Monthly Archives: June 2015

He Said That? 6/30/15

From Ian Winer, director of equity trading at Wedbush Securities, referring to Monday’s financial turmoil:

People are getting nervous, as what seems like—all of a sudden, out of the blue—you have multiple hot spots. They’re just trying to protect their gains on the year and position themselves in the even that this becomes a more dramatic selloff.

The Wall Street Journal, “Turmoil in Europe Shakes Markets,” 6/30/15

Out of the blue? The world has been on a debt, debt monetization, central bank balance sheet expansion and interest rate suppression binge for six years, and the inevitable consequences are somehow out of the blue? Too much debt means eventually somebody has to cut back (China) or cannot pay (Greece and Puerto Rico). Once debt starts imploding, debt and fiat liquidity supported asset prices fall. It’s not like it hasn’t happened before. Remember 2007-2009? This one started in earnest at the end of last year, and if Mr. Winer is surprised then Wedbush Securities should look around for another director of equity trading. If he wants to hold on to his job, Mr. Winer might want to put down whatever mainstream media rags he reads and check out SLL and the sites on its blog roll.

Puerto Rico Governor Speaks Truth To Hedge Fund Speculators: “The Debt Is Not Payable…..I Will Not Kick the Can”, by Michael Corkery and Mary Williams Walsh

This is how debt crises work. There is a seemingly isolated debt “problem” somewhere. It gets fixed, or the debtor goes bankrupt. Then another problem crops up, and it too either gets fixed or the debtor goes bankrupt. Then multiple problems appear, usually concentrated in one sector or geographic area. This presents a bigger problem. There are more debtors, and importantly, there are more creditors. Maybe some of those creditors have debts, too, maybe in fact they’re overextended. Now, like ripples on a lake where a stone has been dropped, credit problems spread. It is not contagion, although that word is always used. Rather, it is due to growth in debt for a significant period of time in excess of underlying growth, and it is due to the fact that virtually every financial asset is somebody else’s financial liability.

This week we get two big ripples that will undoubtedly meet, amplifying each other and other debt ripples (a property of wave physics), causing more financial stress: Greece and Puerto Rico. Michael Corkery and Mary Williams Walsh at The New York Times report, via davidstockmanscontracorner.com, on the Puerto Rico debt situation:

Puerto Rico’s governor, saying he needs to pull the island out of a “death spiral,” has concluded that the commonwealth cannot pay its roughly $72 billion in debts, an admission that will probably have wide-reaching financial repercussions.

The governor, Alejandro García Padilla, and senior members of his staff said in an interview last week that they would probably seek significant concessions from as many as all of the island’s creditors, which could include deferring some debt payments for as long as five years or extending the timetable for repayment.

“The debt is not payable,” Mr. García Padilla said. “There is no other option. I would love to have an easier option. This is not politics, this is math.”

It is a startling admission from the governor of an island of 3.6 million people, which has piled on more municipal bond debt per capita than any American state.

A broad restructuring by Puerto Rico sets the stage for an unprecedented test of the United States municipal bond market, which cities and states rely on to pay for their most basic needs, like road construction and public hospitals.

That market has already been shaken by municipal bankruptcies in Detroit; Stockton, Calif.; and elsewhere, which undercut assumptions that local governments in the United States would always pay back their debt.

Puerto Rico’s bonds have a face value roughly eight times that of Detroit’s bonds. Its call for debt relief on such a vast scale could raise borrowing costs for other local governments as investors become more wary of lending.

Perhaps more important, much of Puerto Rico’s debt is widely held by individual investors on the United States mainland, in mutual funds or other investment accounts, and they may not be aware of it.

Puerto Rico, as a commonwealth, does not have the option of bankruptcy. A default on its debts would most likely leave the island, its creditors and its residents in a legal and financial limbo that, like the debt crisis in Greece, could take years to sort out.

Still, Mr. García Padilla said that his government could not continue to borrow money to address budget deficits while asking its residents, already struggling with high rates of poverty and crime, to shoulder most of the burden through tax increases and pension cuts.

He said creditors must now “share the sacrifices” that he has imposed on the island’s residents.

“If they don’t come to the table, it will be bad for them,” said Mr. García Padilla, who plans to speak about the fiscal crisis in a televised address to Puerto Rico residents on Monday evening. “What will happen is that our economy will get into a worse situation and we’ll have less money to pay them. They will be shooting themselves in the foot.”

