- The Crack Up Boom, Part III
http://www.traderview.com/economicco...y/div440dg.gif
Introduction
Introduction: At no time in my career have I seen greater opportunities for investors who are properly informed. The AVERAGE amount of M3 central bank money and credit creation is simply astonishing. It is clocking in at an average annual rate of 23%. Yes, that’s right, 23%. Using the rule of 72, that means those money supplies in one form or another are doubling on average every 3.13 years as money does an imitation of confetti.
In actuality, it is fire hoses of hot money being used to underpin the G7 financial and banking systems. Then it is combined with emerging markets throughout the world with dollar pegs and current account surpluses sterilizing their currencies so they do not ROCKET higher against the dollar. It is a powerful cocktail of stimulus for the emerging world, and an inflationary one for us all.
The HORROR story I covered in the beginning of May has materialized in spades. Initially it was the corn market, but that has now spread to soybeans and drought is now surfacing in the Australian wheat crops. As I outlined in that analysis, each year one crop or another gets shortchanged on acreage and must rely on previous year’s reserves. Like a game of musical chairs, when the music stops someone is without a seat.
Unfortunately, not only has corn failed to replenish supplies this year but now soybeans are about to be shortchanged due to FLOODING. Almost 5 million acres of corn are GONE, and almost 19 million acres of beans are either not planted or in JEOPARDY. The moves you have seen up to today–and they are up 10 to 20% since that report in early May–are about to be dwarfed. Supplies of corn are basically OUT. Users HAVE NOT secured supplies properly in anticipation of new crop supplies. You will probably see a repeat of the wheat debacle last year (when wheat went from 7 to 20 dollars) as users vie for scarce supplies and hedgers get crushed by lack of available supplies and bank funding issues.
The themes that started us out last move as seen in “Reflections” are now UNSTOPPABLE. The dollar has fully corrected on weekly charts (regardless of Ben’s HOT AIR) and regular treasury intervention. The commodity chart outlined there is fully active and signaling a huge move unfolding.
The dollar index will probably be the reciprocal of this in the coming months. Helicopter Ben, in a typical head fake, hit the accelerator on short-term liquidity provisions as system repos in the US have TRIPLED since he took on the dollar three weeks ago. As the quarter ends, liquidity is in short supply for the banks as most PRIVATE counter parties have left the short term funding markets in fear of bank insolvency. The central banks must substitute themselves for the former short-term funding sources. Banks in Europe are starved for dollars and EU system repos are frequently over-subscribed by 3 to 1, providing a small support for the dollar as EU banks must then PAY UP to meet short term dollar liquidity requirements.
The myth of lower oil prices is also PANNING out. Take a look at this chart from Dennis Gartman at the www.thegartmanletter.com :
It’s hard to believe anyone has a shortage of dollars, but the G7 money center and investment banks do. Balance sheet black holes that were created during their foray into hedge funds in disguise. They have lent long and borrowed in the short-term money markets. Now those sources of funding are GONE, requiring the G7 central banks to step in and provide the necessary funds to prevent insolvent financial and banking institutions from demise. The reason the Crack up Boom is accelerating into our futures is the tremendous amount of money that will have to manufactured out of THIN AIR to recapitalize the G7 banking systems and prevent CATASTROPHIC NOMINAL losses in so many asset classes. Let’s take a look:
Balance Sheet Destruction and Rescue
The G7 financial regulators and central banks are engaged in the mother of all reflations to underpin the solvency of their financial systems. We are going to look at what lies directly ahead and look at the condition of their balance sheets and what’s going to be required over the next several years to preserve them. Sub-prime was just the first round of the credit crisis. Enormous new black holes of liquidity lie directly ahead and we are going to detail them now. First, let’s just look at the mortgage industry with a chart from a recent daily reckoning ( www.dailyreckoning.com ):
https://www.thefuturestrader.us/tvie...Jun24-img3.jpg
As you can see, this part of the collapse is still in its beginnings as option arms (also known as EXPLODING arms, as when they do reset they explode higher in payment requirements) and Alt A loans are due to reset. These categories are still borrowers of dubious borrowing qualifications, and have NO INCENTIVE to stay in their homes when negative equity SWAMPS the future prospects of their purchases. Housing prices are declining at a year over year rate of 24% in the US and are now declining throughout the real estate markets in Europe as well.
Most of these loans were combined with numerous other types of lending such as credit card receivables, home equity loans and car loans, and securitized into CLO’s, CDO’s, MBS’s, etc (collateralized loan, debt obligations and mortgage-backed securities) and sold to investors with investment and money center banks holding some of the more highly rated tranches. These backs believed their own BS about the quality of the underlying paper mortgages. They were fully aware of the poor lending requirements which were used to make these loans as they securitized them. But once they had the Moody’s, S&P or Fitch ratings, they believed they could hold them long-term and borrow short-term and make the spread.
To Top
As these over the counter securities lose investor interest, they become less and less valuable as bidders disappear. Thus they move from liquid level one investment to illiquid level two and three and as they do so bank balance sheets become more and more ILLIQUID as a result. As they fall from level one to level three, regulators require more and more capital set aside to cover losses. Let’s take a look at level 2 and 3 assets, and look how the crisis is now spreading to the insurance sectors:
https://www.thefuturestrader.us/tvie...Jun24-img4.jpg https://www.thefuturestrader.us/tvie...Jun24-img5.jpg
Now let’s look at level III assets as a percent of shareholder equity:
https://www.thefuturestrader.us/tvie...Jun24-img6.jpg
These ratios have ballooned as a direct reflection of the deterioration of their balance sheets. They are sinking ever more deeply into insolvency as their assets VAPORIZE in value and become increasingly impaired and unmarketable. The more these assets sink the more they try to hedge their exposure to further losses. So the holders of these toxic securities have turned to the unregulated over the counter insurance market known as the credit default swaps (CDS) for protection from losses. It has grown by over 15 trillion dollars since the first of the year and now is over $60 trillion in size. What’s even worse is that these companies above are buying these CDS from EACH OTHER and from hedge funds trying to trade in and out of them whose ability to perform their counterparty responsibility is unknown.
Bruce
USD/JPY has tried breaking 200sma on a daily chart several times, but failed to hold above it. Although the main trend seems to be still up, this shows that the medium trend of this pair could be heading lower to 106.50-70 nearby. That is what I see from the chart below.
