A World on Fire

Posted by Ed 9 mths ago
Every day, news reporters, traders, and workers of all sorts the world over wake to do their work as they always have. Part of that requires that everyone pretend that life is normal, fixable, and more or less stable. All of this is temporary. It will come and go and really not be that bad.

Strange, isn’t it? Human beings have a hard time adjusting to disaster, in their decision-making and even in their mindset. Reporters have to do their jobs as they are trained. Traders too. Everyone does. They please their bosses. They don’t sound alarms. They don’t scream and yell as they probably should.

But there is a moment in the day when the work is done and perhaps a cocktail comes out or the dishes are washed and the kids are in bed and the room falls silent. At this moment, millions and billions of people the world over know it. Disaster is all around us. We are just pretending otherwise, simply because this is what we have to do.

It was this way during lockdowns. They must know what they are doing otherwise why would we be forced to do this. If we all do our part, maybe this will end sooner rather than later. The experts surely know better than we do what is what. What can we do but trust?
Let us adjust and find a way to normalize all of this in our minds. We are powerless to change it in any case.
And thus the peoples of the world adjusted and will continue to do so as the fundamentals decay and rot, long past the end of lockdowns and most vaccine mandates, even as all the old rituals and signals of life as we once knew it fade further into memory.
Enough with the dreary existentialism. Let’s talk about life in a one-bedroom apartment in London. The price of energy for heat has nearly doubled, seemingly overnight. Truly, it took months but it has felt like one day to the next. The energy bills will be approaching a substantial portion of the rent itself. And the forecast — which one has to do because that’s how energy markets work on the consumer end — is showing a doubling and doubling again.
Here is what Goldman Sachs is seeing.
Small businesses cannot function under these conditions. “Tom Kerridge, the celebrity chef, revealed that the annual energy bill at his pub has soared from £60,000 to £420,000 and warned that ‘ludicrous’ price rises left the hospitality sector facing a ‘terrifying landscape’,” reports Telegraph.
“The U.K. may be facing a wave of business bankruptcies exceeding anything witnessed during the post-2008 panic and recession,” reports Joseph Sternberg. “Some 100,000 firms could be forced into insolvency in coming months, bankruptcy consultancy Red Flag Alert warned this week. These are otherwise healthy firms with at least £1 million in annual revenue. Business failures on this scale would dwarf the roughly 65,000 firms of any size that went under from 2008-10.” 

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Ed 9 mths ago
Rock-bottom interest rates have long allowed companies to paper over cracks in their business models.
As central banks raise rates to tame surging inflation, scores of debt-laden companies suddenly face the uncomfortable prospect of trying to service higher interest bills with crimped cashflows.
To assemble our list of debt monsters, we chose a market metric: companies with debt trading more than 10 percentage points (1,000 basis points) above government bonds, drawn from Ice’s Global High Yield index.
Although this does not capture companies turning to private debt markets or bank loans, it produces a diverse range of 207 companies whose bond spreads are flashing a red warning signal.
The top is dominated by Chinese property companies, which until recently had seemed to defy the laws of financial gravity. But the disparate group shows just how widespread corporate distress has become in 2022, taking in a French supermarket chain, an Irish aircraft lessor, an Indian miner, a Belgian toilet maker and Britain’s largest chicken producer. We have chosen to examine in more detail a sample of 35 companies from the list.
Bond investors are professional worriers and in uncertain times the market can reflect their darkest thoughts. Plenty of companies on the list have defied previous prophecies of doom, while many have already pushed out the day their debt comes due far into the future. Consider this as a tour of businesses that debt markets are fretting over, rather than a collection of condemned companies.

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Ed 9 mths ago

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Ed 8 mths ago
Central Banks Panic As Debt & Currency's Begin To Fail

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Ed 8 mths ago
UK Chaos Economics: Fretting over “Financial Stability” & “Contagion” after Gilts Plunged, Bank of England Buys Bonds
It wasn’t big hedge funds that blew up, but £1.5 trillion in leveraged pension funds. BoE stepped in to bail them out and prevent further contagion.