To continue reading: Puerto Rico’s Debt Is Not Payable

The Care and Feeding of a Financial Black Hole, by Dmitry Orlov

A black hole is a good, readily understood analogy for a debt implosion, and SLL has used it (see “Crisis Progress Report (5): The Black Hole,” SLL, 3/11/15). Orlov, of cluborlov.blogspot.com, uses it a slightly different fashion, but depict a world sliding into the event horizon:

A while ago I had the pleasure of hearing Sergey Glazyev—economist, politician, member of the Academy of Sciences, adviser to Pres. Putin—say something that very much confirmed my own thinking. He said that anyone who knows mathematics can see that the United States is on the verge of collapse because its debt has gone exponential. These aren’t words that an American or a European politician can utter in public, and perhaps not even whisper to their significant other while lying in bed, because the American eavesdroppers might overhear them, and then the politician in question would get the Dominique Strauss-Kahn treatment (whose illustrious career ended when on a visit to the US he was falsely accused of rape and arrested). And so no European (never mind American) politician can state the obvious, no matter how obvious it is.

The Russians have that pretty well figured out by now. Yes, maintaining a dialogue and cordial directions with the Europeans is important. But it is well understood that the Europeans are just a bunch of American puppets with no will or decision-making authority of their own, so why not talk to the Americans directly? Alas, the Americans too are puppets. The American officials and politicians are definitely puppets, controlled by corporate lobbyists and shady oligarchs. But here’s a shocker: these are also puppets—controlled by the simple imperatives of profitability and wealth preservation, respectively. In fact, it’s puppets all the way down. And what’s at the bottom is a giant, ever-expanding, financial black hole.

Do you like your black hole? If you aren’t sure you like it, then let me ask you some other questions: Do you like the fact that your credit cards still work, or that you can still keep money in the bank and even get cash out of an ATM machine, or that you are either receiving or hope to eventually receive a pension? Do you like the fact that you can get useful things—food, gas, airline tickets—for mere pieces of paper with pictures of dead white men on them? Do you like the fact that you have internet access, that the lights are on, and that there is water on tap? Well, if you like these things, then you must also like the financial black hole, because that’s what’s making all of these things possible in spite of your country being bankrupt. Perhaps it’s a love-hate relationship: you love being able to pretend that everything is still OK even though you know it isn’t, and you wish to enjoy a bit more of the business-as-usual before it all goes to hell, be it for a few more days or another year or two; but you hate the fact that eventually the black hole will suck you in, after which point things will definitely… suck.

In the United States, so far the black hole has been sucking in individual families (although it does sometimes suck in entire cities, like Detroit, Michigan, or Bakersfield, California, or Camden, New Jersey). With the help of the fraudulent mortgage racket, it sucks in houses, and spits them out again encumbered with bad debt. With the help of the medical industry, it sucks in sick people and spits them out again, bankrupt. With the help of the higher education racket, it sucks in hopeful young people, and spits them out as graduates, with worthless degrees and saddled with mountainous student debt. With the help of the military-industrial complex, it sucks in just about anything and spits out corpses, invalids, environmental damage, terrorists and global instability. And so on.

To continue reading: The Care and Feeding of a Financial Black Hole

The Global Template for Collapse: The Enchanting Charms of Cheap, Easy Credit, by Charles Hugh Smith

From Charles Hugh Smith, at oftwominds.com:

Cheap, easy credit has created moral hazard and nurtured magical thinking throughout the global economy.

According to polls, the majority of Greek citizens want the benefits of membership in the euro/EU and the end of EU-imposed austerity. The idea that these are mutually exclusive doesn’t seem to register.

This is the discreet charm of magical thinking: it promises an escape from the difficulties of hard choices, tough trade-offs, the disruption of vested interests and most painfully, the breakdown of the debt machine that has enabled the distribution of swag to virtually everyone in the system (a torrent to those at the top, a trickle to the majority at the bottom, but swag nonetheless).

If we had to summarize the insidious charm of magical thinking, we might start with the overpowering appeal of using credit to ease all difficulties.

Need money to fund various healthcare/national defense rackets? Borrow the money. Need to keep people employed building ghost cities in the middle of nowhere? Borrow the money. Need to keep buying shares of the company’s stock to push the value of each share ever higher? Borrow the money.

The problem with cheap, easy credit is Cheap, easy credit destroys discipline. The lifetime costs of debt taken on to fund bridges to nowhere, healthcare/national defense rackets, ghost cities, stock buybacks, etc. are never calculated. The opportunity costs are also never calculated.

When credit is costly and hard to get, marginal borrowers can’t get loans and nobody dares borrow at high rates of interest for low-yield, high-risk schemes.When credit is costly and hard to get, what doesn’t pencil out doesn’t get funded.

When credit is cheap and easy to get, every scheme and racket gets funding because hey, why not? The cost is low (at the moment) and the gain might be fantastic. But even if the gain is unknown, the kickback/campaign contributions make it worthwhile even if the scheme fails.

Professional economists are duty-bound to claim national economies are not merely extensions of households. But this is just another falsity passed off as sophisticated truth by a profession that is being discredited by the reality of its failed policies, failed theories and failed predictions.

