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https://phys.org/news/2020-04-covid-...-industry.html
A COVID-19 crisis looms in the mortgage industry, experts warn
by University of California - Berkeley
https://scx1.b-cdn.net/csz/news/800/2019/mortgage.jpg
Credit: CC0 Public Domain
Berkeley Haas Professors Nancy Wallace and Richard Stanton were some of the few voices to forewarn of the massive risk posed by shoddy practices in the mortgage industry prior to the 2008 financial crisis.
Unfortunately, history seems to be repeating itself.
More than two years ago, Wallace and Stanton again began raising the alarm that the mortgage landscape that emerged from the last crisis is dominated by "nonbank" lenders who operate with little of their own capital or access to emergency cash. It was another disaster waiting to happen, they warned, and called for increased oversight.
No one predicted a shock the size and speed of the coronavirus pandemic, but it's now upon us, and Wallace fears the worst. Millions of laid-off Americans won't be able to make mortgage payments, and have been given a temporary payment reprieve by the federal rescue package. This plummeting cash flow could quickly push fragile nonbanks into bankruptcy. And since so many of the loans they service are backed by the U.S. government, that's who will be left holding the bag.
"The $2.2. trillion (coronavirus relief act) was the largest in history, but we're talking about liabilities that are orders of magnitude bigger," Wallace says. "Solutions are going to have to involve trillions of dollars. It could be the bailout of all bailouts."
Wallace says this new crisis will begin to show itself within the next 30 days, as people forgo their monthly payments and the highly leveraged nonbanks face margin calls from the brokers they've borrowed from—commercial banks like JP Morgan Chase and Wells Fargo Bank and investment banks such as Morgan Stanley. They need cash to pay these lenders, and they don't have it. The nonbanks have already begun asking for a rescue.
We asked Wallace, who has studied real estate industry financial dynamics for the past three decades, to explain this looming mortgage crisis.
What are nonbanks, and who are the biggest players?
Mortgages are originated and serviced by two types of institutions. Traditional lenders are the highly regulated banks, funded with deposits or Federal Home Loan Bank advances. They tend to have multiple lines of business.
Nonbank lenders, in contrast, are lightly regulated and get their funding through short-term credit. Usually their only line of business is originating and servicing residential mortgages.
Some of the biggest players are Quicken Loans, Mr. Cooper Group, and Freedom Mortgage. They include about 1,088 smaller companies as well.
When did you become aware of the risks posed by nonbanks?
The standard narrative of the 2007-2010 housing crisis centers on the collapse of the housing bubble that was fueled by low interest rates, easy credit, low regulation, and subprime mortgages. However, we found nonbanks played an overlooked role, defaulting on their credit agreements and contributing to the collapse.
Why and how have nonbanks grown?
After the financial crisis, the traditional banks were put under heavy regulation. Because of the stringent capital requirements and the fact that they lost a lot of money servicing defaulted mortgages, most of the big banks scaled back their residential mortgage businesses. A number of large banks sold off loan servicing rights, and the nonbanks stepped in. The growing market share of the nonbanks came about in part because they were very nimble with new platform lending technology—like Quicken, with the eight-minute mortgage.
Nonbanks originated 20% of single-family home loans in 2007, and that had grown to half of loans by 2016. Today they service about two-thirds of home loans. The bigger problem is they tend to have a high proportion of the riskier loans to low- and moderate-income people, which are backed by the U.S. government. We're talking trillions of dollars. As of February 2020 they originated 88% of the loans sold to Ginnie Mae, which is part of the Department of Housing and Urban Development and has a $2.1 trillion portfolio. And 61% of loans sold to the GSEs (government sponsored enterprises) Fannie Mae and Freddie Mac, which have a combined residential single family loan portfolio of about $4.9 trillion.
How do nonbanks get their money, and how big is their debt exposure?
They rely on short-term lending known as warehouse lines of credit. These credit lines are usually provided by larger commercial and investment banks. It's difficult to get data because most nonbank lenders are private companies which are not required to disclose their financial structures. That was the subject of our Brookings paper, which was the first public tabulation of the scale of warehouse lending to nonbanks. We found there was a $34 billion commitment on warehouse loans at the end of 2016, up from $17 billion at the end of 2013. That translated to about $1 trillion in short-term "warehouse loans" funded over the course of one year. As of year end 2019, there was $101 billion of warehouse commitments on the books of warehouse lenders.
Last year was a banner year. Nonbanks originated nearly a trillion dollars of mortgages that were securitized by Fannie Mae, Freddie Mac, and Ginnie Mae—the largest origination volume since 2006. However, the high levels of refinancing due to historically low interest rates had a significant negative impact on the value of the mortgage servicing rights held by nonbanks.
If nonbanks are so big and borrow so much money, why aren't they regulated like banks?
The simple answer is they have a very powerful lobby, the Mortgage Bankers Association. What the industry leaned on was that they were saving the mortgage market because the banks didn't want to hold mortgages anymore. Nonbanks were happy to promise that they would service 30-year loans and pay the bondholders, whether or not they received borrower principal and interest payments, but there are no mechanisms in place to hold them to that promise. They were gambling that the market wouldn't crash.
The nonbanks have actively resisted paying for any form of liquidity insurance or supporting any credible oversight similar to banks. Their regulator, the Conference of State Bank Supervisors (CSBS), does not have high-quality loan-level data for the mortgage industry. That's why they recently asked our team—Paulo Issler, Christopher Lako, Richard Stanton and me, here at the Real Estate and Financial Markets Lab in the Fisher Center for Real Estate and Urban Economics—to perform detailed data breakdowns and analysis for them. They do not have the data to perform this analysis themselves.
Did anything change after your 2018 paper, co-written with Federal Reserve economists, which called for greater oversight?
Ginnie Mae started trying to require higher capital and liquidity thresholds as well as stress tests, requiring them to show how they would handle an economic shock. They had an initiative called Ginnie Mae 2020, but they were getting major pushback from the industry. In addition, the Conference of State Bank Supervisors has been trying hard to standardize the reporting rules, but they have no data, and they have little power.
Under the $2.2 trillion emergency CARES Act (Coronavirus Aid, Relief and Economic Security), mortgage servicers are required to allow borrowers to delay payments for as long as a year. What do you expect will happen now?
I think the situation is extremely serious, a looming nightmare. We've had 16 million people file for unemployment in three weeks. We know that most Americans can't even withstand a $400 shock to their finances. Millions of people won't be able to make their mortgage payments. They've been told to call their lenders and tell them they can't pay, and the phones are ringing off the hook.
The immediate problem for the nonbanks is the risk to their warehouse lines of credit, and the fact that the nonbank loan servicers still have to make payments to the mortgage-backed security bondholders, even if people don't pay their mortgages. Margin calls have been in the level of tens of millions of dollars and the creditors are demanding cash. Not making your margin calls on lines of credit is a serious problem and could trigger default. Nonbanks are also facing millions of dollars of margin exposure from short sales of mortgage-backed securities. These onerous margin calls, some as large as $100 million for a single institution, are what's leading their lobbyists, the Mortgage Banking Association, to go to the Securities and Exchange Commission and demand that the brokers be forbidden from exercising their margin rights. It's ridiculous, because the brokers—big banks like Goldman Sachs and Morgan Stanley—have every right to play hardball. The SEC has turned down the request.
Why does this pose such a threat to the U.S. government, and ultimately, to taxpayers?
Most of these loans are guaranteed by the U.S. government through Ginnie Mae, Fannie Mae, and Freddie Mac. The nonbank lenders have been given some forbearance, and will eventually receive compensation for the payment shortfalls they are experiencing, but they have a timing problem. In the meantime they still have to make timely payments of interest and principal—for 120 days to the Fannie and Freddie MBS bondholders, and, in the case of those who owe to Ginnie Mae mortgage-backed security bondholders, until they go bankrupt. I'm not sure some of them have the liquidity to last even 30 days, and many won't be able to do it for three months, much less a year. We are going to see bankruptcies, and substantial loss in lending capacity as we did in 2007, when we lost two-thirds of lending capacity. This might be worse because unemployment may be worse.
Will any of the stimulus measures passed so far help?
The nonbanks are already asking for a bailout, but none of the federal relief eff … r have included them. The MBA tried to get some protection in the CARES Act, which had $450 billion in loans and loan guarantees from the Fed and Treasury. But they were excluded for a reason—because these firms have pushed every boundary and rejected every form of oversight. Thus far, they have also been excluded from the actions the Fed has been taking, including a new round of quantitative easing, and participation in the Term Asset-Backed Securities Loan Facility, which is a way to provide liquidity. Ginnie Mae has now created an assistance program to provide loans to its nonbank counterparties who are unable to cover the principal and interest payments to bondholders. Fannie Mae and Freddie Mac have refused to provide such assistance to their nonbank counterparties, because they are still under conservatorship status from the 2008 crisis and face their own capital shortfalls.
So some kind of bailout is nearly inevitable?
To save the market, the nonbanks will have to be bailed out either by the Fed or by the U.S. Treasury. This will be very difficult under restrictions put in place concerning nonbank bailouts under the Dodd-Frank Act. The cost is going to be very high. In my opinion, there has to be a quid pro quo from the industry in the form of significant future fees in return for such extraordinary support—they can't keep pushing the envelope and then expect to be rescued. They don't want to follow any of the rules that banks follow, and then they want to be treated like banks when liquidity shocks occur. It's just wrong.
Explore further
A decade after housing bust, mortgage industry on shaky ground, experts warn
Provided by University of California - Berkeley
A COVID-19 crisis looms in the mortgage industry, experts warn
by University of California - Berkeley
https://scx1.b-cdn.net/csz/news/800/2019/mortgage.jpg
Credit: CC0 Public Domain
Berkeley Haas Professors Nancy Wallace and Richard Stanton were some of the few voices to forewarn of the massive risk posed by shoddy practices in the mortgage industry prior to the 2008 financial crisis.
Unfortunately, history seems to be repeating itself.
More than two years ago, Wallace and Stanton again began raising the alarm that the mortgage landscape that emerged from the last crisis is dominated by "nonbank" lenders who operate with little of their own capital or access to emergency cash. It was another disaster waiting to happen, they warned, and called for increased oversight.
No one predicted a shock the size and speed of the coronavirus pandemic, but it's now upon us, and Wallace fears the worst. Millions of laid-off Americans won't be able to make mortgage payments, and have been given a temporary payment reprieve by the federal rescue package. This plummeting cash flow could quickly push fragile nonbanks into bankruptcy. And since so many of the loans they service are backed by the U.S. government, that's who will be left holding the bag.
"The $2.2. trillion (coronavirus relief act) was the largest in history, but we're talking about liabilities that are orders of magnitude bigger," Wallace says. "Solutions are going to have to involve trillions of dollars. It could be the bailout of all bailouts."
Wallace says this new crisis will begin to show itself within the next 30 days, as people forgo their monthly payments and the highly leveraged nonbanks face margin calls from the brokers they've borrowed from—commercial banks like JP Morgan Chase and Wells Fargo Bank and investment banks such as Morgan Stanley. They need cash to pay these lenders, and they don't have it. The nonbanks have already begun asking for a rescue.
We asked Wallace, who has studied real estate industry financial dynamics for the past three decades, to explain this looming mortgage crisis.
What are nonbanks, and who are the biggest players?
Mortgages are originated and serviced by two types of institutions. Traditional lenders are the highly regulated banks, funded with deposits or Federal Home Loan Bank advances. They tend to have multiple lines of business.
Nonbank lenders, in contrast, are lightly regulated and get their funding through short-term credit. Usually their only line of business is originating and servicing residential mortgages.
Some of the biggest players are Quicken Loans, Mr. Cooper Group, and Freedom Mortgage. They include about 1,088 smaller companies as well.
When did you become aware of the risks posed by nonbanks?
The standard narrative of the 2007-2010 housing crisis centers on the collapse of the housing bubble that was fueled by low interest rates, easy credit, low regulation, and subprime mortgages. However, we found nonbanks played an overlooked role, defaulting on their credit agreements and contributing to the collapse.
Why and how have nonbanks grown?
After the financial crisis, the traditional banks were put under heavy regulation. Because of the stringent capital requirements and the fact that they lost a lot of money servicing defaulted mortgages, most of the big banks scaled back their residential mortgage businesses. A number of large banks sold off loan servicing rights, and the nonbanks stepped in. The growing market share of the nonbanks came about in part because they were very nimble with new platform lending technology—like Quicken, with the eight-minute mortgage.
Nonbanks originated 20% of single-family home loans in 2007, and that had grown to half of loans by 2016. Today they service about two-thirds of home loans. The bigger problem is they tend to have a high proportion of the riskier loans to low- and moderate-income people, which are backed by the U.S. government. We're talking trillions of dollars. As of February 2020 they originated 88% of the loans sold to Ginnie Mae, which is part of the Department of Housing and Urban Development and has a $2.1 trillion portfolio. And 61% of loans sold to the GSEs (government sponsored enterprises) Fannie Mae and Freddie Mac, which have a combined residential single family loan portfolio of about $4.9 trillion.
How do nonbanks get their money, and how big is their debt exposure?
They rely on short-term lending known as warehouse lines of credit. These credit lines are usually provided by larger commercial and investment banks. It's difficult to get data because most nonbank lenders are private companies which are not required to disclose their financial structures. That was the subject of our Brookings paper, which was the first public tabulation of the scale of warehouse lending to nonbanks. We found there was a $34 billion commitment on warehouse loans at the end of 2016, up from $17 billion at the end of 2013. That translated to about $1 trillion in short-term "warehouse loans" funded over the course of one year. As of year end 2019, there was $101 billion of warehouse commitments on the books of warehouse lenders.
Last year was a banner year. Nonbanks originated nearly a trillion dollars of mortgages that were securitized by Fannie Mae, Freddie Mac, and Ginnie Mae—the largest origination volume since 2006. However, the high levels of refinancing due to historically low interest rates had a significant negative impact on the value of the mortgage servicing rights held by nonbanks.
If nonbanks are so big and borrow so much money, why aren't they regulated like banks?
The simple answer is they have a very powerful lobby, the Mortgage Bankers Association. What the industry leaned on was that they were saving the mortgage market because the banks didn't want to hold mortgages anymore. Nonbanks were happy to promise that they would service 30-year loans and pay the bondholders, whether or not they received borrower principal and interest payments, but there are no mechanisms in place to hold them to that promise. They were gambling that the market wouldn't crash.
The nonbanks have actively resisted paying for any form of liquidity insurance or supporting any credible oversight similar to banks. Their regulator, the Conference of State Bank Supervisors (CSBS), does not have high-quality loan-level data for the mortgage industry. That's why they recently asked our team—Paulo Issler, Christopher Lako, Richard Stanton and me, here at the Real Estate and Financial Markets Lab in the Fisher Center for Real Estate and Urban Economics—to perform detailed data breakdowns and analysis for them. They do not have the data to perform this analysis themselves.
Did anything change after your 2018 paper, co-written with Federal Reserve economists, which called for greater oversight?
Ginnie Mae started trying to require higher capital and liquidity thresholds as well as stress tests, requiring them to show how they would handle an economic shock. They had an initiative called Ginnie Mae 2020, but they were getting major pushback from the industry. In addition, the Conference of State Bank Supervisors has been trying hard to standardize the reporting rules, but they have no data, and they have little power.
Under the $2.2 trillion emergency CARES Act (Coronavirus Aid, Relief and Economic Security), mortgage servicers are required to allow borrowers to delay payments for as long as a year. What do you expect will happen now?
I think the situation is extremely serious, a looming nightmare. We've had 16 million people file for unemployment in three weeks. We know that most Americans can't even withstand a $400 shock to their finances. Millions of people won't be able to make their mortgage payments. They've been told to call their lenders and tell them they can't pay, and the phones are ringing off the hook.
The immediate problem for the nonbanks is the risk to their warehouse lines of credit, and the fact that the nonbank loan servicers still have to make payments to the mortgage-backed security bondholders, even if people don't pay their mortgages. Margin calls have been in the level of tens of millions of dollars and the creditors are demanding cash. Not making your margin calls on lines of credit is a serious problem and could trigger default. Nonbanks are also facing millions of dollars of margin exposure from short sales of mortgage-backed securities. These onerous margin calls, some as large as $100 million for a single institution, are what's leading their lobbyists, the Mortgage Banking Association, to go to the Securities and Exchange Commission and demand that the brokers be forbidden from exercising their margin rights. It's ridiculous, because the brokers—big banks like Goldman Sachs and Morgan Stanley—have every right to play hardball. The SEC has turned down the request.
Why does this pose such a threat to the U.S. government, and ultimately, to taxpayers?
Most of these loans are guaranteed by the U.S. government through Ginnie Mae, Fannie Mae, and Freddie Mac. The nonbank lenders have been given some forbearance, and will eventually receive compensation for the payment shortfalls they are experiencing, but they have a timing problem. In the meantime they still have to make timely payments of interest and principal—for 120 days to the Fannie and Freddie MBS bondholders, and, in the case of those who owe to Ginnie Mae mortgage-backed security bondholders, until they go bankrupt. I'm not sure some of them have the liquidity to last even 30 days, and many won't be able to do it for three months, much less a year. We are going to see bankruptcies, and substantial loss in lending capacity as we did in 2007, when we lost two-thirds of lending capacity. This might be worse because unemployment may be worse.
Will any of the stimulus measures passed so far help?
The nonbanks are already asking for a bailout, but none of the federal relief eff … r have included them. The MBA tried to get some protection in the CARES Act, which had $450 billion in loans and loan guarantees from the Fed and Treasury. But they were excluded for a reason—because these firms have pushed every boundary and rejected every form of oversight. Thus far, they have also been excluded from the actions the Fed has been taking, including a new round of quantitative easing, and participation in the Term Asset-Backed Securities Loan Facility, which is a way to provide liquidity. Ginnie Mae has now created an assistance program to provide loans to its nonbank counterparties who are unable to cover the principal and interest payments to bondholders. Fannie Mae and Freddie Mac have refused to provide such assistance to their nonbank counterparties, because they are still under conservatorship status from the 2008 crisis and face their own capital shortfalls.
So some kind of bailout is nearly inevitable?
To save the market, the nonbanks will have to be bailed out either by the Fed or by the U.S. Treasury. This will be very difficult under restrictions put in place concerning nonbank bailouts under the Dodd-Frank Act. The cost is going to be very high. In my opinion, there has to be a quid pro quo from the industry in the form of significant future fees in return for such extraordinary support—they can't keep pushing the envelope and then expect to be rescued. They don't want to follow any of the rules that banks follow, and then they want to be treated like banks when liquidity shocks occur. It's just wrong.
Explore further
A decade after housing bust, mortgage industry on shaky ground, experts warn
Provided by University of California - Berkeley
1
- Post #8,164
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- Apr 17, 2020 10:57pm Apr 17, 2020 10:57pm
- | Joined Mar 2020 | Status: Member | 96 Posts
I cannot believe those pictures, wow! You sure enjoy speghetti haha
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https://www.oftwominds.com/blogapr20...ality4-20.html
While the Top 10% and the Fed Cheer Stocks Rebounding, the Bottom 60% Lose their Livelihoods and Lives
April 17, 2020
If you have any doubt that the Fed and Wall Street will some day be dismantled, please re-read this "real life in America" list again.
The pandemic is a stark, brutal spotlight on income/wealth inequality in America: while the top 10% who own the majority of the nation's wealth cheer the Federal Reserve's relentless pimping of the stock market, the bottom 60%--America's vast underclass of low-paid, marginalized, gig-economy, Amazon warehouse precarious proletariats (precariats)-- are losing their livelihoods and tragically, their lives as the pandemic ravages the ranks of those who cannot work at home and those whose health is impaired by the ceaseless struggle to survive in Unequal America.
The inequality isn't just in wealth and income; it's in what that wealth and income can buy-- stability, security and better health. While there are plenty of wealthy Americans in poor health, there's no getting past the reality that those with big incomes, 7-figure net worths and gold-plated healthcare insurance paid by their employer or family-owned enterprise can afford to be gym rats, hire personal trainers, get regular dental care, eat costly delicacies from Whole Foods (Whole Paycheck to precariats)--in other words, everything needed (including the financial security that enables a good night's sleep) to be slim and healthy.
America's vast Underclass is dying in the pandemic because their health is impaired by inequality.
As long as there are plenty of precariats earning less than $30,000 a year to walk their dog, empty Mom's bedpan, ship their order from an Amazon "fulfillment center," a.k.a. 21st century sweatshop, deliver their groceries from Whole Foods, drive their Uber ride, clean their McMansions, etc., the top 10% could care less about inequality in America.
Like the Fed, their focus is on the stock market, their free money machine: thanks to the Fed, your wealth doubles or triples without actually having to produce any value at all.
The excuse is the wealth effect: the Fed's pimping of the top 10%'s free money machine gives the top 10% the financial "animal spirits" confidence to buy, buy, buy services that create all those precariat jobs.
Here's a brief primer for all the top 10%ers who have no idea of what life is like for America's 60% Underclass:
1. Income is insecure as shift/hours per week/gigs are all uncertain.
2. When you are at your job, you're overloaded with work: the pressure never lets up.
3. You have long commutes, long hours.
4. There are insufficient rewards and recognition for your labors: low pay, no stock options, supervisors pressured to fire people, not praise them.
5. There's no trust or community at work; you're either competing for miserable pay in the gig economy, or you work with a constantly shifting mix of people. There's no trust or support.
6. Every day is an object lesson in unfairness: all you see are workers being treated unfairly while invisible bosses skim huge paychecks or millions/billions in stock options.
7. You cannot value or have pride in your work because the product/service is garbage, as defined and dictated by your overlords, who care only about maximizing profit by whatever means are available, i.e. lowering quality and hiding this from customers.
8. There are few avenues for advancement, unless you want to become a slave-driving crew chief for another lousy dollar or two an hour.
9. There's no way to get ahead, as your wobbly paycheck barely covers expenses, and any savings are wiped out by dental emergencies, car repairs, desperation-soaked loans to relatives, etc.
10. The constant overwork and all the anxieties of economic insecurity have undermined your health.
If you have any doubt that the Fed and Wall Street will some day be dismantled, please re-read this "real life in America" list as many times as needed to break through the obsession with the free money machine of a Fed-pimped euphoric stock market.
The pandemic might yet have a positive consequence if America's vast Underclass eventually decides that enough is enough.
https://www.oftwominds.com/photos202...rship1-20a.jpg
https://www.oftwominds.com/photos202...uality4-20.png
My COVID-19 Pandemic Posts
If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com.
While the Top 10% and the Fed Cheer Stocks Rebounding, the Bottom 60% Lose their Livelihoods and Lives
April 17, 2020
If you have any doubt that the Fed and Wall Street will some day be dismantled, please re-read this "real life in America" list again.