Over the past few days, the pound plunged, including with a flash-crash on Monday that briefly took it to record lows against the US dollar. Prices of long-dated bonds went into a death spiral, with the 10-year yield spiking by 130 basis points in four trading days to 4.63% early today, and by 275 basis points in seven weeks ago (up from 1.88% in early August).

The bond market reaction represents a colossal and sudden degree of “tightening” of the financial conditions, before the Bank of England’s QT had even started. QT is designed to bring up long-term yields, but they already exploded due to chaos.

It was the market’s backlash against the new government’s reckless plan to cut taxes for the rich and for corporations, funded by new debt, while piling on spending to subsidize energy costs, also funded by new debt, thereby requiring the issuance of large amounts of new debt, even as inflation has already reached to 10%.

The Bank of England, which is in charge of maintaining financial stability, now has a slew of problems to deal with: inflation spiraling out of control, currency plunging, bond market in chaos, financial stability at risk, and spreading contagion. And some of them require the response that the others require.

So this is a mess, and there are no good solutions.

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Ed 8 mths ago
Fed’s Favored Inflation Index Says: Underlying Inflation Just Isn’t Slowing Down at All

Everyone wants to know when inflation is finally going to cry uncle.

Just briefly here: The Fed uses the “core PCE” inflation index, released by the Bureau of Economic Analysis, as yardstick for its inflation target. This “core PCE” index – the overall PCE inflation index minus the volatile food and energy components – is therefore crucial in the current rate-hike scenario, amid red-hot inflation, when everyone wants to know when inflation is finally going to cry uncle.

Some folks thought that happened in July, when the month-to-month “core PCE” inflation slowed to “0%” (rounded down).

Turns out this much-ballyhooed month-to-month “core PCE” reading in July of “0%” was just a one-off event. In August, according to the BEA today, the core-PCE inflation index jumped by 0.6%, same as the multi-decade records in June 2022 and in April 2021 (all rounded to 0.6%). As Powell had said during the FOMC press conference: Underlying inflation is just not slowing down.


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Ed 8 mths ago
Is Credit Suisse about to be the new Lehman Brothers?
Something is brewing in the financial world

There is much speculation that at least one major bank is not fine and could create the next Lehman Brothers moment. ABC Australia, quoting ‘a credible source’, reported that a major investment bank is on the brink. Morgan Stanley have said that the surging US dollar is setting the stage for “something to break” in the financial system.

The Bank of America have warned that the Fed is about to break the corporate bond market.

The two which are in the worst shape are Deutsche Bank (heavily exposed to the energy crisis) and Credit Suisse. Both are already trading at distressed valuation but I’ll focus on Credit Suisse in this post.


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Ed 7 mths ago
Horror-Show Inflation in Euro Countries: Overall 10.7%, Germany 11.6%, Without Energy 6.9%
“Defeating inflation is our mantra, our mission, our mandate,” and that’s “why we have to raise interest rates”: ECB’s Lagarde now, after years of money-printing and NIRP.
Inflation began spiking last year well before Russia’s invasion of Ukraine. Early 2021 was when the inflation dam broke globally, with the pandemic money-printing and deficit-spending binge still in full swing. The dam just broke, and inflation washed over the lands. In July 2021 in the Eurozone, inflation shot past the ECB’s target of 2%. It hit 4.9% in November 2021, and 5.1% in January 2022 before the war in Ukraine had begun. Russia’s invasion of Ukraine made the existing trends worse.  https://wolfstreet.com/2022/10/31/horror-show-inflation-in-euro-countries-overall-10-7-germany-11-6-without-energy-6-9/





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Ed 7 mths ago
Imploded Stocks of the Day: Carvana, Twilio, Atlassian, Cloudflare
The free-money virus turned investors’ brains to mush. But the healing has started, interest rates are recovering, QT is here, and look what we got.
Let’s just walk through some of the already Imploded Stocks that further imploded on Friday. There were quite a few of them, as is now usually the case during earnings season, but we’ll just look at a handful. They imploded even as markets rallied for the day. On Friday, the Nasdaq rose 1.3%, reducing its loss for the week to just 5.6%, that kind of week. But a whole bunch of stuff plunged after reporting “earnings” – I’m using that term loosely because they all reported huge losses on top of endless losses.

