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by
Nomi Prins
Executive Summary
- The banking system runs on liquidity
- Banks will do anything to keep it flowing — including raiding their depositors
- The risks of a global liquidity crunch are dangerously high today
- Why extracting physical cash from the system is highly advised
If you have not yet read Part 1: In A World Of Artificial Liquidity – Cash Is King available free to all readers, please click here to read it first.
It's All About Liquidity For The Banks
Liquidity is the buzz-word that central banks used to justify their policies of keeping short term rates at zero (give or take) percent and buying bonds from banks in return for giving them more of it. Central banks say their primary responsibility is to balance full employment with low inflation, but that’s just code for being able to keep the largest banks solvent in times of emergency by all means possible. This current emergency has lasted nearly seven years and counting.
Here are my laws of liquidity behavior:
The first law of liquidity – when it is most needed, it will be least available.
The second law of liquidity – the easier it is to get, the less value it holds for the recipient.
The third law of liquidity – the harder it is to find, the greater its systemic cost.
Banks gain on multiple fronts from “accommodative” monetary policy with respect to their liquidity needs. First, they can borrow money at next to nothing. Second, they can hoard that extra cash under the guise of complying with capital reserve requirements and get brownie points for passing stress tests because they are holding the cash or high quality assets bought with the cash, that central banks provided them to begin with. Third, they can sell bonds they don’t want or need at full value to central banks, and afterwards mark similar bonds at higher levels than the market would otherwise value them.
This is all shell-game finance. It is why people should be diligent about…
They’re Coming For Your Cash
PREVIEW by Nomi PrinsExecutive Summary
- The banking system runs on liquidity
- Banks will do anything to keep it flowing — including raiding their depositors
- The risks of a global liquidity crunch are dangerously high today
- Why extracting physical cash from the system is highly advised
If you have not yet read Part 1: In A World Of Artificial Liquidity – Cash Is King available free to all readers, please click here to read it first.
It's All About Liquidity For The Banks
Liquidity is the buzz-word that central banks used to justify their policies of keeping short term rates at zero (give or take) percent and buying bonds from banks in return for giving them more of it. Central banks say their primary responsibility is to balance full employment with low inflation, but that’s just code for being able to keep the largest banks solvent in times of emergency by all means possible. This current emergency has lasted nearly seven years and counting.
Here are my laws of liquidity behavior:
The first law of liquidity – when it is most needed, it will be least available.
The second law of liquidity – the easier it is to get, the less value it holds for the recipient.
The third law of liquidity – the harder it is to find, the greater its systemic cost.
Banks gain on multiple fronts from “accommodative” monetary policy with respect to their liquidity needs. First, they can borrow money at next to nothing. Second, they can hoard that extra cash under the guise of complying with capital reserve requirements and get brownie points for passing stress tests because they are holding the cash or high quality assets bought with the cash, that central banks provided them to begin with. Third, they can sell bonds they don’t want or need at full value to central banks, and afterwards mark similar bonds at higher levels than the market would otherwise value them.
This is all shell-game finance. It is why people should be diligent about…
by
Brian Pretti
Executive Summary
- Expect a bond market bloodbath as rates rise
- Municipal, corporate and sovereign defaults will soon follow
- Liquidity suffers as necessary goods prices rise, but securities prices fall
- The new, nuclear risk of a derivatives market collapse
If you have not yet read Part 1: The Global Credit Market Is Now A Lit Powderkeg available free to all readers, please click here to read it first.
You may remember that what caused then Fed Chairman Paul Volcker to drive interest rates up in the late 1970’s was embedded inflationary expectations on the part of investors and the public at large. Volcker needed to break that inflationary mindset. Once inflationary expectations take hold in any system, they are very hard to reverse.
A huge advantage for Central Bankers being able to “print money” in very large magnitude in the current cycle has been that inflationary expectations have remained subdued. In fact, consumer prices as measured by government statistics (CPI) have been very low in recent years.
When Central Bankers started to print money, many were worried this currency debasement would lead to rampant inflation. Again, that has not happened for a very specific reason. For the heightened levels of inflation to sustainably take hold, wage inflation must be present. I've studied historical inflationary cycles and have not been surprised at outcomes in the current cycle in the least, as in the current cycle, continued labor market pressures have resulted in the lowest wage growth of any cycle in recent memory. But is this about to change at the margin?
