This coming week could be very telling. China just ended a disastrous week and finished just whiskers away from entering bear market (-20%) territory http://www.zerohedge.com/news/2015-06-27/chinas-370-billion-margin-call . Credit markets all over the world are weakening and yields are rising. Greece will not make their June 30 payment(s) and probably go through a referendum to decide whether or not to flip their creditors the bird in a meaningless vote. In fact, Greece will probably “go boom” this week. Their banks and stock markets may not open Monday morning http://www.zerohedge.com/news/2015-06-27/greek-stock-market-may-not-open-monday-greek-officials-warn . Two days later, some sort of plan will need to be concocted to classify their bankruptcy as not a “DEFAULT”, otherwise a $3 trillion fuse to a $1.4 quadrillion bomb will be lit! These and more will be very important “mid-term exams”, any failure will bleed over into derivatives and become “final and terminal exams” with zero chance of a passing grade!
We have all heard about the Greenspan, Bernanke and now the Yellen “put”.
It has been believed (and for good reason), the Fed would step in and save the stock market should it begin to buckle. Magically, and time after time as the stock market would hit critical levels, panic buying would appear. This has been written about many times by many authors. Would the Fed really buy stocks or even indices? I would ask, “why wouldn’t they, it is actually even legal” after the plunge protection team was created in 1988. This is not conspiracy theory, it is FACT! All one needs to do is look at the Bank of Japan, they openly buy stocks and even seem proud of it! As for equities, please ask yourself these questions. How “sound” is a stock market that makes continual new highs on lesser and lesser volume? http://www.zerohedge.com/news/2015-06-27/bad-breadth-milestone-warning-stocks If you are a large holder, are you bigger than the available exit? What if everyone at once took Ms. Yellen up on her “put offer”?
Another area where Fed buying looks to be very important is in our credit markets. Unless they step up with some serious buying, and soon, our 10 year Treasury yield will take out 2.5% to the upside. U.S. Treasuries and their “value” are what act as collateral or foundation for everything the world “believes in”. Before going further, I do want to mention another aspect of the ultra low rates we live with. When rates are 10%, a 100 basis point move is only 10%, when rates are 2%, a 100 basis move is 50%! In other words, movements in interest rates when rates are low have a hugely magnified impact. When rates rise, collateral “shrinks” very rapidly from a low interest rate base which means margin calls are more rapid and bigger in amounts. Higher rates will make insolvencies that much more likely and will then occur “systemically”.
This topic was suggested to me by Jim, as he put it, I believe this chapter will be described as “The Phantom of the Fed Put revealed.” Please understand what is meant here. There is a “confidence” all over the world in not just the Fed but in ALL central banks. This is a misplaced confidence because the markets themselves are far larger than any single central bank or even ALL of them collectively. Yes, The Fed can push, pull, support and suppress …for a time. They cannot stop a broad tide from going out or prevent a tsunami from coming in over a long time frame. The current timeframe is six years, A LONG time for us Westerners, might as well be six days for those from the East. Does a Fed (central bank) put really exist? Or is it only the “belief” a put exists?
My point is this, the only thing holding markets together is confidence …and the only thing keeping confidence from being shattered is the belief central banks are and will provide a “free put” to all markets. Take the three examples I started with up top. If the Chinese market continues to implode, what will that say about the abilities of the PBOC? Or when Greece defaults and triggers others, what will that say about the ECB or IMF? Were Treasury yields to rise through 2.5% amongst the other turmoil, what will that say about the “safe haven” status of Treasuries and thus the dollar? It will be a reflection of Fed impotence. The skeptics who say “they will do this forever” …can say what they say at their own peril!
Let me finish this with the BIG BAZOOKA. I am sure you remember Hank Paulson talking about $700 billion TARP as a bazooka? The reality is this amount will not even be a spitball this next time around. There are over $1.4 quadrillion worth of notional value derivatives outstanding. The apologists say “notional” value has no meaning, it is only the “margin” that counts. They are correct during “normal times”. Normal times being defined as being “trusted enough” and being able to breathe. Seriously, if you can breathe today you can borrow money. What comes next is a change of thought and a massive phase of global distrust. When trust and confidence break, “margin call” will become a familiar term to nearly all.
