Financial Collapse: “It May Take Less Than 48 Hours to Take it All Down”
Bill Holter
Here is the latest news as it related to the current Financial Crisis
Whether you want to see it or not, the financial system is in a forced unwinding.
It took some 70 years to build this great credit edifice.
When it goes it may take less than 48 hours to take it ALL down.
When it goes it may take less than 48 hours to take it ALL down.
Submitted by Bill Holter, JSMineset:
After my last article we received two logical questions from readers. The first one pertaining to “gaps” and the Deutsche Bank derivative exposure, the second pertaining to Japan’s strong currency with negative yields while the debt to GDP levels are astronomical. Below is the first question;
“In the past you have warned about derivative exposure and now gapping.
One of my worst fears as a day trader on a derivatives platform is gapping. That is why I will never have an open position when the market is closed. Even then, that is not guaranteed.
A lot of trading platforms got hammered when the Swiss franc was revalued.
Could you put out a letter for your readers explaining why for example the Deutsche Bank derivatives exposure is so dangerous in terms of gapping.”
In my opinion, this is a very astute observation. The reader will not carry overnight positions because as he says, “the Swiss franc revaluation killed many” within less than 10 minutes of the markets opening. That said, even if not in any overnight position and the great leveling moment comes, how does anyone know if their broker even survives the carnage …with YOUR MONEY?
But this is another topic entirely.
As for Deutsche Bank, we know they have been recently screaming about negative interest rates hurting their operations. This very well may be so, but it is my opinion it is not so much negative interest rates killing them. I believe it is off balance sheet derivatives. Not only has DB denied any problem, the German finance minister has now chimed in with reassurance! http://www.zerohedge.com/news/2016-02-09/german-finance-minister-joins-db-ceo-says-not-worried-about-deutsche-bank Where have we seen this before? Does Bear Stearns or Lehman Bros. ring a bell? Doth the Germans protest too much? By the way, their credit spreads are stretching out, and stock price has now taken out the 2008 lows!
The second question regarding confusion of Japan’s 10 yr. yield hitting 0% and their currency strengthening while being the fiscal basket case of the world is also a good one but very simple to explain. http://www.zerohedge.com/news/2016-02-08/japanese-10y-yield-hits-zero-first-time-ever-yen-strongest-2014-stocks-crash. Japan has a debt to GDP ratio of 260%, if you add in corporate debt it approaches 400%, how could they not have a crashing currency and 20% (or higher) interest rates?
The simple answer is this, the global “carry trade” is unwinding. The Japanese yen was a major tool used to create and float the carry trade which inflated assets. Now, as asset prices are falling, this trade is being unwound (think of it as a margin call). Previous yen that were borrowed are now being bought back to settle the trade. This was a synthetic short similar to the dollar short being covered. A quick question and very short answer, why would anyone in their right mind invest money for 10 years at zero percent in a currency who’s issuer publicly states their goal is to grossly debase? Answer: BECAUSE THEY HAVE TO!
The problem is this, as the yen strengthens from short covering it is putting more and more of these carry trades under water and actually forcing more sales of assets and more buying of yen. This will end in one of two ways …both badly! Either the trades get unwound with asset prices collapsing and the yen at truly stupid levels, or someone “fails” and the derivatives chain breaks. I would personally bet the farm on option number two.
While writing this, CNBC is parading guest after guest as to whether a recession is “likely”. This is not about a “recession”, this is about whether the entire system fails or not!
Can Deutsche Bank “fail” while being counter party to over $70 trillion in derivatives? Can even a small counter party fail without causing a cascade? Just look at the volatility in markets, junk bonds are collapsing, credit spreads blowing out, currencies making wild swings, $7 trillion worth of sovereign debt trading at negative interest rates …not to mention stock markets moving from all time highs into bear markets within just a couple of months. (While editing this, CNBC is actually questioning if DB is a “one off” situation? Is this even possible? Do they even understand what they are asking?!!!)
Do you think “someone” might have lost some money since January 1st? Enough to bankrupt them? THIS is the question! The answer in my opinion is this, there are dead bodies strewn all over the place yet are hidden from view. They are being hidden from view because if they are seen, the entire system comes into question with answers being delivered within probably a 48 hour period. The answer of course will be the biggest “gaps” in all of history …both in price AND time! By this I am saying the re-opening gaps will be larger in percentage and the time to reopen longer than ever before.
