As I wrote yesterday, markets have become schizophrenic and volatility has exploded. It is obvious the uncertainty regarding “QE” (monetization) is at the heart of this renewed volatility. I do want to mention and remind you of past crashes and vicious bear markets, they ALL have seen big volatility (in both directions) prior to the collapse. 1929, 1987, 2000, 2008 …they all experienced big swings in the market prior to the big declines, this is what I believe we are experiencing now.
Before getting to my topic “the Fed IS the problem,” I want to remind you how we have gotten here. Back in 2008, we had both fiscal and monetary stimulus as the policy response to dysfunctional markets and a shrinking economy. You might remember Hank Paulson talking about his “bazooka” TARP plan while the Fed was lowering rates furiously and even lending $16 trillion secretly. They threw the proverbial kitchen sink at the problems. The problems did not go away nor were they fixed, they were only postponed. The postponement date now seems to be upon us as the end of another QE nears …or another round must begin. Can the U.S. Treasury pump more fiscal stimulus without spooking the bond market and exposing insolvency? Who will buy another “1 off” stimulus plan? If the answer is “no one” then it will fall solely on the shoulders of the Fed. Do you see where this goes?
The Fed is literally backed into a corner. They have to reflate the system yet they themselves are stretched more than any monetary entity in history. They are levered at nearly 80 to 1. This means the Fed can only withstand a 1.25% loss on total assets before their capital is wiped out. I have a question for you, do you really believe the Fed has not ALREADY lost 1.25% on total assets? Please remember, they “absorbed” the “crappy” assets after the 2008 debacle. They were buying bonds from banks in order to get the assets off of the books of the banking system …so that the system itself could pretend to still be solvent. Do you remember when some of these assets were offered for sale and the auctions immediately pulled because the bids were coming in UNDER .20 cents on the dollar? Do you suppose on their entire book of business there actually is any equity left?
The answer of course is no, the Fed is most probably already insolvent and has been since their last white knight, “lender of last resort” exercise. What I am trying to point at here is there cannot be another crisis like 2008 because there is no longer anything left big enough to reflate the system. The Treasury doesn’t have the might and neither does the Fed. Herein lies the problem, everyone has looked to the Fed since 2008 to save the system. Everyone has relied on the Fed to create “the bid” so to speak, the saying “the Fed’s got your back” comes to mind. But here they are with a severely crippled balance sheet, a history of 4 rounds of QE (plus the secretive $16 trillion) and …the markets are beginning to test them again.
Understand what I mean by “testing.” The markets are throwing a temper tantrum and want “more” liquidity, can the Fed really do it? Yes, technically yes they can but only by wrecking an already wrecked balance sheet. The next question is what happens if it doesn’t work? What happens if the selling does not abate? What happens if the markets actually realize that QE has done very little to reflate the real economy and all of the accounting tricks have been used up? What happens if speculators go on the attack and call the Fed’s bluff? Who will step up and save the Fed?
No one of course will or is able to rescue the Fed. Possibly the Chinese “could” rescue the Fed, but would they? I believe you already have your answer by Chinese actions over the last 5 years. They have set up currency swaps all over the world and signed trade deals directly with U.S. friends and foes alike, they have been preparing for this for a very long time. There are of course even bigger problems for the Fed than just what happens here in the U.S., they must support all banks far and wide within the “dollar system.” Immediately, 4 German banks currently come to mind. The European stress test out at the end of this week will be an interesting whitewash.
I mentioned above that there cannot be another crisis like 2008 …which is why you have seen markets do things over the last 3 years they have never before done in history. The entire game has been rigged and the charts painted to preach the picture of “control.” This is now changing, “something” is and already has obviously changed. “Control” is definitely beginning to slip away, otherwise you would not see this much volatility. You see, volatility is now a very VERY bad thing because of the amount of derivatives outstanding. Outsized volatility can very easily turn a (so called) solvent bank today …insolvent by tomorrow morning.
The main point I am trying to make here is that the solvency of the Fed itself will be questioned during the next crisis …which looks to already have begun. Either the Fed gets these markets calmed down or “under control” …or, I believe the markets will begin to question the Fed’s “all-encompassing power.” The Fed “IS” the problem, my only question is when will speculators take them on? Another announcement of further QE will probably do the trick.
Hi Bill, I read every one of your articles. I love them and the approach that you have. So, thanks. I am sure you have plenty to do, but was wondering if you would give your thoughts on the article below – I have attached the link. I personally can’t grasp the concept and I think it is just another distraction from reality, but would love to have your thoughts. Thanks and many blessings.
thanks Bob, too long an article to comment on.
Great article as usual.
The Fed is going to get what they have coming to them in that their ponzi scheme will fail and they are doomed. Serves them right for being dishonest and a bunch of crooks.
As to all that salary they are making at the Fed I hope they are not smart enough to buy precious metals and they will get a double dose of what they have coming to them.