The chart below shows us…
What Awaits Us In The Future Of Higher Interest Rates
PREVIEW by Brian PrettiExecutive Summary
- Expect a bond market bloodbath as rates rise
- Municipal, corporate and sovereign defaults will soon follow
- Liquidity suffers as necessary goods prices rise, but securities prices fall
- The new, nuclear risk of a derivatives market collapse
If you have not yet read Part 1: The Global Credit Market Is Now A Lit Powderkeg available free to all readers, please click here to read it first.
You may remember that what caused then Fed Chairman Paul Volcker to drive interest rates up in the late 1970’s was embedded inflationary expectations on the part of investors and the public at large. Volcker needed to break that inflationary mindset. Once inflationary expectations take hold in any system, they are very hard to reverse.
A huge advantage for Central Bankers being able to “print money” in very large magnitude in the current cycle has been that inflationary expectations have remained subdued. In fact, consumer prices as measured by government statistics (CPI) have been very low in recent years.
When Central Bankers started to print money, many were worried this currency debasement would lead to rampant inflation. Again, that has not happened for a very specific reason. For the heightened levels of inflation to sustainably take hold, wage inflation must be present. I've studied historical inflationary cycles and have not been surprised at outcomes in the current cycle in the least, as in the current cycle, continued labor market pressures have resulted in the lowest wage growth of any cycle in recent memory. But is this about to change at the margin?
The chart below shows us…
by
Chris Martenson
Executive Summary
- Liquidity is drying up
- Volatility is returning
- HFT has dramatically increased crash risk
- The key takeaways for investors
If you have not yet read Part 1: Credit Market Warning available free to all readers, please click here to read it first.
Financial assets are worth what someone will pay for them. A corollary of this is that you’d much rather be trying to buy or sell in markets that are deep and liquid. Thin markets provide bad prices at best, and no bids or offers at worst.
Low trading volumes are worrisome because they are usually accompanied by higher volatility. And those two can easily become dance partners that whirl each other ever faster.
There are numerous warning signs coming from all asset markets, but especially from the bond markets.
Low Liquidity
The issue of low liquidity really jumped out at me roughly a year ago with the news that the utterly broken Japanese government bond (JGB) market had gone an entire 36 hours without a single trade(!!).
Japan bond market liquidity dries up as BoJ holding crosses ¥200tn
Arp 15, 2015
The Bank of Japan’s massive purchases of government debt hit a milestone this week, sucking liquidity out of the market to such an extent that the benchmark 10-year bond went untraded for more than a day, the first time in 13 years.
The current 10-year cash bonds saw its first trade of the week yesterday afternoon, having gone untraded for more than a day and a half.
Trade volume in the benchmark cash bonds so far this month dropped to less than one trillion yen, down about 70% from the same period last year.
(Source)
Thus comes the law of unintended consequences. The main reason for buying JGB’s by the Bank of Japan (BoJ) was to inject a lot of liquidity into ‘the system’ in hopes that the Japanese economy would take off.
While that may have happened to some (slight) extent what also happened was that …
The Warning Indicators To Watch For Trouble In The Bond Market
PREVIEW by Chris MartensonExecutive Summary
- Liquidity is drying up
- Volatility is returning
- HFT has dramatically increased crash risk
- The key takeaways for investors
If you have not yet read Part 1: Credit Market Warning available free to all readers, please click here to read it first.
Financial assets are worth what someone will pay for them. A corollary of this is that you’d much rather be trying to buy or sell in markets that are deep and liquid. Thin markets provide bad prices at best, and no bids or offers at worst.
Low trading volumes are worrisome because they are usually accompanied by higher volatility. And those two can easily become dance partners that whirl each other ever faster.
There are numerous warning signs coming from all asset markets, but especially from the bond markets.
Low Liquidity
The issue of low liquidity really jumped out at me roughly a year ago with the news that the utterly broken Japanese government bond (JGB) market had gone an entire 36 hours without a single trade(!!).
Japan bond market liquidity dries up as BoJ holding crosses ¥200tn
Arp 15, 2015
The Bank of Japan’s massive purchases of government debt hit a milestone this week, sucking liquidity out of the market to such an extent that the benchmark 10-year bond went untraded for more than a day, the first time in 13 years.
The current 10-year cash bonds saw its first trade of the week yesterday afternoon, having gone untraded for more than a day and a half.
Trade volume in the benchmark cash bonds so far this month dropped to less than one trillion yen, down about 70% from the same period last year.
(Source)
Thus comes the law of unintended consequences. The main reason for buying JGB’s by the Bank of Japan (BoJ) was to inject a lot of liquidity into ‘the system’ in hopes that the Japanese economy would take off.