Whether you want to see it or not, the financial system is in a forced unwinding. It took some 70 years to build this great credit edifice, when it goes it may take less than 48 hours to take it ALL down. To finish I leave you with a short clip of what the collapse might look like …and how quickly it can get there!
Standing watch,
Bill Holter
Holter-Sinclair collaboration
Jaw-Dropping Indicator Last Seen During Great Depression Just Hit An All-Time High!
http://kingworldnews.com/jaw-dropping-indicator-last-seen-during-great-depression-just-hit-an-all-time-high/
This Economic Crash Will Be The Crash That Ends All Crashes: Andrew Hoffman
European Banks Are Crashing Which Will Light The Economic Collapse Fuse
Deranged Central Bankers Are Blowing Up The World
It is now self-evident to any sentient being (excludes CNBC shills, Wall Street shyster economists, and Keynesian loving politicians) the mountainous level of unpayable global debt is about to crash down like an avalanche upon hundreds of millions of willfully ignorant citizens who trusted their politician leaders and the central bankers who created the debt out of thin air. McKinsey produced a report last year showing the world had added $57 trillion of debt between 2008 and the 2nd quarter of 2014, with global debt to GDP reaching 286%.
The global economy has only deteriorated since mid-2014, with politicians and central bankers accelerating the issuance of debt. These deranged psychopaths have added in excess of $70 trillion of debt in the last eight years, a 50% increase. With $142 trillion of global debt enough to collapse the global economy in 2008, only a lunatic would implement a “solution” that increased global debt to $212 trillion over the next seven years thinking that would solve a problem created by too much debt.
The truth is, these central bankers and captured politicians knew this massive issuance of more unpayable debt wouldn’t solve anything. Their goal was to keep the global economy afloat so their banker owners and corporate masters would not have to accept the consequences of their criminal actions and could keep their pillaging of global wealth going unabated.
The issuance of debt and easy money policies of the Fed and their foreign central banker co-conspirators functioned to drive equity prices to all-time highs in 2015, but the debt issuance and money printing needs to increase exponentially in order keep stock markets rising. Once the QE spigot was shut off markets have flattened and are now falling hard. You can sense the desperation among the financial elite. The desperation is borne out by the frantic reckless measures taken by central bankers and politicians since 2008.
- 637 rate cuts since Bear Stearns
- $12.3 trillion of asset purchases by global central banks in the past 8 years
- $8.3 trillion of global government debt currently yielding 0% or less
- 489 million people currently living in countries with official negative rates policies (i.e. Japan, Eurozone, Switzerland, Sweden, Denmark)
- -0.92%, the most negative yield in the world (2-year Swiss government bond)
The trillions in low grade junk bonds are beginning to go bad. The bond market is the canary in the coalmine. A tsunami of defaults is approaching the shoreline, investors are running for the hills, and deranged central bankers are telling people to come a see the colorful shells in the surf. As John Hussman points out, following their advice will be fatal.
Despite short-term interest rates
being only a whisper above zero, we increasingly hear assertions that
“financial conditions have tightened.” Now, understand that the reason
they’ve “tightened” is that low-grade borrowers were able to issue a
mountain of sketchy debt to yield-seeking speculators in recent years,
encouraged by the Federal Reserve’s deranged program of quantitative
easing, and that debt is beginning to be recognized as such. As default
risk emerges and investors become more risk-averse, low-grade credit has
weakened markedly. The correct conclusion to draw is that the
consequences of misguided policies are predictably coming home to roost.
But in the labyrinth of theoretically appealing but factually baseless
notions that fill the minds of contemporary central bankers, the
immediate temptation is to consider a return to the same misguided
policies that got us here in the first place, just more aggressively.
Based on the CDS market, fear is rising rapidly and European bank
stocks are collapsing faster than they did in 2008. The Too Big To Trust
Wall Street banks have seen their stocks fall 25% thus far. Bank debt
has fallen even faster. The lying and denials by bank CEOs sounds
exactly like the summer of 2008. The most smoke is coming from Deutsche
Bank, and where there’s smoke there’s fire. The papering over of billions in bad debt with more bad debt is reaching its logical and expected disastrous conclusion.