Carvana, an online used-vehicle retailer, is one of the earliest entries into my pantheon of Imploded Stocks. Thursday evening, it reported “earnings” – you know what I mean. Everything went the wrong way: The number of vehicles it sold to retail customers fell, revenues fell, cost of sales jumped, gross profit plunged, selling and administrative expenses soared, interest expense more than tripled, and the net loss exploded to $508 million.

The used-car startups Carvana, Vroom, and Shift “face an existential crisis,” I wrote in April 2022, based on the changing dynamics in the used vehicle market, the fading willingness of investors to keep fueling cash-burn machines, and driven by the used-vehicle startups themselves that were never designed to make money and never could figure out how to make money, not even in the hottest used-vehicle market ever in 2021.

They were designed to burn investor cash. And investors no longer want their cash to be burned. And so that existential crisis is now.
The chart displays the now classic pattern of how the Fed’s trillions of dollars in QE and interest rate repression – the free-money era started in 2009 – mutated over the years into a virus that turned investors’ brains into mush, and after their brains had turned into mush, they inflated asset prices to ridiculous levels. 

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Ed 6 mths ago
The Unavoidable Crash

After years of ultra-loose fiscal, monetary, and credit policies and the onset of major negative supply shocks, stagflationary pressures are now putting the squeeze on a massive mountain of public- and private-sector debt. The mother of all economic crises looms, and there will be little that policymakers can do about it.


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Ed 6 mths ago
The Bubble Economy's Credit-Asset Death Spiral
Who believed that central banks' financial perpetual motion machine was anything more than trickery designed to generate phantom wealth?

Central banks seem to have perfected the ideal financial perpetual motion machine: as credit expands, money pours into risk assets, which shoot higher under the pressure of expanding demand for assets that yield either hefty returns (junk bonds) or hefty capital gains as the soaring assets suck in more capital chasing returns.

As assets soar in value, they serve as collateral for more credit. Higher valuations = more collateral to borrow against. This open spigot of additional credit sluices capital right back into the assets that are climbing in value, pushing them higher--which then creates even more collateral to support even more credit.

This self-reinforcing feedback of expanding credit feeding expanding valuations feeding expanding collateral which then feeds expanding credit has no apparent end. Modest houses once worth $100,000 are now worth $1,000,000, and nobody's complaining except those priced out of the infinite spiral of prices and credit.

For those priced out of traditional assets, there's NFTs, meme stocks and short-duration options. The credit-asset bubble-economy casino has a gaming table for everyone's budget and desire to "make it big" via speculation, since the traditional ladders to middle-class security have all been splintered.

This financial perpetual motion machine distorts traditional incentives. Why bother renting a house bought for speculative gains? Renters are problematic, better to just let it sit empty and rack up huge capital gains.

Count the lighted windows at night in all those new condo high-rises. Are even 20% occupied? Probably not.

This is how you get a "housing shortage": investors would rather keep units clean and off the market rather than risk renting units. When credit and asset valuations are both feeding an infinite expansion, all that matters is leveraging capital to acquire as many assets as possible to maximize the gains from this self-reinforcing wealth-creation machine.

This machine also incentivizes fraud. To really maximize gains, why not borrow clients' capital? Indeed, why not?

But unbeknownst to the central bank sorcerers and the greed-crazed participants, all systems have limits and all consequences have their own consequences, i.e. second-order effects. There are many such dynamics which are eroding the apparently unbreakable financial perpetual motion machine.

One is debt saturation. Even low rates of interest eventually pile up consequential debt-service obligations, and any weakening in revenues, cash flow or income exposes the borrower to a cash crunch which can only be resolved by selling assets.

Another is the widening disconnect between financially sound valuations and "market" valuations set by rapidly expanding credit and collateral. Based on rental income or cash flow, Asset B is worth $200,000, but it's currently valued at $1 million, and still rising. Obviously, traditional methods of valuation no longer apply.