While that may have happened to some (slight) extent what also happened was that …
by
charleshughsmith
Executive Summary
- Which power groups will determine how the war on cash is waged?
- Is it better to hold cash in savings/checking accounts, or securities accounts?
- What will likely happen with retirement accounts?
- Ways to diversify your cash risk
If you have not yet read Part 1: The War on Cash: Officially Sanctioned Theft available free to all readers, please click here to read it first.
In Part 1, we reviewed the basic elements of the war on cash, and how it benefits banks and governments but not households that don’t already own productive assets.
In Part 2, we’ll review the downside of imposing capital controls and eliminating physical cash, and discuss strategies to protect our financial assets from bail-ins and negative interest rates/fees on cash.
What Will The Wealthy And Politically Powerful Tolerate?
One of the key dynamics in this discussion is: what will the wealthy and powerful tolerate? Any policy that inhibits or harms the wealthy and politically powerful is a non-starter, and so if we align our strategies accordingly, we are less likely to suffer any negative consequences.
The wealthy and politically powerful have little need for physical cash (President John F. Kennedy famously carried no cash), so eliminating cash will probably not generate any resistance in the financial elite.
But other forms of capital control, such as requiring retirement accounts to hold Treasury bonds and limiting transfers to other nations’ banks might…
What To Do With Your Cash Savings
PREVIEW by charleshughsmithExecutive Summary
- Which power groups will determine how the war on cash is waged?
- Is it better to hold cash in savings/checking accounts, or securities accounts?
- What will likely happen with retirement accounts?
- Ways to diversify your cash risk
If you have not yet read Part 1: The War on Cash: Officially Sanctioned Theft available free to all readers, please click here to read it first.
In Part 1, we reviewed the basic elements of the war on cash, and how it benefits banks and governments but not households that don’t already own productive assets.
In Part 2, we’ll review the downside of imposing capital controls and eliminating physical cash, and discuss strategies to protect our financial assets from bail-ins and negative interest rates/fees on cash.
What Will The Wealthy And Politically Powerful Tolerate?
One of the key dynamics in this discussion is: what will the wealthy and powerful tolerate? Any policy that inhibits or harms the wealthy and politically powerful is a non-starter, and so if we align our strategies accordingly, we are less likely to suffer any negative consequences.
The wealthy and politically powerful have little need for physical cash (President John F. Kennedy famously carried no cash), so eliminating cash will probably not generate any resistance in the financial elite.
But other forms of capital control, such as requiring retirement accounts to hold Treasury bonds and limiting transfers to other nations’ banks might…
by
Brian Pretti
Executive Summary
- What the NACM Index and the Atlanta GDPNow are telling us about the odds of returning to recession
- Bond market volatility is picking up
- Are central banks are losing their control?
- Why monitoring credit markets will be our best indicator of the next downturn
If you have not yet read Part 1: As Goes The Credit Market, So Goes The World available free to all readers, please click here to read it first.
That indicator is the current level of the National Association of Credit Managers Index. Although not wildly well known, the National Association of Credit Managers Index is an indicator deserving of attention and monitoring immediately ahead.
As per the National Association of Credit Management (NACM), the Credit Managers Index is a monthly survey of responses from US credit and collections professionals rating factors such as sales, credit availability, new credit applications, accounts placed on collection, etc. The NACM tells us that numeric response levels above 50 represent an economy in expansionary mode, which means readings below 50 connote economic contraction. For now, the index rests in territory connoting economic expansion, but the index is also sitting quite near a 6 year low. We’ve been here before in the current cycle as the economy has moved in fits and starts in terms of the character of growth:
In a prior discussion, I mentioned the slowing in the US economy in the first quarter of 2015. I highlighted the Atlanta Fed GDPNow model that turned out to be very correct in its assessment of Q1 US GDP. While the Atlanta Fed was predicting a 0.1% Q1 GDP growth rate number, the Blue Chip Economists were expecting 1.4% growth. When the 0.2% number was reported, it turns out the Atlanta Fed GDPNow model was virtually right on the mark. As of now, the Atlanta Fed GDPNow model is predicting a…
The Central Banks Are Losing Control Of The System
PREVIEW by Brian PrettiExecutive Summary
- What the NACM Index and the Atlanta GDPNow are telling us about the odds of returning to recession
- Bond market volatility is picking up
- Are central banks are losing their control?
- Why monitoring credit markets will be our best indicator of the next downturn
If you have not yet read Part 1: As Goes The Credit Market, So Goes The World available free to all readers, please click here to read it first.