John Hussman notes when credit default swaps soar, the massive level of
defaults are only a quarter or two away, despite the propaganda and
lies perpetuated by Wall Street to cover their asses as they scramble to
escape again.
Credit default swaps continued to
soar last week, particularly among European banks. Given that risks
surrounding China and the energy sector are widely discussed, European
banks continue to have my vote for “most likely crisis from left field.”
In the fixed income market, we
wouldn’t touch low-grade credit at present. Once credit spreads widen
sharply, the default cycle tends to kick in several quarters later. The
present situation is much like what we observed in early 2008, when we
argued that it was impossible for financial companies to simply “come
clean” about bad debts, because then as now, the bulk of the defaults
were still to come.
The mainstream corporate media has been assuring the masses the recent 10% to 20% plunge in stock market indexes is just a temporary hiccup and isn’t anything like the 2008 worldwide financial collapse. They’re right. The situation today is far more dire and widespread than it was in 2008. Global debt is 50% higher, rates are at zero or below, the global economy is already in recession, with war and civil chaos spreading around the globe.
There are no more rabbits for central bankers to pull out of their hats. U.S. annual deficits are headed to $1 trillion without Keynesian shovel ready stimulus packages. The Fed increased their balance sheet fivefold while creating speculative bubbles in stocks, bonds and real estate simultaneously. As John Hussman points out, the bubbles are bursting again and economic collapse is baked in the cake.
The Fed’s real policy error, as it
was during the housing bubble, was to hold interest rates so low for so
long in the first place, encouraging years of yield-seeking speculation
and malinvestment by doing so. Put simply, the Federal Reserve
has created the third speculative bubble in 15 years in return for real
economic improvements that amount to literally a fraction of 1% from
where we would otherwise have been.
The entire global economy seems
condemned to repeatedly suffer from deranged central bankers that wholly
disregard the weak effect size of monetary policy on policy targets
like employment and inflation, and equally disregard their
responsibility for the disruptive economic collapses that have followed
on the heels of Fed-induced yield-seeking speculation.
This stock market crash in progress is following the exact pattern exhibited in prior crash periods.
The market has gone nowhere since QE3 ceased and had fallen by 14%
since November. The tremendous rally on Friday is nothing but the
beginning of a 5% to 8% retracement of the initial loss. Once this head
fake lures in more muppets, the bottom will drop out. As Hussman
discusses below this crash is following the 2000 and 2007 pattern. When
the 1,800 level is breached a vertical drop to the 1,500’s will happen
in the blink of an eye. That will get the attention of a few 401k
holders.
With regard to the stock market, I
suspect that the first event in the completion of the current market
cycle may be a vertical loss that would put the S&P 500 in the
mid-1500’s in short order. I’ve often noted the historical signature of
market crashes: a sustained period of overvalued, overbought,
overbullish conditions that is then coupled with a clear deterioration
in market internals and hostile yield trends, particularly in the form
of widening credit spreads. See my comments from the 2000 and 2007
market peaks about the identical syndrome at those points.
Historically, what we know as “crashes” have followed only after a
compressed, initial market loss on the order of about 14%, a recovery
that retraces 1/3 to 2/3 of the initial decline; and finally a break
below that initial low. That threshold is currently best delineated by
the 1800-1820 level on the S&P 500.
Not only have deranged central bankers created the conditions
for a catastrophic collapse, but they have encouraged crazed
sociopathic mega-corp CEOs to borrow billions to buy back their own
stocks at all-time high prices. These Ivy League educated MBA
lemmings have done this to boost their compensation because they are too
incompetent to grow their businesses through true investment. These
rocket scientists have managed to lose $126 billion on their highly
leveraged stock purchases in the past three years. Some of the top
losers include:- IBM – $9.8 billion of losses
- American Express – $4.1 billion of losses
- Chevron – $2.8 billion of losses
- Macy’s – $1.5 billion of losses
- Ford – $500 million of losses
- Starwood Resorts – $500 million of losses
Janet Yellen looked like a deer in headlights last week while testifying before Congress. She realizes, along with the other central bankers around the world, their Keynesian lunacy is about to create a crisis that will make 2008 seem like a walk in the park. The coming destruction of trillions in wealth ($1.2 trillion already), along with the accelerating currency wars, and the further impoverishment of billions will ultimately lead to global war.