But weirdly enough, they do. Debt service doesn't matter when your collateral is expanding so fast you can borrow mountains of capital at "low, low prices" and not even consider debt service. But once collateral stops rising and interest rates start rising, suddenly all those absurd obsessions with cash flow start making sense.

But too late, too late: bubbles, regardless of how rock-solid the sorcery, tend to manifest symmetry: they fall at roughly the same rate and magnitude as they rose. As collateral declines, loans slide underwater as the asset is not longer worth more than the outstanding loan. Credit dries up and so does buying as greed-crazed buyers start worrying that perhaps the asset they're about to buy might actually be worth less next month (gasp).

Liquidity and the credit impulse aren't sorcery, they're herd behaviors. When the madness of the herd switches from greed to panic, buyers disappear and thus so does liquidity--the ability of sellers to find a Greater Fool to buy the depreciating asset.

Greater Fools are soon wiped out and then there's nobody left who's dumb enough to buy assets that are in freefall and still far above any financially prudent valuation. The magic circle reverses, and as valuations fall, collateral shrinks and credit collapses. Lenders who greedily reckoned valuations and thus collateral would rise forever are stuck with life-changing losses--along with all the punters who built shanties of credit and leverage they mistakenly viewed as permanent palaces.

In making the economy dependent on the financial sorcery of self-reinforcing credit-asset bubbles, central banks and all the greed-crazed punters who participated have guaranteed a self-reinforcing death spiral as the "virtuous" self-reinforcing wealth-creation machine reverses into a self-reinforcing wealth-destruction machine.

Who believed that central banks' financial perpetual motion machine was anything more than trickery designed to generate phantom wealth? Once the death spiral reaches its devastating end-game, the true believers will have fallen silent.

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Ed 5 mths ago
The Looming Financial Contagion
With inflation on the rise and the era of ultra-low interest rates over, financial markets will face a huge stress test in 2023. While banking systems are more robust than they were in 2008, a real-estate slump could severely affect heavily leveraged private-equity firms, producing a systemic crisis.   
CAMBRIDGE – The fact that the world did not experience a systemic financial crisis in 2022 is a minor miracle, given the surge in inflation and interest rates, not to mention a massive increase in geopolitical risk. But with public and private debt having risen to record levels during the now-bygone era of ultra-low interest rates, and recession risks high, the global financial system faces a huge stress test. A crisis in an advanced economy – for example, Japan or Italy – would be difficult to contain. 
Rickards: On The Cusp Of A Global Liquidity Crisis
Is there a financial calamity worse than a severe recession in early 2023? Unfortunately, the answer is “yes” and it’s coming quickly.
While the initial failure makes headlines, the greater danger lies ahead in the form of contagion. Capital markets are densely connected. Banks lend to hedge funds. Hedge funds speculate in markets for stocks, bonds, currencies and commodities both directly and in derivative form.

Money market funds buy government debt. Banks guarantee some instruments held by those funds. Primary dealers (big banks) underwrite government debt issues but finance those activities in repo markets where the purchased securities are pledged for more cash to buy more securities in long chains of rehypothecated collateral.

You get the point. The linkages go on and on.

The Federal Reserve has printed $6 trillion as part of its monetary base (M0). But the total notional value of the derivatives of all banks in the world is estimated at $1 quadrillion. For those unfamiliar, $1 quadrillion = $1,000 trillion. This means the total value of derivatives is 167 times all of the money printed by the Fed.

And the Fed money supply is itself leveraged on a small sliver of only $60 billion of capital. So, the Fed’s balance sheet is leveraged 100-to-1, and the derivatives market is leveraged 167-to-1 to the Fed money supply, which means the derivatives market is leveraged 16,700-to-1 in terms of Fed capital.

Nervous yet?