The pandemic is a stark, brutal spotlight on income/wealth inequality in America: while the top 10% who own the majority of the nation's wealth cheer the Federal Reserve's relentless pimping of the stock market, the bottom 60%--America's vast underclass of low-paid, marginalized, gig-economy, Amazon warehouse precarious proletariats (precariats)-- are losing their livelihoods and tragically, their lives as the pandemic ravages the ranks of those who cannot work at home and those whose health is impaired by the ceaseless struggle to survive in Unequal America.
The inequality isn't just in wealth and income; it's in what that wealth and income can buy-- stability, security and better health. While there are plenty of wealthy Americans in poor health, there's no getting past the reality that those with big incomes, 7-figure net worths and gold-plated healthcare insurance paid by their employer or family-owned enterprise can afford to be gym rats, hire personal trainers, get regular dental care, eat costly delicacies from Whole Foods (Whole Paycheck to precariats)--in other words, everything needed (including the financial security that enables a good night's sleep) to be slim and healthy.
America's vast Underclass is dying in the pandemic because their health is impaired by inequality.
As long as there are plenty of precariats earning less than $30,000 a year to walk their dog, empty Mom's bedpan, ship their order from an Amazon "fulfillment center," a.k.a. 21st century sweatshop, deliver their groceries from Whole Foods, drive their Uber ride, clean their McMansions, etc., the top 10% could care less about inequality in America.
Like the Fed, their focus is on the stock market, their free money machine: thanks to the Fed, your wealth doubles or triples without actually having to produce any value at all.
The excuse is the wealth effect: the Fed's pimping of the top 10%'s free money machine gives the top 10% the financial "animal spirits" confidence to buy, buy, buy services that create all those precariat jobs.
Here's a brief primer for all the top 10%ers who have no idea of what life is like for America's 60% Underclass:
1. Income is insecure as shift/hours per week/gigs are all uncertain.
2. When you are at your job, you're overloaded with work: the pressure never lets up.
3. You have long commutes, long hours.
4. There are insufficient rewards and recognition for your labors: low pay, no stock options, supervisors pressured to fire people, not praise them.
5. There's no trust or community at work; you're either competing for miserable pay in the gig economy, or you work with a constantly shifting mix of people. There's no trust or support.
6. Every day is an object lesson in unfairness: all you see are workers being treated unfairly while invisible bosses skim huge paychecks or millions/billions in stock options.
7. You cannot value or have pride in your work because the product/service is garbage, as defined and dictated by your overlords, who care only about maximizing profit by whatever means are available, i.e. lowering quality and hiding this from customers.
8. There are few avenues for advancement, unless you want to become a slave-driving crew chief for another lousy dollar or two an hour.
9. There's no way to get ahead, as your wobbly paycheck barely covers expenses, and any savings are wiped out by dental emergencies, car repairs, desperation-soaked loans to relatives, etc.
10. The constant overwork and all the anxieties of economic insecurity have undermined your health.
If you have any doubt that the Fed and Wall Street will some day be dismantled, please re-read this "real life in America" list as many times as needed to break through the obsession with the free money machine of a Fed-pimped euphoric stock market.
The pandemic might yet have a positive consequence if America's vast Underclass eventually decides that enough is enough.
https://www.oftwominds.com/photos202...rship1-20a.jpg
https://www.oftwominds.com/photos202...uality4-20.png
My COVID-19 Pandemic Posts
If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com.
- Post #8,167
- Quote
- Edited 7:28am Apr 18, 2020 7:14am | Edited 7:28am
- | Commercial Member | Joined Dec 2014 | 11,632 Posts
https://www.zerohedge.com/markets/le...ops+to+zero%29
Authored by Alasdair Macleod via GoldMoney.com,
The powerful forces of bank credit contraction are at the heart of a rapidly evolving financial crisis in global derivatives, whose gross value is over $600 trillion; an unimaginable sum. Central banks are on course to destroy their currencies through unlimited monetary expansion, lethal for bullion banks with fractionally reserved unallocated gold accounts, while being dramatically short of Comex futures.
This article explains the dynamics behind the current crisis in precious metal derivatives, and why it is the observable part of a wider derivative catastrophe that is caught in the tension between contracting bank credit and infinite monetary inflation.
https://zh-prod-1cc738ca-7d3b-4a72-b...nk_Lending.jpg
Introduction
One of the scares at the time of the Lehman crisis was that insolvent counterparties risked collapsing the whole over-the-counter derivative complex. It was for this reason that AIG, a non-bank originator of many derivative contracts, had to be bailed out by the Fed. By a mixture of good judgement and fortune a derivative crisis was averted, and by consolidating some of the outstanding positions, the gross value of OTC derivatives was subsequently reduced.
According to the Bank for International Settlements, in mid-June last year all global OTC contracts outstanding were still unimaginably large at $640 trillion, a massive sum in anyone’s book. It is unlikely to have changed much by today. But in bank balance sheets only a net figure is usually shown, and you have to search the notes to financial statements to find evidence of gross exposure. It is the gross that matters, because each contract bears counterparty risk, sometimes involving several parties, and derivative payment failures could make the payment failures now evident in disrupted industrial supply chains look like small beer.
Deutsche Bank’s 2019 balance sheet gives us an excellent example of how they are accounted for in commercial banks. It conceals derivative exposure under the headings “Trading assets” and “Trading liabilities” on the balance sheet. You have to go into the notes to discover that under Trading assets, derivative financial instruments total €80.848bn, and under Trading liabilities, derivative financial instruments total €81.910bn, a difference of €1.062bn This is relatively trivial for a bank with a balance sheet of €777bn.
But wait, there is another table that breaks derivative exposure down even further into categories, and it turns out the earlier figures are consolidated totals. The true total of OTC derivatives and exchange traded derivatives to which the bank is exposed is €37.121 trillion. That is nearly thirty-five thousand times the €1.062bn netted difference in the balance sheet. And when you bear in mind that valuing OTC derivatives is somewhat subjective, or as the cynics say, mark to myth, it invalidates the valuation exercise.
Clearly, by taking the mildest of a positive approach to derivatives held as assets, and a slightly more conservative approach to valuing derivatives on the liabilities side, that 35,000:1 leverage at the balance sheet level can make an enormous difference.
Now let us take our imagination a little further. A large number of these derivatives will have commercial entities as counterparties, businesses that have been shut down by the coronavirus since the balance sheet date. With the German economy already heading into recession before the coronavirus closed down much of the global economy, Deutsche Bank’s risk of losses arising from its derivative position could turn out to be in the trillions, not the one billion netted difference shown on the balance sheet.
Not only is there the emergence of counterparty failures to deal with, but there are ever-changing fair values, which will particularly reflect interest rate spreads increasing for Deutsche Bank’s €30.25 trillion interest rate-linked derivatives. We cannot know whether it is net positive or negative for shareholders. And with balance sheet gearing of assets 22 times larger than share capital very little change could wipe them out.
Deutsche Bank is not alone in presenting derivative risk in this manner: it is the elephant in many bank boardrooms. As a weak link, Deutsche is a relevant illustration of risks in the banking system. Since the Lehman crisis, its senior management has been on the back foot, retreating from businesses they could neither control nor understand. They have also made very public mistakes in precious metals, which is our next topic.
Gold derivatives in crisis
While a struggling bank like Deutsche provides us with a laboratory experiment for how a derivative virus can kill a bank, we are now seeing it kill off bullion banks in real time. A rising gold price, out of the control normally imposed by expandable derivatives, has effectively gone bid only in any size. We are told this is due to COVID-19 shutting mines and refineries and disrupting logistics, and so is purely temporary.
The LBMA and CME which runs Comex have been issuing calming statements and even announced the introduction of a new 400-ounce gold futures contract alleged to ease the supply shortage.
In short, the gold derivative establishment is panicking. The swaps position on Comex shows why.
https://zh-prod-1cc738ca-7d3b-4a72-b.../Picture_1.png
With their net short position in very dangerous territory, Comex swaps are badly wrongfooted at a time when the Fed and other central banks have announced unlimited monetary inflation, signalling a paradigm shift in the relationship between sound and unsound money. For ease of reference and to understand their relevance, a swap dealer is defined by the Commodity Futures Trading Commission, which collates the figures, as follows:
Therefore, a swap dealer is one that operates across derivative markets, and typically will trade in London forwards as well as on Comex. In a nutshell, it describes a bullion bank’s trading desk.
In a further piece of disinformation this week, Jeff Christian, head of CPM Group, in an obviously staged interview for MacroVoices claimed that traders in London were forced by their banks to cover trading risk in the futures market as a condition of their funding. The implication was shorts on Comex are matched to longs in London’s forward market and therefore not a problem. This may be true of an independent trader looking for arbitrage opportunities between markets but is not how it works in a bank.
The mechanics of gold derivative trading
A bank which has bullion business will almost certainly have a trading desk and be a member of the LBMA. Look at it from a banker’s point of view. The bank has business flows in gold, which requires access to the market and a dealing capability. He will employ one or more gold traders with acknowledged expertise to manage the desk. As a profit centre and because a skilled trader will require it, he will give the desk discretionary trading limits and monthly or quarterly profit targets. Part of the deal with the desk is profits will be struck net of the cost of funding the book, usually a reference to Libor, which is effectively the marginal cost to the bank of expanding its credit to back the dealers’ positions.
When the gold desk has established a profitable track record, the banker will be eager to raise the trading desk’s position limits. For bullion banking this has been going on for years, and while individual trading desks come and go, traders now have a large degree of dealing autonomy. It is not, as Mr Christian misinforms us, just a covered arbitrage business between forwards in London and futures in America.
The LBMA lists twelve market makers, all of which are well-known banks. There are thirty-one other banks, some of which run trading desks which take positions. It is worth noting that dealing in gold is normally one of many banking and trading activities undertaken by an LBMA member bank, including forex trading with which this activity is very similar. All of them are funded by the expansion of bank credit, which is the point of having a banking licence.
Turning to Comex, according to CTFC data there are a maximum of 28 swap dealers which recently have been active in gold futures, either with long or short positions. These numbers tie in nicely with the likely number of trading desks and designated market makers in the banks which are LBMA members.
An LBMA member bank will have physical bullion business and is likely to offer allocated and unallocated accounts to customers. Since the point of banking is to operate a fractional reserve-based customer service, a bullion bank discourages allocated (custodial) accounts, usually by making them an expensive way for customers to hold bullion. Unallocated accounts, which under fractional reserve banking will be a multiple of gold or gold derivatives in the possession of the bank, becomes the bank’s standard customer offering.
One of the benefits of LBMA membership is it gives a bullion bank access to paper markets, so that it can replace physical bullion held against unallocated client accounts with long positions for forward settlement, positions that can be rolled and rolled without ever having to take delivery. Another benefit is access to leased gold from central banks which store bullion in the Bank of England’s vault.
One can begin to see why dealings between LBMA members are so significant, recently hitting 60 million ounces a day, the equivalent of 1,866 tonnes. This represents dealings between LBMA members only and excludes dealings between a member and a non-member. In the distant past they were included in LBMA estimates, which inflated the numbers even further by a factor of about five times.
All this is done on minimum bullion liquidity, which when you take away central bank gold, physical ETF custodial bullion, as well as bullion owned or allocated to miscellaneous institutions, family offices and private individuals stored in London bullion vaults, is not the 8,326 tonnes claimed in a recent LBMA press release designed to calm the markets, but is almost certainly significantly less than a thousand tonnes.
Clearly, running long positions for forward settlement has become a substitute for backing unallocated accounts with a fractional amount of physical metal. While the trading books in London keep the plates spinning in their dangerously geared operation, the profit opportunities on Comex have become a separate matter instead of just a hedging facility.
Officially described as speculators, but better described as suckers, gold and silver futures are the medium for a repeating cycle whereby market makers supply them contracts by drawing on the ability of their banks to create bank credit out of thin air. Once the suckers run out of buying power, the market makers pull the rug out from under them, taking out their stop-loss points. It has been an immensely profitable exercise for swap dealers.
Fortunately for swap dealers, the suckers have short memories. Until last year, it was a frequently repeated exercise, leading to a blasé attitude. Corruption among traders had become rife and they began to be caught spoofing and rigging the fix against bank customers. Dealers were sacked, fined and jailed.
Deutsche Bank were fined and forced out of the twice-daily fix. A JPMorgan trader pleaded guilty last August to manipulating the precious metals markets for nine years. Another with the same firm had pleaded guilty the previous October. In the past five years federal prosecutors have brought twelve spoofing cases against sixteen defendants, most pleading guilty.
This corruption is typical of end-of-cycle behaviour, when the derivative ringmasters in precious metals believe they have risen above the law. The point behind the current crisis unfolding in the gold derivative markets is the scam has fully run its course, and the bankers in charge of bullion desks will be increasingly concerned of the reputational damage.
How the ending of the gold derivative scam started
In the past, bullion banks always managed to put a lid on open interest, returning it from an overbought 600,000 contracts to under 400,000 contracts, in the process getting an even book or exceptionally going long, ready for the next pump-and-dump cycle. But then something changed. Last year, the pump-and-dump schemes of the bullion banks’ trading desks went awry, with open interest rocketing to nearly 800,000 contracts by January this year. After several failed attempts, in June 2019 gold had broken above $1350, which encouraged the speculators to chase the price up even further. The interest rate outlook then softened along with the global economy, and by early September, with open interest threatening to rise above the historically high 650,000 level, the Fed was forced to inject inflationary liquidity into the US banking system through repos.
At its peak on 23 January 2020, the sum of all short positions on Comex was the equivalent of 2,488 tonnes of gold, worth $125bn. The suckers were finally breaking the banks, who held the bulk of the shorts. This can be seen in the chart below of Comex open interest:
https://zh-prod-1cc738ca-7d3b-4a72-b...ages/comex.png
It was imperative that the position be brought under control, and accordingly, it appears that central banks, presumably at the behest of the Bank of England, arranged for gold to be leased to the bullion banks to ease liquidity pressures. And then trading desks were hit by a perfect storm.
The coronavirus put large swathes of the global economy into lockdown, disrupting payment chains in industrial production. This meant that formerly solvent businesses now face collapse and are turning en masse to their banks for liquidity. The bankers’ natural instinct is no longer the pursuit of profit, but fear of losses, and they now have an overwhelming desire to contract outstanding bank credit. In a panic, the Fed cut the Fed funds rate to the zero bound and promised unlimited liquidity support in a desperate attempt to avoid a deflationary spiral. Meanwhile, our swaps traders in gold futures were caught record short, the worst possible position for them given the evolving situation.
The coup de grâce has now come from their banking superiors. Despite the efforts of the Fed to persuade them otherwise, bankers in their lending have become strongly risk-averse and know they will be forced to commit bank credit to failing corporations against their instincts. For this reason, they are taking every opportunity to reduce their balance sheet exposure to other activities. One of the first divisions to suffer is bound to be bullion bank desks running short positions, synthetic in London and actual on Comex, which are wholly inappropriate at a time of massive monetary inflation.
It is this last pressure that has led to an unusual combination of collapsed open interest, shown in the chart above, and rising gold prices, accompanied by a persistent premium of $40 or more over the spot price in London. Clearly, there is good reason for the LBMA and the CME to panic. If the gold price rises much further, there will be bullion desks, managing shorts on Comex and fractionally reserved positions in London, at risk of bankrupting their employers.
The Comex contract, which anchors itself to physical gold through the option of physical delivery at expiry, will face enormous challenges when the active June contract expires at the end of next month. At expiry, the speculators have a chance to obtain delivery. Normally, when the spot price is lower than the future, only the insane would insist on delivery at the higher price. But with very low availability of bullion and price premiums for delayed delivery common, London is being rapidly drained of physical liquidity as well. It is like a good old-fashioned one-two boxing combination: first the Comex market is delivered a body-blow, and then the LBMA gets an uppercut.
Many central banks who have stored their earmarked gold at the Bank of England will be unhappy as well, having leased their gold in the expectation it would stabilise the bullion market. They will not do it again for an interesting reason: gold leasing rates have turned strongly negative, with the two-month rate currently minus 3.7%. No sensible entity is going to pay a lessor to lease its gold and will want leased gold returned instead. Therefore, the availability of gold for leasing is now cut off and gold already leased will need to be returned if delivered to the lessors, or unencumbered if it remained in the Bank of England’s vaults as is the normal leasing practice.
Gold liquidity in London will then disappear entirely, at which point those with a claim to custodial gold will hope that their property rights remain protected.
Broader implications of the failure of gold derivatives
This article has gone into some detail why Comex and the LBMA face their current difficulties, and why liquidity is vanishing. For any bank with large unallocated gold liabilities, bearing in mind they are fractionally reserved mostly against derivatives instead of bullion, these problems are likely to lead to their withdrawal from the market. ABN-Amro is already reported to have closed its customers’ accounts, having forced them to sell positions, and other banks will surely follow.
The gold derivative market is probably the largest foreign exchange cross after the US dollar euro. But it is also the most fundamental of all monetary exchange markets. The relationship was famously captured in John Exter’s inverse pyramid, which showed how the world’s credit obligations were all supported on a diminishingly small apex of gold.
The liquidity pressures that result from banks trying to reduce their balance sheets also affects other derivative markets, and from our discourse on Deutsche Bank’s balance sheet, we can see that the whole banking system is in a very precarious position with respect to derivatives. While we survived the Lehman crisis with only one investment bank failing, the collapse of industrial production of goods and services due to lockdowns to control the spread of the coronavirus will almost certainly lead to multiple bank failures. Bankers are staring into an abyss.
For central banks, monetary inflation is everywhere the solution. Bank rescues, payment chain failures, the furloughing of millions of employees, helicopter money to bail out whole populations, money to bail out governments, money to support all categories of financial assets: the list is endless in scope and infinite in quantity. The survival of the global financial system is at stake. If it survives, state-issued money will have been destroyed. But then what is the point of owning financial assets valued in valueless currency?
While this process of monetary destruction would have reasonably been expected to evolve over time, the coronavirus has accelerated it.
The fate of the $640 trillion derivative mountain recorded by the Bank for International Settlements is sealed and will be settled through bank bankruptcies and state-directed elimination. In observing the train wreck that is precious metal derivative markets, we are at Act 1 Scene 1 of a rapidly-evolving and dramatic derivatives tragedy.
Authored by Alasdair Macleod via GoldMoney.com,
The powerful forces of bank credit contraction are at the heart of a rapidly evolving financial crisis in global derivatives, whose gross value is over $600 trillion; an unimaginable sum. Central banks are on course to destroy their currencies through unlimited monetary expansion, lethal for bullion banks with fractionally reserved unallocated gold accounts, while being dramatically short of Comex futures.
This article explains the dynamics behind the current crisis in precious metal derivatives, and why it is the observable part of a wider derivative catastrophe that is caught in the tension between contracting bank credit and infinite monetary inflation.
https://zh-prod-1cc738ca-7d3b-4a72-b...nk_Lending.jpg
Introduction
One of the scares at the time of the Lehman crisis was that insolvent counterparties risked collapsing the whole over-the-counter derivative complex. It was for this reason that AIG, a non-bank originator of many derivative contracts, had to be bailed out by the Fed. By a mixture of good judgement and fortune a derivative crisis was averted, and by consolidating some of the outstanding positions, the gross value of OTC derivatives was subsequently reduced.
According to the Bank for International Settlements, in mid-June last year all global OTC contracts outstanding were still unimaginably large at $640 trillion, a massive sum in anyone’s book. It is unlikely to have changed much by today. But in bank balance sheets only a net figure is usually shown, and you have to search the notes to financial statements to find evidence of gross exposure. It is the gross that matters, because each contract bears counterparty risk, sometimes involving several parties, and derivative payment failures could make the payment failures now evident in disrupted industrial supply chains look like small beer.
Deutsche Bank’s 2019 balance sheet gives us an excellent example of how they are accounted for in commercial banks. It conceals derivative exposure under the headings “Trading assets” and “Trading liabilities” on the balance sheet. You have to go into the notes to discover that under Trading assets, derivative financial instruments total €80.848bn, and under Trading liabilities, derivative financial instruments total €81.910bn, a difference of €1.062bn This is relatively trivial for a bank with a balance sheet of €777bn.
But wait, there is another table that breaks derivative exposure down even further into categories, and it turns out the earlier figures are consolidated totals. The true total of OTC derivatives and exchange traded derivatives to which the bank is exposed is €37.121 trillion. That is nearly thirty-five thousand times the €1.062bn netted difference in the balance sheet. And when you bear in mind that valuing OTC derivatives is somewhat subjective, or as the cynics say, mark to myth, it invalidates the valuation exercise.
Clearly, by taking the mildest of a positive approach to derivatives held as assets, and a slightly more conservative approach to valuing derivatives on the liabilities side, that 35,000:1 leverage at the balance sheet level can make an enormous difference.
Now let us take our imagination a little further. A large number of these derivatives will have commercial entities as counterparties, businesses that have been shut down by the coronavirus since the balance sheet date. With the German economy already heading into recession before the coronavirus closed down much of the global economy, Deutsche Bank’s risk of losses arising from its derivative position could turn out to be in the trillions, not the one billion netted difference shown on the balance sheet.
Not only is there the emergence of counterparty failures to deal with, but there are ever-changing fair values, which will particularly reflect interest rate spreads increasing for Deutsche Bank’s €30.25 trillion interest rate-linked derivatives. We cannot know whether it is net positive or negative for shareholders. And with balance sheet gearing of assets 22 times larger than share capital very little change could wipe them out.
Deutsche Bank is not alone in presenting derivative risk in this manner: it is the elephant in many bank boardrooms. As a weak link, Deutsche is a relevant illustration of risks in the banking system. Since the Lehman crisis, its senior management has been on the back foot, retreating from businesses they could neither control nor understand. They have also made very public mistakes in precious metals, which is our next topic.
Gold derivatives in crisis
While a struggling bank like Deutsche provides us with a laboratory experiment for how a derivative virus can kill a bank, we are now seeing it kill off bullion banks in real time. A rising gold price, out of the control normally imposed by expandable derivatives, has effectively gone bid only in any size. We are told this is due to COVID-19 shutting mines and refineries and disrupting logistics, and so is purely temporary.
The LBMA and CME which runs Comex have been issuing calming statements and even announced the introduction of a new 400-ounce gold futures contract alleged to ease the supply shortage.
In short, the gold derivative establishment is panicking. The swaps position on Comex shows why.
https://zh-prod-1cc738ca-7d3b-4a72-b.../Picture_1.png
With their net short position in very dangerous territory, Comex swaps are badly wrongfooted at a time when the Fed and other central banks have announced unlimited monetary inflation, signalling a paradigm shift in the relationship between sound and unsound money. For ease of reference and to understand their relevance, a swap dealer is defined by the Commodity Futures Trading Commission, which collates the figures, as follows:
An entity that deals primarily in swaps for a commodity and uses the futures markets to manage or hedge risks associated with those swap transactions. The swap dealer’s counterparties may be speculative traders, like hedge funds, or traditional commercial clients that are managing risk arising from their dealings in the physical commodity.
