You hear that Mr. Anderson? That is the sound of inevitability. —Agent Smith (“The Matrix”)
I used this excellent quote from the movie Matrix in one of my Epoch Times columns to summarize into what the Federal Reserve and other central banks were about to hit. The commentary was published on 18 May.
This is part of the pain of a forecaster. You recognize where we are and see certain ‘horribleness’ way before others. I’ve had it all my life with many things, including cars needing maintenance (breaking down on a trip), with bad/good financial decisions (not always my own) and with very bad policy decisions. No one is naturally correct all of the time, but as a (good) forecaster you learn also from from your mistakes (a general rule of life).
Well, on 28 September, my forecast from May became a reality, when the Bank of England (BoE) was forced to step (back) into the gilt markets to stop British pension funds from collapsing under massive margin calls caused by plummeting gilt prices (skyrocketing yields).
Today, we learned that the BoE is extending the program to index-linked gilts, it will widen the scope of daily gilt purchase operations, and temporary pause the APF (Asset Purchase Facility) corporate bond sale operations. These tell a very worrying story of existential and widening troubles in the financial sector.
We are, again, at the brink of a collapse. And there’s no easy fix, because the threat of a collapse is caused by years of ill-conceived policies.
The long coming of the metro train
In the movie “The Matrix,” the hero, Neo or Mr. Anderson, is eventually able to escape from the chokehold of Agent Smith and avoid a collision with an approaching metro train. We, however, are unlikely to be so lucky, and skilfull.
The first time we warned on the likely detrimental outcomes of the ill-conceived central bank policies was in June 2013. Then we wrote in our Q-Review report that:
It is possible that the banking sector and the world economy were be saved by using too strong methods in 2008. As a consequence of this, it is also possible that the world economy is more like zombie economy, where unprofitable banks and companies are kept alive with easy money and rescue packages from the governments. This kind of an environment is extremely sensitive to shocks or market disturbances, and this is a reason to be worried although there is no reason to panic, yet.
In March 2017, we envisaged that
The crisis of 2007 - 2008 reversed the trend of financial globalization, which has undermined global growth. The pull-back in financial globalization has been masked by central bank-induced liquidity and continuous stimulus from governments which have created an artificial recovery and pushed different asset valuations to unsustainable levels. This implies that we live in a “central bankers’ bubble”.
And, in December 2017, we concluded that:
In the current financial markets, there is one major entity which does not have a budget limit and the only aim of which is to tweek the market prices to whatever direction it sees suitable. The central banks have, through their QE -programs, effectively destroyed, or at least seriously damaged, the market mechanism and thus disrupted the allocation of financial capital. The central banks have, in essence, created their own version of a centrally controlled economy. There has never been such a monetary policy experiment in modern history.
We are now at pinnacle and the inflection point of this massive experiment, and it’s unlikely to end well.
In comes the train
On 29 April, we concluded in our Deprcon Monthly Outlook that:
So, we may now wittness an economic boom, which is likely to be short-lived. A lot depends on the Fed and other central banks. If the Fed pushed ahead with strong rate rises and hastened balance sheet run-off, artificial liquidity will be drawn from the markets and financial conditions will turn noticeably tighter during the summer. Thus, we urge everyone to enjoy the summer, because fall is likely to bring ‘heavy skies’ over the global economy and the financial markets.
The main reason for this was that the mammoth-sized liquidity injections by central banks since 2009, and especially during the spring of 2020 were about to be withdrawn at the same time, when the real economy would be likely plunge into a recession with mounting war (sanction) related costs. Again, the pain of a forecaster.
There simply is no way of pulling the close to $30 trillion “central bank bazooka” back without crushing the extremely-levered financial system.
Extremely low interest rates and money printing (QE:s) produce massive fragilities and market bailouts breed ‘moral hazard’ into the system. When you try to pull the measures providing this artificial liquidity back, like central banks have recently tried to, there’s an ‘impact’ (with the “train”) and the whole system caves in within itself.
What to do before the ‘train’ hits?
Well, the simple remedy is do what Neo did, i.e., get off the 'god damn’ rails!
Like I and we have detailed, the most important remedy against financial calamity is to reduce leverage to the minimum and close all risky positions noting that this time around they may include former safe havens, including Britain and Japan.
We have already detailed many of the means of preparation in our GnS Economis Newsletter, and I will provide more of my personal view here.
I (and we) consider that central banks are likely do the utmost in trying to stop the crisis from escalating. I think that they will fail. This is because the system has become rotten to the core that only a full-socialization, with CBDCs and all, can save it from collapsing. This is visible in, e.g., troubles of the pension funds.
This is not to say that they would not try to save “everything”. I just think that a full-scale socialization of the financial markets and the economy would be too much even to these ‘master-manipulators’ modern central bankers). I could be wrong on this, though, but I dearly hope that I am not.
Yesterday, I received an excellent email pointing out how you get into a margin call. That “only happens when an asset to loan margin reaches a predetermined level.” So, this quite correctly implies that even pension fund managers have become ‘players’ in the system.
Few years back, when I was giving a presentation to managers of one of the major pension funds of Finland, I learned that Finnish pension funds have taken up leverage and entered the ‘junk bond’ market to gain sufficien yield. I asked the fund managers, did they understand the risks they were taking and adviced them to “get the hell out fo Dodge”.
We should remember, though, that pension funds are fixed income investors, which need to obtain sufficient yield. After central banks pushed yields of government bonds to ‘oblivion’ their options grew very limited. Thus, also the pension fund crisis, is mostly the making of the central banks.
The situation with the pension funds, however, portraits the ultimate moral hazard central bankers have pushed the system into.
It, quite directly, also implies that you cannot trust managers at any financial institution, to take good care of you money. They have most likely played taken a huge gamble with them already and are now trying to cover their (your) losses with possible hasty risky investments, which most likely are the making situation worse, and/or providing a variety of excuses.
So, be extremely vigilant with your money going forward, and trust no one (in the financial industry)!
Disclaimer:
The information contained herein is current as at the date of this entry. The information presented here is considered reliable, but its accuracy is not guaranteed. Changes may occur in the circumstances after the date of this entry and the information contained in this post may not hold true in the future.
No information contained in this entry should be construed as investment advice. Readers should always consult their own personal financial or investment advisor before making any investment decision, and readers using this post do so solely at their own risk. Readers must make an independent assessment of the risks involved and of the legal, tax, business, financial or other consequences of their actions. GnS Economics nor Tuomas Malinen cannot be held i) responsible for any decision taken, act or omission; or ii) liable for damages caused by such measures.
"Trust no one." Always excellent advice. (Sad, but true.) Brace for impact.