This you MUST understand, when trust evaporates, credit will cease entirely. Without credit, the world will stop spinning. Everything finance and many things real will be gone. The financial house cannot stand with a worthless foundation and distribution of real products will cease as the supply chain breaks. Over $1.4 quadrillion in derivatives is a larger number than “everything is worth” …not to mention far larger than the money supplies to settle the trades or put up the margin. You see, “putting up the margin” will equate to 100% of all these contracts because in default …notional and real value are one and the same! Settlement is not an option! It is this $1.4 quadrillion margin call that hangs over the entire system each and every day. Margin calls are almost never issued into calm. They are almost always issued into panics and by definition ALWAYS at the wrong time! The only way to shed all margin is to get G.O.T.S.!
I have said all along and stand by my statement “when this thing gets lit, it will only take 48 hours to engulf everything”. If this is truly the “beginning of the ending sequence”, many markets will go no bid while a couple will go no offer! Meaning you will have what you and that’s all you will have… I leave you with this horrible thought for the weekend. How better might $100 be spent? A nice dinner with your spouse or on 200 lbs. of parboiled rice?
Regards, Bill Holter
Comments welcome! [email protected]
Bill – what does the acronym GOTS stand for?
get out of the system.
The fuse certainly seems to have been lit. By the way, I read this morning that Puerto Rico has announced that it is mathematically impossible for it to repay its debts/bonds. Sounds like this reality contagion is starting to spread from the EU to other parts of the globe. Probably not long before the fed sends up a trial balloon about QE4 (or maybe is forced to institute it on an emergency basis).
yes GB, when the tide goes out… you will see who was bathing naked.
The PPT (plunge protection team) have saved the DOW Transports with a mysterious ramp up this morning, carrying along the general index.
The SNB (Swiss National Bank) have stepped into the FX (currencies) market this morning to coral the volatility surrounding the Euro.
The PBOC (Peoples Bank of China) has cut rates four times since November and are now on the verge of QE Joining the loser’s brigade of nations destroying their currency.
The degree of volatility in the global bond market is ratcheting up, which currently could be safely described as “turmoiling”.
This is just the opening sequence of the final act, last scene, before the bigga-badda-boom! Count down is getting shorter. Hang onto your hats folks, its going to be a wild ride!
Wow! That didn’t last long! The PPT ramping the DOW Transports gave the general index a little bounce and is now back in the red for the year.
The Greek government bonds have crashed, now trading at 15% Everybody and their dogs willing to sell their GGB’s at any price point before they go worthless!
Yet despite all this negative news, gold and silver get hammered!
relax. OLI, gold and silver are worth what they are worth, NOT what COMEX says.
we will now see many strange things transpire.
Statement that stood out to me is This you MUST understand, when trust evaporates, credit will cease entirely. Without credit, the world will stop spinning.
this is the perfect explanation of why the will happen fast.
Thanks for the article Mr. Holter
Here is MSN money response to their question on Greece.
See it’s all OK…..for the rest of the world. Time will heal all wounds.
“4. How will the mess affect the markets in Europe and the U.S.?
European markets traded sharply lower on Monday, and the Dow Jones Industrial Average opened nearly 1 percent lower in New York. But the effect may be short-lived: S&P Capital IQ published a 70-year historical analysis of past market shocks that found events like this produce an average decline of 2.4 percent on the next trading day, which has been recovered in an average of 14 trading days.
“Greece represents less than 2 percent of the EU’s GDP,” S&P strategist Sam Stovall wrote. “By itself, its default or exit won’t upend the EU. … Yet if this drachma drama triggers a market decline in excess of 10 percent, not seen since October 2011, it may be a blessing in disguise. As history has shown, prior market shocks have usually proven to be better opportunities to buy than bail, primarily because the events did not dramatically alter the course of global economic growth.”
see my article for tomorrow.
It’s getting to where I am afraid to go to sleep on Friday fearing what Monday will bring.
I think I need to go after that parboiled rice!
You are correct that the COMEX price means nothing!
I picked me up a couple hundred pounds of that in addition to various beans and some freeze dried stuff also. Also got the hand pump for my water well. . . . Just in case
France24 is reporting IMF will put Greece in “Arrears”, not “Default”. ;-/
Next “kick” July 20, ECB payment due…
Skip to 6:30 http://www.france24.com/en/20150629-tsipras-urges-no-vote-bailout-referendum-better-arm-greece-eu-eurozone-imf
too funny because …if it walks like a duck…