Therefore, a swap dealer is one that operates across derivative markets, and typically will trade in London forwards as well as on Comex. In a nutshell, it describes a bullion bank’s trading desk.
In a further piece of disinformation this week, Jeff Christian, head of CPM Group, in an obviously staged interview for MacroVoices claimed that traders in London were forced by their banks to cover trading risk in the futures market as a condition of their funding. The implication was shorts on Comex are matched to longs in London’s forward market and therefore not a problem. This may be true of an independent trader looking for arbitrage opportunities between markets but is not how it works in a bank.
The mechanics of gold derivative trading
A bank which has bullion business will almost certainly have a trading desk and be a member of the LBMA. Look at it from a banker’s point of view. The bank has business flows in gold, which requires access to the market and a dealing capability. He will employ one or more gold traders with acknowledged expertise to manage the desk. As a profit centre and because a skilled trader will require it, he will give the desk discretionary trading limits and monthly or quarterly profit targets. Part of the deal with the desk is profits will be struck net of the cost of funding the book, usually a reference to Libor, which is effectively the marginal cost to the bank of expanding its credit to back the dealers’ positions.
When the gold desk has established a profitable track record, the banker will be eager to raise the trading desk’s position limits. For bullion banking this has been going on for years, and while individual trading desks come and go, traders now have a large degree of dealing autonomy. It is not, as Mr Christian misinforms us, just a covered arbitrage business between forwards in London and futures in America.
The LBMA lists twelve market makers, all of which are well-known banks. There are thirty-one other banks, some of which run trading desks which take positions. It is worth noting that dealing in gold is normally one of many banking and trading activities undertaken by an LBMA member bank, including forex trading with which this activity is very similar. All of them are funded by the expansion of bank credit, which is the point of having a banking licence.
Turning to Comex, according to CTFC data there are a maximum of 28 swap dealers which recently have been active in gold futures, either with long or short positions. These numbers tie in nicely with the likely number of trading desks and designated market makers in the banks which are LBMA members.
An LBMA member bank will have physical bullion business and is likely to offer allocated and unallocated accounts to customers. Since the point of banking is to operate a fractional reserve-based customer service, a bullion bank discourages allocated (custodial) accounts, usually by making them an expensive way for customers to hold bullion. Unallocated accounts, which under fractional reserve banking will be a multiple of gold or gold derivatives in the possession of the bank, becomes the bank’s standard customer offering.
One of the benefits of LBMA membership is it gives a bullion bank access to paper markets, so that it can replace physical bullion held against unallocated client accounts with long positions for forward settlement, positions that can be rolled and rolled without ever having to take delivery. Another benefit is access to leased gold from central banks which store bullion in the Bank of England’s vault.
One can begin to see why dealings between LBMA members are so significant, recently hitting 60 million ounces a day, the equivalent of 1,866 tonnes. This represents dealings between LBMA members only and excludes dealings between a member and a non-member. In the distant past they were included in LBMA estimates, which inflated the numbers even further by a factor of about five times.
All this is done on minimum bullion liquidity, which when you take away central bank gold, physical ETF custodial bullion, as well as bullion owned or allocated to miscellaneous institutions, family offices and private individuals stored in London bullion vaults, is not the 8,326 tonnes claimed in a recent LBMA press release designed to calm the markets, but is almost certainly significantly less than a thousand tonnes.
Clearly, running long positions for forward settlement has become a substitute for backing unallocated accounts with a fractional amount of physical metal. While the trading books in London keep the plates spinning in their dangerously geared operation, the profit opportunities on Comex have become a separate matter instead of just a hedging facility.
Officially described as speculators, but better described as suckers, gold and silver futures are the medium for a repeating cycle whereby market makers supply them contracts by drawing on the ability of their banks to create bank credit out of thin air. Once the suckers run out of buying power, the market makers pull the rug out from under them, taking out their stop-loss points. It has been an immensely profitable exercise for swap dealers.
Fortunately for swap dealers, the suckers have short memories. Until last year, it was a frequently repeated exercise, leading to a blasé attitude. Corruption among traders had become rife and they began to be caught spoofing and rigging the fix against bank customers. Dealers were sacked, fined and jailed.
Deutsche Bank were fined and forced out of the twice-daily fix. A JPMorgan trader pleaded guilty last August to manipulating the precious metals markets for nine years. Another with the same firm had pleaded guilty the previous October. In the past five years federal prosecutors have brought twelve spoofing cases against sixteen defendants, most pleading guilty.
This corruption is typical of end-of-cycle behaviour, when the derivative ringmasters in precious metals believe they have risen above the law. The point behind the current crisis unfolding in the gold derivative markets is the scam has fully run its course, and the bankers in charge of bullion desks will be increasingly concerned of the reputational damage.
How the ending of the gold derivative scam started
In the past, bullion banks always managed to put a lid on open interest, returning it from an overbought 600,000 contracts to under 400,000 contracts, in the process getting an even book or exceptionally going long, ready for the next pump-and-dump cycle. But then something changed. Last year, the pump-and-dump schemes of the bullion banks’ trading desks went awry, with open interest rocketing to nearly 800,000 contracts by January this year. After several failed attempts, in June 2019 gold had broken above $1350, which encouraged the speculators to chase the price up even further. The interest rate outlook then softened along with the global economy, and by early September, with open interest threatening to rise above the historically high 650,000 level, the Fed was forced to inject inflationary liquidity into the US banking system through repos.
At its peak on 23 January 2020, the sum of all short positions on Comex was the equivalent of 2,488 tonnes of gold, worth $125bn. The suckers were finally breaking the banks, who held the bulk of the shorts. This can be seen in the chart below of Comex open interest:
https://zh-prod-1cc738ca-7d3b-4a72-b...ages/comex.png
It was imperative that the position be brought under control, and accordingly, it appears that central banks, presumably at the behest of the Bank of England, arranged for gold to be leased to the bullion banks to ease liquidity pressures. And then trading desks were hit by a perfect storm.
The coronavirus put large swathes of the global economy into lockdown, disrupting payment chains in industrial production. This meant that formerly solvent businesses now face collapse and are turning en masse to their banks for liquidity. The bankers’ natural instinct is no longer the pursuit of profit, but fear of losses, and they now have an overwhelming desire to contract outstanding bank credit. In a panic, the Fed cut the Fed funds rate to the zero bound and promised unlimited liquidity support in a desperate attempt to avoid a deflationary spiral. Meanwhile, our swaps traders in gold futures were caught record short, the worst possible position for them given the evolving situation.
The coup de grâce has now come from their banking superiors. Despite the efforts of the Fed to persuade them otherwise, bankers in their lending have become strongly risk-averse and know they will be forced to commit bank credit to failing corporations against their instincts. For this reason, they are taking every opportunity to reduce their balance sheet exposure to other activities. One of the first divisions to suffer is bound to be bullion bank desks running short positions, synthetic in London and actual on Comex, which are wholly inappropriate at a time of massive monetary inflation.
It is this last pressure that has led to an unusual combination of collapsed open interest, shown in the chart above, and rising gold prices, accompanied by a persistent premium of $40 or more over the spot price in London. Clearly, there is good reason for the LBMA and the CME to panic. If the gold price rises much further, there will be bullion desks, managing shorts on Comex and fractionally reserved positions in London, at risk of bankrupting their employers.
The Comex contract, which anchors itself to physical gold through the option of physical delivery at expiry, will face enormous challenges when the active June contract expires at the end of next month. At expiry, the speculators have a chance to obtain delivery. Normally, when the spot price is lower than the future, only the insane would insist on delivery at the higher price. But with very low availability of bullion and price premiums for delayed delivery common, London is being rapidly drained of physical liquidity as well. It is like a good old-fashioned one-two boxing combination: first the Comex market is delivered a body-blow, and then the LBMA gets an uppercut.
Many central banks who have stored their earmarked gold at the Bank of England will be unhappy as well, having leased their gold in the expectation it would stabilise the bullion market. They will not do it again for an interesting reason: gold leasing rates have turned strongly negative, with the two-month rate currently minus 3.7%. No sensible entity is going to pay a lessor to lease its gold and will want leased gold returned instead. Therefore, the availability of gold for leasing is now cut off and gold already leased will need to be returned if delivered to the lessors, or unencumbered if it remained in the Bank of England’s vaults as is the normal leasing practice.
Gold liquidity in London will then disappear entirely, at which point those with a claim to custodial gold will hope that their property rights remain protected.
Broader implications of the failure of gold derivatives
This article has gone into some detail why Comex and the LBMA face their current difficulties, and why liquidity is vanishing. For any bank with large unallocated gold liabilities, bearing in mind they are fractionally reserved mostly against derivatives instead of bullion, these problems are likely to lead to their withdrawal from the market. ABN-Amro is already reported to have closed its customers’ accounts, having forced them to sell positions, and other banks will surely follow.
The gold derivative market is probably the largest foreign exchange cross after the US dollar euro. But it is also the most fundamental of all monetary exchange markets. The relationship was famously captured in John Exter’s inverse pyramid, which showed how the world’s credit obligations were all supported on a diminishingly small apex of gold.
The liquidity pressures that result from banks trying to reduce their balance sheets also affects other derivative markets, and from our discourse on Deutsche Bank’s balance sheet, we can see that the whole banking system is in a very precarious position with respect to derivatives. While we survived the Lehman crisis with only one investment bank failing, the collapse of industrial production of goods and services due to lockdowns to control the spread of the coronavirus will almost certainly lead to multiple bank failures. Bankers are staring into an abyss.
For central banks, monetary inflation is everywhere the solution. Bank rescues, payment chain failures, the furloughing of millions of employees, helicopter money to bail out whole populations, money to bail out governments, money to support all categories of financial assets: the list is endless in scope and infinite in quantity. The survival of the global financial system is at stake. If it survives, state-issued money will have been destroyed. But then what is the point of owning financial assets valued in valueless currency?
While this process of monetary destruction would have reasonably been expected to evolve over time, the coronavirus has accelerated it.
The fate of the $640 trillion derivative mountain recorded by the Bank for International Settlements is sealed and will be settled through bank bankruptcies and state-directed elimination. In observing the train wreck that is precious metal derivative markets, we are at Act 1 Scene 1 of a rapidly-evolving and dramatic derivatives tragedy.
- Post #8,168
- Quote
- Edited 9:42am Apr 18, 2020 9:31am | Edited 9:42am
- | Commercial Member | Joined Dec 2014 | 11,632 Posts
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Jim Willie CB, editor of the “HAT TRICK LETTER”
Use the above link to subscribe to the paid research reports, which include coverage of critically important factors at work during the ongoing panicky attempt to sustain an unsustainable system burdened by numerous imbalances aggravated by global village forces. The historically unprecedented ongoing collapse has been created by compromised central bankers and inept economic advisors, whose interference has irreversibly altered and damaged the world financial system, urgently pushed after the removed anchor of money to gold. Analysis features Gold, Crude Oil, USDollar, Treasury Bonds, and inter-market dynamics with the US Economy and US Federal Reserve monetary policy.
The Gold suppression game appears finally to be coming to an end. A Perfect Storm is hitting the Gold market, with an internal factor (QE), an external factor (SGE), and a systemic factor (Basel). These factors can be identified, each very powerful, each with a very new recent twist to alter the landscape. All three forces are positive in releasing Gold from the corrupt clutches of the Anglo-American banker organization. They have been willing to destroy the global financial structure and many national economies, in order not just to maintain the political power, but also to continue the privilege of granting themselves $trillion free loans. The owners of the US Federal Reserve, Euro Central Bank, and Bank of England have granted themselves free money in gifted pilferage for a full century. As the saying goes, a nation needs a central bank like an oyster needs a piano. In the last ten years since the Lehman Brothers failure, all systems have undergone the same reckless treatment that the mortgage bonds endured. They saw corrupted underwriting, corrupted title database, and corrupted demand functions.
THE US-UK BANKSTERS HAVE FINALLY CREATED THE USTREASURY BOND AS THE GLOBAL SUBPRIME BOND. THIS IS THE RESULT OF Q.E. ABUSE.
The perfect storm in the Boston area involves three storm masses hitting the New England coast at the same time from different angles. One of the most beautiful sights in my 20 years in Boston was seeing a Nor’Easter slamming the coast with white snow laced with blue algae, visible in the sunlight angles. The perfect financial storm will be at least three times worse than the 2008 financial crisis that engulfed the subprime bond market. This time, the entire global bond market has been wrecked. The USTreasury Bond market has almost no legitimate buyers, has suffered massive dumpings in abandonment, and depends upon banker derivatives to fabricate phony demand. The corporate bond market is turning gradually into a BBB junk bond yard, after years of abused bond issuance devoted to share buybacks and executive options. The malinvestment has been astonishing and universal. The Emerging Market bonds have been kept afloat by Western banks, as they lent money to service the badly impaired debt. It can actually be stated with accuracy that the entire global bond market is subprime, led by the USTBonds.
Harken back to 2012, when the Swiss decided to install the 120 Euro-Swiss Franc peg. The publicly stated monetary policy was cover for a grand Gold price scheme which involved the USDollar, the Euro, and the Swiss Franc currency. It was very successful in bringing down the Gold price from its $1900 high, with full Euro Central Bank collusion, joined by massive USDollar Swaps. Together with the Quantitative Easing (QE) monetary policy from the US Federal Reserve, the Gold price has been stuck in a rangebound interval. However, an impasse has been reached, and the roadblock is being cleared.
In the last ten years, absolutely nothing has been fixed, no remedy even attempted, while all the errors, crimes, and reckless monetary policy that created the Lehman fiasco with the Global Financial Crisis, have been repeated on a global scale.
The Emerging Market debt is ready to explode. The Petro-Dollar has been largely dismantled, no evidence better than the crude oil price which cannot find its way above the $60 to $65 mark. Therefore, Wall Street energy portfolios, stuck with shale sector debt, are also set to explode. The corporate bond market is set to turn into junk, with GE, General Motors, and Deutsche Bank leading the parade of perhaps $1 trillion in corp debt into junk territory in the next year. But the grandest of the big stories is that the USTreasury Bond has become the global subprime bond.
Three factors will work to force the Gold price much higher, as a new chapter is unfolding. The factors are internal with QE, external with the SGE in Shanghai, and systemic with the BIS in Basel. One must always recall that the Gold price for almost a century had followed the money supply in a tight correlation. For the last ten years, the USD-based money supply has almost tripled. The process created a coiled spring. The Gold price is due to triple, making up for lost time. It just needs some internal, external, and systemic pushes.
INTERNAL – QE
The stage is set for another heavy big important Quantitative Easing (QE) initiative. The official monetary tightening has been a disaster. Next comes a reversal of policy, and resumption of extreme easing with heavy volume bond purchases. Maybe this time, it will include all types of bonds, from sovereign to bank bonds to general corporates to mortgages, even to energy sector bonds. A new wave of securitized bonds could occur, to facilitate monetization of debt, enabling the central banks to purchase them efficiently. Witness the dawn of the everything bond bubble yielding to the everything bond QE purchase program to save the Western financial system. It has been called the QE FOREVER bond initiative, which might be called upon to monetize the entire Western banking system. To be sure, the Gold price will respond with upward jettison to the conclusion of the full ruination of money. They masters must prevent a full banking system collapse.
The world’s financial system has become dependent on huge central bank balance sheets. Yet the assets of central banks around the world have begun to contract notably, relative to Gross Domestic Product, for the first time since the 2008 crash. This is important to understand and a dangerous risk for both financial markets and real economies because of the key role played by central banks in the funding system. The USFed expanded its balance sheet in a tremendous burst over the last ten years. It grew from $900 billion in 2008 to $4.3 trillion in 2018. They built a dangerous credit dependence as they staved off collapse.
The USTBond lost the majority of its investors. The official tightening in the last year has caused financial market convulsions. A change in the Fed Open Market Committee winds has been duly noted in recent several weeks. They will not only be flexible, but they anticipate QE to become a permanent policy. The United States is freed to embark on a new course, and to avoid further damage from the tightening and lost trade. China did not succumb to the tightening. Next comes the inevitable loosening of monetary policy by the USFed. Welcome QE FOREVER.
Expect to see another round of central bank asset purchases, which many call QE4, far sooner than many expect. The Jackass calls it QE to Infinity again or perhaps QE186 in jest. Others call it QE FOREVER, which might be the best name of all. Next comes the inevitable loosening of monetary policy by the USFed. They must avoid an economic downward spiral. They must avoid a financial system breakdown. The consequences will be severe. The policymakers will permit more inflation, both in monetary flows and in price structures. They must monetize the uncontrolled debt and perhaps even the banking system. The result will be a powerful upward move in the Gold price. They will make the painful decision sooner or later, since global collapse is the alternative. THE KEY POINT IS THAT THE US FEDERAL RESERVE HAS NO CREDIBILITY ON THE GLOBAL STAGE. THEY ARE ON THE VERGE OF ANNOUNCING A FULL BLOWN Q.E. TO INFINITY. THEY MUST RESCUE EVERYTHING WITH Q.E. FOREVER.
The USTreasury Bond will be widely recognized as the global subprime bond. It will rally from orchestrated pursuit of safe haven, but later break down in a grand default. The default type will be a restructured debt. The Gold Price will enjoy an enormous lift, with the Silver price rising in lockstep. In this next episode, the safe haven will be globally recognized as Gold, since the USTBond is subprime, supported by fraudulent derivatives, and dumped the world over.
EXTERNAL – SGE
The China Gold window has set a trap for the USDollar. A stronger dollar means the Chinese accelerate their conversion of USDollars to Gold, even as their trade surplus grows. A weaker dollar means the entire globe abandons USD-based assets. Amidst the panic, the Gold safe haven is discovered and embraced. By opening the Gold-RMB window, China has assured the death of the toxic USDollar and the death of the corrupt LBMA Gold market. The sunset of the entire Petro-Dollar defacto standard has arrived in full force. The cooperation, collusion, and support from Saudi Arabia is fast vanishing. The entire OPEC oil cartel is moving under the Russian Rosneft umbrella, outside the USD control. The East is shifting quickly away from the USD sphere, and toward the RBM arena, which should act as a caretaker toward passage into the full implementation of the Gold Standard.
Since March 2018, in a hidden manner, the USDollar has become captive to the Shanghai futures contracts that control the Gold-Oil-Yuan. The result is a slow death for either the USDollar or the Gold Market as we know it, namely the LBMA in collusion with the COMEX. During these four decades or more, the USDollar has reigned supreme as the global reserve asset. In recent years, the USD has faced direct challenges with an enormous volume of USTreasury Bonds having been discharged by the entire set of central banks. China strives to achieve more independence from the USD, no longer willing to operate in the King Dollar shadow. Rather than displace the USD and win equal global reserve status for the Chinese Yuan (CNY) currency, they have employed a different strategy, and it will be successful. China had to open the CNY-Gold window to internationalize the CNY, which will drain the USDollar power.
The Chinese Yuan is not backed by Gold, a common error that most analysts and investors make. It means that nations with credits from the Chinese are given a choice. They can hold the CNY as currency or convert it to Gold, but only at the Shanghai Gold Exchange. This was the first step that China had to take to convince the energy (oil & natgas) exporters to accept CNY and thus to initiate the Petro/NG-Yuan trade. Call it the Petro-RMB trade. It is expanding very quickly in volume, to overtake the Brent crude oil trade. Nations will accumulate RMB in the energy trade, from gigantic Chinese oil & gas purchases. They will be led to convert to Gold, and to refuse holding USTBonds. China will only sell Gold in their domestic currency (Chinese Yuan) at the SGE. They will not sell Gold in any other currency. This opening of the SGE CNY-Gold window has essentially trapped the US, USD and LBMA. Various alternative paths are presented.
If the USD strengthens versus the CNY, then the Chinese and other nations rush to the LBMA in London to purchase Gold in USD terms. They bankrupt the LBMA and wreck the Gold Market, which is corrupted by Western paper contracts. The other nations would suffer economic turmoil from the continually rising USD, and then turn to Gold as refuge. Worse, the cheaper Chinese CNY currency leads to continued outsized US trade deficit with respect to China. In turn, China will convert its growing USTreasurys stash won in trade to Gold holdings even faster.
If the USD weakens versus the CNY, then the entire sets of foreign holders of USD assets (stocks, bonds, property) move to exit these USD assets. Gold moves in the opposite direction. The weaker USDollar also would indicate price inflation as a standard signal, leading to more Gold demand as hedge. Amidst USD price declines in a broadbased manner, the USD-based financial markets begin to experience a collapse, while panic rises. In turn, the masses are encouraged and directed into the safe haven of Gold. The run on bullion bankrupts the LBMA.
The introduction of the SGE CNY-Gold window in Shanghai has guaranteed the bankruptcy of the LBMA. The ruin and bust of the US-UK Gold market, steeped in corruption, is assured. There is not enough gold at current price to satisfy demand. In fact, the demand can only be met with a higher Gold price which destroys the USDollar as a Global Reserve Asset. The ongoing operation of the SGE CNY-Gold window, compounded by its rising volume, has signaled the end of the USD as a global currency reserve and the death of the LBMA. It also means China can buy all commodities in CNY terms and can run a monetary policy independent of the USFed. China no longer needs to acquire more USTreasurys, or to hold them in reserves. They are spending their USTBonds in great volume in the funding of third party projects, called Indirect Exchange. It has been a major dumping exercise for the last four or five years. After accounting for USTBond swaps, the Chinese rank behind the Japanese in USTreasury holdings.
The Chinese will observe the US-UK bankster tagteam struggle sweat and squirm. As the USFed, with approval by the London banker set, embark upon the QE FOREVER policy, the Chinese will dictate the terms of the Gold market. It is simply a case of when not if the USD and LBMA die a slow death. China can go about its business while observing the process, since it has made all the requisite steps in Shanghai. The Gold Price will enjoy an enormous lift, with the full adoption of trade payment systems led by China, to be executed in Gold terms. The entire Eurasian Trade Zone, integrating the entire Belt & Road Initiative with its $4 to $6 trillion in projects, has no more linkage to the USDollar orbit. In this next episode, the Gold Trade Note will become a standard. It will be first seen in the energy trade payments, then in commodities generally, and finally in consulting service work.