In short, what we should fear is not
the slight impact of recent policy normalizations, but the violent,
delayed, yet inevitable consequences of years of speculative distortions
that are already fully baked in the cake. What we should fear are the
Fed’s repeated and deranged attempts to achieve weak effects on the real
economy, at the cost of speculative distortions that exact ten times
the damage when they unwind. What we should fear is more of the same Fed
recklessness that encouraged a yield-seeking bubble in mortgage debt,
enabling a housing bubble that collapsed to create the worst economic
crisis since the Great Depression. What we should fear is Fed policy
that has encouraged a yield-seeking bubble in equities, debt-financed
stock repurchases, and covenant-lite junk debt; that has carried
capitalization-weighted valuations to the second greatest extreme in
history other than the 2000 peak, and median equity valuations to the
highest level ever recorded. That’s exactly what the Fed has done in
recent years, and the cost of that unwinding is still ahead.
“Sooner or later we all sit down to a banquet of consequences” – Robert Louis Stevenson
Gerald Celente - Trends In The News - "Economic "Death Spiral": The Panic Is On!
Canadian Banks May Be Next to See Meltdown
Back in the summer of 2011, when we reported that Canadian banks appear dangerously undercapitalized on a tangible common equity basis….. the highest Canadian media instance, the Globe and Mail decided to take us to task. To wit: Were the folks at Zerohedge.com looking at the best numbers when they argued that Canadian banks were just as levered as troubled European banks? In a simple analysis that generated a great deal of commentary, a blogger at Zerohedge.com, an oddball but widely followed financial site, suggested that Canadian banks were as leveraged as European banks because they have low ratios of tangible common equity to total assets.
But there’s an argument that looking at that ratio is the wrong way to judge a bank’s strength because it ignores the composition of the assets. Sadly, the folks at Zerohedge.com were looking at the best numbers, and even more sadly, in the interim nearly 5 years, Canada’s banks took absolutely no action to bolster their capital ratios; in fact, these have only deteriorated.The Globe and Mail, however, was right about one thing: the TC ratio did not capture the full risk embedded in Canadian bank balance sheets: it was merely a shorthand as to how much capital said banks have in case of a rainy day. Sadly for Canada, it’s not only raining, it’s pouring for the country’s energy industry, a downpour which is about to migrate into its banking sector. Which is why it is indeed time to take a somewhat deeper dive into the Canadian banks’ balance sheets, where we find something very troubling. FULL REPORT
GLOBAL FINANCIAL PANIC -- Andy Hoffman
The Market Is Starting Crack Under The Economic Collapse Pressure
Current Economic Collapse News Brief
Gerald Celente Warns The Global Crash Of 2016 Will Be Twice As Devastating As The 2008 Collapse
With
gold spiking nearly $70 at one point during today’s trading, today the
top trends forecaster in the world warned King World News that the
global crash of 2016 will be twice as devastating as the 2008 collapse.
Gerald Celente: “Well, people should be scared to death of deflation. And it’s more than oil prices that are deflating. According to the Bloomberg Commodity Index, commodities have now plunged to 1991 levels. Eric, this deflation is really a global depression….
Gerald Celente continues: “We are now looking at the Panic of 2016 and the second round of what has been politely called the ‘Great Recession.’ And for many countries it’s going to be a full-blown depression. That’s why prices are plunging across the globe, along with worldwide stock markets.”
Eric King: “People are flocking to gold all over the world today.”
Gerald Celente: “As I have been saying on KWN for quite some time, “When panic strikes, gold prices will spike!” The kind of massive surge that we saw in the price of gold today, that’s what you are going to see more and more of in the coming months. The bottom line is, despite occasional pullbacks, the trend for gold is higher as panic continues to sweep across the globe.”
Eric King: “You predicted this global crash last year on KWN. And after a failed rally, we’re in it now, Gerald.”