I’ve never seen such a bunch of bullshitters and liars in all my life (over 60 years)! Opps I forgot about the government as they fit into that catagory as well!
When I want the truth I go to a family reunion high up in the mountains of Arkansas. No bullshitting going on up there, just simple every day living.
As to that bozo that said all gold will be rounded up and stored somewhere secret, I’d like to see him go to Russia, China, India, etc. and say “…I’m here boys to round up your gold so hand it over…” That will be one dead bozo. I know some rednecks that actually own some gold and silver as well. I’d love to see Mr. Bozo go and ask for their gold amd silver!!! Bozo would disappear off the face of the earth.
Well, I guess we are all off to see what happens today. I would like to think it would be uneventful, but probably not.
Rickards said it.
That was a surprise coming from him. I know some think he is one of the elite BSers, but I think of him as smart and he does say gold will go up appreciably over the next few years…
no surprise for me, I met him 3 years ago in London and he had no idea there had not been a Ft. Knox audit since 1956.
wow! Another surprise (for me).
Bill, I was listening to an interview the other day (i forgot with who) that claimed the the BIS is already back stopping the FED? I think I’ve heard Rickards claim the the IMF has a clean balance sheet & can print SDR’s? Can one of these entities pick up the slack behind the scenes & keep the game going much longer?
I have also heard that China is backing the Fed, who knows? Rickards is a CIA spook by his own admission, be careful what you believe when he says it. Much of it is true but he does slip in little “untruths” along the way.
Bill,Thanks for the article.I am with you 100%.I got the same feeling about JR.Could you please elaborate on the half-truths as you see it…Here are some suggestions as I see it:1)The SDR solution sure seems to be not a solution at all! Its the same problem we have today times a million? Isn’t it? Nobody as far as I know, has ever mentioned this solution before Mr JR-Is he pushing for it? 2)The “fact” that China would necessarily want to be involved in the Western Banking IMF-Cabal–getting just enough Gold to “sit at the table” on par with the US?;as opposed to just doing their own BRICKS Bank Equivalent.
3) The fact that the US Gold “number”, is so easily just accepted on face value.No Questions asked…And the China current estimated Gold Holdings,…seems just a tad low? 4)The 10% number suggested as Gold holdings…buying into Art at the top of a bubble–Holding Cash…Getting the Believers,so to speak,just a tad misdirected? Just like SLV and GLD is a misdirected “Gold” investment, giving the Banks more power to rig the game even more. Am I missing anything else?
you answered your own questions!
Good article, but things are not what they seem. Up is down and down is up so to speak. The Fed could care less if they have a solid balance sheet or not. And the taper theme is just a storyline to maintain control. They never started tapering in the first place. In a world where fiat is “called money” and most people don’t know otherwise the transfer of wealth to them will be complete! So when the system does collapse from its own weight they will probably maintain control by reissuance of new and improved fiat paper, restart the ponzi process, etc. Or another option is to have a conflict to remove them from strangle hold. Ah, that’s a big question? I’m afraid most Americans will not have the balls or the stomach for a conflict which is why our leaders are hungry to water down the demographics where a lot of people here don’t have a emotional connection with being an American. I hope I’m very wrong!
Food & Skills = Money
Thanks for What you and Andy Do!
your welcome Mile, I don’t believe any new currency without some sort of backing …and thus confidence will be accepted after this episode.
Thanks for another excellent article Bill…
I am completely amazed at how TPTB can whitewash the ‘numbers’ and continue to have any shred of credibility. At lease in days of old, the bald face lying was at least kept within spitting distance of reality. Now, they just tell you anything and do whatever they want! We are no longer a land that follows the rule of law. If we were, there would be many ‘rich men’ serving life in prison sentences for the fraud and out-and-out theft they have perpetrated on ‘We the People’.
With all of the free giveaways by politicians, the ridiculous overspending, and the flagrant voting fraud, I think we passed the Rubicon long ago, and are now just waiting for the final drop. I’ve tried so hard to see how we could get out of our predicament, and I keep coming back to epic failure as the only real result. Maybe it goes on for a few more years, maybe it collapses tomorrow, either way, the US as we knew it even 10 short years ago is gone. We poisoned ourselves through political correctness, cultivation of a ‘free lunch’ society, allowing continual government overreach, allowing the minority (and one off situations) to rule the majority and common sense, and losing our constitutional identity.
I cannot express the frustration and utter disappointment and sadness I feel when I think of all that ‘We the People’ allowed our so-called elected officials to rob from us. I won’t be surprised if the IMF is used by TPTB to keep this so-called economy grinding on a few more years. I think with BRICS and China making gains in diminishing the US Govt financial hegemony, the next calamity is close to make sure the IMF is *the only place* for the world to turn to. If TPTB let this go on long enough, the outcome becomes less assured in their favor (i.e. IMF as savior). If it goes that way, I also would not be surprised to see more of the same economically without significant changes because none of the American populace would want to imagine or deal with what it will take to seriously fix the system. The ‘We the People’ cattle will continue up the ramp to the slaughter house because its easy and its all ‘We the People’ know. I can only hope that things break bad enough that the system is totally unrecoverable.
funny thing but I think the path began to steepen downhill when we heard a sitting U.S. president say “I did not have sex with that woman”. After this we had stolen elections and other frauds too numerous to mention.