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Ed 5 mths ago

The Money Bubble: What To Do Before It Pops (January 2, 2014) by James Turk and John Rubino, pp. 144-150:


[A] “complex system” system, like a weather front, living organism, or pre-avalanche snow-covered mountainside contains numerous parts that do change in response to their communication and interaction. This process can create feedback loops begetting “emergent properties” that differ radically from the system’s constituent parts or its previous state. Think of a tropical depression becoming a Cat-5 hurricane overnight and you have a sense of the power and potential instability of a complex system.

Such systems have some other notable features:

•As they grow larger, the energy required to maintain their stability rises exponentially. Double the size of a complex system and its energy requirements might increase ten-fold.


•They are prone to catastrophic collapse, and this propensity also rises exponenetionally as the system becomes bigger and more complex.


•With a highly-complex and therefore fragile system, small inputs can have exaggerated effects. When a mountainside has a sufficient amount of snow, for instance, a single snowflake can start an avalanche. But the snowflake itself wasn’t special in any way; the system was simply ready to go. As Harvard historian Niall Ferguson explained it in a 2010 Foreign Affairs article, “Such systems can appear to operate quite stably for some time; they seem to be in equilibrium but are, in fact, constantly adapting. But there comes a moment when complex systems ‘go critical.’ A very small trigger can set off a ‘phase transition’ from a benign equilibrium to a crisis …. In such systems a relatively minor shock can cause a disproportionate — and sometimes fatal — disruption.”


•The details of a complex system’s collapse are inherently unpredictable. Set a fire in a dry forest, for example, and the scale of the resulting conflagration can vary from a few square yards to hundreds of miles.

This brings us to the point of the exercise, which is that financial markets are complex systems, and today’s global financial system is orders of magnitude more complex — and therefore less stable and more prone to catastrophic failure — than ever before.
From here on, the US and the rest of the developed world can borrow as much as they want and the only result will be more debt. Wealth won’t increase, while complexity continues to soar.
[S]itting politicians will instinctively delay the inevitable with more debt, which causes the system to become even more complex, requiring even bigger infusions of new money, and so on.
When the crash comes it will dwarf what almost happened in 2008 — and what actually did happen in the 1930s.


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Ed 5 mths ago
Central banks risk setting off a financial earthquake with constant rate rises, warns ex-IMF economist

Odds of a major financial crisis are shortening, says Ken Rogoff

Breakneck monetary tightening by the major central banks is nearing a critical tipping point and risks triggering a chain-reaction of financial distress, the world’s leading expert on debt crises has warned.

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Ed 3 mths ago

“But this time, notice that the Fed is not helping"

40:33 The Fed is increasing rates, which as we saw is hurting asset values, and the same time
40:40 the Fed is selling assets.
40:45 And so it is withdrawing liquidity. So we are most certainly here in uncharted territory.
40:51 The Fed is not helping the situation. So you can fully expect this line to keep going; the panic is going to continue.
40:59 We are deep into uncharted territory. I’m not sure how this story ends. . . .
The Fed is harming, it is hurting the banks. it is hurting the system.
41:39 It’s making things worse now, whereas back here it at least tried to help. It cut rates.
41:45 When it saw emergency borrowing, it cut rates. cut rates, it cut rates.
41:50 And it increased asset purchases here, increased asset purchases here; added liquidity.
41:56 It’s not doing that anymore. Okay? But what we are looking at here—this is the end of manufacturing really, for the most
42:04 part here. . . .

42:48 And we’re into uncharted territory, like I say. So to summarize all this, the banks are all bankrupt right now.

42:57 Well, not all of them. But the system as a whole, the U.S. banking system right now, it is bankrupt.
43:03 It is deeply bankrupt. The panic borrowing has begun. You saw that with the huge FHLB advances, and you see both of those things going on
43:13 in the Quarterly Banking Profile. In other words, you see the bankruptcy of the entire banking system, and you see the
43:20 panic borrowing going on right now. And rather than helping the situation, as I point out, rather than helping the system
43:28 with rate cuts—it actually can’t cut rates anymore, at least when this started, because the rates are zero.
43:34 But rather than leave the rates at zero, and just leave investment values where they are,
43:40 the Fed is increasing rates. It is increasing rates, and like I say, it is selling assets, which has the effect of
43:46 pulling liquidity from the system. “

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Ed 3 mths ago
SVB And Signature Bank Were Just The Tip Of The Iceberg
The demise of Silicon Valley Bank and Signature Bank was just the tip of the iceberg. As it turns out, hundreds of banks are at risk. This explains why the Federal Reserve and US Treasury rushed to provide what is effectively a bailout for the entire banking system.