Gerald Celente: “The headline in today’s Financial Times: ‘Europe Bank Shares Stage Rebound.’ What rebound? Just look at what I said yesterday on King World News. Part of what I said was that this talk about a bank buyback is BS and gold prices were going to surge.
The banks are in deep distress. The banks are exposed in all these areas that are collapsing. That is why this deflation is turning into a global depression.
The Global Crash Of 2016 Will Be Devastating
I predicted the Panic of 2008, but I’m telling you now, Eric, that the Global Crash of 2016 is going to be twice as devastating as the one in 2008. The central bankers of the world have built up a massive debt bubble of over $225 trillion, and now the bubble has burst. The damage will not only rattle global markets, it’s going to hit everyone. And the chaos is going to spread wide and far. People better prepare for this. They better learn how to survive and prevail.”
"I Guess It's Food Stamps": 400,000 Americans In Jeopardy As Giant Pension Fund Plans 50% Benefit Cuts
Dale Dorsey isn’t happy.
After working 33 years, he’s facing a 55% cut to his pension benefits,
a blow which he says will “cripple” his family and imperil the
livelihood of his two children, one of whom is in the fourth grade and
one of whom is just entering high school.
Dorsey attended a town hall meeting in Kansas City on
Tuesday where retirees turned out for a discussion on “massive” pension
cuts proposed by the Central States Pension Fund, which covers 400,000
participants, and which will almost certainly go broke within the next
decade.
“A controversial 2014 law allowed the pension to propose [deep] cuts, many of them by half or more, as a way to perhaps save the fund,” The Kansas City Star wrote
earlier this week adding that “two much smaller pensions also have
sought similar relief under the law, and still more pensions are
significantly underfunded.”
“What’s happening to us is a microcosm of what’s going to
happen to the rest of the pensions in the United States,” said Jay
Perry, a longtime Teamsters member.
Jay is probably correct.
Public sector pension funds are grossly underfunded in
places like Chicago and Houston, while private sector funds are
struggling to deal with rock bottom interest rates, which put pressure
on expected returns and thus drive the present value of funds’
liabilities higher.
Illinois’ pension burden has brought the state to its knees
financially speaking and in November, Springfield was forced to miss a
$560 million payment to its retirement fund. In the private sector, GM said on Thursday that it will sell 20- and 30-year bonds in order to meet its pension obligations."At the end of last year GM's U.S. hourly pension plan was underfunded by $10.4 billion," The New York Times writes. "About $61 billion of the obligations were funded for the plan's roughly 360,000 pensioners." Maybe it's time for tax payers to bail themselves out.
Speaking of GM, Kenneth Feinberg - the man who oversaw the distribution of cash compensation to victims who were involved in accidents tied to faulty ignition switches - is now tasked with deciding whether the Central States Pension Fund's proposal to cut benefits passes legal muster. "Central States’ proposal would allow the retirees to work and still collect their reduced benefits. But some are no longer able to work, and the idea didn’t seem plausible to others," the Star goes on to note.
“You know anybody hiring a 73-year-old mechanic?” Rod Heelan asked Feinberg. “I’m available.”
“I’ll have to go find a job. I don’t know. I’m 68,” Gary Meyer of Concordia, Mo said. “It would probably be a minimum-wage job.”
To be sure, retirees' frustrations are justified. That said, the fund is simply running out of money. "We simply can’t stay afloat if we continue to pay out $3.46 in pension benefits for every $1 paid in from contributing employers," a letter to retirees reads.
The fund is projected to go broke by 2026. Without the proposed cuts, no benefits at all will be paid from that point forward.
According to letters shared with The Star, cuts range from around 40% to 61%. "[The] average pension loss was more than $1,400 a month," the paper says.
As for what will become of those who depend upon their benefits to survive, the above quoted Gary Meyer summed it up best: "I guess food stamps. Hopefully not. It would be a last resort."
Don't worry Gary, you aren't alone...
Gerald Celente - Trends In The News - "Crash? Don't Worry! All's Okay!"
The Economy Is Hanging By A Thread And It's About To Break
10 Clear Signs the Government Is Fibbing About the Economy
Late last week, financial headlines surrounding the possibility of an impending global recession made for a wild week on Wall Street. CNBC asked, “The health of the global economy has been gnawing at investors, but does the U.S. have anything to worry about?” Dick Kovacevich, former Wells Fargo CEO, told CNBC that he doesn’t think so, adding, “The rest of the world does have issues; I don’t think they yet apply to the United States.”