That indicator is the current level of the National Association of Credit Managers Index. Although not wildly well known, the National Association of Credit Managers Index is an indicator deserving of attention and monitoring immediately ahead.
As per the National Association of Credit Management (NACM), the Credit Managers Index is a monthly survey of responses from US credit and collections professionals rating factors such as sales, credit availability, new credit applications, accounts placed on collection, etc. The NACM tells us that numeric response levels above 50 represent an economy in expansionary mode, which means readings below 50 connote economic contraction. For now, the index rests in territory connoting economic expansion, but the index is also sitting quite near a 6 year low. We’ve been here before in the current cycle as the economy has moved in fits and starts in terms of the character of growth:
In a prior discussion, I mentioned the slowing in the US economy in the first quarter of 2015. I highlighted the Atlanta Fed GDPNow model that turned out to be very correct in its assessment of Q1 US GDP. While the Atlanta Fed was predicting a 0.1% Q1 GDP growth rate number, the Blue Chip Economists were expecting 1.4% growth. When the 0.2% number was reported, it turns out the Atlanta Fed GDPNow model was virtually right on the mark. As of now, the Atlanta Fed GDPNow model is predicting a…
by
Chris Martenson
Executive Summary
- There is not nearly enough net energy to meet our growth expectations in our lifetime
- We are past the "tipping point". A hard rendezvous with limits to growth will arrive in the next 2 decades
- What you can do to avoid that pain that the majority undoutedly will face
- Prepare for the current "mother of all bubbles" to burst soon
If you have not yet read, In Denial: We Pursue Endless Growth At Our Peril available free to all readers, please click here to read it first.
Energy Denial
It is said that you cannot explain water to a fish and I have nearly as difficult time trying to explain energy to people today. We are surrounded by it so completely it is difficult to properly appreciate.
But it is in every particle of food you eat, every piece of furniture in your house, every item you wear, and every trip you take — are all 100% dependent on energy that came from somewhere and subsidizes every single item and action.
Fossil fuels are the vast majority of all the energy we use and, it cannot be repeated enough, they visibly and invisibly subsidize the so-called renewables, too. By that I mean solar and wind power cannot be generated until and unless the components are first manufactured and installed. And those activities are nearly 100% driven by fossil fuels today.
To grasp this more fully, watch this time-lapse video of a wind tower being installed and, while marveling at the ingenuity and speed of the team involved, think about where all of the components came from:
https://www.youtube.com/watch?v=84BeVq2Jm88
How were the cranes, bulldozers and trucks built? What fuels do they run on? How did all those workers get there? Who grew their food and how did they come to eat it? How are the roads they drove on built and maintained? How is concrete made and how did it all get to the job site? What do the factories and foundries run on that built the windmill? How far did each windmill component have to travel before arriving at the site?
The answer to all of those questions is…
Life Beyond The Tipping Point
PREVIEW by Chris MartensonExecutive Summary
- There is not nearly enough net energy to meet our growth expectations in our lifetime
- We are past the "tipping point". A hard rendezvous with limits to growth will arrive in the next 2 decades
- What you can do to avoid that pain that the majority undoutedly will face
- Prepare for the current "mother of all bubbles" to burst soon
If you have not yet read, In Denial: We Pursue Endless Growth At Our Peril available free to all readers, please click here to read it first.
Energy Denial
It is said that you cannot explain water to a fish and I have nearly as difficult time trying to explain energy to people today. We are surrounded by it so completely it is difficult to properly appreciate.
But it is in every particle of food you eat, every piece of furniture in your house, every item you wear, and every trip you take — are all 100% dependent on energy that came from somewhere and subsidizes every single item and action.
Fossil fuels are the vast majority of all the energy we use and, it cannot be repeated enough, they visibly and invisibly subsidize the so-called renewables, too. By that I mean solar and wind power cannot be generated until and unless the components are first manufactured and installed. And those activities are nearly 100% driven by fossil fuels today.
To grasp this more fully, watch this time-lapse video of a wind tower being installed and, while marveling at the ingenuity and speed of the team involved, think about where all of the components came from:
https://www.youtube.com/watch?v=84BeVq2Jm88
How were the cranes, bulldozers and trucks built? What fuels do they run on? How did all those workers get there? Who grew their food and how did they come to eat it? How are the roads they drove on built and maintained? How is concrete made and how did it all get to the job site? What do the factories and foundries run on that built the windmill? How far did each windmill component have to travel before arriving at the site?
The answer to all of those questions is…
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