In the first week, the Federal Reserve handed out more than $300 billion in loans through its newly created Bank Term Funding Program (BTFP).


According to a Washington Post report, banks would face unprecedented losses if they were forced to liquidate their bond portfolios as SVB did.


According to the Post, the total capital buffer in the US banking system totals $2.2 trillion. Meanwhile, total unrealized losses in the system based on a pair of academic papers is between $1.7 and $2 trillion.


In other words, if banks were suddenly forced to liquidate their bond and loan portfolios, the losses would erase between 77 percent and 91 percent of their combined capital cushion. It follows that large numbers of banks are terrifyingly fragile.”


A second report by the Wall Street Journal cites a study from Stanford and Columbia Universities that found 186 US banks are in distress.


As economist Peter St. Onge put it, “In other words, we were already right up against the edge.”


This is precisely why the Fed had to create a way for banks to borrow against their devalued bond portfolio. If banks were put in a position where they had to sell those bonds to raise capital, they would have fallen like dominoes.


The Fed bailout may have plugged that hole in the dam, but there will almost certainly be more cracks in the future.


So, how did we get into this situation?


Peter Schiff summed it up during an interview with Liz Claman.


It’s because of the government that Silicon Valley Bank was in the position that it was. The reason it owned so many long-term, low-yielding US Treasuries and mortgage-backed securities was because the Fed kept interest rates at zero for so long. And the reason that it chose those assets was because bank regulators kind of pushed banks into Treasuries and mortgage-backed securities because they give them favorable accounting treatment. They don’t have to take any haircuts. They don’t have to mark them to market. So, the government created the problem.


St. Onge went into more detail in an article published by the Mises Wire.


In short, while tech bros and loose bankers hog the headlines, what drives hundreds of banks to the edge is our crony banking system.


In this case, rapid Fed rate hikes crashed into a banking system that fractional reserve banking and the Fed’s “Lender of Last Resort” (LOLR) permanent bailout have driven to permanently drive as fast as possible, as close to the edge of the cliff as possible.


Together, the moral hazard has given a green light to those reckless tech bros, to those loose bankers who hand out millions—it turns out hundreds of billions. And it drives the entire banking industry to use opaque accounting tricks to hustle sleepy regulators and innocent taxpayers and dollar-holders who get stuck with the bill. The bankers themselves sleep like babies because they know you’ll cover their losses, but they keep their wins.


What turned this rigged casino into a crisis is in the past year the Fed hiked rates at the fastest pace in 50 years, from 0 percent last March to 4.5 percent to 4.75 percent today. They did this in a desperate bid to cancel the inflation they caused by financing $7 trillion in deficit spending and Covid lockdowns. Indeed, those of us who wondered why voters stood by meekly had only to look at the flood of money going out the door.


These reckless hikes savaged long bond prices, by far the most popular asset in bank vaults: Across the board, long bonds fell 20 percent, feeding an estimated 10 percent plunge in all bank asset values. In essence, the bank thought it had a dollar in the vault, but turns out it only had 90 or 80 cents. In the case of high-flyers like Silicon Valley and potentially hundreds more, it was more like 60 cents. Few banks can survive that.


So, what’s next?


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Ed 3 mths ago
The Everything Crisis



Even the most cursory glance at economic and financial history will reveal a litany of bubbles and booms, crashes and crises. We’ve seen numerous instances of speculative manias, real estate bubbles, market collapses and banking crises. Even the dot-com bubble of 1995-2000 wasn’t really ‘a first’, since there’s at least one previous instance – the Railway Mania of the 1840s – of the public being blinded to reality by the glittering allure of the latest vogue in technology.