Financial expert and national television and radio host Dan Celia begs to differ. In fact, he has a pretty long list to prove it. “We’re hearing an awful lot in the markets globally about a recession—that it could be we’re entering into a recession,” Celia told his listening audience on Friday. “Really? Folks, we’ve never been out of the recession. “These are the things that I said were going to come home to roost,” added Celia, who is also the leader of Financial Issues Stewardship Ministries (FISM, financialissues.org). “These are the economic numbers and false positives that are reality.” READ MORE
The US Goverment Recovery Just Went Down The Drain
Paul Craig Roberts – The Frightening Truth About What Is Really Happening In The United States
http://kingworldnews.com/paul-craig-roberts-the-frightening-truth-about-what-is-really-happening-in-the-united-states/
The Global Run On Physical Cash Has Begun: Why It Pays To Panic First
Back in August 2012, when negative interest rates were still merely viewed as sheer monetary lunacy instead of pervasive global monetary reality that has pushed over $6 trillion in global bonds into negative yield territory, the NY Fed mused hypothetically about negative rates and wrote "Be Careful What You Wish For" saying that "if rates go negative, the U.S. Treasury Department’s Bureau of Engraving and Printing will likely be called upon to print a lot more currency as individuals and small businesses substitute cash for at least some of their bank balances."
Well, maybe not... especially if physical currency is gradually phased out in favor of some digital currency "equivalent" as so many "erudite economists" and corporate media have suggested recently, for the simple reason that in a world of negative rates, physical currency - just like physical gold - provides a convenient loophole to the financial repression of keeping one's savings in digital form in a bank where said savings are taxed at -0.1%, or -1% or -10% or more per year by a central bank and government both hoping to force consumers to spend instead of save.
For now cash is still legal, and NIRP - while a reality for the banks - has yet to be fully passed on to depositors.
The bigger problem is that in all countries that have launched NIRP, instead of forcing spending precisely the opposite has happened: as we showed last October, when Bank of America looked at savings patterns in European nations with NIRP, instead of facilitating spending, what has happened is precisely the opposite: "as the BIS have highlighted, ultra-low rates may perversely be driving a greater propensity for consumers to save as retirement income becomes more uncertain."
Call it another massive error on behalf of Keynesian central planners who once again fail to appreciate the nuances of the common sense and the liquidity preference of ordinary consumers.
However, just because negative rates have not been passed on to savers yet or just because cash still has not been made illegal, that doesn't mean it won't be.
The question at this point is twofold: what happens after the savings of ordinary depositors in the bank officially taxed and/or cash becomes phased out, and more importantly, what happens just before.
In other words, will there be a run on physical cash?
The truth is that if society panics and there is a full blown rush out of existing electronic bank deposits and into physical currency to avoid negative rate taxation, only those who panic first will be safe. Why? Because of the "magic" of fractional reserve banking - there is simply not enough physical currency in circulation to satisfy all savers' claims.
Here is HSBC's Steven Major trying to explain the problem:
Based on the evidence so far, households have not rushed to withdraw cash and put it into a safe or, more significantly, pay for someone else to store it for them. This is because retail deposit rates have stayed at or above zero as banks have opted to not pass the lower market rates on.
The assumption that bank deposits can be rapidly converted into cash does not hold up, in our opinion. If everybody wanted to take their cash out of the bank at the same time, the system would soon run out as there are simply not enough notes in circulation. It would take a considerable time to print the currency needed to meet the demand. A central bank could enforce a negative rate for a considerable period of time under these conditions. For example, in the US, even if the production rate is doubled – and assuming the pace of retirement of old notes is unchanged and there is demand for USD3trn of new notes - printing would take 20-years.
To explain this, consider the demand for currency created if savers tried to remove cash from the US banking system. This demand could total anything between USD2.5trn (of excess reserves) and USD4.5trn (the Fed’s total balance sheet). Currently there is USD1.5trn of currency in circulation and the total annual production had a face value USD149bn in 2014, suggesting the 20 years it would take to print the cash.
