Yesterday the Fed made their announcement and deleted the famous word “patient”. I have never seen such a nonsensical frenzy over anything, never mind a single word. The reaction was everything …except the dollar was bid. Sadly, reality has also been deleted as the Fed cannot “go there”, if they did and when they do (are forced to), life as we knew it will be history. Reality is the global economy has stalled. Most of Europe is in recession, China’s growth has stalled and the U.S., even with fudged numbers will not be able to show any growth.
As recent examples, China’s real estate crashing at the fastest pace ever, Canada’s wholesale trade crashing, the Fed growth model show only .03% growth, housing starts dropped 17% and car sales have turned horrible. The sovereigns Ukraine and Greece are clearly bankrupt and currencies have already been more volatile than any time in history. Add to the previous an oil market that has collapsed and clearly a margin call has been issued.
My topic today of a global margin call is a serious one and one which should be looked at with an eye towards the debt and derivatives markets. For example, can the oil markets handle a 60% drop in product price without creating some dead and insolvent bodies? Oil is the largest and most important commodity market in the world with $trillions borrowed to drill, frack, produce, refine and ship to market. Some of this debt has been impaired and will never be paid back, who will take the losses? Someone, somewhere MUST take the losses, ultimately it will be whoever originally lent the capital. Ah yes, we will hear “but they were hedged”. I would ask how and by whom because as just mentioned, “someone must eat the loss”. The funny thing about debt is this, unless it is paid off, it never goes away and must be accounted for somewhere and by someone or entity.
Oil is just one market. What about the derivatives on currencies? Or sovereign treasury securities? What about stock markets? I ask these questions because one must question whether any central bank on the planet can ever actually tighten or if any treasury can employ austerity? Think about this long and hard. Central banks all over the world have been easing and printing while nearly all treasuries are deficit spending …and yet here we are with real economies stuck in the mud and financial markets with more leverage and less ability to perform than ever before.
The above is unfortunately lost on our academics driving the financial bus. While listening this morning to former Fed governor Robert McTeer, he actually said the Fed should just “let ‘er rip and raise rates, who’s afraid of a quarter point hike in rates after six years of 0%?” He also said the Fed did not initially lower rates for the stock market but it is a “referendum” on their policy. A few questions might be in order starting with a one wonder, REALLY? The Fed does not act to affect the stock market? Do QE’s 1, 2, and 3 come to mind at all? Weren’t the stock markets collapsing and promptly reversed with each QE announcement? Yes I know, the plunge protection team is a minion of the Treasury, the Fed would never stoop so low… And what exactly does a “measly” quarter percent hike in rates mean?
In relation to one quarter point, a quarter point is a 100% increase …and here’s the rub. Everything from real estate to stocks and of course bonds are “based” or calculated doing an interest rate assumption. Using an interest rate, one can calculate how much of a mortgage they can carry or how much cash flow from a commercial or rental property is required to carry the note. As for stocks, PE ratios are discounted off of a base interest rate, a higher rate will generally mean a lower price. Bonds of course are directly inverse to interest rates. As I mentioned yesterday, the aspect of “front running” to exit is the problem we will now face. In other words, if you know or believe a margin call is going to be issued, your natural reaction will be to exit ahead of time …which creates a problem.
This problem arises because the “exit door” is so small. What I am trying to say is this, volume has decreased markedly over the last several years and in particular the last year. How exactly do investors actually exit? This is not a problem for Mom and Pop, it is a problem for those managing their pension plans. How will money managers will $billions under management get out? Who will stand as a buyer? If you are a seller, there must be a buyer …but at what price? Do you see? Any moves to exit or get out of the way will be self fulfilling in the form of a crash. More and more leverage has built in all markets as they went higher and higher, but volume has become less and less. Now, the Fed wants you to believe they will actually raise rates, it is like a lifeguard whistle telling everyone to get out of the water. But how?
