last week I talked about the political side of this. Our embrace of either crony capitalism or welfare statism is going to end very badly. Ideological positions have hardened to the point that compromise seems impossible.

Central bankers are politicians, in a sense, and in some ways far more powerful and dangerous than the elected ones. Some recent events provide a glimpse of where they’re taking us.

Hint: It’s nowhere good. And when you combine it with the fiscal shenanigans, it’s far worse.

Simple Conceit

Central banks weren’t always as responsibly irresponsible, as my friend Paul McCulley would say, as they are today. Walter Bagehot, one of the early editors of The Economist, wrote what came to be called Bagehot’s Dictum for central banks: As the lender of last resort, during a financial or liquidity crisis, the central bank should lend freely, at a high interest rate, on good securities.

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

Guggenheim’s Minerd Warns Of A Nearing ‘Minsky Moment’ That Could “Reset” Asset Prices

Guggenheim’s Minerd Warns Of A Nearing ‘Minsky Moment’ That Could “Reset” Asset Prices

Guggenheim Partners’ Scott Minerd warned in a new market outlook titled “From the Desk of the Global CIO: Risk and Reward of Successful ‘Mid-Cycle’ Rate Cuts” that recent 75bps rate cuts by the Jerome Powell–run Federal Reserve had created a similar environment today to 1998 when central banks created a “liquidity-driven rally that caused the Nasdaq index to double within a year before the bubble finally burst.”

The 1998-scenario has already been playing out through 2019, as shown in the chart below, with global central banks plowing liquidity into financial markets. 

Minerd suggests that a Minsky moment could be nearing as a period of financial distortions will eventually be unwound in a very violent fashion.  

Minerd wasn’t entirely clear how long the Fed’s bubble-blowing could last but said today’s environment will eventually “lead to a significant widening of credits.” 

Minerd said he’d already taken pre-emptive action to “preserve capital” for the inevitable correction in risk assets: “Thus, while the Fed has prolonged the expansion, the reality is that it is also the start of silly season in risk assets. By heeding the lessons of the past we continue to position defensively so that we can preserve capital and be prepared to take advantage of opportunities when asset prices inevitably reset.”

He said cracks have already started to surface in the corporate debt markets. In particular, the spread between the high-yield debt and government debt, indicate tighter spreads have pushed investors extremely far out on the risk curve at a time where they need to be more defensive.

He said the best strategy to navigate markets today is “capital preservation in a market where the risk/reward trade-off looks unattractive in many credit sectors.” 

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

Rabobank: “We’re Toast”

Rabobank: “We’re Toast”

I have made this reference before, but looking at euphoric markets I am again reminded of comedian Caroline Aherne as fake TV chat-show host Mrs Merton asking glamorous blonde Debbie McGee of her very short, plain, hair-piece wearing husband: “So what attracted you to the millionaire Paul Daniels?” 

Indeed, So what attracted you to central-bank-liquidity-driven markets? Because where would very short, plain, wig-wearing assets be without the Fed throwing in hundreds of billions in repo operations and NOT-QE, and China going down the same old unsustainable debt path to juice GDP for 2-3 quarters? Feeling pretty unloved, one would guess – and probably very shorted. Yet having studiously failed to learn that this extra-liquidity doesn’t drive sustainable recoveries, or prevent socio-economic unrest–in fact it drives it–we are set for a whole lot more from central banks, no doubt.

Of course, the phase one trade deal, which virtually nobody sees as realistic or sustainable, also continues to drive market sentiment. Yet CNY is still only around the 7 level, underlining what I have said about the risk/reward being mostly to the downside from here. Presumably, however, when the trade deal does break down, which could be even sooner than many expect, more central-bank liquidity will be required. So let’s celebrate that in advance too, why not?

The afterglow of the UK election also seems to be encouraging markets. And on that front we see that fiscal stimulus is going to pick up, the right kind of liquidity for once, and in the north and midlands for once too, which is set to become BoJo’s mojo dojo as he hopes to release animal spirits in left-behind locations. However, Johnson is also going to amend the UK Brexit legislation such that December 2020 is a hard exit date with no extension of the looming post-Brexit transition period possible.

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

Olduvai IV: Courage
In progress...

Olduvai II: Exodus
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