So true! Thanks again Bill
Clearly we are living Atlas Shrugged more and more every day. The connected get their favors, and the leeches want a free middle class lifestyle for doing nothing. Now nearly 50% of families pay NO federal income tax? Of course they will vote themselves other peoples’ money!
yes, correct Doug.
“.., I don’t believe any new currency without some sort of backing … ”
And herein lies the problem. Because the Euro already exists and the ECB gold reserves are already marked to market. (see http://victorthecleaner.wordpress.com/2012/02/22/currency-wars-why-the-united-states-cannot-return-to-a-gold-standard/#more-442)
The US cannot return to a fixed gold standard!
SDRs without goldbacking will not work at all, because SDRs are for intermediate trade balance only and not for settlement. As soon as gold is included in the SDR currency basket, it will drive out ever devaluating currencies and be the anchor of last resort! Marked to marked.
We will watch the birth of the gold asset standard together, right? 🙂
Exchange rates floating against a demonetised golden asset mtm! The next logical step.
Do you agree, Bill? 😉
gold will in some way, shape or form be a part of whatever new foundation arises.
Thanks Bill another great read and I’m sure you have seen this from Zerohedge. Here’s the link if not. http://www.zerohedge.com/news/2014-10-21/magic-number-revealed-it-costs-central-banks-200-billion-quarter-avoid-market-crash
your welcome James, sort of fits in with today’s piece.
The ones who are at the top now directing what we must do will stay there. The ones that will be dumped are their underlings – us included.
I can remember just a few years ago that everybody in the world wanted to be paid with the U. S. Dollar. So what will be the difference if everybody wants to be paid with a Chinese currency?
Nothing really chances, unless The King gets the old Heave Ho, The King and his people will rule.
America could have saved the world from all of this, instead the American rulers never gave America a chance.
Starting with George Washington ordering the killing and burning the villiages of any Indian tribes that did not do as the settlers want done. Nothing ever changes it just happens over and over again.
all about power.
Bill, nice article as always. I agree, they are close to, if not flat out insolvent. HOWEVER, they stay liquid, due to the printing press, preventing a default on their part, and they could hold all “securities” until maturity, in which case they would not suffer a loss. A loss it is when marked to market, which they obviously do not do, as they do not intend to sell. So the only way I see this stop is that the rest of the world takes away their printing press thereby collapsing the dollar (especially against gold – so the PMs are one Achilles heel, the other being the large dollar holding entities, but they all conspire in this, at least for now). So this BS may still go on for a while… Who long is anyone’s guess at this point. We’l now only “after the fact”. Just be prepared for this eventuality too. I’m loooong agNau. Thanks again for all you and the MF-team do.
China will put an end to it.
Am I missing something? How can the Fed be levered 80 to 1 when they don’t owe anybody anything? The money they created didn’t cost them anything. The bonds and mortgage backed securities that they purchased with this money are assets owned free and clear. If these assets suddenly become 1% of their original value, the Fed still wouldn’t owe anything, and even if they did, they could just create more money to bail themselves out.
look at their balance sheet, assets held to equity.
I agree with Brad. Nice article Bill, but what the heck meaning does “balance sheet” and “capital ” have for an entity that can create trillions of new currency units at will. Ok so they are levered 80:1 and are insolvent. No they’re not, they can increase their leverage to inifinity.
You treat the Fed like it is a normal corporation, it is not, it is a printing press and/or destroyer of currency.
yes, a destroyer of currency and at some level of leverage this is exactly what will happen.
OK. I looked at the Fed’s balance sheet, and the assets are 80 times the equity. So technically, you could call it leverage, but the so called liabilities don’t present risk. For example, the $1.25 trillion of Federal Reserve notes are treated as a liabilities, and everyone else treats them as US dollars. So what would happen if someone cashed in his/her notes? Would the Fed exchange one set of US dollars for another set of US dollars? It’s a circular definition now that US dollars are no longer backed by gold. The bottom line is: the liabilities are meaningless, so there is no risk (to the Fed) associated with the leverage.
It appears to me that the Fed is not following Generally Accepted Accounting Principles. But what would you expect? They have never had a full audit.
“It appears to me that the Fed is not following Generally Accepted Accounting Principles” …ya think?
If you think that it is so obvious that the Fed is not using GAAP, then why are you regurgitating the Fed’s numbers? The Fed is not backed into a corner – the holders of Federal Reserve notes are.
if the Fed desires “their product” to retain any value then yes, they are in a corner. Holders can get out of the “corner” by spending their FRN’s.
Well at least we can all feel better knowing that wall street and the bankers and the fed all saw the error of their ways and changed the way they were doing things before 08…..