SYSTEMIC – BIS (Basel Rules)
The new Basel rules make physical Gold a Tier-1, riskless asset starting the end of March. The impact will be realized on big bank balance sheets. For years, a ban has been in place on Gold as a reserve asset. No more!! Combined with the substantial accumulation by central banks in gold reserves over the last 12-18 months, the signal is clear. The insolvent central banks have a plan. It is not a new plan, but rather one promoted by Zijlstra and White, two heavyweights at the Bank for International Settlements (BIS) in Basel Switzerland. The Dutch-born Jelle Zijlstra served as the chairman from 1967 to December 1981. William White was the BIS Chief Economist in the last decade. The elite and highly respected chairman wrote books on monetary policy. In Zijlstra’s second book, “Per Slot Van Rekening,” one sees a very candid man, even a contrarian who would win favor from Von Mises at the Austrian School of Economics. Zijlstra gives a very precise description of how central bankers conduct their business and maintain their independence from government interference. Whereas conventional monetary debasement is described in polite terms, Zijlstra explains what central bankers actually do in policy actions. Zijlstra acknowledges that the Gold price is kept far too low. Consider his pronouncements as blasphemy from Basel, in opposition to the US-UK bankster crowd. The Jackass believes Basel will not permit its own failure, in order to follow the Anglo-Americans down the path to ruin. Over a year ago, Basel began to refuse to supply London its endless demands for gold bullion. Instead, the Vatican has satisfied the large demand which keeps the ruinous game going.
In going much further, Zijlstra explains his perceived role of Gold in what he eloquently calls the international Monetary Cosmos. He stated that “Gold functions like the sun, with all currencies as planets orbiting around it, with only the sun in fixed position. It is perhaps nice to get into the role of Gold and its meaning in the time before the monetary cosmos collapsed into more chaotic conditions. Throughout centuries Gold was a protection against [natural] disasters, arbitrariness, and persecution. Because natural production levels hardly allow overproduction with substantial depreciating values as result. Because it does not rust and, once produced, never perishes, excessive scarcity can never occur. That is why Gold developed its image of solidity, stability, and reliability. [In reference to monetary policy during past crises…] A good solution would have been to drastically raise the price of Gold, since it was extraordinarily peculiar that in the post-World War II world, in which everything became more than three to four times more expensive than in the 1930s, the price of Gold remained the same. Actually, two things had to be done. The official Gold price in all currencies had to be raised and, besides this, the official dollar price of Gold had to be raised extra, to allow the dollar to devalue against all other currencies.” The Americans rejected his proposals, finding his ideas like high pitched swearing in a cathedral church. They refused to permit the USDollar to become of second rank to Gold.
Zijlstra and White have written about the Basel Plan for restoring the financial health of the major central banks. They are now hopelessly insolvent, having served as buyers of last resort for sovereign bonds which the market rejected. No buyers were found. As chronic blind bond buyers of junk, the central banks built gigantic toxic paper waste centers. Due to their unending bond purchases, they have accomplished two things. They have rendered their institutions insolvent. They have forced the situation where Gold must bail them out. The major central banks, according to the Basel BIS Plan, must accumulate large volumes of Gold bullion, count it as reserves, build the solid foundation, then permit (push) the Gold price to rise 3-fold, then 5-fold, then 10-fold.
In doing so, the Gold price will compensate finally for the fast rise in the USD money supply from the last decade. The result will be the revitalization of the central bank balance sheets, the exit from insolvency, and the restoration of their financial health. In short, if the central banks do not endorse Gold and lead the path to a $5000 Gold price, then later a $10,000 Gold price, then these same central banks will be destroyed and with it the banker cabal power. THE MOVE TO MAKE GOLD A TIER-1 ASSET IS THE FIRST STEP TO EXECUTE THE END GAME PLAN. Then comes large volume accumulation by the entire central bank franchise system. They will sell USTreasury Bonds and buy Gold bullion, but quietly with no fanfare or publicity. Then they will assist in the significant rise in the Gold price. It is written in the Basel BIS manual. It will be done.
BULLISH GOLD CHARTS
The Gold price is showing a strong bullish pattern in the short term, the intermediate term, and the long term. All charts are bullish. Except for certain rigged USTreasurys, the asset Gold was the best performing of all global assets in full year 2018, gaining good attention. The current Gold charts are showing strength in USD terms, but also in EUR terms, in British Pound terms, in Swiss Franc terms, in Japanese Yen terms, and in Canadian Dollar terms. The perfect storm is aligning to produce a wonderful year for Gold, with global recognition that it is the center of the solution for the blossoming global financial crisis. The USTreasury Bond will lose its safe haven status, and Gold will capture it. The Chinese must take the leading role in pushing up the Gold price. The trade war and growing Eastern consensus will enable China to take this role with enthusiasm, gusto, and vigor.
The intermediate Gold chart shows a clear Cup & Handle reversal bullish pattern. It is a highly reliable pattern. The target is $1520, bolstered by the bullish crossover of the Moving Averages. Expect a battle for consolidating gains at this right side of the handle, which could last another month. Refer to the $1320 to $1350 interval. Then comes the breakout to jump past $1400 and sure to attract global attention. The intermediate term is the dominant perspective at this time.
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The very short-term Gold chart is a stair-step rise. It is justified by the bullish Moving Average crossover seen in early January. Technical traders lock on such signals, with confirmation of daily MA seen in the weekly MA also. The pennant pause pattern in January resulted in a fall but quickly a powerful rise, as fundamentals coincided with the technical pattern. The bull flag pattern in February resolved easily in the upward direction. It is not clear what comes next. Therefore expect some consolidation, before further upward movement.
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The long-term weekly Gold chart offers some very good clarity. The Cup & Handle reversal will provide the lift for overcoming the $1365 resistance, which has several touch points. When it is overcome, the lift will thus be powerful. The longer-term look is dominated by the bullish triangle formed in the last three years. It has a sizeable 250-point potential, which indicates a target of $1600. It is a reliable pattern also. Watch the fundamentals accelerate in the confirmation process, as the King Dollar loses its luster, as its integrity is undermined by unbridled debt, as war with sanctions are the primary defense mechanisms. The USDollar is no longer defended by economic strength, or banking integrity, or industrial vitality, or even political leadership. In fact, no nations pay much attention to what the US Government says anymore, their policies largely ignored. Gold will take center stage in 2019 and 2020.
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subscribe: Hat Trick Letter
Jim Willie CB, editor of the “HAT TRICK LETTER”
Use the above link to subscribe to the paid research reports, which include coverage of critically important factors at work during the ongoing panicky attempt to sustain an unsustainable system burdened by numerous imbalances aggravated by global village forces. The historically unprecedented ongoing collapse has been created by compromised central bankers and inept economic advisors, whose interference has irreversibly altered and damaged the world financial system, urgently pushed after the removed anchor of money to gold. Analysis features Gold, Crude Oil, USDollar, Treasury Bonds, and inter-market dynamics with the US Economy and US Federal Reserve monetary policy.
The Gold suppression game appears finally to be coming to an end. A Perfect Storm is hitting the Gold market, with an internal factor (QE), an external factor (SGE), and a systemic factor (Basel). These factors can be identified, each very powerful, each with a very new recent twist to alter the landscape. All three forces are positive in releasing Gold from the corrupt clutches of the Anglo-American banker organization. They have been willing to destroy the global financial structure and many national economies, in order not just to maintain the political power, but also to continue the privilege of granting themselves $trillion free loans. The owners of the US Federal Reserve, Euro Central Bank, and Bank of England have granted themselves free money in gifted pilferage for a full century. As the saying goes, a nation needs a central bank like an oyster needs a piano. In the last ten years since the Lehman Brothers failure, all systems have undergone the same reckless treatment that the mortgage bonds endured. They saw corrupted underwriting, corrupted title database, and corrupted demand functions.
THE US-UK BANKSTERS HAVE FINALLY CREATED THE USTREASURY BOND AS THE GLOBAL SUBPRIME BOND. THIS IS THE RESULT OF Q.E. ABUSE.
The perfect storm in the Boston area involves three storm masses hitting the New England coast at the same time from different angles. One of the most beautiful sights in my 20 years in Boston was seeing a Nor’Easter slamming the coast with white snow laced with blue algae, visible in the sunlight angles. The perfect financial storm will be at least three times worse than the 2008 financial crisis that engulfed the subprime bond market. This time, the entire global bond market has been wrecked. The USTreasury Bond market has almost no legitimate buyers, has suffered massive dumpings in abandonment, and depends upon banker derivatives to fabricate phony demand. The corporate bond market is turning gradually into a BBB junk bond yard, after years of abused bond issuance devoted to share buybacks and executive options. The malinvestment has been astonishing and universal. The Emerging Market bonds have been kept afloat by Western banks, as they lent money to service the badly impaired debt. It can actually be stated with accuracy that the entire global bond market is subprime, led by the USTBonds.
Harken back to 2012, when the Swiss decided to install the 120 Euro-Swiss Franc peg. The publicly stated monetary policy was cover for a grand Gold price scheme which involved the USDollar, the Euro, and the Swiss Franc currency. It was very successful in bringing down the Gold price from its $1900 high, with full Euro Central Bank collusion, joined by massive USDollar Swaps. Together with the Quantitative Easing (QE) monetary policy from the US Federal Reserve, the Gold price has been stuck in a rangebound interval. However, an impasse has been reached, and the roadblock is being cleared.
In the last ten years, absolutely nothing has been fixed, no remedy even attempted, while all the errors, crimes, and reckless monetary policy that created the Lehman fiasco with the Global Financial Crisis, have been repeated on a global scale.
The Emerging Market debt is ready to explode. The Petro-Dollar has been largely dismantled, no evidence better than the crude oil price which cannot find its way above the $60 to $65 mark. Therefore, Wall Street energy portfolios, stuck with shale sector debt, are also set to explode. The corporate bond market is set to turn into junk, with GE, General Motors, and Deutsche Bank leading the parade of perhaps $1 trillion in corp debt into junk territory in the next year. But the grandest of the big stories is that the USTreasury Bond has become the global subprime bond.
Three factors will work to force the Gold price much higher, as a new chapter is unfolding. The factors are internal with QE, external with the SGE in Shanghai, and systemic with the BIS in Basel. One must always recall that the Gold price for almost a century had followed the money supply in a tight correlation. For the last ten years, the USD-based money supply has almost tripled. The process created a coiled spring. The Gold price is due to triple, making up for lost time. It just needs some internal, external, and systemic pushes.
INTERNAL – QE
The stage is set for another heavy big important Quantitative Easing (QE) initiative. The official monetary tightening has been a disaster. Next comes a reversal of policy, and resumption of extreme easing with heavy volume bond purchases. Maybe this time, it will include all types of bonds, from sovereign to bank bonds to general corporates to mortgages, even to energy sector bonds. A new wave of securitized bonds could occur, to facilitate monetization of debt, enabling the central banks to purchase them efficiently. Witness the dawn of the everything bond bubble yielding to the everything bond QE purchase program to save the Western financial system. It has been called the QE FOREVER bond initiative, which might be called upon to monetize the entire Western banking system. To be sure, the Gold price will respond with upward jettison to the conclusion of the full ruination of money. They masters must prevent a full banking system collapse.
The world’s financial system has become dependent on huge central bank balance sheets. Yet the assets of central banks around the world have begun to contract notably, relative to Gross Domestic Product, for the first time since the 2008 crash. This is important to understand and a dangerous risk for both financial markets and real economies because of the key role played by central banks in the funding system. The USFed expanded its balance sheet in a tremendous burst over the last ten years. It grew from $900 billion in 2008 to $4.3 trillion in 2018. They built a dangerous credit dependence as they staved off collapse.
The USTBond lost the majority of its investors. The official tightening in the last year has caused financial market convulsions. A change in the Fed Open Market Committee winds has been duly noted in recent several weeks. They will not only be flexible, but they anticipate QE to become a permanent policy. The United States is freed to embark on a new course, and to avoid further damage from the tightening and lost trade. China did not succumb to the tightening. Next comes the inevitable loosening of monetary policy by the USFed. Welcome QE FOREVER.
Expect to see another round of central bank asset purchases, which many call QE4, far sooner than many expect. The Jackass calls it QE to Infinity again or perhaps QE186 in jest. Others call it QE FOREVER, which might be the best name of all. Next comes the inevitable loosening of monetary policy by the USFed. They must avoid an economic downward spiral. They must avoid a financial system breakdown. The consequences will be severe. The policymakers will permit more inflation, both in monetary flows and in price structures. They must monetize the uncontrolled debt and perhaps even the banking system. The result will be a powerful upward move in the Gold price. They will make the painful decision sooner or later, since global collapse is the alternative. THE KEY POINT IS THAT THE US FEDERAL RESERVE HAS NO CREDIBILITY ON THE GLOBAL STAGE. THEY ARE ON THE VERGE OF ANNOUNCING A FULL BLOWN Q.E. TO INFINITY. THEY MUST RESCUE EVERYTHING WITH Q.E. FOREVER.
The USTreasury Bond will be widely recognized as the global subprime bond. It will rally from orchestrated pursuit of safe haven, but later break down in a grand default. The default type will be a restructured debt. The Gold Price will enjoy an enormous lift, with the Silver price rising in lockstep. In this next episode, the safe haven will be globally recognized as Gold, since the USTBond is subprime, supported by fraudulent derivatives, and dumped the world over.
EXTERNAL – SGE
The China Gold window has set a trap for the USDollar. A stronger dollar means the Chinese accelerate their conversion of USDollars to Gold, even as their trade surplus grows. A weaker dollar means the entire globe abandons USD-based assets. Amidst the panic, the Gold safe haven is discovered and embraced. By opening the Gold-RMB window, China has assured the death of the toxic USDollar and the death of the corrupt LBMA Gold market. The sunset of the entire Petro-Dollar defacto standard has arrived in full force. The cooperation, collusion, and support from Saudi Arabia is fast vanishing. The entire OPEC oil cartel is moving under the Russian Rosneft umbrella, outside the USD control. The East is shifting quickly away from the USD sphere, and toward the RBM arena, which should act as a caretaker toward passage into the full implementation of the Gold Standard.
Since March 2018, in a hidden manner, the USDollar has become captive to the Shanghai futures contracts that control the Gold-Oil-Yuan. The result is a slow death for either the USDollar or the Gold Market as we know it, namely the LBMA in collusion with the COMEX. During these four decades or more, the USDollar has reigned supreme as the global reserve asset. In recent years, the USD has faced direct challenges with an enormous volume of USTreasury Bonds having been discharged by the entire set of central banks. China strives to achieve more independence from the USD, no longer willing to operate in the King Dollar shadow. Rather than displace the USD and win equal global reserve status for the Chinese Yuan (CNY) currency, they have employed a different strategy, and it will be successful. China had to open the CNY-Gold window to internationalize the CNY, which will drain the USDollar power.
The Chinese Yuan is not backed by Gold, a common error that most analysts and investors make. It means that nations with credits from the Chinese are given a choice. They can hold the CNY as currency or convert it to Gold, but only at the Shanghai Gold Exchange. This was the first step that China had to take to convince the energy (oil & natgas) exporters to accept CNY and thus to initiate the Petro/NG-Yuan trade. Call it the Petro-RMB trade. It is expanding very quickly in volume, to overtake the Brent crude oil trade. Nations will accumulate RMB in the energy trade, from gigantic Chinese oil & gas purchases. They will be led to convert to Gold, and to refuse holding USTBonds. China will only sell Gold in their domestic currency (Chinese Yuan) at the SGE. They will not sell Gold in any other currency. This opening of the SGE CNY-Gold window has essentially trapped the US, USD and LBMA. Various alternative paths are presented.
If the USD strengthens versus the CNY, then the Chinese and other nations rush to the LBMA in London to purchase Gold in USD terms. They bankrupt the LBMA and wreck the Gold Market, which is corrupted by Western paper contracts. The other nations would suffer economic turmoil from the continually rising USD, and then turn to Gold as refuge. Worse, the cheaper Chinese CNY currency leads to continued outsized US trade deficit with respect to China. In turn, China will convert its growing USTreasurys stash won in trade to Gold holdings even faster.
If the USD weakens versus the CNY, then the entire sets of foreign holders of USD assets (stocks, bonds, property) move to exit these USD assets. Gold moves in the opposite direction. The weaker USDollar also would indicate price inflation as a standard signal, leading to more Gold demand as hedge. Amidst USD price declines in a broadbased manner, the USD-based financial markets begin to experience a collapse, while panic rises. In turn, the masses are encouraged and directed into the safe haven of Gold. The run on bullion bankrupts the LBMA.
The introduction of the SGE CNY-Gold window in Shanghai has guaranteed the bankruptcy of the LBMA. The ruin and bust of the US-UK Gold market, steeped in corruption, is assured. There is not enough gold at current price to satisfy demand. In fact, the demand can only be met with a higher Gold price which destroys the USDollar as a Global Reserve Asset. The ongoing operation of the SGE CNY-Gold window, compounded by its rising volume, has signaled the end of the USD as a global currency reserve and the death of the LBMA. It also means China can buy all commodities in CNY terms and can run a monetary policy independent of the USFed. China no longer needs to acquire more USTreasurys, or to hold them in reserves. They are spending their USTBonds in great volume in the funding of third party projects, called Indirect Exchange. It has been a major dumping exercise for the last four or five years. After accounting for USTBond swaps, the Chinese rank behind the Japanese in USTreasury holdings.
The Chinese will observe the US-UK bankster tagteam struggle sweat and squirm. As the USFed, with approval by the London banker set, embark upon the QE FOREVER policy, the Chinese will dictate the terms of the Gold market. It is simply a case of when not if the USD and LBMA die a slow death. China can go about its business while observing the process, since it has made all the requisite steps in Shanghai. The Gold Price will enjoy an enormous lift, with the full adoption of trade payment systems led by China, to be executed in Gold terms. The entire Eurasian Trade Zone, integrating the entire Belt & Road Initiative with its $4 to $6 trillion in projects, has no more linkage to the USDollar orbit. In this next episode, the Gold Trade Note will become a standard. It will be first seen in the energy trade payments, then in commodities generally, and finally in consulting service work.
SYSTEMIC – BIS (Basel Rules)
The new Basel rules make physical Gold a Tier-1, riskless asset starting the end of March. The impact will be realized on big bank balance sheets. For years, a ban has been in place on Gold as a reserve asset. No more!! Combined with the substantial accumulation by central banks in gold reserves over the last 12-18 months, the signal is clear. The insolvent central banks have a plan. It is not a new plan, but rather one promoted by Zijlstra and White, two heavyweights at the Bank for International Settlements (BIS) in Basel Switzerland. The Dutch-born Jelle Zijlstra served as the chairman from 1967 to December 1981. William White was the BIS Chief Economist in the last decade. The elite and highly respected chairman wrote books on monetary policy. In Zijlstra’s second book, “Per Slot Van Rekening,” one sees a very candid man, even a contrarian who would win favor from Von Mises at the Austrian School of Economics. Zijlstra gives a very precise description of how central bankers conduct their business and maintain their independence from government interference. Whereas conventional monetary debasement is described in polite terms, Zijlstra explains what central bankers actually do in policy actions. Zijlstra acknowledges that the Gold price is kept far too low. Consider his pronouncements as blasphemy from Basel, in opposition to the US-UK bankster crowd. The Jackass believes Basel will not permit its own failure, in order to follow the Anglo-Americans down the path to ruin. Over a year ago, Basel began to refuse to supply London its endless demands for gold bullion. Instead, the Vatican has satisfied the large demand which keeps the ruinous game going.
In going much further, Zijlstra explains his perceived role of Gold in what he eloquently calls the international Monetary Cosmos. He stated that “Gold functions like the sun, with all currencies as planets orbiting around it, with only the sun in fixed position. It is perhaps nice to get into the role of Gold and its meaning in the time before the monetary cosmos collapsed into more chaotic conditions. Throughout centuries Gold was a protection against [natural] disasters, arbitrariness, and persecution. Because natural production levels hardly allow overproduction with substantial depreciating values as result. Because it does not rust and, once produced, never perishes, excessive scarcity can never occur. That is why Gold developed its image of solidity, stability, and reliability. [In reference to monetary policy during past crises…] A good solution would have been to drastically raise the price of Gold, since it was extraordinarily peculiar that in the post-World War II world, in which everything became more than three to four times more expensive than in the 1930s, the price of Gold remained the same. Actually, two things had to be done. The official Gold price in all currencies had to be raised and, besides this, the official dollar price of Gold had to be raised extra, to allow the dollar to devalue against all other currencies.” The Americans rejected his proposals, finding his ideas like high pitched swearing in a cathedral church. They refused to permit the USDollar to become of second rank to Gold.
Zijlstra and White have written about the Basel Plan for restoring the financial health of the major central banks. They are now hopelessly insolvent, having served as buyers of last resort for sovereign bonds which the market rejected. No buyers were found. As chronic blind bond buyers of junk, the central banks built gigantic toxic paper waste centers. Due to their unending bond purchases, they have accomplished two things. They have rendered their institutions insolvent. They have forced the situation where Gold must bail them out. The major central banks, according to the Basel BIS Plan, must accumulate large volumes of Gold bullion, count it as reserves, build the solid foundation, then permit (push) the Gold price to rise 3-fold, then 5-fold, then 10-fold.
In doing so, the Gold price will compensate finally for the fast rise in the USD money supply from the last decade. The result will be the revitalization of the central bank balance sheets, the exit from insolvency, and the restoration of their financial health. In short, if the central banks do not endorse Gold and lead the path to a $5000 Gold price, then later a $10,000 Gold price, then these same central banks will be destroyed and with it the banker cabal power. THE MOVE TO MAKE GOLD A TIER-1 ASSET IS THE FIRST STEP TO EXECUTE THE END GAME PLAN. Then comes large volume accumulation by the entire central bank franchise system. They will sell USTreasury Bonds and buy Gold bullion, but quietly with no fanfare or publicity. Then they will assist in the significant rise in the Gold price. It is written in the Basel BIS manual. It will be done.
BULLISH GOLD CHARTS
The Gold price is showing a strong bullish pattern in the short term, the intermediate term, and the long term. All charts are bullish. Except for certain rigged USTreasurys, the asset Gold was the best performing of all global assets in full year 2018, gaining good attention. The current Gold charts are showing strength in USD terms, but also in EUR terms, in British Pound terms, in Swiss Franc terms, in Japanese Yen terms, and in Canadian Dollar terms. The perfect storm is aligning to produce a wonderful year for Gold, with global recognition that it is the center of the solution for the blossoming global financial crisis. The USTreasury Bond will lose its safe haven status, and Gold will capture it. The Chinese must take the leading role in pushing up the Gold price. The trade war and growing Eastern consensus will enable China to take this role with enthusiasm, gusto, and vigor.