You’d be wrong, though, if you concluded that “there’s nothing new under the Sun” about what we’re experiencing now. The coming crunch – for which the best shorthand term might be ‘the everything crisis’ – sets new precedents in at least two ways.

First, it’s unusual for all of the various forms of financial crises to happen at the same time. Even the global financial crisis (GFC) of 2008-09 wasn’t an ‘everything crisis’. Now, though, it’s quite possible that we’re experiencing the start of a combined stock, property, banking, financial, economic and technological crisis, with ‘everything happening at once’.

Second, all previous crises have occurred at times when secular (non-cyclical) economic growth remained feasible. This enabled us to ‘grow out of’ these crises, much as youngsters ‘grow out of’ childhood ailments.

No such possibility now exists.

The true story of modern economic and financial history involves, on the one hand, the ending and reversal of centuries of economic expansion and, on the other, an absolute refusal to come to terms with this reality.

What follows is an attempt to tell that story as briefly as possible.


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Ed 2 mths ago
The Everything Bubble And Global Bankruptcy
In eras of easy credit, both creditworthy and marginal borrowers are suddenly able to borrow more. This flood of new cash seeking a return fuels red-hot demand for conventional assets considered "safe investments" (real estate, blue-chip stocks and bonds), demand which given the limited supply of "safe" assets, pushes valuations of these assets to the moon. 

In the euphoric atmosphere generated by easy credit and a soaring asset valuations, some of the easy credit sloshes into marginal investments (farmland that is only briefly productive if it rains enough, for example), high-risk speculative ventures based on sizzle rather than actual steak and outright frauds passed off as legitimate "sure-fire opportunities."

The price people are willing to pay for all these assets soars as the demand created by easy credit increases. And why does credit continue increasing? The assets rising in value create more collateral which then supports more credit.


This self-reinforcing feedback appears highly virtuous in the expansion phase: the grazing land bought to put under the plow just doubled in value, so the owners can borrow more and use the cash to expand their purchase of more grazing land. The same mechanism is at work in every asset: homes, commercial real estate, stocks and bonds: the more the asset gains in value, the more collateral becomes available to support more credit.

Since there's plenty of collateral to back up the new loans, both borrowers and lenders see the profitable expansion of credit as "safe."

This safety is illusory, as it's resting on an unstable pile of sand: bubble valuations driven by easy credit. We all know that price is set by what somebody will pay for the asset. What attracts less attention is price is also set by how much somebody can borrow to buy the asset.

Once the borrower has maxed out their ability to borrow (their income and assets-owned cannot support more debt) or credit conditions tighten, then those who might have paid even higher prices for assets had they been able to borrow more money can no longer borrow enough to bid the asset higher.

Since price is set on the margin (i.e. by the last sales), the normal churn of selling is enough to push valuations down. At first the euphoria is undented by the decline, but as credit tightens (interest rates rise and lending standards tighten, cutting off marginal buyers and ventures) then buyers become scarce and skittish sellers proliferate.


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Ed 2 mths ago
Lenders could face pressure on earnings or liquidity, or to pay higher rates for deposits

When Silicon Valley Bank collapsed last month, the core problem was a giant hole in its bond portfolio. When depositors started fleeing First Republic Bank FRC 4.39%increase; green up pointing triangle soon afterward, the concern mainly was about a hole in its loan book.

Nearly every publicly traded bank in the country is sitting on loans that have declined in value since they were made. The culprit is rising interest rates, which also slashed the value of banks’ other big asset, their holdings of securities.

The overall market-value losses on securities are well known because they are tallied up industrywide by banking regulators. The scale of market-value losses on loans made by publicly traded banks has to be tallied from banks’ securities filings.

“Fair values of loans and securities are not qualitatively different,” said Tom Linsmeier

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Ed 48 days ago
Stagflation has Begun

The deception of the past decade is that central banks have been “printing money” via quantitative easing. This may have helped boost confidence in the real economy that it was safe to borrow once more. But other than the printing of the tiny volumes of cash, which account for less than two percent of transactions, central banks have no means of directly creating currency.