Currency in circulation is small compared to the potential demand in a negative rate environment. As an example, the Fed’s assets are three times the currency in circulation and the Riksbank’s nearly ten times (see Table 1), but production capacity is limited.
While largely correct, Major is wrong about two critical things.
First, when estimating the potential demand for physical currency in circulation, one has to take into consideration not only the amount of total Fed reserves (or its entire balance sheet) but the entire fractional reserve banking system, and specifically the amount of paperless deposits parked at banks in the form of demand, checking, and savings account, or in other words, all the core components of M2. Not only that, but one must also consider the threat by increasingly more economists that large denomination bills may be outlawed, first in Europe with the €500 bill and then in the US with the $100 bill.
What a ban of Ben ($100 bill) would imply is that the total notional value of US currency in circulation would plunge from $1.35 trillion in the most recent week, to just $271 billion once the total $1.08 trillion value of $100 bills is eliminated. Putting this in context, there are as of this moment, $11.1 trillion in various forms of savings parked at banks as summarized in the chart below.
For the sake of simplicity, this analysis ignores what would happen globally in a comparable scenario in which paper currency in other developed markets is likewise "curbed" in part or in whole. Recall that for NIRP to truly work, paper currency has to be substantially eliminated everywhere it is implemented. We will analyze the impact of a global rush into paper currency in a subsequent post.
Still, what the chart above shows is that if, and when, a run on physical cash begins, there will be roughly $1 dollar in physical to satisfy $10 dollars in savers' claims, a ratio which drops to 20 cents of "deliverable" cash if the $100 bill is taken out of circulation.
* * *
The second, and far more critical error Major makes, is the assumption that "households have not rushed to withdraw cash and put it into a safe." As we explained previously, while this may have been true for a long time since 2014 when the first cases of NIRP were unveiled, that is no longer the case. Recall from "Safes Sell Out In Japan, 1,000 Franc Note Demand Soars As NIRP Triggers Cash Hoarding"
Now that the cash ban calls have gotten sufficiently loud to be heard by the generally clueless masses and now that the likes of Jose Canseco are shouting about negative rates, savers are beginning to pull their money out of the banks.“Look no further than Japan’s hardware stores for a worrying new sign that consumers are hoarding cash--the opposite of what the Bank of Japan had hoped when it recently introduced negative interest rates,” WSJ wrote this morning. “Signs are emerging of higher demand for safes—a place where the interest rate on cash is always zero, no matter what the central bank does.”“In response to negative interest rates, there are elderly people who’re thinking of keeping their money under a mattress,” one saleswoman at a Shimachu store in eastern Tokyo told The Journal, which also says at least one model costing $700 is sold out and won’t be available again for a month.“According to the BOJ theory, they should have moved their funds into riskier but higher-earning assets. Instead, they moved into pure cash that earned nothing,” Richard Katz, author of The Oriental Economist newsletter wrote this month.Meanwhile, in Switzerland, circulation of the 1,000 franc note soared 17% last year in the wake of the SNB’s move to NIRP.“One consequence of the decision to cut the Swiss central bank’s deposit rate into negative territory in late 2014, and deepen the negative rate to -0.75% early last year, may have been to increase stockpiling,” WSJ reports. “Holding money in cash would protect it from the risk of Swiss banks at some point charging a broad range of customers to deposit money.”“The connection between the increasing circulation of the big Swiss bill and the central bank policy is obvious,” Karsten Junius, chief economist at Bank J. Safra Sarasin said. Well yes, it is. Just as the connection between soaring safe sales in Japan and Haruhiko Kuroda’s NIRP push is readily apparent.So once again, we see that when one experiments with policies that fly in the face of logic (like charging people to hold their money), there are very often unintended consqeuences and when you combine sluggish demand with NIRP in a monetary regime that still has physical banknotes, you get a run on cash. And on safes to store it in.
