After the 2009 Crash, the Queen asked why nobody saw it coming. After Crash2, there may well be bricks hurtling through her windows. The social change that will follow an inevitable global debt cock-up is incalculable. The Slog offers some clues as to how it might start.
If you voted to Leave the EU – or don’t have especially strong feelings either way – then I suspect you have the sort of open but decisive mind that grasps the realities of globalist neoliberal business and neocon foreign policy. In short, you just know that the screaming abdabs of hysteria the Remain camp spread 24/7 are either gullible naivety or calculated lying.
Preferring to spend the majority of my time keeping a weather eye on the fiscal fantasies and economically busted flushes of global commerce, I get especially worked up (as in angry) about blithering idiots like Lord Adonis, Dominic Grieve and Yvette Cooper who demonstrate by their every utterance that they have not the first clue when it comes to a real priorities on the Disaster League of life.
I don’t simply mean the obvious Ponzi scheme that is the eurozone banking system, or the incompetently corrupt nature of the main players in Brussels. I mean the world beyond the EU: a world that, to the upside, appears to be growing faster than the EU; but to the downside, is a vast airliner which just lost a wing, having earlier in the flight dumped the engines out of a fear of excess weight.
The average legislator, media commentator, social columnist or general rentagob knows close to nothing about the financial connectivity of the world economy, and the depths suppliant statisticians will plumb in an effort to make the approaching meteorite appear as nothing more than a passing cloud. This is one of those empirical observations where averaging is entirely accurate, because they are all entirely average.
So as another unseasonally cold Bank Holiday dawns to offer us sanctuary from Adam Boulton asking Sky’s cleaning lady what she thinks is going to happen next on Brexit, I felt the need to pen this piece. Think of it as a parallel, which I would describe as follows: the need to point out to the bloke on the beach that the grey thing on the horizon is is a Tsunami of sea water. It is more important than the wasp that just stung your buttock.
The US economy
We’re approaching the end of the world’s longest, completely manufactured-for-the-few stock market Bull run. Over the last decade, about four fifths of all stock transactions in the US were quoted company directors using cheap money to buy their own rising shares. Other bourses tend to follow or ape what the Wall Street stars with the stripes do. The Dow is thus utterly divorced from economic reality.
Central banks and governments seek out data, indicators and signals that suggest green shoots of growth and then recovery. They ignore the other 97 factors that suggest such an interpretation is insane.
Roughly 95 million age-active Americans are unemployed, but counted as having a job because they have been jobless for long enough to be removed from welfare benefits. Recoveries are not made of this….but the US Fed is still ‘normalising’ by cutting QE and either raising or leaving interest rates.
Google’s holding company Alphabet just saw a 9% drop in earnings growth. 3M has reported its worst earnings forecast in a decade, and Intel has delivered earnings well market estimates. Goldman Sachs, Citigroup, Exxon and Chevron are in the same boat. Booms do not look like this.
US retail sales have been declining since Q4 2018. Credit card debt and household debts have hit record levels, but retailers report plunge after plunge in sales. The only possible explanation for that is that all the credit available to consumers is being used to pay off the maxed-out credit debts they already have. Trust me, this is not the precursor to a rising demand curve…and my feeling is further backed up by sales slumps in every automotive sector – plus a flatlining property market. Because nobody these days buys either commodity without a big lump of credit.
Here’s the rub guys and gals: there’s plenty of credit. But the users can’t afford it…..at any rate.
This (not so much credit crunch as credit bulimia) will soon spread to those trading in the markets….on, you guessed it, credit. Because the cost of that credit only makes sense in a rising market. And the markets have been rising for two main reasons: in the long term, cheap money via QE and Zirp; and over the last few months, thanks to massive stimulus injections from China.
Now that the Fed is playing silly buggers (and Trump is banging the trade war drum against Beijing) the PRC is losing interest in QE. They’ve been saying not entirely inscrutable things like, “We don’t intend to do this forever”.
President Donald, of course, wants the Fed to reverse its normalisation policy (to keep the boom mirage rippling); but he also wants a diplomatic victory via his 25% surcharge on Chinese goods. He can’t have both.