Before finishing, the action of the dollar needs to be looked at. The dollar has been on a wild tear to the upside. Higher interest rates would presumably exacerbate this, but, there is a problem with this. A higher dollar will create more inflation for already inflation stricken countries and also cause financial stress for those short dollars. Remember, the financial system as a whole has never been more levered than it is now and rarely been under the current stress. A higher dollar will increase the stress on the financial system to the breaking point, yet with this much leverage nothing can be allowed to fail because it will spread like a virus.
Talk is cheap as the saying goes, but it is all the Fed can afford to do at this point. Higher rates cannot be allowed to happen, they certainly cannot be “policy” because it is suicide. I will be shocked if next move by the Fed is not the exact opposite of what they are talking about currently. The next move by the Fed in my opinion will be a massive QE4 to try to stop a tsunami of panic engulfing everything financial.
I hope you’re correct. The sooner the dollar and their financial markets implode, the sooner the real economy can be rebuilt, hopefully on a solid base derived from a gold and silver backed currency.
I believe the rest of the world is beginning to think this way.
I too would like the inevitable collapse to happen sooner, to be less catastrophic. But I do not see how the US will tolerate a gold backed system. Fort Knox is empty and we cannot play in that game. What will replace it? I’m afraid our only card left is the nuclear shield. Or will it not be a shield anymore? The picture that comes to mind is a desperate kidnapper holding a hostage up against the wall, grenade in hand with the pin pulled. “Let us come to the table without gold, or I will let go of this grenade.” Whatever happened to our white hat?
it has turned black over the years.
Bill,
I would be surprised if the Fed hasn’t already hit the QE++ flood gates covertly. Everything now seems to be a paper ponzi shale game setting the stage for the biggest wealth transfer that will ever-ever happen. This one will be for all the marbles for centuries to come because of the simple fundamental fact of peak energy and resources. I’m afraid as a global civilization we all are headed for one hell of a bad roller coaster that will not end in our life time.
Thanks again for what you and the Miles Franklin team do.
thanks Colonel.
I find that most have heard of derivatives, but very few actually ‘know’ what they are composed of, or how they work.
These are financially engineered, structured investment products which “derive” (derivative) their value from the underlying securities of which they are constructed. These securities can be anything. Literally! Weather, shares, currencies, options, bonds, real estate, rates, forwards, commodities, swaps, indices, etc.
Some of the more common types of derivatives;
ABS – Asset backed security
MBS – Mortgage backed security
CDS – Credit default swap
CDO – Collateralized debt obligation
CMO – Collateralized mortgage obligation
CBO – Collateralized bond obligation
CLO – Collateralized loan obligation
CFO – Collateralized fund obligation
A derivative may form any number of underlying securities,and then is broken down into usually three tiers. Each tier pays to the derivative ‘buyers’ a return based upon where they stand in the seniority stack. You pay more to own a tier 1 so therefore you receive more. Anything left over flows down to tier 2 and so on.
The problem comes when this “flow” slows down or stops. The derivative buyers can’t make their loan payments with which they originally bought the derivative. Or the “owners” demand margin return, for which there is no liquidity. BOOM!
Bill, this is a very simplified explanation, but I hope it sheds some light on just what these “financial weapons of mass destruction” are.
yes, thank you very much Out, good job!
There you go again, Bill; spouting the truth. I’ve been studying the markets and economics for over thirty years and I don’t see a way out for these corrupt bankers and their accomplices in the Federal government.
In the market there is a phrase that seems appropriate to this situation, “Bulls make money, Bears make money, Pigs get slaughtered”. It’s not going to be a real safe time to be a banker pretty soon.
I was wondering, today, what would happen if after the crash, private individuals created private exchanges to keep currency (PM) flowing at a local level. I believe that competing with TPTB is hazardous to your health, but I don’t see a better way to help once the SHTF. Or maybe I’ll be too busy staying alive to concern myself with this endeavor!
there is no way out.
War is looking like the only way out now.
