by John Ward
When an econo-financial world based on never-ending credit meets the reality of suspicion about inability to repay debt, all bets are off. Last week saw the end of the beginning of a crisis of liquidity in credit-driven capitalism in the United States. This week, more information is available to confirm our fears. As we head towards the tidying of balance sheets at the year-end, more tartan paint salesmen are about to become IPOs on already squeamish markets. The signs are not good.
Earlier last week, The Slog ran this story about the New York Federal Reserve bailing out a liquidity-short bank (to the tune of $35bn) under its remit last Monday. The MSM around the World completely ignored the story, although several online sites soon had it. I read the Wall Street on Parade story within an hour of being tipped off by an NYC contact, so they have to get the First Place on this one – and richly deserved: it’s a great site.
In the blogosphere, the yarn gathered traction in the following two days. A press conference called by Fed Reserve boss Jerome Powell was asked one feeble MSM question about the affair, which he studiously ignored. It then emerged that the original order to supply funds (in a standard format) was dated 48 days earlier, at the start of the vacation season. Finally on Friday night, a whistleblower let it be known that there were in fact four banks involved, and that the Repo sector had been liquified by some $143bn already. To the best of my knowledge, we still don’t now who the banks were; what was obvious, however, was a sudden loss of interbank trust in a vital sector.
The news blackout occurred despite the fact that Repo rates had gone nuts, moving from 1.8 to 10% earlier in the week. [In the Repo Market, banks and investors can offer short-term loans if the borrower has A1 collateral such as Government Bonds].
At last – in the Weekend FT on Saturday morning – the bailouts reached an Establishment front page. Powell admitted that the Fed will pump in “a further $90bn” this week. What started as “a little local difficulty” has quickly turned into a realisation that the US financial system has a liquidity problem every bit as dangerous as the one in the eurozone. The person managing that little baby is Christine Lagarde, so we should all be very afraid.
At the back of all this technical hoohah, however, the problem here is our old friend credit debt. An overconfident US Treasury Department has this year (for some reason) been sucking cash out of the system for its own purposes, and first thing last Monday, it scooped up a big chunk unexpectedly. To say the least of it, this was a profoundly daft thing to do at a time when large businesses are being asked to fund their annual tax demands.
We’d all be well advised to worry about why per se the Treasury needed to take that decision, but the disturbing outcome – near panic among systemic Repo lenders – is the main event in the spotlight.
This in turn is, without doubt, related to the reduction in bank reserves by some 14% this year. My own view is that the reserves are far too low anyway (given some of the exposures and liabilities these monsters have) and reducing them further during a period of recognised economic slowdown was a classically reckless act.
Debt is everywhere. The econo-financial-fiscal systems of the World (let alone the West) can’t survive without it, but they can’t control it either. Crash2 has been a long time coming: but Crash1 in 2008 was postponed really from 2003, and in 2019 the situation, on every level imaginable – is far, far worse than it was sixteen years ago.
Consider this: most US banks have a calendar fiscal. We are now just 13 weeks away from annual bank auditing, and the need to look pukka in terms of the balance sheet. Repo lending towards the end of that quarter is therefore always extremely restrained. As I write, there are probably at least four US banks out there wondering how to keep the wolf from the door, let alone afford a Goose for the Christmas table.
All up, we can forget the balm of the official figures: the Repo sector bailout is heading (I am informed today) towards half a trillion Dollars and counting. Reprising what I wrote last Thursday, one cannot relegate the Repo to some sort of flea-bite niche of no import: it is an essential short-term funding bazaar that banks and financial counter-parties regularly tap to lend each other many trillions of Dollars. And it is behaving in a similar neurotic manner to those less than halcyon days of late 2007, as we approached the cliff-edge of the US housing market crash.
Credit debt again: you see, there is no escape once sociopathic sales directors push their labrats further and further towards sales targets that involve lending munnneeeee to bribe jailers just as the aristocrats are setting off for Madame la Guillotine. It’s all about sensibility and timing….something of a short suit for the financial markets’ Sherman McCoys.
Meanwhile, if you’re looking for another financial bubble to burst (not that we’re short of them) think on this one: as I have less than tactfully suggested before, there are an awful lot of wannabe quoted companies out there – way beyond Tesla and its $250,000 automobile valuations – being introduced for IPOs (Initial Public Offerings) at the moment.
IPOs in the 21st century are increasingly aimed at the gullible space cadet incapable of discerning that the Huuuooge “potential” in that distant place called Tomorrow is somewhat marred by the fact that the company is yet to make a profit as such, and has a debt mountain of Everestine proportions.
As it happens, several of these South Sea Tulips are due to test the bourse waters over the next few weeks. Mega players like JP Morgan Chase and Goldman Sachs have outlooks full-frontally exposed to success or failure when it comes to uptake of the shares.
This should be fun to watch.
Meanwhile, gold is challenging $1520 again today. With the usual legal arse-covering (I am not a professional gold dealer, and this does not represent a buying recommendation) one cannot help feeling that treasure ships sailing into safe ports are onto a good thing.