The Fed Just Lobbed A Financial Nuke



ORIGINAL POST
Posted by Ed 2 yrs ago

By Larry McDonald, author of the Bear Traps Report

 

We are living in a period of mass “Jonestown” economic delusion. Just twenty months ago – central bankers were offering to buy nearly every junk bond known to mankind, dramatically distorting the “true cost of capital.” All the way from crypto to emerging markets – it was a moral hazard overdose. Everyone on earth was borrowing money at fantasy-land bond yields.

 

Now, the Fed is promising endless rate hikes and $1T of balance sheet reduction onto a planet with emerging market and Euro-zone credit markets in flames.

 

Listen, all I have is an economics degree from the University of Massachusetts, but after having spent the last 20 years trading bonds professionally and embarking on a 20k feet deep autopsy on the largest bank failure of all time – from my seat the current Fed agenda is sheer madness and will be outed very soon.

 

The true cost of capital was distorted for so long, we now have hundreds of academics– clueless to the underlying serpent inside global markets. When the 6 foot seven, Paul Volcker walked the halls of the Marriner S. Eccles Building of the Federal Reserve Board in Washington, our planet embraced about $200T LESS debt than we are staring down the barrel at today. Please call out the risk management imbeciles that make any reference of “Powell to Volcker.”

 

In 2021, global debt reached a record $303T, according to the Institute of International Finance, a global financial industry association. This is a FURTHER jump from record global debt in 2019 of $226T, as reported by the IMF in its Global Debt Database. Volcker was jacking rates into a planet with about $200T LESS debt. Please call out the risk management imbeciles that make any reference of Powell to Volcker.

 

Many economists in 2022 are highly delusional – a very dangerous group indeed. When you hike rates aggressively with a strong dollar you multiply interest rate risk, which was already off the charts coming from such a low 2020 base in terms of yield – it's a convexity nightmare. Interest rate hikes today - hand in hand with a strong U.S. Dollar - carry 100x the destructive power than the Carter – Reagan era.

 

At the same time, you add lighter fluid on to the credit risk fire in emerging markets with a raging greenback. Global banks have to mark to market most of these assets. If global rates reset higher and stay at elevated levels, the sovereign debt pile is in gave danger. The response to Lehman and Covid crisis squared (see above) has left a mathematically unsustainable bill for follow on generations. The Fed CANNOT hike rates aggressively into this mess without blowing up the global economy. We are talking about mass - Jonestown delusion on roids.

 
 
https://www.zerohedge.com/markets/take-tragedy-sri-lanka-and-multiply-ten-fed-just-lobbed-financial-nuke-will-obliterate
 
https://hongkong.asiaxpat.com/Utility/GetImage.ashx?ImageID=7272640c-b686-4cfd-927f-6bd09f11f973&refreshStamp=0?itok=rQlL_XL8 

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