The intermediate Gold chart shows a clear Cup & Handle reversal bullish pattern. It is a highly reliable pattern. The target is $1520, bolstered by the bullish crossover of the Moving Averages. Expect a battle for consolidating gains at this right side of the handle, which could last another month. Refer to the $1320 to $1350 interval. Then comes the breakout to jump past $1400 and sure to attract global attention. The intermediate term is the dominant perspective at this time.
https://www.silverdoctors.com/wp-con...1-02-25-19.jpg
The very short-term Gold chart is a stair-step rise. It is justified by the bullish Moving Average crossover seen in early January. Technical traders lock on such signals, with confirmation of daily MA seen in the weekly MA also. The pennant pause pattern in January resulted in a fall but quickly a powerful rise, as fundamentals coincided with the technical pattern. The bull flag pattern in February resolved easily in the upward direction. It is not clear what comes next. Therefore expect some consolidation, before further upward movement.
https://www.silverdoctors.com/wp-con...2-02-25-19.jpg
The long-term weekly Gold chart offers some very good clarity. The Cup & Handle reversal will provide the lift for overcoming the $1365 resistance, which has several touch points. When it is overcome, the lift will thus be powerful. The longer-term look is dominated by the bullish triangle formed in the last three years. It has a sizeable 250-point potential, which indicates a target of $1600. It is a reliable pattern also. Watch the fundamentals accelerate in the confirmation process, as the King Dollar loses its luster, as its integrity is undermined by unbridled debt, as war with sanctions are the primary defense mechanisms. The USDollar is no longer defended by economic strength, or banking integrity, or industrial vitality, or even political leadership. In fact, no nations pay much attention to what the US Government says anymore, their policies largely ignored. Gold will take center stage in 2019 and 2020.
https://www.silverdoctors.com/wp-con...3-02-25-19.jpg
HAT TRICK LETTER PROFITS IN THE CURRENT CRISIS.
“Jim Willie’s proprietary contacts in highly strategic positions around the world help him better predict the future with an accurately as high as 90%. That is astounding! The Hat Trick Letter is my secret sauce to better understand what is really happening, so I can make better financial decisions during this tumultuous period.”
- Post #8,169
- Quote
- Edited 11:34am Apr 18, 2020 11:20am | Edited 11:34am
- | Commercial Member | Joined Dec 2014 | 11,632 Posts
https://www.zerohedge.com/political/...ops+to+zero%29
Authored by Matt Taibbi,
It’s early days, but the Federal Reserve “bazooka” has mostly impacted the 1%...
https://zh-prod-1cc738ca-7d3b-4a72-b...4500x3000.jpeg
Take a look at some contrasting sets of headlines.
First, from planet earth:
Then from Wall Street:
As we head into the second month of pandemic lockdown, two parallel narratives are developing about the financial rescue.
In one, ordinary people receive aid through programs that are piecemeal, complex, and riddled with conditions.
A law freezing evictions applies to holders of government-backed mortgages only. “Disaster grants” are coming more slowly and in smaller amounts than expected; small businesses were disappointed to learn from the SBA early last week that aid would be limited to $1000 per employee.
A one-time “economic impact payment,” reportedly delayed so recipients could experience the thrilling visual of Donald Trump’s name on the check, might help make half a rent payment. Unemployment insurance amounts have been raised, so tip and gig workers can now be ineligible for $600 a week more than before! The cost of a coronavirus test might be free, but you test positive, you could up paying $50,000 or more in hospital costs even with insurance. And so on.
Meanwhile, “relief” programs aimed at the top income levels were immediate, staggering in size and scope, and often appeared as grants rather than loans. One of the biggest layouts of the Covid-19 rescue was a political carrying charge that members of congress extracted just to get the larger bailout out the door – a pre-bailout bailout, if you will.
Although the $2 trillion coronavirus rescue was approved unanimously, a set of tax breaks was stuck in by Republicans, in the original version of the CARES Act put forward by Mitch McConnell.
When Donald Trump signed his whopper Tax Cuts and Jobs Act two years ago, the bill contained clauses to offset the loss of revenue that would entail from shaving down the top individual tax rate relatively a little (from 39.6% to 37%) and slashing the corporate tax rate a lot (from 35% all the way down to 21%).
One of those changes limited the amount of losses that could be used to offset taxable income in any given year. Another limited the amount of losses from so-called “pass-through” businesses (i.e. businesses that don’t pay corporate taxes) that wealthy individuals could use to offset taxable income. These provisions particularly impacted real estate developers (!), hedge fund managers, and other high net worth individuals with volatile revenue profiles.
The second provision only affected people making at least $250,000, or couples earning at least $500,000.
The CARES Act sought to wipe out or alter both provisions. Republicans also tried to include tax relief for multinationals who offshore profits, but that provision was stripped out in favor of these first two loopholes, seemingly reflecting their importance to the caucus.
As Steve Wamhoff of the Institute on Taxation and Economic Policy points out, the changes on the use of “pass-through” losses only benefit a select group. “It has to be stressed that this exclusively helps wealthy people,” Wamhoff says. “It only has an impact on people already making over $250,000.”
Because the CARES Act was rushed to the floor, members didn’t have all of the information they might have wanted before the vote. After the bill passed, Democratic staffers sent these tax provisions in the CARES Act, sections 2303 and 2304, to the Joint Committee on Taxation, to be scored. They were stunned to learn they would cost $195 billion over ten years.
In other words, what seemed like a run-of-the-mill offhand legislative pork provision ended up dwarfing the airline bailout and other main parts of the bill.
“It’s greater than CARES provided for all state and local governments.”
The JCT analysis found that 80% of the benefit of the bill went to just 43,000 taxpayers each earning over $1 million a year. The average tax break for those 43,000 individuals was $1.6 million, an interesting number when one considers the loudness of the controversy over $1,200 relief checks for everyone else.
Doggett joined Rhode Island Senator Sheldon Whitehouse in sending a letter to the Trump administration, demanding to know the provenance of these tax breaks. “This irresponsible provision must be repealed,” he says. It’s possible we’ll find out someday whose idea it was to insert those breaks. By then, however, other windfalls from the Covid-19 rescue might have rendered the $195 billion bailout appetizer quaint.
With the Fed’s announcement on April 9th of a $2.3 trillion program that includes purchases of junk bonds, the toolkit for support of the financial economy now encompasses nearly every conceivable official response apart from subsidy of stock markets. The sheer quantity of money raining down on the finance sector appears transformational, a “joyful noise” heard around the world.
The Fed deployed many of the bailout tools it used in response to the 2008 crisis at the end of March. These were radical enough, but still confined to the finance version of safe sex: buying investment grade debt, U.S. treasuries, government-backed mortgages, etc.
On April 9th, the Fed took a walk on the wild side, announcing a spate of new facilities that dramatically expand its footprint in the economy.
Some programs are less controversial, like a Municipal Liquidity Facility providing aid to states and localities.
Others however steer money to “fallen angel”companies with declining credit ratings, longshot problem horses at the global racetrack. As a Wall Street Journal editorial put it in awed tones, “the Fed will in effect buy the worst shopping malls in the country and some of the most indebted companies.”
The WSJ went on to dissect the logic of the bailout (emphasis mine):
The coronavirus rescue is a “trickle-down” plan. Many of the Fed programs don’t appear even secondarily concerned with maintaining employment.
The basic idea instead has been to hurl money at “assets,” underscoring the bizarre dualistic nature of this rescue.
If the ordinary person during the crisis dreams of being relieved from market stresses like housing and medical costs, only to receive (at best) one $1200 check, it’s Wall Street actors who are seeing the tyranny of markets fundamentally overthrown, replaced by a giant financial happy face called the Federal Reserve that appears to want to simulate real buying and selling, only with the downside removed. Party on, Wayne!
As Marcus Stanley of Americans for Financial Reform puts it, “the Fed’s perspective on this is, they want to create normalcy” in financial markets. What “normalcy” means, however, at a moment when many businesses are closed or careening toward bankruptcy, is not clear. This heads-I-win, tails-the-Fed-loses economy is resulting in win after win across the financial sector, some more malodorous than others.
According to Bloomberg, Citi then turned right around and sold those bonds to the Fed’s Primary Dealer Credit Facility at “closer to par,” i.e. nearer to 100 cents on the dollar, a nearly instant $100 million windfall.
The reader should be able to do the math on who knew what, and when, in that story.
It’s hard to know what is ordinary front-running of this type and what is sincere worship at the altar of the Fed’s new “limitless” purchasing power.
Investors are now chasing Fed decisions with seemingly real zeal, causing private money to flow directly into the very risk-laden sectors of the economy they probably would be fleeing absent government intervention.
In one of many hallucinatory headlines from this week, the head of the global allocation team for BlackRock – the company that’s administering Fed buying programs – said his company would henceforth be betting on the Fed’s bets.
“We will follow the Fed and other DM central banks by purchasing what they’re purchasing, and assets that rhyme with those,” said BlackRock’s Rick Rieder.
Other companies are employing the same strategy. “The stimulus seems to be endless,” said Dirk Thiels of KBC Asset Management in Brussels. “Buy what the central bank has been buying and in the short-term it’ll be a good strategy.”
It’s one thing for the Fed to step in and help important companies that have been unduly damaged by coronavirus, firms like Ford, whose debt was downgraded to junk in late March (but which is eligible for support under the Fed programs announced on April 9th).
It’s another thing for the Fed to create fresh bull markets around its own investments in the debt of basket-case companies, especially since it’s not clear how, say, the continuous propping up of junk bond Exchange-Traded Funds (ETFs) addresses issues like unemployment, or anything else for that matter.
Brian Chappatta of Bloomberg added a similar criticism this week, asking, “How exactly do high-yield ETF purchases help Americans get jobs or pay rent?”
The Bank of England last summer identified the state of such “open-ended funds” as a potential systemic problem:
The Bank added, “the mismatch between the liquidity of a fund’s assets and its redemption terms can create incentives for investors to withdraw funds ahead of other investors.”
It went on to say that under a “severe but plausible set of assumptions,” there could be a rush of redemption requests that could “overwhelm the capacity of dealers to absorb those sales,” causing “market dysfunction.”
This is a fancy way of saying that investment banks and asset managers have been making big bucks trading collections of longer-term, potentially hard-to-sell corporate bonds as highly liquid and relatively safe products. In a crisis, the Bank of England warned, these would suddenly be hard to sell, at which point the possible underlying dogshit-ness of these debt instruments might be exposed, causing further market panic.
When the Covid-19 crisis hit, exactly this “severe” scenario seemed to take place. Several of the world’s biggest corporate bond funds plummeted in value, and buyers were suddenly scarce. A $30 billion bond fund managed by (again) BlackRock, the iShares iBoxx $ Investment Grade Corporate Bond ETF or “LQD,” went into freefall, only to rebound spectacularly once the Fed announced its first bond-buying program (managed by Black Rock, of course) in late March.
“A $33 billion ETF sees most cash in 18 years on Fed-fueled rally,” read the cheery Bloomberg headline on March 25th. LQD at this writing is up 23.7% since the Fed announced its bond-buying program. Another troubled BlackRock fund, the $15.8 billion HYG – the world’s largest junk bond fund – now looks like an ascendant product as well.
All of these issues come on top of others inherent with the Fed programs. As Stanley’s Americans for Financial Reform has pointed out:
Again, there are some restrictions in parts of the CARES Act, and in some of the Fed programs, that take aim at layoffs, buybacks, executive bonuses, and other issue. But the bond purchasing programs in particular have few restrictions on executive compensation, on buybacks, on layoffs or offshoring of labor, on payments to private equity owners, etc. There isn’t much point in restricting the spending of bailout money on handouts with one hand, if you can do it freely with the other hand, yet this is how the coronavirus rescue is structured.
This is in addition to the near-total lack of oversight. To date, the only person assigned to the Congressional Oversight Commission with purview over these programs is former adviser to Elizabeth Warren, Bharat Ramamurti. Ramamurti has no staff, no office, nothing except — this is not a joke — a Twitter account.
I asked him if more resources had come his way since early Swiftian news stories identified him as a quixotic “lone” regulator attempting to watch and oversee trillions in spending by himself
“Nope,” he said.
Ramamurti has however sent Fed chair Jerome Powell a letter, “to respectfully request that the Federal Reserve publicly release detailed and timely information about each individual transaction” made under the new lending programs.
Remember, much of the Fed’s rescue lending is backed by Treasury dollars, which means the taxpayer is eating what otherwise would have been the market risk of many of its investments.
However, the Fed has shown no inclination to release any information about its activities. Thus this is a brave new world not just in terms of economics, but also oversight. Essentially, the spending of huge amounts of taxpayer money has been outsourced to the Fed, whose ideas about disclosure suck even worse than those of congress.
It’s early, but the Main Street and Wall Street rescues are looking increasingly disconnected from one another. One looks like it doesn’t work, while the other might work way too well. If only we could see enough to know for sure.
Authored by Matt Taibbi,
It’s early days, but the Federal Reserve “bazooka” has mostly impacted the 1%...
https://zh-prod-1cc738ca-7d3b-4a72-b...4500x3000.jpeg
Take a look at some contrasting sets of headlines.
First, from planet earth:
Weekly Jobless Claims Hit 5.425 Million, Raising Monthly Loss To 22 Million Due To Coronavirus (CNBC)
Worst Case Fears Of 20%-Plus U.S. Jobless Rate Are Now Realistic (Bloomberg)Then from Wall Street:
Private Equity-Owned Companies Sell New Bonds in Credit Rally (Bloomberg Law)
Fed’s Historic Move Spurs Rally in Junk Bonds: 6 ETF Picks (Nasdaq.com)As we head into the second month of pandemic lockdown, two parallel narratives are developing about the financial rescue.
In one, ordinary people receive aid through programs that are piecemeal, complex, and riddled with conditions.
A law freezing evictions applies to holders of government-backed mortgages only. “Disaster grants” are coming more slowly and in smaller amounts than expected; small businesses were disappointed to learn from the SBA early last week that aid would be limited to $1000 per employee.
A one-time “economic impact payment,” reportedly delayed so recipients could experience the thrilling visual of Donald Trump’s name on the check, might help make half a rent payment. Unemployment insurance amounts have been raised, so tip and gig workers can now be ineligible for $600 a week more than before! The cost of a coronavirus test might be free, but you test positive, you could up paying $50,000 or more in hospital costs even with insurance. And so on.
Meanwhile, “relief” programs aimed at the top income levels were immediate, staggering in size and scope, and often appeared as grants rather than loans. One of the biggest layouts of the Covid-19 rescue was a political carrying charge that members of congress extracted just to get the larger bailout out the door – a pre-bailout bailout, if you will.
Although the $2 trillion coronavirus rescue was approved unanimously, a set of tax breaks was stuck in by Republicans, in the original version of the CARES Act put forward by Mitch McConnell.
When Donald Trump signed his whopper Tax Cuts and Jobs Act two years ago, the bill contained clauses to offset the loss of revenue that would entail from shaving down the top individual tax rate relatively a little (from 39.6% to 37%) and slashing the corporate tax rate a lot (from 35% all the way down to 21%).
One of those changes limited the amount of losses that could be used to offset taxable income in any given year. Another limited the amount of losses from so-called “pass-through” businesses (i.e. businesses that don’t pay corporate taxes) that wealthy individuals could use to offset taxable income. These provisions particularly impacted real estate developers (!), hedge fund managers, and other high net worth individuals with volatile revenue profiles.
The second provision only affected people making at least $250,000, or couples earning at least $500,000.
The CARES Act sought to wipe out or alter both provisions. Republicans also tried to include tax relief for multinationals who offshore profits, but that provision was stripped out in favor of these first two loopholes, seemingly reflecting their importance to the caucus.
As Steve Wamhoff of the Institute on Taxation and Economic Policy points out, the changes on the use of “pass-through” losses only benefit a select group. “It has to be stressed that this exclusively helps wealthy people,” Wamhoff says. “It only has an impact on people already making over $250,000.”
Because the CARES Act was rushed to the floor, members didn’t have all of the information they might have wanted before the vote. After the bill passed, Democratic staffers sent these tax provisions in the CARES Act, sections 2303 and 2304, to the Joint Committee on Taxation, to be scored. They were stunned to learn they would cost $195 billion over ten years.
In other words, what seemed like a run-of-the-mill offhand legislative pork provision ended up dwarfing the airline bailout and other main parts of the bill.
“The cost of caring for this small slice of the wealthiest one percent is greater than the CARES Act funded for all hospitals in America,” says Texas Democrat Lloyd Doggett.
“It’s greater than CARES provided for all state and local governments.”
The JCT analysis found that 80% of the benefit of the bill went to just 43,000 taxpayers each earning over $1 million a year. The average tax break for those 43,000 individuals was $1.6 million, an interesting number when one considers the loudness of the controversy over $1,200 relief checks for everyone else.
Doggett joined Rhode Island Senator Sheldon Whitehouse in sending a letter to the Trump administration, demanding to know the provenance of these tax breaks. “This irresponsible provision must be repealed,” he says. It’s possible we’ll find out someday whose idea it was to insert those breaks. By then, however, other windfalls from the Covid-19 rescue might have rendered the $195 billion bailout appetizer quaint.
With the Fed’s announcement on April 9th of a $2.3 trillion program that includes purchases of junk bonds, the toolkit for support of the financial economy now encompasses nearly every conceivable official response apart from subsidy of stock markets. The sheer quantity of money raining down on the finance sector appears transformational, a “joyful noise” heard around the world.
“POW!#* @ BAM&$# SMASH! @#$% KABOOM*#!@?%
That’s the sound of the Fed’s big bazooka,” reads Forbes in a typical financial news report.
The Fed deployed many of the bailout tools it used in response to the 2008 crisis at the end of March. These were radical enough, but still confined to the finance version of safe sex: buying investment grade debt, U.S. treasuries, government-backed mortgages, etc.
On April 9th, the Fed took a walk on the wild side, announcing a spate of new facilities that dramatically expand its footprint in the economy.
Some programs are less controversial, like a Municipal Liquidity Facility providing aid to states and localities.
Others however steer money to “fallen angel”companies with declining credit ratings, longshot problem horses at the global racetrack. As a Wall Street Journal editorial put it in awed tones, “the Fed will in effect buy the worst shopping malls in the country and some of the most indebted companies.”
The WSJ went on to dissect the logic of the bailout (emphasis mine):
The Fed may feel all of this is essential to protect the financial system’s plumbing and reduce systemic risk until the virus crisis passes, but make no mistake that the Fed is protecting Wall Street first. The goal seems to be to lift asset prices, as the Fed did after the financial panic, and hope that the wealth effect filters down to the rest of the economy.
The coronavirus rescue is a “trickle-down” plan. Many of the Fed programs don’t appear even secondarily concerned with maintaining employment.
The basic idea instead has been to hurl money at “assets,” underscoring the bizarre dualistic nature of this rescue.
If the ordinary person during the crisis dreams of being relieved from market stresses like housing and medical costs, only to receive (at best) one $1200 check, it’s Wall Street actors who are seeing the tyranny of markets fundamentally overthrown, replaced by a giant financial happy face called the Federal Reserve that appears to want to simulate real buying and selling, only with the downside removed. Party on, Wayne!
As Marcus Stanley of Americans for Financial Reform puts it, “the Fed’s perspective on this is, they want to create normalcy” in financial markets. What “normalcy” means, however, at a moment when many businesses are closed or careening toward bankruptcy, is not clear. This heads-I-win, tails-the-Fed-loses economy is resulting in win after win across the financial sector, some more malodorous than others.
In late March, for instance, Citigroup bought nearly $2 billion of AAA-rated securitized commercial loans from PGIM, the investment management business of Prudential, at roughly 90 cents on the dollar.
According to Bloomberg, Citi then turned right around and sold those bonds to the Fed’s Primary Dealer Credit Facility at “closer to par,” i.e. nearer to 100 cents on the dollar, a nearly instant $100 million windfall.
The reader should be able to do the math on who knew what, and when, in that story.
It’s hard to know what is ordinary front-running of this type and what is sincere worship at the altar of the Fed’s new “limitless” purchasing power.
Investors are now chasing Fed decisions with seemingly real zeal, causing private money to flow directly into the very risk-laden sectors of the economy they probably would be fleeing absent government intervention.
In one of many hallucinatory headlines from this week, the head of the global allocation team for BlackRock – the company that’s administering Fed buying programs – said his company would henceforth be betting on the Fed’s bets.
“We will follow the Fed and other DM central banks by purchasing what they’re purchasing, and assets that rhyme with those,” said BlackRock’s Rick Rieder.
Other companies are employing the same strategy. “The stimulus seems to be endless,” said Dirk Thiels of KBC Asset Management in Brussels. “Buy what the central bank has been buying and in the short-term it’ll be a good strategy.”
It’s one thing for the Fed to step in and help important companies that have been unduly damaged by coronavirus, firms like Ford, whose debt was downgraded to junk in late March (but which is eligible for support under the Fed programs announced on April 9th).
It’s another thing for the Fed to create fresh bull markets around its own investments in the debt of basket-case companies, especially since it’s not clear how, say, the continuous propping up of junk bond Exchange-Traded Funds (ETFs) addresses issues like unemployment, or anything else for that matter.
“These financial bailouts are unconnected to any real-world crisis strategy,” is how one market analyst puts it.
Brian Chappatta of Bloomberg added a similar criticism this week, asking, “How exactly do high-yield ETF purchases help Americans get jobs or pay rent?”
The Bank of England last summer identified the state of such “open-ended funds” as a potential systemic problem:
More than US$30 trillion of global assets are now held in open‑ended funds that offer short‑term redemptions while investing in longer‑dated and potentially illiquid assets, such as corporate bonds…
The Bank added, “the mismatch between the liquidity of a fund’s assets and its redemption terms can create incentives for investors to withdraw funds ahead of other investors.”
It went on to say that under a “severe but plausible set of assumptions,” there could be a rush of redemption requests that could “overwhelm the capacity of dealers to absorb those sales,” causing “market dysfunction.”
This is a fancy way of saying that investment banks and asset managers have been making big bucks trading collections of longer-term, potentially hard-to-sell corporate bonds as highly liquid and relatively safe products. In a crisis, the Bank of England warned, these would suddenly be hard to sell, at which point the possible underlying dogshit-ness of these debt instruments might be exposed, causing further market panic.
When the Covid-19 crisis hit, exactly this “severe” scenario seemed to take place. Several of the world’s biggest corporate bond funds plummeted in value, and buyers were suddenly scarce. A $30 billion bond fund managed by (again) BlackRock, the iShares iBoxx $ Investment Grade Corporate Bond ETF or “LQD,” went into freefall, only to rebound spectacularly once the Fed announced its first bond-buying program (managed by Black Rock, of course) in late March.
“A $33 billion ETF sees most cash in 18 years on Fed-fueled rally,” read the cheery Bloomberg headline on March 25th. LQD at this writing is up 23.7% since the Fed announced its bond-buying program. Another troubled BlackRock fund, the $15.8 billion HYG – the world’s largest junk bond fund – now looks like an ascendant product as well.