This scenario is close to roosting. When it does, some of the eurozone based but globally infectious banks are going to collapse. Most of them are in Italy. One very, very big one isn’t.
Deutsche Bank, which has a market valuation of around $18 billion – a fraction of what it was worth eight years ago – now owes €300 billion to its counterparties.
So it owes sixteen times more than it’s worth. Sobering, what?
However, there is also the small matter of €48 trillion of derivative contracts on its books. About two-thirds (by value) of these are – in theory – “squared off”: that is to say, the risk is (allegedly) minimal.
Thus leaving around approximately 16 trillion U.S. dollars worth of these little mothers that, um, aren’t.
Now let’s have a look at the players connected to that whopping Deutsche liability.
The International Monetary Fund, says Deutsche Bank “is heavily interconnected financially” to Wall Street banks JPMorgan Chase, Citigroup, Goldman Sachs, Morgan Stanley and Bank of America…..and by far the biggest interconnection (what a lovely word that is) involves derivative contracts.
But if Deutsche catches a cold – and why would it not? – that will turn to pneumonia not just in the US, but pretty well everywhere in the eurozone.
Draghing us Down
Almost nobody in global finance and commerce now believes the world can escape a rescue of Deutsche Bank. As long as liquidity via quantitative easing is flowing into an economy, this isn’t that big an issue: Mario Draghi’s European Central Bank (ECB) was providing that, and using negative deposit rates to force eurobanks to lend to business rather than just get fat depositing dosh at his place. Even that didn’t stop Eurozone GDP declining by 12% in the Big Six over the last decade.
But now that’s finished. And capital inflows from outside the EU have dried up. (You may remember me reporting three years ago that SuperMario had made it almost impossible to figure this out at the ECB site. Now you know why).
Signor Draghi has a problem. His gold reserves are minute, and Italian politicians will soon have to pay real interest rates on €2.85 trillion of government debt…..with a private sector GDP tax base producing only €840 billion. This is what we fiscal economists call impossible.
Yes, Mario Draghi has a problem, and so Italy has a problem. And if Italy has a problem, the eurozone economy has an insoluble problem….but more to the point, both the euro itself and Deutsche Bank have a health problem likely to prove terminal.
The euro’s viability depends on the ECB. The ECB’s subscribed equity capital is €7.74 billion and its own balance sheet total is €414 billion. This gives an operational gearing on core capital of 53 times. That make’s Deutsche Bank’s look positively risk averse. If you look at the old central banks, the Bundesbank is owed €900 billion, and the Bank of Italy owes €490. The relationship is not entirely uncorrelated.
Now let’s look at the sheer amount of debt that has been accumulated by the Master of the Unizone. That’s €2.25 trillion euros. None of that matters for a central bank…..unless the old central banks have taken the hit from doing it, as a result of deteriorating Eurozone collateral values. This explains the €900 billion hole at the Bundesbank. The other badly hit member State banks are Luxembourg, Netherlands, and Finland. You can’t keep trust alive when the bread and butter States are in the mire.
As for Deutsche Bank itself, like several other banks in the zone, it has a major exposure to Italian debt. Tot up all the banks owed money (which is very close now to a write-off) and we’re looking at just over 760 billion euros – over a third of which is owed to the French majors.
Globalist Banks need Gold
To my mind, there’s only one way the central banks can deal with these otherwise insoluble problems: they will have to go shit or bust for taking on a massive increase in the most solid asset – gold – and then, once it’s on board, revalue it upwards by a crazy amount.
It is perhaps too late even for that….although it is very obviously what they have in mind: without their efforts already to keep the lid on gold’s price, it would almost certainly be trading at over US$2,500 at the moment. As things stand, gold is trying another breakout today at $1,280; expect to see it fail by the end of the week at the latest.
But at some stage after that, a combination of big, savvy money and yet more bad news will produce an uncontrollable breakout. Such will spook the markets, depress stocks and confuse the algorithms.
Anyone who thinks it will end there simply isn’t paying attention. When the reset starts, it is going to make the Brexit saga look like one West End flop a few months before the invasion of Poland.