They may create “central bank reserves” – although the impact of these is overstated. And by using them to purchase the unsafe “assets” held by commercial banks in the aftermath of the 2008 crash, they could encourage new bank lending. Nevertheless, the fact that several rounds of quantitative easing, coupled to real negative interest rates, failed to generate even modest inflation gives the lie to the “money creation” fallacy.

What QE actually did was to create a desperate search for yield, in which financial institutions and big investors sought assets which would give higher rates of return. And so, in the course of the decade between the Crash and the Covid, they helped to inflate the financial “everything bubble,” in which unproductive assets – which are excluded from official inflation measures – across the economy inflated in price at an astronomical rate.


Not that investors fare particularly well, since there is no means of realising the theoretical value of the assets themselves, because the institutions which own them are the only ones who could realistically buy them. In a sense, they are trading real returns for the illusion of appreciating assets… we have plenty of examples of what happens when shareholders seek to sell at the same time, or when bank depositors all try to withdraw their cash… it isn’t pretty.


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Ed 44 days ago

Things aren’t going well for the United Kingdom these days.

For the past several months, the flow of bad news has been constant, the country’s coffers are empty, public administration is ineffective and the nation’s corporations are struggling. As this winter came to an end, more than 7 million people were waiting for a doctor’s appointment, including tens of thousands of people suffering from heart disease and cancer. According to government estimates, some 650,000 legal cases are still waiting to be addressed in a court of law.
And those needing a passport or driver’s license must frequently wait for several months. Boarded up windows and signs reading “To Let” and “To Rent” have become a common sight on the country’s high streets, while numerous products have disappeared from supermarket shelves. Recently, a number of chains announced that they would be rationing cucumbers, tomatoes and peppers for the foreseeable future.

Last year, 560 pubs closed their doors forever, with thousands more soon to follow, according to the industry association. Without Oxfam, the Salvation Army and other charitable organizations that operate second-hand stores, numerous city centers would have almost no shops left at all. Last week, the International Monetary Fund forecast that in no other industrialized nation would the economy develop as poorly as in Britain this year.

 Whereas the number of billionaires in the UK – at 177 – is higher than it has ever been, millions of Britons have slid into poverty. Newspapers and television channels are full of cheap recipes and shows like Jamie Oliver’s “£1 Wonders.” Since December, hardly a day has passed without a strike by bus drivers, medical workers, teachers, public servants, university employees or rail workers. Last week, assistant doctors across the country went on strike for four days, with the media calling on the populace to avoid all activities that could result in injury.

For many, the situation is reminiscent of the 1970s, when high debt, punishing inflation and widespread protests brought the country to its knees – leading Henry Kissinger, who was U.S. secretary of state at the time, to grumble from across the Atlantic: “Britain is a tragedy, reduced to begging, borrowing and stealing.”  



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Ed 33 days ago
"It's Spooky": Stanford Professor Warns Thousands Of US Banks Are "Potentially Insolvent"
Rapidly rising interest rates create perilous conditions for banks because of a basic principle: The longer the duration of an investment, the more sensitive it is to changes in interest rates. When interest rates rise, the assets that banks hold to generate a return on their investment fall in value. And because the banks' liabilities — like its deposits, which customers can withdraw at any time — usually are shorter in duration, they fall by less.
Thus, increases in interest rates can deplete a bank's equity and risk leaving it with more liabilities than assets. So it's no surprise that the US banking system's market value of assets is around $2 trillion lower than suggested by their book value. When the entire set of approximately 4,800 banks in the United States is examined, the decline in the value of equity is most prominent for midsize and smaller banks, reflecting their heavier bets on long-term assets. 

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Ed 33 days ago

Why Is The World's Most Important Market CRASHING?

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Ed 23 days ago

Food prices DOUBLE in the UK as inflation at ‘shockingly high levels’  



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Ed 10 days ago
“I’m sitting here staring in the face at the biggest and probably the broadest asset bubble — forget that I’ve ever seen, but that I’ve ever studied,” Stanley Druckenmiller said at the 2023 Sohn Investment Conference.

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