Executive Summary
In today’s episode, I delve into the current financial landscape, which is teetering on the edge of a systemic crisis. We’re seeing signs of a liquidity crisis morphing into a solvency crisis, and if things continue, we might be looking at a full-blown systemic crisis where markets could shut down, and banks might not function as we expect. Here’s what I’m thinking:
The Path to Crisis
The journey to this point has been marked by the Federal Reserve’s continuous pumping of money into the system, leading to overpriced stocks and now, a liquidity crisis. This happens when the new money being injected isn’t enough to offset the money being destroyed elsewhere, creating a mismatch that could lead to a solvency crisis. I’ve got the data to back this up, and it’s already happening, just as I predicted.
Systemic Crisis
A systemic crisis would mean closing markets, imposing capital controls, and a scenario where banks might not work. Imagine if Japan’s market crashes, the U.S. might have to cut financial lifelines, leading to a breakdown in cross-border financial flows. This is the big scary part, and it’s not just a theory; it’s a real possibility given the interconnectedness of global markets.
The Basis Trade
I’ve been talking about the basis trade, where hedge funds leverage tiny differences between futures and current treasury prices. This trade has ballooned to over a trillion dollars, and with the recent volatility, we’re seeing the first victims.
by pks 