🙁
There aren’t going to be any national debt jubilees. Who or what can possibly provide debt jubilees for sovereign debts?!? All the populations are going to get burdened & crushed. There will be violent uprisings all over the world. Predicting exact severity of uprisings in different parts of the world is very difficult. It could even become random hotspots. (In Tunisia, it began randomly after a spark, i.e. a poor vegetable vendor was butchered in the streets in broad daylight. It spread to Egypt in seemingly random fashion, but was hijacked by different fascists & CIA backing etc.)
🙁
I can’t believe any of this madness by accident. It is by design. The plan has been to get the entire planet population involved in destructive wars, kicking or screaming.
I agree, no jubilee… but, there will be some sovereigns that say “we can’t pay”. Or worse, “we won’t pay”. Greece?
Haha, Greece! If they self-enforce their own debt jubilee like that, they’ll get installation of the Golden Dawn Nazi Party. And indiscriminate killings/disappearances of people will start.
Versailles Treaty mess was kind of like this. Anybody with a brain between their ears at the time knew full well, there was no way in hell Germany could meet war reparation demands. Germany desperately needed a debt jubilee. But instead of thinking of relief, the bankers slammed Germany with even more burden. (Woodrow Wilson acting like a dirty prostitute for the bankers.) Eventually, this led to a no-name never-heard-of puny loudmouth coward punk Adolf Hitler to rise up to stratosphere.
Rise of the Nazi Party in Germany was not an accident. At least on a high level, it was by design.
Hitler & the Nazi’s were able to stay in power by taking the weapons away from the people.
The same event is taking place in America as the criminals in DC along with their favorite corporations, wall street & the banksters are attempting to stay in power by taking the weapons from the American people.
this will be a very big task.
They are playing with the American psyche thru their drills gone live in the hopes of convincing the majority of the American people to willingly give up their right to bear arms.
has been the game plan for years.
This comment is in response to the lie that John told, even if he repeated this lie out of ignorance, it is still a lie.
This is the lie that John wrote, “Hitler & the Nazi’s were able to stay in power by taking the weapons away from the people.”
The truth is quite the opposite. Adolph Hitler EXPANDED the rights of citizens to own guns, as opposed to the common fiction of Germans being absolutely prevented from owning guns.
1. He lowered the age for people to get a gun license and made it easier to buy ammunition.
2. Some of the finest guns have been made in Germany, then and now. Do you think if he’d banned Guns, those companies could have survived?
3. In stark contrast, under Communism, one of the first things they did was disarm the populace, and during the Russian revolution which bore Communism/Bolshevism, some 65 million to 135 million disarmed civilians were murdered.
4. The only German civilians murdered in Germany were at the hands of the Allies who blanket bombed there way across Germany killing millions upon millions. In Dresden, 600,000 civilians were killed in 2 days.
One newspaper account published in a German paper, Eidgenosse, (1-3-86) lists 480,000 dead. That count looks like this:
37,000 babies and toddlers
46,000 school age children
55,000 wounded and sick in the hospitals, including their doctors, nurses and other personnel
12,000 rescue personnel
330,000 dead simply described as “men and women.”
Just think of Hiroshima. That city’s atom casualties were 71,879.
During the entire war, England suffered less than 50,000 casualties from bombings.
No. Germany was well armed, and guns were freely available.
And in reality, the Weimar Republic — a very politically compromised, “democratic”/Marxist-like government, which fostered a debauched society, was in place before Hitler was elected — was far more restrictive of private gun rights.
sorry Fiat, I have to call BS on part of your post. You wrote “4. The only German civilians murdered in Germany were at the hands of the Allies”. Really? Auschwitz and the other death camps did not happen? You are trying to say the Germans did not try to exterminate Jews?
Mr.Holter, Please never stop writing. yep! Looks like QE to infinity. At Demonocracy.info is a an awesomely great cgi graphic of physical 100 dollar bills on stacked pallets showing the derivative books of the big banks.Your eyes will be a poppin’ Also there are a few other choice categories.enjoy
I won’t, never thought I’d start in the first place!
QE4ever.
Maybe they raise rates and do a QE4, saying they need to help the parts of the economy that are still needing a lift up. They show a little on their books and hide the rest.
the QE part will be far larger than any rate hike.