'There is every reason to take the unfolding crisis most seriously. There will be comparisons to 2008, but we must recognize the potential for something worse.''Global markets did not “seize up” this week. However, the week had all the characteristics of the start of a serious period of de-risking/deleveraging. The SVB and U.S. banking crisis is, of course, an important dynamic. But the global nature of the unfolding crisis creates a much more complex market and financial backdrop. Derivatives markets in disarray. Hedge funds/family offices are running for cover. And in stark contrast to 2022, currency markets have turned disorderly and unpredictable. No place to hide. No environment for leverage. When markets start malfunctioning like this, my thoughts return to the $65 TN of “hidden leverage” identified by the Bank of International Settlements.
Friday under the MarketWatch (Vivien Lou Chen) headline, “Bond-Market Volatility at Highest Since 2008 Financial Crisis Amid Rolling Fallout From Banks”: “Analysts described the impact on the U.S. and German bond market as a rolling one in nature over the past five days, producing the biggest single-day drops in yields in well over a quarter of a century… On Monday, following a weekend government intervention to protect the depositors of… Silicon Valley Bank and Signature Bank…, the policy-sensitive 2-year U.S. note yield experienced its biggest one-day fall since Oct. 20, 1987… -- though, outside of U.S. hours, the rate dropped by the most since 1982. That intraday drop of almost 60 bps exceeded the declines seen during the 2007-2009 financial crisis/recession; the Sept. 11, 2001, terrorist attacks; and 1987’s Black Monday stock-market crash. Two days later, as troubles emerged at Swiss banking giant Credit Suisse, the 2-year German yield saw its biggest daily decline based on available data going back to the country's reunification period in 1990… The ICE BofAML Move Index, a gauge of bond-market volatility, soared on Wednesday and Thursday to its highest levels since the fourth quarter of 2008, or the height of the Great Financial Crisis…”
There is every reason to take the unfolding crisis most seriously. There will be comparisons to 2008, but we must recognize the potential for something worse.
Some data to ponder: Outstanding Treasury Debt ended 2007 at $6.051 TN, or 41.8% of GDP. Treasury Securities ended 2022 at $26.832 TN, or 105% of GDP. The Fed’s balance sheet was $951 billion (7% of GDP) to close out ‘07. This week it’s $8.639 TN, or 34% of GDP. Bank Loans ended 2007 $8.259 TN. They’re now $14.054 TN. Consumer Credit jumped from $1.132 TN to $2.661 TN. Total Bank Deposits have inflated from $8.487 TN (58% of GDP) to $20.698 TN (79% of GDP) – with Deposits expanding by a third ($5.165 TN) over the past three years.
China and emerging markets were in relatively robust up-cycles in 2008, with their stimulus and speedy recoveries providing a “global locomotive” that helped pull the world economy out of the morass. Chinese bank assets closed 2007 below $8.0 TN. Possibly surpassing $60 TN this year, Chinese bank Credit won’t be the global savior for this cycle.
I’ve argued for a while now that the “government finance Bubble” would prove the end of the line. There’s simply no category of financial claims outside sovereign debt and central bank Credit with the potential to expand sufficiently for Bubble reflation. A major expansion of bank Credit extended the cycle, but that fateful boom is now in jeopardy. Runaway growth in both central bank and sovereign Credit risks a devastating crisis of confidence.
A Lehman bailout wouldn’t have thwarted the crisis. There were Trillions of mispriced securities and too much speculative leverage, dysfunctional finance that fueled deep structural maladjustment. Today, there are tens of Trillions of securities – priced as if they’re actually backed by real economic wealth. The day of reckoning is long overdue.
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..And no amount of money-printing will resolve deep structural problems decades in the making. Moreover, we could be entering a major global crisis with every man (central bank) for himself. There will be an inclination to prioritize domestic over international. Some will remain focused on severe inflation problems, while others will pivot to financial instability. There are different agendas – “world orders” and geopolitical considerations to contemplate.
I don’t like being the guy yelling “fire” in the crowded theater. But there’s a fire burning. I hope it can be contained. It’s uncomfortable to hear so many shouting “stay calm, no fire!” And we’ve all grown tired of the false alarms. There’s just so much highly combustible material that has accumulated over the years. The stuff’s everywhere, in the aisles and even obstructing some exits.
How much confidence should we place in those decrepit fire extinguishers working this time around? With all the structural changes, it’s become such a towering theater – the grandeur, the dazzling new technologies and sophistication, filled with the unsuspecting, the rascals and newbies – with the same old small exits. Look at those guys eagerly making their way through the exit. Weren’t they the ones hollering “no fire”? It’s difficult to predict how the jittery crowd will respond to those first whiffs of smoke, but I’m not going to assume things stay orderly.'
- Doug Noland,
Fire, March 18, 2023
Context(Banking Reform - English/Dutch) '..a truly stable financial and monetary system for the twenty-first century..'(Global Stagflation) - German inflation unexpectedly accelerates in February [2023](Global Stagflation)(QE Was a Colossal Policy Mistake) - '..wage earners have to get a 14.8 per cent wage increase just to hold even with this kind of inflation..'