Since human psychology remains the dominant force in all economics, the household and national economies can only differ in scale.

To continue reading: The Global Template for Collapse

Project “Make Everyone Germany” has failed, by Simon Black

From Simon Black at sovereignman.com:

It is somewhat amusing that the word ‘crisis’ originates from Ancient Greece.

It’s actually a medical term; Hippocrates wrote extensively about ‘crisis’ being the key turning point in disease progression– the time at which it either overcomes the patient, or it subsides.

And though the word ‘crisis’ is thrown about routinely these days, it’s safe to say that Greece is now truly in crisis in the purest sense of the definition.

Same with the euro, for that matter.

A century from now when future historians write about our time, it’s highly likely they’ll conclude that the euro was the dumbest invention of this age.

And that will really be saying something because the competition is fierce: pet rocks. Acid-washed jeans. FATCA. Google Glass. Fox Business News. Obamacare.

But the euro deserves first prize in the ugly contest.

The idea was to take completely incompatible economies, pretend that they were all Germany, and put them under one monetary roof simply because they were on the same continent.

This is ridiculous, especially today. It’s 2015. Geography is an irrelevant anachronism.

Imagine jamming Argentina, Australia, Angola, and Azerbaijan into a currency union simply because they all start with the letter “A”. It’s just as pointless and arbitrary as geography.

And when one of them starts to collapse (probably Argentina), rather than admit their mistake and dissolve the whole stupid idea, the bureaucrats spend massive amounts of other people’s money fruitlessly trying to hold the project together.

This is what’s happened in Europe.

Every time they wrote a bailout check or extended another loan package to Greece, all the bureaucrats did was INCREASE their risk exposure.

It’s like running back into a burning building– literally the *exact opposite* of what any sensible person would do.

Eurocrats have spent untold billions of other people’s money to save face, just so they wouldn’t have to admit that Project “Make Everyone Germany” has failed.

But what they never acknowledged was that no matter how much they extend and pretend, the disease will always reach its crisis.

And this financial disease is going to slay the patient. History is very clear on this point: debt kills.

Greece long ago reached the point of no return where they were borrowing money just to pay interest. Now it’s time for brutal honesty: game over.

To continue reading: Project “Make Everyone Germany” has failed

In the Name of Tolerance, Kill the Curmudgeons, by Robert Gore

Game of Thrones features beheadings, hangings, torture, incineration, parricide, war, rape, incest, betrayal, and intrigue, among other untoward depictions. Refreshingly, the aspirants to the Iron Throne do not pretend they seek it for the public interest, common good, or the children. Those contenders with some nobility among the admixture of their motives acknowledge their ambition—it’s good to be King (or Queen)—and the ignoble have the courage of their own ruthless rottenness.

This naked drive for power, shorn of hypocrisy, stands in welcome contrast to contemporary politics. Between now and November of 2016, we’ll hear countless speeches and interviews from a dozen plus candidates claiming—while wiping away a tear or two—that they are running to Restore America’s Greatness, or Take Back America, or Fulfill America’s Promise, or some such Madison Avenue-conceived, poll-driven, focus-group-tested drivel. Any candidate who admitted that he or she sought the presidency because the American government has treasure, power, and empire that puts Alexander, Caesar, Khan, Napoleon, and Hitler combined to shame and yes, by God, it’s good to be King (or Queen), would be disqualified immediately. Instead, all must swear to make like Glinda the Good Witch and use their power—should they be chosen to lead the great people of this great nation—only for the Benefit of Humanity. That anyone can stomach this revolting nonsense is astounding, but millions do because of the central tenet of American politics: You can get away with anything as long as you say you’re doing it for somebody else.

Facebook, the company that made “like” a noun, epitomizes America, 2015. While human nature hasn’t changed a whit over the millennia, almost everyone wants to hide the worser demons of their natures, accumulating actual likes on Facebook and figurative ones in every other avenue of social interaction. Oh sure, if you poke around the Internet you can kind find plenty of naysayers, bubble-busters, and other curmudgeons, but even many of those misanthropes hide behind aliases. Nice people don’t journey to such dark corners. “Nice” is the vapid kissing cousin of “like.”

One can be labelled “nice” merely by keeping one’s mouth shut and nodding at the appropriate times. What’s a Facebook like worth when there is no “dislike”? The only word in the English language more insipid than “like” and “nice” is “cute,” a distinction achieved upon birth by virtually all mammalian offspring and many reptilian, amphibious, and bird species’ offspring as well. It is especially important for political and entertainment celebrities, their stock-in-trade popularity, to be considered nice and likable, which is why most of them acquire causes once they’re in the limelight. Never mind the bodies they stepped over on their climb to the top, the lies, backstabbing, criminality, debauchery, addictions, and transparent phoniness; they are deeply concerned about global warming, or income inequality, or the plight of the denizens of some obscure corner of the planet, or something equally worthy.