All of these issues come on top of others inherent with the Fed programs. As Stanley’s Americans for Financial Reform has pointed out:
… the announced terms for these facilities would seem to permit public financing of leveraged buyouts, public financing of share buybacks to enrich already wealthy executives, public support for corporations that are simultaneously engaged in laying off their workers, and a range of other highly problematic outcomes…
Again, there are some restrictions in parts of the CARES Act, and in some of the Fed programs, that take aim at layoffs, buybacks, executive bonuses, and other issue. But the bond purchasing programs in particular have few restrictions on executive compensation, on buybacks, on layoffs or offshoring of labor, on payments to private equity owners, etc. There isn’t much point in restricting the spending of bailout money on handouts with one hand, if you can do it freely with the other hand, yet this is how the coronavirus rescue is structured.
This is in addition to the near-total lack of oversight. To date, the only person assigned to the Congressional Oversight Commission with purview over these programs is former adviser to Elizabeth Warren, Bharat Ramamurti. Ramamurti has no staff, no office, nothing except — this is not a joke — a Twitter account.
I asked him if more resources had come his way since early Swiftian news stories identified him as a quixotic “lone” regulator attempting to watch and oversee trillions in spending by himself
“Nope,” he said.
Ramamurti has however sent Fed chair Jerome Powell a letter, “to respectfully request that the Federal Reserve publicly release detailed and timely information about each individual transaction” made under the new lending programs.
Remember, much of the Fed’s rescue lending is backed by Treasury dollars, which means the taxpayer is eating what otherwise would have been the market risk of many of its investments.
However, the Fed has shown no inclination to release any information about its activities. Thus this is a brave new world not just in terms of economics, but also oversight. Essentially, the spending of huge amounts of taxpayer money has been outsourced to the Fed, whose ideas about disclosure suck even worse than those of congress.
It’s early, but the Main Street and Wall Street rescues are looking increasingly disconnected from one another. One looks like it doesn’t work, while the other might work way too well. If only we could see enough to know for sure.
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Preface to Anatomy of the Crash
TAGS The FedBusiness Cycles
4 HOURS AGO
Tho Bishop
[This is the preface for the Mises Institute's new online book Anatomy of the Crash: The Financial Crisis of 2020.]
"End the Fed!" Three small words became one of the most improbable and powerful political chants in modern politics thanks to the presidential campaigns of Dr. Ron Paul. With the backdrop of a global financial crisis, the congressman from Texas was able to use the microphone of modern politics, forever changed by the internet and social media, to wake up a generation of Americans to the threat posed by central banks and fiat money. Ideological gatekeepers in Washington and the corporate press found themselves forced to recognize and attack a previously obscure school of economic thought that was now being talked about by college students, activists, and even the odd politician.
Of course, no such movements ever truly happen overnight. The seeds of the international Austrian revival were planted when Ludwig von Mises escaped World War II Europe and made a home for himself in America. With positions at New York University and the Foundation for Economic Education, Mises was able to develop a legion of followers in both academia and the public at large. Several students of his NYU seminar, such as Israel Kirzner, Hans Sennholz, and Ralph Raico, became important Austrian scholars in their own right. It was, however, Murray Rothbard who was perhaps Mises’s most significant mentee, with not only significant contributions to economics, history, and political philosophy, but popular writings aimed at energizing a grassroots Austro-libertarian movement far outside the restraints of the ivory tower.
Rothbard’s potent blend of serious scholarship and dynamic popularism became a model for the Mises Institute, which he helped found with Lew Rockwell in 1982.
Since the beginning, the Institute has been both an incubator for new generations of Austrian scholars and a fount of education for the public at large.
Anyone who is familiar with the works of Mises, Rothbard, and the Austrian school understands how far removed they are from the progressive-dominated zeitgeist that has long controlled the most powerful microphones of the West. Although this carries with it the curse of limiting the influence that it could have with policymakers in government, it also means that it benefits from times when the public questions the very foundations of the institutions that it was indoctrinated to believe in.
Two thousand eight was such a time. Unfortunately, 2020 appears to be one as well.
The purpose of this collection is to highlight the important work of contemporary Austrian economists on the modern financial system. Although the mainstream financial press has been crediting American, European, and Chinese policymakers with upholding the global economy in the aftermath of 2008, Austrians have long been warning that these very same actions have only set the world up for a larger disaster. Promises in 2008 of the ease of normalizing monetary policy—such as by reducing balance sheets and phasing out market intervention—have been proven to be lies, just as Austrians warned.
While the government response to the coronavirus may serve as a catalyst for the next crisis, it is the irresponsible actions of central bankers, governments, and globalist institutions that will make the pain so much more intense. Worse still, the response will be led by individuals who are only versed in the same failed ideologies that brought us to where we are now.
The first section is a look back at major policy decisions that brought us to where we are now. One of the important aims of this collection is to highlight the truly global nature of these failings, not simply critiquing the actions of the Federal Reserve, but their colleagues at the European Central Bank, the Bank of Japan, and elsewhere. It is the coordinated attempt by central bankers around the world to try to bolster markets by hiding and mispricing underlying financial risk that has only served to escalate the fragility of the global economy.
This is followed by a look forward to what we might expect from policymakers as they are forced to respond. The combined fiscal and monetary response to the coronavirus and the government-imposed lockdown has highlighted the degree to which central bankers and modern governments feel completely unhampered by concerns about inflation or government debt. Every attempt will be made to prop up the financial bubbles they have created, and these actions will only compound the fundamental issues we face. Of course, as economic decision-makers become ever more drastic in their thought, we can expect them to resort more to using the full authoritarian powers of the modern state.
Lastly, the book looks at placing the ideas of the Austrian school within the context of the modern world. Although questions of underlying ideology may be dismissed by “practical” individuals who pride themselves on being “independent thinkers,” Mises understood the degree to which our intellectual environment directly guides policy and institutional frameworks. In the aftermath of the challenging times that may be ahead, the only way to build a stronger, more prosperous, and more stable future will be with an ideological revolution.
I hope that you will find this collection of articles enlightening, even if the ramifications of their content mean difficulty in the short term.
Author:
Contact Tho Bishop
Tho is an assistant editor for the Mises Wire, and can assist with questions from the press. Prior to working for the Mises Institute, he served as Deputy Communications Director for the House Financial Services Committee. His articles have been featured in The Federalist, the Daily Caller, and Business Insider.
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http://www.whatdoesitmean.com/index3190.htm
April 18, 2020
Satellite Explodes—US Blames Russia, Calls For War With China, And Abruptly Orders Nuclear Bombers Back To America
By: Sorcha Faal, and as reported to her Western Subscribers
An actually terrifying new Security Council (SC) report circulating in the Kremlin today discussing highly-classified “Of Special Importance” events occurring in the “Coronavirus Pandemic War” pertaining to this week’s Ministry of Defense (MoD) national security preparations utilizing Aerospace Defense Forces, states that the numerous NOTAMS (Notice To Airmen) being issued to Western military forces by the Russian Federation are in direct response to increasingly hostile actions being displayed by the United States—hostile actions that started on 11 April when the MoD issued a NOTAM warning of “Hazardous Operations, Rocket Launching” in the splashdown area in the Laptev Sea—a NOTAM warning issued in preparation for the successful 15 April testing of the PL-19 Nudol anti-ballistic missile interceptor that also functions as an anti-satellite weapon—an 15 April successful testing of the PL-19 Nudol missile system, however, that exactly coincided with an as yet unidentified satellite exploding in space, its falling slowly in flames through the atmosphere, and then crashing somewhere in the United Kingdom—and upon crashing, saw US Space Command US Air Force General John Raymond screaming to Russia: “This test is further proof of Russia's hypocritical advocacy of outer space arms control proposals designed to restrict the capabilities of the United States while clearly having no intention of halting their counterspace weapons programs”—which Russia immediately replied to by pointing out that Moscow is still waiting for Washington to answer its questions about US activities in outer space and stating: “We also have a lot of questions…We asked them quite a long time ago and want to have an answer after all”—that itself was followed within the hour by known President Donald Trump “media mouthpiece” Lou Dobbs of Fox News floating the idea of war with Communist China as a “consequence” for the coronavirus—and immediately upon its floating, saw President Trump ordering the US Air Force to abruptly end its continuous nuclear bomber presence on Guam after 16-years and immediately return all of its B-52s back to America. [Note: Some words and/or phrases appearing in quotes in this report are English language approximations of Russian words/phrases having no exact counterpart.]
According to the very limited, indeed near non-existent information contained in this classified at the highest level report permitted to be openly commented on by various ministries, what appears to be the main focus of Russian leadership concern right now is the “United States bigger biological presence beyond its borders, in particular in former Soviet republics”—with this report specifically mentioning Foreign Ministry Spokeswoman Maria Zakharova stating yesterday: “Naturally, we cannot ignore the fact that the Americans are developing an infrastructure with hazardous biological potential in the direct proximity to the Russian borders, and we cannot rule out that the Americans use such reference laboratories in third countries to develop and modify various pathogenic agents, including in military purposes”.
Taken just by itself this statement just made by Foreign Ministry Spokeswoman Zakharova could have multiple meanings—but when viewed in the context of this report’s numerously referenced sub-files, sees something truly ominous emerging—sub-files containing an MoD document describing a clandestine biological weapons laboratory in the country of Georgia being operated by the US military—and a frightening sub-file documenting events that occurred in the former Soviet republic of Kyrgyzstan—a Kyrgyzstan that was once part of the old Soviet biological-warfare network, and where the NATO nation of Canada planned to build a high-security bio-lab holding the world’s most deadly pathogens opponents dubbed the “laboratory of death”—a project that fell under the Canadian government’s $1-billion Global Partnership Program, itself part of a wider G8 effort to help prevent nuclear, biological and chemical agents in former Soviet lands from getting into the wrong hands.
Though NATO member Canada was never able to finish its “laboratory of death” in Kyrgyzstan due to that nation’s 2010 revolution, this report documents how the Obama-Clinton Regime used US defense monies to fund and build its Republican Center of Quarantine and Especially Dangerous Infections (RCQ&EDI MH KR)—a research center for the world’s most deadliest pathogens in Kyrgyzstan still fully funded by the World Health Organization—and MoD alarms were sounded about in March-2018 when the United States military pulled out of Kyrgyzstan.
Further MoD alarms about Kyrgyzstan were sounded in April-2019 when they joined the Belt and Road Initiative to connect themselves with southern China, which borders their nation—an initiative enacted by Communist China in 2013 so they could gain supremacy in global trade—but five-months after Kyrgyzstan had linked up with southern China, in October-2019—this report all but admits the MoD threatened to attack Armenia unless it opened up to Russian military scientists its US military bio-lab—a threat Armenia bowed to and saw them preparing to sign an inspection agreement with the MoD on 25 October 2019.
In piecing together why Russia was prepared to go to war with Armenia unless they opened up to MoD scientists the US military bio-lab in their country, this report references what had occurred the month previously in September-2019—which was when the MoD began to document troubling reports coming out of southern China near the border with its new Belt and Road Initiative partner Kyrgyzstan about a mysterious disease that was killing people—with confirmation of this being true having just been publically released by a team of researchers led by a Cambridge University that have traced the coronavirus to have first emerged in southern China—not Wuhan.
On 24 February 2014 we posted our report titled “Putin Orders Troops To Crimea Passes, Warns NATO Of War” to alert you that President Putin was prepared to launch a total war against the United States—a report scoffed at and derided at the time of its posting as being fake news—that is until a little over a year later, in March-2015, when President Putin admitted to the world that he, indeed, was ready to put Russia’s nuclear forces on alert over Crimea—with the importance of this reminder being so you can fully understand and comprehend the significance of this highly-classified report containing a large sub-file with the heading “Montagnier”—who is the Nobel Prize winning French virologist Doctor-Scientist Luc Montagnier, the man who discovered the HIV virus back in 1983, currently works as a full-time professor at Shanghai Jiao Tong University in China, and who’s just declared that the coronavirus rampaging across the world: “Could Only Have Been Created In A Lab”—which now leaves our rapidly fracturing world tumbling towards the abyss with the same fears voiced to the British peoples by Prime Minister Winston Churchill at the outbreak of World War II in 1939, “I cannot forecast to you the action of Russia…It is a riddle, wrapped in a mystery, inside an enigma; but perhaps there is a key… That key is Russian national interest”—a “national interest” we can assure you, with all certainty, means that whoever created and released this coronavirus won’t just have to worry about their satellites being shot out of space—they’ll soon be watching some of their most important military bases exploding into nuclear fireballs, too.
April 18, 2020 EU and US all rights reserved. Permission to use this report in its entirety is granted under the condition it is linked to its original source at WhatDoesItMean.Com. Freebase content licensed under CC-BY and GFDL.
[Note: Many governments and their intelligence services actively campaign against the information found in these reports so as not to alarm their citizens about the many catastrophic Earth changes and events to come, a stance that the Sisters of Sorcha Faal strongly disagree with in believing that it is every human being’s right to know the truth. Due to our mission’s conflicts with that of those governments, the responses of their ‘agents’ has been a longstanding misinformation/misdirection campaign designed to discredit us, and others like us, that is exampled in numerous places, including HERE.]
[Note: The WhatDoesItMean.com website was created for and donated to the Sisters of Sorcha Faal in 2003 by a small group of American computer experts led by the late global technology guru Wayne Green(1922-2013) to counter the propaganda being used by the West to promote their illegal 2003 invasion of Iraq.]
[Note: The word Kremlin (fortress inside a city) as used in this report refers to Russian citadels, including in Moscow, having cathedrals wherein female Schema monks (Orthodox nuns) reside, many of whom are devoted to the mission of the Sisters of Sorcha Faal.]
America Endures First In World History “Let Stupid People Die” Pandemic
Nothing Will Ever Be The Same After New Age Of Heroes Arises With Coronavirus
Return To Main Page
April 18, 2020
Satellite Explodes—US Blames Russia, Calls For War With China, And Abruptly Orders Nuclear Bombers Back To America
By: Sorcha Faal, and as reported to her Western Subscribers
An actually terrifying new Security Council (SC) report circulating in the Kremlin today discussing highly-classified “Of Special Importance” events occurring in the “Coronavirus Pandemic War” pertaining to this week’s Ministry of Defense (MoD) national security preparations utilizing Aerospace Defense Forces, states that the numerous NOTAMS (Notice To Airmen) being issued to Western military forces by the Russian Federation are in direct response to increasingly hostile actions being displayed by the United States—hostile actions that started on 11 April when the MoD issued a NOTAM warning of “Hazardous Operations, Rocket Launching” in the splashdown area in the Laptev Sea—a NOTAM warning issued in preparation for the successful 15 April testing of the PL-19 Nudol anti-ballistic missile interceptor that also functions as an anti-satellite weapon—an 15 April successful testing of the PL-19 Nudol missile system, however, that exactly coincided with an as yet unidentified satellite exploding in space, its falling slowly in flames through the atmosphere, and then crashing somewhere in the United Kingdom—and upon crashing, saw US Space Command US Air Force General John Raymond screaming to Russia: “This test is further proof of Russia's hypocritical advocacy of outer space arms control proposals designed to restrict the capabilities of the United States while clearly having no intention of halting their counterspace weapons programs”—which Russia immediately replied to by pointing out that Moscow is still waiting for Washington to answer its questions about US activities in outer space and stating: “We also have a lot of questions…We asked them quite a long time ago and want to have an answer after all”—that itself was followed within the hour by known President Donald Trump “media mouthpiece” Lou Dobbs of Fox News floating the idea of war with Communist China as a “consequence” for the coronavirus—and immediately upon its floating, saw President Trump ordering the US Air Force to abruptly end its continuous nuclear bomber presence on Guam after 16-years and immediately return all of its B-52s back to America. [Note: Some words and/or phrases appearing in quotes in this report are English language approximations of Russian words/phrases having no exact counterpart.]
http://www.whatdoesitmean.com/dak22.jpg
Russian PL-19 Nudol satellite killer missile capable of reaching up and shooting down satellites in low-Earth orbit test fired (above) on 15 April 2020…
http://www.whatdoesitmean.com/dak23.jpg
…and after launching unidentified satellite explodes in space (above)…
http://www.whatdoesitmean.com/dak24.jpg
…that then slowly spirals to Earth in flames (above) before crashing somewhere in the United Kingdom…
http://www.whatdoesitmean.com/dak21.jpg
…all followed by war against China because of the coronavirus being floated in the US and President Donald Trump ordering his nation’s nuclear armed B-52 strategic bombers to immediately leave their Pacific Ocean island base in striking distance of Communist Chinese missiles—B-52 strategic bombers that once safely out of range of being targeted while they fled back to America, suddenly turned on their SQUAK-Transponders to mysteriously identify themselves to the world’s watching radar systems as “SEEYA” (above)—which brings to mind the American idiom: “We’ll be seeing you later”.
According to the very limited, indeed near non-existent information contained in this classified at the highest level report permitted to be openly commented on by various ministries, what appears to be the main focus of Russian leadership concern right now is the “United States bigger biological presence beyond its borders, in particular in former Soviet republics”—with this report specifically mentioning Foreign Ministry Spokeswoman Maria Zakharova stating yesterday: “Naturally, we cannot ignore the fact that the Americans are developing an infrastructure with hazardous biological potential in the direct proximity to the Russian borders, and we cannot rule out that the Americans use such reference laboratories in third countries to develop and modify various pathogenic agents, including in military purposes”.
Taken just by itself this statement just made by Foreign Ministry Spokeswoman Zakharova could have multiple meanings—but when viewed in the context of this report’s numerously referenced sub-files, sees something truly ominous emerging—sub-files containing an MoD document describing a clandestine biological weapons laboratory in the country of Georgia being operated by the US military—and a frightening sub-file documenting events that occurred in the former Soviet republic of Kyrgyzstan—a Kyrgyzstan that was once part of the old Soviet biological-warfare network, and where the NATO nation of Canada planned to build a high-security bio-lab holding the world’s most deadly pathogens opponents dubbed the “laboratory of death”—a project that fell under the Canadian government’s $1-billion Global Partnership Program, itself part of a wider G8 effort to help prevent nuclear, biological and chemical agents in former Soviet lands from getting into the wrong hands.
http://www.whatdoesitmean.com/dak26.jpg
Though NATO member Canada was never able to finish its “laboratory of death” in Kyrgyzstan due to that nation’s 2010 revolution, this report documents how the Obama-Clinton Regime used US defense monies to fund and build its Republican Center of Quarantine and Especially Dangerous Infections (RCQ&EDI MH KR)—a research center for the world’s most deadliest pathogens in Kyrgyzstan still fully funded by the World Health Organization—and MoD alarms were sounded about in March-2018 when the United States military pulled out of Kyrgyzstan.
Further MoD alarms about Kyrgyzstan were sounded in April-2019 when they joined the Belt and Road Initiative to connect themselves with southern China, which borders their nation—an initiative enacted by Communist China in 2013 so they could gain supremacy in global trade—but five-months after Kyrgyzstan had linked up with southern China, in October-2019—this report all but admits the MoD threatened to attack Armenia unless it opened up to Russian military scientists its US military bio-lab—a threat Armenia bowed to and saw them preparing to sign an inspection agreement with the MoD on 25 October 2019.
In piecing together why Russia was prepared to go to war with Armenia unless they opened up to MoD scientists the US military bio-lab in their country, this report references what had occurred the month previously in September-2019—which was when the MoD began to document troubling reports coming out of southern China near the border with its new Belt and Road Initiative partner Kyrgyzstan about a mysterious disease that was killing people—with confirmation of this being true having just been publically released by a team of researchers led by a Cambridge University that have traced the coronavirus to have first emerged in southern China—not Wuhan.
http://www.whatdoesitmean.com/dak27.jpg
Cambridge University researchers have just released coronavirus tracing map (above) showing that coronavirus first emerged in southern China near its border with Kyrgyzstan in September-2019.
On 24 February 2014 we posted our report titled “Putin Orders Troops To Crimea Passes, Warns NATO Of War” to alert you that President Putin was prepared to launch a total war against the United States—a report scoffed at and derided at the time of its posting as being fake news—that is until a little over a year later, in March-2015, when President Putin admitted to the world that he, indeed, was ready to put Russia’s nuclear forces on alert over Crimea—with the importance of this reminder being so you can fully understand and comprehend the significance of this highly-classified report containing a large sub-file with the heading “Montagnier”—who is the Nobel Prize winning French virologist Doctor-Scientist Luc Montagnier, the man who discovered the HIV virus back in 1983, currently works as a full-time professor at Shanghai Jiao Tong University in China, and who’s just declared that the coronavirus rampaging across the world: “Could Only Have Been Created In A Lab”—which now leaves our rapidly fracturing world tumbling towards the abyss with the same fears voiced to the British peoples by Prime Minister Winston Churchill at the outbreak of World War II in 1939, “I cannot forecast to you the action of Russia…It is a riddle, wrapped in a mystery, inside an enigma; but perhaps there is a key… That key is Russian national interest”—a “national interest” we can assure you, with all certainty, means that whoever created and released this coronavirus won’t just have to worry about their satellites being shot out of space—they’ll soon be watching some of their most important military bases exploding into nuclear fireballs, too.
http://www.whatdoesitmean.com/dak25.jpg
April 18, 2020 EU and US all rights reserved. Permission to use this report in its entirety is granted under the condition it is linked to its original source at WhatDoesItMean.Com. Freebase content licensed under CC-BY and GFDL.
[Note: Many governments and their intelligence services actively campaign against the information found in these reports so as not to alarm their citizens about the many catastrophic Earth changes and events to come, a stance that the Sisters of Sorcha Faal strongly disagree with in believing that it is every human being’s right to know the truth. Due to our mission’s conflicts with that of those governments, the responses of their ‘agents’ has been a longstanding misinformation/misdirection campaign designed to discredit us, and others like us, that is exampled in numerous places, including HERE.]
[Note: The WhatDoesItMean.com website was created for and donated to the Sisters of Sorcha Faal in 2003 by a small group of American computer experts led by the late global technology guru Wayne Green(1922-2013) to counter the propaganda being used by the West to promote their illegal 2003 invasion of Iraq.]
[Note: The word Kremlin (fortress inside a city) as used in this report refers to Russian citadels, including in Moscow, having cathedrals wherein female Schema monks (Orthodox nuns) reside, many of whom are devoted to the mission of the Sisters of Sorcha Faal.]