And then this from "Demand For Big Bills Soars As Japan Stuffs Safes With 10,000-Yen Notes":
No it isn't, and not because of concern about the outlook for the Japanese economy: that had no chance long before Abe and Kuroda came on the scene, mostly as a result of Japan's demographic spiral of doomed.“Demand for 10,000-yen bills is steadily rising in Japan, even as the nation’s population falls and the use of credit cards and other forms of electronic payment increases,” Bloomberg writes. “While more cash might sound like a good thing, some economists are concerned that it shows Japanese households are squirreling away money at home instead of investing it or putting it into bank accounts -- where it can make its way back into the financial system and be put to productive use.”
One safe maker who spoke to Bloomberg said safe shipments have doubled over the last six months. While part of the demand for safes is likely attributable to the country's new "My Number" initiative, "the negative-rate policy is likely to intensify the preference of Japanese households to keep cash at home,” Hideo Kumano, an economist at Dai-ichi Life Research Institute said. “Overall, the trend of more cash at home reflects concern about the outlook for economy among households. This isn’t a good thing.”
"It isn't a good thing" because it confirms that the global run on physical cash - as much as the bankers of the world would like to keep it under wraps - has begun, and as the chart above shows, in a fractionally-reserved world in which there are $10 in savers' claims for every $1 in physical currency, it quite literally pays to panic first, as the 9 out of 10 people who panic after the first one, will be stuck with nothing.
* * *
At the end of the day, what it all boils down to, is Exter's inverted pyramid. As a reminder, this is how Elliott's Paul Singer summarized the total notional value of all global asset classes:
- Over-the-Counter derivatives, notional amounts: $692 trillion at year-end 2014, per the BIS. For comparison, this figure was $72 trillion in 1998.
- Global real estate: $180 trillion, according to global real-estate services provider Savills.
- Global debt market, both securities and other forms of debt: $161 trillion at year-end 2014, per the Institute for International Finance’s Capital Markets Monitor. According to the Bank of International Settlements (BIS), debt securities make up $95 trillion of this total.
- Global equities: $64 trillion, per the World Federation of Exchanges.
- Global M1 money supply: $24 trillion at year-end 2013, per the World Bank.
- Gold: $6.8 trillion at year-end 2013, according to the Thompson Reuters GFMS Gold Survey.
The Third and Final Phase for Central Banking Has Begun
By Graham Summers
ALL of the so called, “economic recovery” that began in 2009 has been based on the Central Banks’ abilities to rein in the collapse.
The first round of interventions (2007-early 2009) was performed in the name of saving the system. The second round (2010-2012) was done because it was generally believed that the first round hadn’t completed the task of getting the world back to recovery.
However, from 2012 onward, everything changed. At that point the Central Banks went “all in” on the Keynesian lunacy that they’d been employing since 2008. We no longer had QE plans with definitive deadlines. Instead phrases like “open-ended” and doing “whatever it takes” began to emanate from Central Bankers’ mouths.
However, the insanity was in fact greater than this. It is one thing to bluff your way through the weakest recovery in 80+ years with empty promises; but it’s another thing entirely to roll the dice on your entire country’s solvency just to see what happens.
In 2013, the Bank of Japan launched a single QE program equal to 25% of Japan’s GDP. This was unheard of in the history of the world. Never before had a country spent so much money relative to its size so rapidly… and with so little results: a few quarters of increased economic growth while household spending collapsed and misery rose alongside inflation.
This was the beginning of the end. Japan nearly broke its bond market launching this program (the circuit breakers tripped multiple times in that first week). However it wasn’t until this month that things truly became completely and utterly broken.
The Friday before last, the Bank of Japan cut interest rates to NIRP for the first time in its history. And for the first time since 2008, a major Central Bank’s policy didn’t have a single positive outcome.
Every Central Bank action since 2008 has had a negative consequence whether it be a higher cost of living, publishing savers and those relying on interest income, moral hazard, and the like.
However, up until the week before last, every time a Central Bank launched a new policy, there was always the a positive consequence, namely stocks moving higher.
Not this time.
The Bank of japan launched NIRP and stocks immediately nose-dived.
Please let this sink in: a Central bank, indeed, one of the largest, most important Central Banks, has officially “lost control.”
The Big Crisis, the one in which entire countries go bust, has begun. It will not unfold in a matter of weeks; these sorts of things take months to complete. But it has begun.
Smart investors are preparing now.
Best Regards,
Graham Summers
Chief Market Strategist
Phoenix Capital Research