America Endures First In World History “Let Stupid People Die” Pandemic
Nothing Will Ever Be The Same After New Age Of Heroes Arises With Coronavirus
Return To Main Page
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- Apr 18, 2020 12:33pm Apr 18, 2020 12:33pm
- | Commercial Member | Joined Dec 2014 | 11,632 Posts
https://www.zerohedge.com/health/idi...ops+to+zero%29
Authored by Robert Wright via The American Institute for Economic Research,
The title comes from the two movies reviewed below, Idiocracy (2006) and Experimenter: The Stanley Milgram Story (2015). In normal times, neither would merit mention, much less review, at such a late date. But unless you are just coming off six months on a trapline in Alaska, you know that these are abnormal times.
I couldn’t decide which movie better fits our current situation but then it dawned on me that they are mutually reinforcing, not exclusive.
https://zh-prod-1cc738ca-7d3b-4a72-b...-1-800x267.jpg
Idiocracy stars Luke Wilson, Maya Rudolph, and Terry Crews. In 2005, soldier Wilson and prostitute Rudolph agree to be cryogenically frozen for a year but through a series of mishaps end up sleeping for 500 years. They awaken to a dystopia where selective pressures have rendered humans dumb and dumber.
Americans live surrounded by mountains of trash, watching trash on television, including shows like “Oww My Balls” that make Johnny Knoxville’s Jackass franchise look like high culture.
POTUS Crews and his fellow Americans speak in a pidgin of grunts and rural, urban, and Valley Girl slang that sounds eerily familiar. Unlike our presidents to date, though, he fires a machine gun, Al Pacino-style, for rhetorical emphasis.
I don’t want to ruin the ending, unsurprising as it is, with spoilers but would like to draw attention to a scene where Wilson tries to explain to Crews’ cabinet that the reason that crops stopped growing was because they were irrigating with Brawndo, a ubiquitous sports drink tagged “The Thirst Mutilator,” instead of water.
Everyone was sure that Wilson, though clearly the most intelligent man on earth, was wrong because everyone knows that water is only used in toilets. Moreover, Brawndo is superior to water for irrigation because “plants crave it” because it has “electrolytes.” Nobody knows what electrolytes are but they all know Brawndo has them and that plants crave it.
Somebody with some technical skills ought to dub coronavirus-speak over that scene as it would surely go “viral.” Why do we have to stay inside, even though it is safer outside, and shutter businesses? “To flatten the curve and raise the line.” What does that mean? “Coronavirus craves isolation and economic desolation!” How do you know that? “Flatten the curve, raise the line!” At any cost? Wouldn’t less extreme measures work at least as well at lower cost? “Coronavirus craves isolation and economic desolation!” You get the idea.
Interestingly, after Wilson orders the switch to water, half of Americans lose their jobs because they worked for Brawndo, the stock price of which immediately dropped to “zero” after Wilson’s water-only irrigation pronouncement. That was “good” unemployment, though, because it ended “bad” employment, the creation of an effective herbicide containing “electrolytes.” The unemployment governments are causing today is bad unemployment because it ended good employment for no good reason. There, I said it in terms even a denizen of Idiocracy America could understand.
Where Idiocracy is a semi-funny futuristic dystopian fiction, The Experimenter is a super quirky historical docudrama focusing on the actual experiments conducted by Stanley Milgram in the early 1960s.
Milgram sought to understand why people followed orders during the Holocaust. So he had an actor in a lab coat direct a test subject to administer electrical shocks of increasing voltage to another actor in an adjacent room. The shocks were fake but the screams were real. To everyone’s horror, Milgram discovered that 65 percent of test subjects were willing to administer lethal voltages to another human being, only because an authority figure, in this case a “scientist,” claimed it was necessary.
Test subjects were paid in advance and told during pre-experiment briefings that they could leave at any time, for any reason, with no penalty. In debriefings, some said they were shaken by the experience, which would never pass an IRB today, but none felt coerced in continuing by anything other than the “scientist.”
Milgram played around with variables but time and again about two-thirds of his test subjects, white or black, man or woman, gentile or Jew obeyed the authority figure. He believed that people with an “agentic personality” were susceptible to manipulation because they saw themselves as simply “doing their job” or “playing a role” and hence not morally responsible for their actions.
Again, somebody with some video editing skills could have a field day with that scene by dubbing over something like:
“Scientist”: We must flatten the curve and raise the line.
Zap followed by whimpers.
Subject: The patient sounds like this is hurting him.
“Scientist”: Some must suffer today so that some old people can die of the flu, next year.
Next higher voltage switch, zap, followed by a scream for mercy.
Subject: I don’t know how much more the patient can take.
“Scientist”: What part of flatten the curve and raise the line don’t you understand?
Subject: I don’t understand how torturing this person helps anything.
“Scientist”: How dare you! I am Doctor Fow Chi, M.D., D.O., S.T.A.T.I.S.T., Ph.D. I, and I alone know what is best.
Voltage up, zap, blood curdling scream.
Subject: I still don’t understand.
“Scientist”: And oh by the way you are not zapping just one guy but almost every business owner in America.
Subject: I won’t!
“Scientist”: You will, because I am wearing a white lab coat!
Subject: Do you have a degree in economics? Economic policy? Economic history even?
“Scientist”: Of course not! All irrelevant to flattening the curve and raising the line.
Subject: I don’t know …
“Scientist”: Here is a bunch of money and laws that say you do not have to pay your bills.
Voltage up. Zap. A low moan, then silence.
“Scientist”: Excellent job. You have flattened the economy. The money I just gave you is now worthless and the companies you owed money to are bankrupt anyway. Have a nice life, what is left of it anyway. Now go on social media and brag about what you have done!
Another famous experiment discussed in the movie, conducted by Solomon Asch, showed that one third of his test subjects knowingly chose the wrong answer to a simple question about line lengths when previous respondents, actors instructed to choose the wrong answer, erred. Those test subjects valued conformity over obvious truth. The good news is that when only one other person in the respondent group picked the correct answer, conformists dropped to a mere five percent.
The correct policy response to COVID-19 is more difficult to discern than judging the length of lines and a lot more is at stake, but there are people, more and more each day, who are no longer blindly conforming to the “shift the curve and raise the line” mantra. They are asking questions, tough ones, and thinking for themselves, which is still technically legal in most states.
While a few courageous governors have refused to order lockdowns or massive business closures, most Americans remain locked in what appears to be a giant Milgram experiment testing how far they are willing to go down an increasingly irrational path, egged on by authority figures whose unconstitutional dictates need not be followed. We will not have to wait half a millennium for an America like that depicted in Idiocracy unless we have the courage to say, “enough!”
Authored by Robert Wright via The American Institute for Economic Research,
The title comes from the two movies reviewed below, Idiocracy (2006) and Experimenter: The Stanley Milgram Story (2015). In normal times, neither would merit mention, much less review, at such a late date. But unless you are just coming off six months on a trapline in Alaska, you know that these are abnormal times.
I couldn’t decide which movie better fits our current situation but then it dawned on me that they are mutually reinforcing, not exclusive.
https://zh-prod-1cc738ca-7d3b-4a72-b...-1-800x267.jpg
Idiocracy stars Luke Wilson, Maya Rudolph, and Terry Crews. In 2005, soldier Wilson and prostitute Rudolph agree to be cryogenically frozen for a year but through a series of mishaps end up sleeping for 500 years. They awaken to a dystopia where selective pressures have rendered humans dumb and dumber.
Americans live surrounded by mountains of trash, watching trash on television, including shows like “Oww My Balls” that make Johnny Knoxville’s Jackass franchise look like high culture.
POTUS Crews and his fellow Americans speak in a pidgin of grunts and rural, urban, and Valley Girl slang that sounds eerily familiar. Unlike our presidents to date, though, he fires a machine gun, Al Pacino-style, for rhetorical emphasis.
I don’t want to ruin the ending, unsurprising as it is, with spoilers but would like to draw attention to a scene where Wilson tries to explain to Crews’ cabinet that the reason that crops stopped growing was because they were irrigating with Brawndo, a ubiquitous sports drink tagged “The Thirst Mutilator,” instead of water.
Everyone was sure that Wilson, though clearly the most intelligent man on earth, was wrong because everyone knows that water is only used in toilets. Moreover, Brawndo is superior to water for irrigation because “plants crave it” because it has “electrolytes.” Nobody knows what electrolytes are but they all know Brawndo has them and that plants crave it.
Somebody with some technical skills ought to dub coronavirus-speak over that scene as it would surely go “viral.” Why do we have to stay inside, even though it is safer outside, and shutter businesses? “To flatten the curve and raise the line.” What does that mean? “Coronavirus craves isolation and economic desolation!” How do you know that? “Flatten the curve, raise the line!” At any cost? Wouldn’t less extreme measures work at least as well at lower cost? “Coronavirus craves isolation and economic desolation!” You get the idea.
Interestingly, after Wilson orders the switch to water, half of Americans lose their jobs because they worked for Brawndo, the stock price of which immediately dropped to “zero” after Wilson’s water-only irrigation pronouncement. That was “good” unemployment, though, because it ended “bad” employment, the creation of an effective herbicide containing “electrolytes.” The unemployment governments are causing today is bad unemployment because it ended good employment for no good reason. There, I said it in terms even a denizen of Idiocracy America could understand.
Where Idiocracy is a semi-funny futuristic dystopian fiction, The Experimenter is a super quirky historical docudrama focusing on the actual experiments conducted by Stanley Milgram in the early 1960s.
Milgram sought to understand why people followed orders during the Holocaust. So he had an actor in a lab coat direct a test subject to administer electrical shocks of increasing voltage to another actor in an adjacent room. The shocks were fake but the screams were real. To everyone’s horror, Milgram discovered that 65 percent of test subjects were willing to administer lethal voltages to another human being, only because an authority figure, in this case a “scientist,” claimed it was necessary.
Test subjects were paid in advance and told during pre-experiment briefings that they could leave at any time, for any reason, with no penalty. In debriefings, some said they were shaken by the experience, which would never pass an IRB today, but none felt coerced in continuing by anything other than the “scientist.”
Milgram played around with variables but time and again about two-thirds of his test subjects, white or black, man or woman, gentile or Jew obeyed the authority figure. He believed that people with an “agentic personality” were susceptible to manipulation because they saw themselves as simply “doing their job” or “playing a role” and hence not morally responsible for their actions.
Again, somebody with some video editing skills could have a field day with that scene by dubbing over something like:
Subject: Why must I press the shock button?
“Scientist”: We must flatten the curve and raise the line.
Zap followed by whimpers.
Subject: The patient sounds like this is hurting him.
“Scientist”: Some must suffer today so that some old people can die of the flu, next year.
Next higher voltage switch, zap, followed by a scream for mercy.
Subject: I don’t know how much more the patient can take.
“Scientist”: What part of flatten the curve and raise the line don’t you understand?
Subject: I don’t understand how torturing this person helps anything.
“Scientist”: How dare you! I am Doctor Fow Chi, M.D., D.O., S.T.A.T.I.S.T., Ph.D. I, and I alone know what is best.
Voltage up, zap, blood curdling scream.
Subject: I still don’t understand.
“Scientist”: And oh by the way you are not zapping just one guy but almost every business owner in America.
Subject: I won’t!
“Scientist”: You will, because I am wearing a white lab coat!
Subject: Do you have a degree in economics? Economic policy? Economic history even?
“Scientist”: Of course not! All irrelevant to flattening the curve and raising the line.
Subject: I don’t know …
“Scientist”: Here is a bunch of money and laws that say you do not have to pay your bills.
Voltage up. Zap. A low moan, then silence.
“Scientist”: Excellent job. You have flattened the economy. The money I just gave you is now worthless and the companies you owed money to are bankrupt anyway. Have a nice life, what is left of it anyway. Now go on social media and brag about what you have done!
Another famous experiment discussed in the movie, conducted by Solomon Asch, showed that one third of his test subjects knowingly chose the wrong answer to a simple question about line lengths when previous respondents, actors instructed to choose the wrong answer, erred. Those test subjects valued conformity over obvious truth. The good news is that when only one other person in the respondent group picked the correct answer, conformists dropped to a mere five percent.
The correct policy response to COVID-19 is more difficult to discern than judging the length of lines and a lot more is at stake, but there are people, more and more each day, who are no longer blindly conforming to the “shift the curve and raise the line” mantra. They are asking questions, tough ones, and thinking for themselves, which is still technically legal in most states.
While a few courageous governors have refused to order lockdowns or massive business closures, most Americans remain locked in what appears to be a giant Milgram experiment testing how far they are willing to go down an increasingly irrational path, egged on by authority figures whose unconstitutional dictates need not be followed. We will not have to wait half a millennium for an America like that depicted in Idiocracy unless we have the courage to say, “enough!”
1
- Post #8,174
- Quote
- Apr 18, 2020 1:46pm Apr 18, 2020 1:46pm
- | Commercial Member | Joined Dec 2014 | 11,632 Posts
https://www.zerohedge.com/markets/fe...ops+to+zero%29
"The Fed Is All The Buyers Have": The Banks Agree Stocks Have Never Been More Expensive
https://zh-prod-1cc738ca-7d3b-4a72-b...?itok=LY4e264-
by Tyler Durden
Sat, 04/18/2020 - 13:30
Late last week, we showed a chart from Credit Suisse which we described simply as "insanity" because it demonstrated that as the US careened into a depression, with GDP crashing and the unemployment rate soaring, between the latest Fed-driven surge in stocks and the collapse in earnings estimates, the PE multiple on the broader market had eclipsed the previous record of 19.0x set during the market's February all time high, and had now hit a new all-time high of 19.4x. In other words, the market has never been more overvalued than it is right now.
https://zh-prod-1cc738ca-7d3b-4a72-b...igh%20PE_0.jpg
The chart eventually made its way to Jeff Gundlach who yesterday tweeted that "U.S. GDP looks to be down 15%ish, unannualized, from its peak. SPX is presently down a similar amount from its peak. Ergo (and I over simplify to make a valid point) stocks now are back to the Feb 19th highs from a valuation perspective. “In Fed We Trust” is all the buyers have."
✔@TruthGundlach
U.S. GDP looks to be down 15%ish, unannualized, from its peak. SPX is presently down a similar amount from its peak. Ergo (and I over simplify to make a valid point) stocks now are back to the Feb 19th highs from a valuation perspective. “In Fed We Trust” is all the buyers have.
Gundlach's math is not quite correct because as JPMorgan showed last week, the beta of corporate profits to moves in GDP is about 7x during financial crises. As a result, according to the bank's chief economist Joseph Lipton, in the current recession in which JPM expects global GDP growth to collapse by the same 9.8%-points in Q2, the bank is applying the same profit drop beta of seven—on par with the global financial crisis-- which implies a plunge in corporate profits of roughly 70% in the year through 2Q20.
https://zh-prod-1cc738ca-7d3b-4a72-b...ts%20jpm_0.jpg
Meanwhile, with every passing day the fundamental disconnect is getting worse, because as stock prices soar (mostly due to momentum-chasing machine buying while humans sell) earnings estimates are cashing...
https://zh-prod-1cc738ca-7d3b-4a72-b...stimates_1.jpg
... with Goldman calculating that its latest bear case PE multiple (on 2021 earnings no less as nobody is looking at 2020 anymore) is now a dot com bubble-eseque 24x.
https://zh-prod-1cc738ca-7d3b-4a72-b...20forecast.jpg
Meanwhile, crashing the bulls' party, or rather their expectations for a V-shaped recovery, JPMorgan also cautioned that corporate profits won't recover their pre-pandemic baseline until some time in 2022 if not 2023, which is terrible news for Wall Street strategists as it means they will now have to apply even more ridiculous forward multiples from 2023 for their optimistic recos to make any sense.
https://zh-prod-1cc738ca-7d3b-4a72-b...l%202023_0.jpg
And so as Credit Suisse, JPMorgan and Goldman all point out the schizophrenia in being bullish in a time when corporate profits are set for the biggest - and longest - drop since the Great Depression, late last week two more banks joined the bandwagon with Citi warning that "equities fall the same as EPS in a recession... and reflect that equity markets are currently not reflecting the expected decline of 50% in global EPS in 2020." Make that 70% according to JPMorgan.
https://zh-prod-1cc738ca-7d3b-4a72-b...ril%202020.jpg
Finally, exactly two weeks after our post on the "shocking" topic of how expensive the market is right now, Bank of America's Savita Subramanian has also done the math and concludes that as "stocks have rallied, bottom-up consensus estimates for 2020 have fallen", which in turn has pushed the S&P 500's forward P/E ratio from March's low of 13.0x to 19.5x, higher than mid-Feb's peak P/E of 18.9x.
https://zh-prod-1cc738ca-7d3b-4a72-b...b8XQAA9N6r.jpg
In other words, using the bank's reference table of 20 different valuation metrics, "we're back to elevated multiples on most of the 20 metrics we track" with just three exceptions: lower than average Price to Free Cash Flow, cheaper relative to bonds (equity risk premia frameworks) and - drumroll - relative to gold.
https://zh-prod-1cc738ca-7d3b-4a72-b...overvalued.jpg
The last one is especially amusing because it means that slowly but surely investors are finally realizing that the biggest winner after the current reflationary surge will not be equities but what the WSJ once dubbed "a pet rock."
Of course, even in this unprecedented dislocation of a "market", equity investors still have hope, which is literally is all they have: or as Gundlach puts it, "In Fed We Trust” is all the buyers have" and Citi agrees: "Central bank intervention could cap the downside."
Better pray to those central banking gods, bulls.
"The Fed Is All The Buyers Have": The Banks Agree Stocks Have Never Been More Expensive
https://zh-prod-1cc738ca-7d3b-4a72-b...?itok=LY4e264-
by Tyler Durden
Sat, 04/18/2020 - 13:30
Late last week, we showed a chart from Credit Suisse which we described simply as "insanity" because it demonstrated that as the US careened into a depression, with GDP crashing and the unemployment rate soaring, between the latest Fed-driven surge in stocks and the collapse in earnings estimates, the PE multiple on the broader market had eclipsed the previous record of 19.0x set during the market's February all time high, and had now hit a new all-time high of 19.4x. In other words, the market has never been more overvalued than it is right now.
https://zh-prod-1cc738ca-7d3b-4a72-b...igh%20PE_0.jpg
The chart eventually made its way to Jeff Gundlach who yesterday tweeted that "U.S. GDP looks to be down 15%ish, unannualized, from its peak. SPX is presently down a similar amount from its peak. Ergo (and I over simplify to make a valid point) stocks now are back to the Feb 19th highs from a valuation perspective. “In Fed We Trust” is all the buyers have."
https://pbs.twimg.com/profile_images...U4B_normal.jpgJeffrey Gundlach
✔@TruthGundlach
U.S. GDP looks to be down 15%ish, unannualized, from its peak. SPX is presently down a similar amount from its peak. Ergo (and I over simplify to make a valid point) stocks now are back to the Feb 19th highs from a valuation perspective. “In Fed We Trust” is all the buyers have.
Gundlach's math is not quite correct because as JPMorgan showed last week, the beta of corporate profits to moves in GDP is about 7x during financial crises. As a result, according to the bank's chief economist Joseph Lipton, in the current recession in which JPM expects global GDP growth to collapse by the same 9.8%-points in Q2, the bank is applying the same profit drop beta of seven—on par with the global financial crisis-- which implies a plunge in corporate profits of roughly 70% in the year through 2Q20.
https://zh-prod-1cc738ca-7d3b-4a72-b...ts%20jpm_0.jpg
Meanwhile, with every passing day the fundamental disconnect is getting worse, because as stock prices soar (mostly due to momentum-chasing machine buying while humans sell) earnings estimates are cashing...
https://zh-prod-1cc738ca-7d3b-4a72-b...stimates_1.jpg
... with Goldman calculating that its latest bear case PE multiple (on 2021 earnings no less as nobody is looking at 2020 anymore) is now a dot com bubble-eseque 24x.
https://zh-prod-1cc738ca-7d3b-4a72-b...20forecast.jpg
Meanwhile, crashing the bulls' party, or rather their expectations for a V-shaped recovery, JPMorgan also cautioned that corporate profits won't recover their pre-pandemic baseline until some time in 2022 if not 2023, which is terrible news for Wall Street strategists as it means they will now have to apply even more ridiculous forward multiples from 2023 for their optimistic recos to make any sense.
https://zh-prod-1cc738ca-7d3b-4a72-b...l%202023_0.jpg
And so as Credit Suisse, JPMorgan and Goldman all point out the schizophrenia in being bullish in a time when corporate profits are set for the biggest - and longest - drop since the Great Depression, late last week two more banks joined the bandwagon with Citi warning that "equities fall the same as EPS in a recession... and reflect that equity markets are currently not reflecting the expected decline of 50% in global EPS in 2020." Make that 70% according to JPMorgan.
https://zh-prod-1cc738ca-7d3b-4a72-b...ril%202020.jpg
Finally, exactly two weeks after our post on the "shocking" topic of how expensive the market is right now, Bank of America's Savita Subramanian has also done the math and concludes that as "stocks have rallied, bottom-up consensus estimates for 2020 have fallen", which in turn has pushed the S&P 500's forward P/E ratio from March's low of 13.0x to 19.5x, higher than mid-Feb's peak P/E of 18.9x.
https://zh-prod-1cc738ca-7d3b-4a72-b...b8XQAA9N6r.jpg
In other words, using the bank's reference table of 20 different valuation metrics, "we're back to elevated multiples on most of the 20 metrics we track" with just three exceptions: lower than average Price to Free Cash Flow, cheaper relative to bonds (equity risk premia frameworks) and - drumroll - relative to gold.
https://zh-prod-1cc738ca-7d3b-4a72-b...overvalued.jpg
The last one is especially amusing because it means that slowly but surely investors are finally realizing that the biggest winner after the current reflationary surge will not be equities but what the WSJ once dubbed "a pet rock."
Of course, even in this unprecedented dislocation of a "market", equity investors still have hope, which is literally is all they have: or as Gundlach puts it, "In Fed We Trust” is all the buyers have" and Citi agrees: "Central bank intervention could cap the downside."
Better pray to those central banking gods, bulls.
- Post #8,175
- Quote
- Apr 18, 2020 1:51pm Apr 18, 2020 1:51pm
- | Commercial Member | Joined Dec 2014 | 11,632 Posts
- Post #8,176
- Quote
- Apr 18, 2020 2:00pm Apr 18, 2020 2:00pm
- | Commercial Member | Joined Dec 2014 | 11,632 Posts
- Post #8,177
- Quote
- Apr 18, 2020 2:35pm Apr 18, 2020 2:35pm
- | Commercial Member | Joined Dec 2014 | 11,632 Posts
https://www.zerohedge.com/health/new...ops+to+zero%29
Authored by Allen Stevo via The Mises Institute,
It was autumn 1989. Momentous things were taking place in the world.
The Berlin Wall had fallen. The people of the Eastern Bloc had succeeded at getting to the West through Hungary. The firm line between east and west was wavering. The situation was moving away from the course that Warsaw Pact communist governments had charted: that their populations must remain captive within the borders of the Communist Bloc.
It was unclear whether this social contagion for freedom would spread into Czechoslovakia.
But then November 17, 1989, arrived, a day etched in history. This was Students Day, a legal holiday. Everything had to close under government fiat. People were off school and off work. But some folks were agitated about prior government actions which many saw as abuses.
When the government gave the people of Czechoslovakia that day off, it was like a match to tinder. The small flame grew into a big one.
https://zh-prod-1cc738ca-7d3b-4a72-b.../velours_0.jpg
It was a revolution noted for its bloodlessness. The Velvet Revolution, we call it today, leaning on what the Czechs called it. People, for as far as the eye could see, gathered in a giant square in Prague and called for the ouster of their government.
In the face of the idea that saying the wrong words politically could be toxic to one’s health, much like in America today, some did not resort to speaking words against their government. They merely pulled their keys out of their pockets and jingled them.
The message was clear.
Imagine tens of thousands of people jingling their keys at once.
Imagine the horror that would fill you, as a member of the communist government, looking out the window at a crowd, visible as far as the eye could see, and knowing that this delicate sound being made by each individual, growing into a horrifying sound in unison, called for your ouster.
What could a government minister, sitting at their desk, overlooking the square, even have imagined that sound to have been the first time it arose?
How ominous. How threatening. How deeply horrifying it must have been to peer out that window. The day of reckoning had finally arrived.
At that moment, a question was answered for them: what is the last thought that goes through a tyrant’s head? That is the thought that flashed through theirs as they realized what that sound was: reckoning. It had finally arrived. Were the government ministers thinking those thoughts as the keys jingled below them?
The people of Czechoslovakia remained largely peaceful.
By the end of the year, Czech dissident Vaclav Havel, who had been in prison earlier that year, would be installed in Prague Castle. The beloved Alexander Dubcek, the Slovak hero of the 1968 Prague Spring, would be his right-hand man.
The present-day American state's response, in ways, goes beyond the communism of even the USSR. The Soviets actually wanted their economy to work. They wanted to beat the West. Churches remained open and remained an important part of society, both for political use, and because the people wouldn’t have it any other way.
But just as the communists of Eastern Europe didn't back down until they were forced to, the lockdowns of today won’t stop unless government officials fear resistance.
There is a chance right now, with many unhappy Americans and many idle hands, much like Students Day, November 17, 1989, to tell the government “no more.”
Will they be pushed out of office? Will it be peaceful? I don’t know. Time will tell.
But it is time for this to stop. And daily, more people grow angry at being lied to as they witness the mass destruction of their country and culture in the spring of 2020.
It wasn’t the jingling of keys that escorted the evil communists from power in 1989. It was the threat of what all those people jingling keys could do if those in power did not step aside.
Retaining political influence depends dearly on timing. Some of those communists who knew when to step aside, who knew how to apologize, had prosperous careers long after the revolution, some to this very day.
In sharp contrast, the far more stubborn Nicolae Ceausescu of regional neighbor Romania was put to death by a firing squad on December 25, 1989.
https://zh-prod-1cc738ca-7d3b-4a72-b...%20%282%29.jpg
We have reached a point where government officials have yet to admit that there is a real cost in terms of life and health that comes with bringing the economy to a standstill. And these same politicians and experts have yet to show that the benefits of their lockdowns are greater than the costs imposed. The models have been shown to be wrong.
Everyone is entitled to a mistake. But to continue making the same mistake repeatedly, destroying lives, amounts to malice.
In my daily life, I am increasingly seeing my country turn into a tinderbox that the disconnected leaders, elected and unelected, cannot imagine and must not toy with. To do so is dangerous for us all.
Not next month, not next week, not tomorrow. Today is the day for the government-imposed lockdowns to stop.
Authored by Allen Stevo via The Mises Institute,
It was autumn 1989. Momentous things were taking place in the world.
The Berlin Wall had fallen. The people of the Eastern Bloc had succeeded at getting to the West through Hungary. The firm line between east and west was wavering. The situation was moving away from the course that Warsaw Pact communist governments had charted: that their populations must remain captive within the borders of the Communist Bloc.
It was unclear whether this social contagion for freedom would spread into Czechoslovakia.
But then November 17, 1989, arrived, a day etched in history. This was Students Day, a legal holiday. Everything had to close under government fiat. People were off school and off work. But some folks were agitated about prior government actions which many saw as abuses.
When the government gave the people of Czechoslovakia that day off, it was like a match to tinder. The small flame grew into a big one.
https://zh-prod-1cc738ca-7d3b-4a72-b.../velours_0.jpg
It was a revolution noted for its bloodlessness. The Velvet Revolution, we call it today, leaning on what the Czechs called it. People, for as far as the eye could see, gathered in a giant square in Prague and called for the ouster of their government.
In the face of the idea that saying the wrong words politically could be toxic to one’s health, much like in America today, some did not resort to speaking words against their government. They merely pulled their keys out of their pockets and jingled them.
The message was clear.
Imagine tens of thousands of people jingling their keys at once.
Imagine the horror that would fill you, as a member of the communist government, looking out the window at a crowd, visible as far as the eye could see, and knowing that this delicate sound being made by each individual, growing into a horrifying sound in unison, called for your ouster.
What could a government minister, sitting at their desk, overlooking the square, even have imagined that sound to have been the first time it arose?
How ominous. How threatening. How deeply horrifying it must have been to peer out that window. The day of reckoning had finally arrived.
At that moment, a question was answered for them: what is the last thought that goes through a tyrant’s head? That is the thought that flashed through theirs as they realized what that sound was: reckoning. It had finally arrived. Were the government ministers thinking those thoughts as the keys jingled below them?
The people of Czechoslovakia remained largely peaceful.
By the end of the year, Czech dissident Vaclav Havel, who had been in prison earlier that year, would be installed in Prague Castle. The beloved Alexander Dubcek, the Slovak hero of the 1968 Prague Spring, would be his right-hand man.
The present-day American state's response, in ways, goes beyond the communism of even the USSR. The Soviets actually wanted their economy to work. They wanted to beat the West. Churches remained open and remained an important part of society, both for political use, and because the people wouldn’t have it any other way.
But just as the communists of Eastern Europe didn't back down until they were forced to, the lockdowns of today won’t stop unless government officials fear resistance.
There is a chance right now, with many unhappy Americans and many idle hands, much like Students Day, November 17, 1989, to tell the government “no more.”
Will they be pushed out of office? Will it be peaceful? I don’t know. Time will tell.
But it is time for this to stop. And daily, more people grow angry at being lied to as they witness the mass destruction of their country and culture in the spring of 2020.
It wasn’t the jingling of keys that escorted the evil communists from power in 1989. It was the threat of what all those people jingling keys could do if those in power did not step aside.
Retaining political influence depends dearly on timing. Some of those communists who knew when to step aside, who knew how to apologize, had prosperous careers long after the revolution, some to this very day.
In sharp contrast, the far more stubborn Nicolae Ceausescu of regional neighbor Romania was put to death by a firing squad on December 25, 1989.
https://zh-prod-1cc738ca-7d3b-4a72-b...%20%282%29.jpg
We have reached a point where government officials have yet to admit that there is a real cost in terms of life and health that comes with bringing the economy to a standstill. And these same politicians and experts have yet to show that the benefits of their lockdowns are greater than the costs imposed. The models have been shown to be wrong.
Everyone is entitled to a mistake. But to continue making the same mistake repeatedly, destroying lives, amounts to malice.
In my daily life, I am increasingly seeing my country turn into a tinderbox that the disconnected leaders, elected and unelected, cannot imagine and must not toy with. To do so is dangerous for us all.
Not next month, not next week, not tomorrow. Today is the day for the government-imposed lockdowns to stop.
- Post #8,178
- Quote
- Apr 18, 2020 2:42pm Apr 18, 2020 2:42pm
- | Commercial Member | Joined Dec 2014 | 11,632 Posts
https://www.zerohedge.com/economics/...ops+to+zero%29
Earlier this week, JPMorgan reported that its loan loss provision surged five fold to over $8.2 billion for the first quarter, the biggest quarterly increase since the financial crisis (even if its total reserve for losses is still a fraction of what it was during the 2008-2009 crash).
https://zh-prod-1cc738ca-7d3b-4a72-b...0provision.jpg
And while Jamie Dimon was mum on how much more losses the bank may be forced to take in coming quarters to offset the coming default surge (something we discussed in Houston: The Banks Have A Huge Problem), it hinted that things are about to get much worse when it first halted all non-Paycheck Protection Program based loan issuance for the foreseeable future (i.e., all non-government guaranteed loans) because as we said "the only reason why JPMorgan would "temporarily suspend" all non-government backstopped loans such as PPP, is if the bank expects a default tsunami to hit coupled with a full-blown depression that wipes out the value of any and all assets pledged to collateralize the loans."
Then, just a few days later, the bank also said it would raise its mortgage standards, stating that customers applying for a new mortgage will need a credit score of at least 700, and will be required to make a down payment equal to 20% of the home’s value, a dramatic tightening since the typical minimum requirement for a conventional mortgage is a 620 FICO score and as little as 5% down. Reuters echoed our gloomy take, stating that "the change highlights how banks are quickly shifting gears to respond to the darkening U.S. economic outlook and stress in the housing market, after measures to contain the virus put 16 million people out of work and plunged the country into recession."
In short, JPM appears to be quietly exiting the origination of all interest income generating revenue streams over fears of the coming recession, which prompted us to ask "just how bad will the US depression get over the next few months if JPMorgan has just put up a "closed indefinitely" sign on its window."
That question was especially apt today, when JPM exited yet another loan product, when it announced that it has stopped accepting new home equity line of credit, or HELOC, applications. The bank confirmed that this change was made due to the uncertainty in the economy, and didn't give an end date to the pause according to the Motley Fool.
Like in the other previous exits, the move doesn't affect customers who already have HELOCs with the bank. They'll still be able to withdraw funds on their existing HELOCs as they wish.
With HELOCs generally seen as riskier for banks than purchase or refinance mortgages as they represent a second lien on the home, it was only a matter of time before the bank - which had already exited new first-lien loan issuance would but up a "closed" sign on this particular product.
In short, JPMorgan wants no part of the shitstorm that is about to be unleashed on middle America, and especially the housing sector which is about to be hammered like never before.
While the U.S. housing market was on a steady footing earlier this year, all hell broke loose as a result of the economic paralysis and deepening depression resulting from the Coronavirus pandemic. And with would-be home buyers unable to view properties or close purchases due to social distancing measures, the health crisis now threatens to derail the sector, especially as banks are going to make it next to impossible to get a new mortgage.
To be sure, as we reported last week the residential mortgage market is already freefalling after borrower requests to delay mortgage payments exploded by 1,896% in the second half of March. And unfortunately, this is just the beginning: last week, Moody’s Analytics predicted that as much as 30% of homeowners - about 15 million households - could stop paying their mortgages if the U.S. economy remains closed through the summer or beyond. Bloomberg called this the "biggest wave of delinquencies in history."
https://zh-prod-1cc738ca-7d3b-4a72-b...ortgages_0.jpg
This would result in a housing market depression and would lead to tens of billions in losses for mortgage servicers and originators such as JPMorgan.
Earlier this week, JPMorgan reported that its loan loss provision surged five fold to over $8.2 billion for the first quarter, the biggest quarterly increase since the financial crisis (even if its total reserve for losses is still a fraction of what it was during the 2008-2009 crash).
https://zh-prod-1cc738ca-7d3b-4a72-b...0provision.jpg
And while Jamie Dimon was mum on how much more losses the bank may be forced to take in coming quarters to offset the coming default surge (something we discussed in Houston: The Banks Have A Huge Problem), it hinted that things are about to get much worse when it first halted all non-Paycheck Protection Program based loan issuance for the foreseeable future (i.e., all non-government guaranteed loans) because as we said "the only reason why JPMorgan would "temporarily suspend" all non-government backstopped loans such as PPP, is if the bank expects a default tsunami to hit coupled with a full-blown depression that wipes out the value of any and all assets pledged to collateralize the loans."
Then, just a few days later, the bank also said it would raise its mortgage standards, stating that customers applying for a new mortgage will need a credit score of at least 700, and will be required to make a down payment equal to 20% of the home’s value, a dramatic tightening since the typical minimum requirement for a conventional mortgage is a 620 FICO score and as little as 5% down. Reuters echoed our gloomy take, stating that "the change highlights how banks are quickly shifting gears to respond to the darkening U.S. economic outlook and stress in the housing market, after measures to contain the virus put 16 million people out of work and plunged the country into recession."
In short, JPM appears to be quietly exiting the origination of all interest income generating revenue streams over fears of the coming recession, which prompted us to ask "just how bad will the US depression get over the next few months if JPMorgan has just put up a "closed indefinitely" sign on its window."
That question was especially apt today, when JPM exited yet another loan product, when it announced that it has stopped accepting new home equity line of credit, or HELOC, applications. The bank confirmed that this change was made due to the uncertainty in the economy, and didn't give an end date to the pause according to the Motley Fool.
Like in the other previous exits, the move doesn't affect customers who already have HELOCs with the bank. They'll still be able to withdraw funds on their existing HELOCs as they wish.
With HELOCs generally seen as riskier for banks than purchase or refinance mortgages as they represent a second lien on the home, it was only a matter of time before the bank - which had already exited new first-lien loan issuance would but up a "closed" sign on this particular product.
In short, JPMorgan wants no part of the shitstorm that is about to be unleashed on middle America, and especially the housing sector which is about to be hammered like never before.
While the U.S. housing market was on a steady footing earlier this year, all hell broke loose as a result of the economic paralysis and deepening depression resulting from the Coronavirus pandemic. And with would-be home buyers unable to view properties or close purchases due to social distancing measures, the health crisis now threatens to derail the sector, especially as banks are going to make it next to impossible to get a new mortgage.
To be sure, as we reported last week the residential mortgage market is already freefalling after borrower requests to delay mortgage payments exploded by 1,896% in the second half of March. And unfortunately, this is just the beginning: last week, Moody’s Analytics predicted that as much as 30% of homeowners - about 15 million households - could stop paying their mortgages if the U.S. economy remains closed through the summer or beyond. Bloomberg called this the "biggest wave of delinquencies in history."
https://zh-prod-1cc738ca-7d3b-4a72-b...ortgages_0.jpg
This would result in a housing market depression and would lead to tens of billions in losses for mortgage servicers and originators such as JPMorgan.
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- Apr 18, 2020 3:15pm Apr 18, 2020 3:15pm
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https://www.zerohedge.com/economics/...ops+to+zero%29
Over the past month, in its quest to bailout the richest Americans and the country's financial system, the Fed has unleashed an unprecedented array of actions meant to backstop capital markets, going so far as buying investment grade, high yield bonds and even AAA-rated CLO bonds.
It won't be enough.
In what would mark the most draconian and widespread ratings action since the financial crisis, on Friday Moody's warned it may cut the ratings on $22 billion of U.S. collateralized loan obligations - a fifth of all such bonds it grades - as a result of the collapse in cash flows due to the Covid-19 pandemic.
The ratings agency took action on 859 bonds from 358 CLOs that package leveraged loans into securities of varying degrees of risk and return. The step - which according to Bloomberg affects about 19% of Moody’s-rated CLOs that purchase broadly syndicated loans - comes as the underlying debt gets downgraded at a record pace.
Earlier in the week, Moodys reported that its "B3 Negative and lower list" soared to its highest tally ever — 311 companies. That tops a former peak of 291 companies, reached during the credit crisis of 2009 and the commodity-related downturn in April 2016. At 20.7% of the total rated spec-grade population, the list also shot up above its long-term average of 14.8%, and closing in on its all-time high of 26.1%. This spike is the result of the confluence of a coronavirus outbreak, plunging oil prices, and mounting recessionary conditions, which created severe and extensive credit shocks across many sectors, regions and markets, the effects of which are unprecedented.
https://zh-prod-1cc738ca-7d3b-4a72-b...t%20surged.jpg
And with the underlying bonds set to suffer an unprecedented collapse in solvency, it is only a matter of time before the products where they are packaged are also hammered.
Which brings us to what some have called a possible "extinction level event" for the CLOs space, and not just the lowest rated tranches. On Friday, Moody's warned that as a result of a surge in expected losses on the CLO securities which have "increased materially," it could downgrade an unprecedented 20% of all CLOS, with more than 40% of the bonds on review having an investment-grade rating, with 13 rated A, and 355 rated at the Baa level. The rest have sub-investment ratings through to CCC.
While we have discussed the importance of CLOs for both the US loan markets - and Japan's banks and insurance companies - on numerous previous occasions (here, here and here), in a nutshell CLOs are the biggest buyers in the $1.2 trillion leveraged loan market, which in recent years fueled a boom in debt-fueled buyouts and other transactions. But the loans have been particularly hard-hit in the market rout triggered by the pandemic, with a benchmark index plunging last month to the lowest level since the global financial crisis (although the index has recovered some of its losses in recent weeks when the Fed stepped in to partially backstop the sector).
As Bloomberg notes, the extent of losses that CLO bonds incur depends on the deals’ exposure to downgrades and other negative ratings actions on the underlying loans, as well as the bonds’ priority in the capital structure. How much cushion the bonds have either from asset coverage or cash flow diverted from riskier debt that sits below them is also a factor.
In any event, the more severe the downgrades, the greater the impairments for structured investors, with losses potentially stretching deep into the A-space. And while Moody’s said it usually tries to conclude its ratings reviews within 90 days, the “high degree of uncertainty” of the current environment may mean it takes longer.
Or not: in summarizing the surge in deep junk rated companies, the rating agency said that "key indicators flashing red on an alarming rise in spec-grade credit stress, increasing defaults" and added that "a wide range of industry outlooks turned negative in the first quarter of 2020, based in large part on the economic consequences of the coronavirus outbreak." Worse, "the share of companies carrying B3 ratings is much higher than at the start of 2009, providing tinder to fuel future downgrades. These companies will find it difficult to refinance debt in deteriorating economic conditions and, once downgraded, could ultimately face a default if markets remain shut to lower-rated issuers."
Moody’s warning comes just hours after S&P also on Friday put 155 CLO bonds on review, accounting for about 6.3% of its rated CLO securities.
And while some may say the Fed will fix it, recall that the expanded Term Asset-Backed Securities Loan Facility (TALF) announced by the Fed last Thursday only buys AAA-rated bonds of CLOs, which after the Moody's downgrade is complete, will not only collapse in nominal size but will mean that any further attempts to stabilize the CLO space will require yet another Fed backstop of even riskier - i.e., rated AA and lower - structured products.
Over the past month, in its quest to bailout the richest Americans and the country's financial system, the Fed has unleashed an unprecedented array of actions meant to backstop capital markets, going so far as buying investment grade, high yield bonds and even AAA-rated CLO bonds.
It won't be enough.
In what would mark the most draconian and widespread ratings action since the financial crisis, on Friday Moody's warned it may cut the ratings on $22 billion of U.S. collateralized loan obligations - a fifth of all such bonds it grades - as a result of the collapse in cash flows due to the Covid-19 pandemic.
The ratings agency took action on 859 bonds from 358 CLOs that package leveraged loans into securities of varying degrees of risk and return. The step - which according to Bloomberg affects about 19% of Moody’s-rated CLOs that purchase broadly syndicated loans - comes as the underlying debt gets downgraded at a record pace.
Earlier in the week, Moodys reported that its "B3 Negative and lower list" soared to its highest tally ever — 311 companies. That tops a former peak of 291 companies, reached during the credit crisis of 2009 and the commodity-related downturn in April 2016. At 20.7% of the total rated spec-grade population, the list also shot up above its long-term average of 14.8%, and closing in on its all-time high of 26.1%. This spike is the result of the confluence of a coronavirus outbreak, plunging oil prices, and mounting recessionary conditions, which created severe and extensive credit shocks across many sectors, regions and markets, the effects of which are unprecedented.
https://zh-prod-1cc738ca-7d3b-4a72-b...t%20surged.jpg
And with the underlying bonds set to suffer an unprecedented collapse in solvency, it is only a matter of time before the products where they are packaged are also hammered.
Which brings us to what some have called a possible "extinction level event" for the CLOs space, and not just the lowest rated tranches. On Friday, Moody's warned that as a result of a surge in expected losses on the CLO securities which have "increased materially," it could downgrade an unprecedented 20% of all CLOS, with more than 40% of the bonds on review having an investment-grade rating, with 13 rated A, and 355 rated at the Baa level. The rest have sub-investment ratings through to CCC.
While we have discussed the importance of CLOs for both the US loan markets - and Japan's banks and insurance companies - on numerous previous occasions (here, here and here), in a nutshell CLOs are the biggest buyers in the $1.2 trillion leveraged loan market, which in recent years fueled a boom in debt-fueled buyouts and other transactions. But the loans have been particularly hard-hit in the market rout triggered by the pandemic, with a benchmark index plunging last month to the lowest level since the global financial crisis (although the index has recovered some of its losses in recent weeks when the Fed stepped in to partially backstop the sector).
As Bloomberg notes, the extent of losses that CLO bonds incur depends on the deals’ exposure to downgrades and other negative ratings actions on the underlying loans, as well as the bonds’ priority in the capital structure. How much cushion the bonds have either from asset coverage or cash flow diverted from riskier debt that sits below them is also a factor.
In any event, the more severe the downgrades, the greater the impairments for structured investors, with losses potentially stretching deep into the A-space. And while Moody’s said it usually tries to conclude its ratings reviews within 90 days, the “high degree of uncertainty” of the current environment may mean it takes longer.
Or not: in summarizing the surge in deep junk rated companies, the rating agency said that "key indicators flashing red on an alarming rise in spec-grade credit stress, increasing defaults" and added that "a wide range of industry outlooks turned negative in the first quarter of 2020, based in large part on the economic consequences of the coronavirus outbreak." Worse, "the share of companies carrying B3 ratings is much higher than at the start of 2009, providing tinder to fuel future downgrades. These companies will find it difficult to refinance debt in deteriorating economic conditions and, once downgraded, could ultimately face a default if markets remain shut to lower-rated issuers."
Moody’s warning comes just hours after S&P also on Friday put 155 CLO bonds on review, accounting for about 6.3% of its rated CLO securities.
And while some may say the Fed will fix it, recall that the expanded Term Asset-Backed Securities Loan Facility (TALF) announced by the Fed last Thursday only buys AAA-rated bonds of CLOs, which after the Moody's downgrade is complete, will not only collapse in nominal size but will mean that any further attempts to stabilize the CLO space will require yet another Fed backstop of even riskier - i.e., rated AA and lower - structured products.