Declarations of unmet social needs have preceded every expansion of the welfare state and of course, such needs can only be met by removing money from some people’s pockets and putting it other people’s pockets. The pickpockets claim the mantle of “nice,” or more grandiosely, “humanitarian,” while protests from the pick-pocketed prove that they’re selfish and mean, the evil opposite of nice. That pursuit of happiness thing implies a certain selfishness, so it has been modified. You can marry someone of the same sex if that floats your boat. (Gay marriage isn’t just nice, it’s rainbow nice!). If you’d be happy keeping what you’ve earned, forget about it. You’re selfish and mean, and it’s a good thing Facebook doesn’t have a thumbs down, or you’d get a bunch of them. Besides, letting you keep what you earn would pull the rug out from under Obamacare, which the Supreme Court just twisted itself into a linguistic pretzel to save.

Nice as we are to each other at home (except to the selfish, the naysayers, the bubble-busters, and the curmudgeons) we outdo ourselves in war. Not since the Civil War has the US fought on its home territory. Since then, all its wars have been fought to save someone in some foreign land against some terrible scourge. Weirdly, oftentimes even the people we’re saving don’t want us there, and gratitude for our efforts is lacking. Oftentimes, so too is success. The misanthropes in our midst might say that our efforts have usually made the situation worse. They certainly have costed a lot of money and killed a lot of people, although that is cancelled out by the purity of our motives, which excuses us from conducting honest assessments of our failures and allows us to produce more of them.

Only the blackest of hearts question the motives of the pure. Those black hearts note that money involuntarily extracted from selfish bastards doesn’t just meet unmet social needs and make the world safe for democracy and the American Way of Life. It buys votes; funds bloated medical-care, welfare, agricultural, educational, and military-industrial-intelligence complexes, and pays the salaries of a swarm of micromanaging bureaucrats who get to make life miserable for the rest of us. Even with all the money the government extracts in pursuit of its unquestionably worthy goals, with such a big heart it cannot help but live beyond its means. A host of connected, but worthy, Wall Street types make well-deserved oodles of money using borrowed funds at ultra-cheap rates to speculate on the debt and interest rate machinations of the government and its central bank. Only the misanthropic could object to such a charitable endeavor.

There is only one problem with our rubber room, Barney the Dinosaur world: reality is sometimes not nice. As Greece and Puerto Rico demonstrate, credit markets can turn off the spigot and governments can go bankrupt, even when they are stocked with good people and the money is to be used for worthy purposes. It’s a funny thing about many not-so-nice people: they’re often the ones who know how to produce things. When the nice people—for the best of reasons, of course—make it difficult to produce, the not-so-nice produce no more than is necessary to keep themselves and their loved ones (even the not-so-nice have loved ones) alive. Selfish, you may say, but they have skills other than being likable—for which they often have nothing but contempt—and they use them. They may not much care if the whole system collapses, because they can take care of themselves, and if you want something from them, you’d better have something of value to offer in return.

So push them far enough, and the not-so-nice drop out…or rebel. The Confederate flag is a symbol of racism, which we all abhor. It is also a symbol of secession and rebellion, which may be a bigger part of why it is abhorred. In our Age of Tolerance, those sentiments are intolerable. The US was founded on secession and rebellion; they were once as essential to the American character as self-reliance and individualism (now known as antisocial selfishness). It would be the latest in a long string of mistakes from our benevolent powers that be if they assumed that spirit was dead and not just dormant. The better bet is that it will be awakened when their goo-goo flotilla of inoffensive banality, speech codes, trigger warnings, political correctness, and spineless conformity crashes on the shoals of dire but prescient warnings dismissed and hard truths left unspoken.

NICE IS BORING; THIS NOVEL IS NOT.

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AMAZON

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He Said That? 6/29/15

A hat tip to theburningplatform.com, which compiled the following quotes from Charles Mackay’s classic Extraordinary Popular Delusions and the Madness of Crowds. They seemed appropriate for today’s financial market ruction:

“Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, one by one.”

“In reading The History of Nations, we find that, like individuals, they have their whims and their peculiarities, their seasons of excitement and recklessness, when they care not what they do. We find that whole communities suddenly fix their minds upon one object and go mad in its pursuit; that millions of people become simultaneously impressed with one delusion, and run after it, till their attention is caught by some new folly more captivating than the first.”

“Nations, like individuals, cannot become desperate gamblers with impunity. Punishment is sure to overtake them sooner or later.”

“Of all the offspring of Time, Error is the most ancient, and is so old and familiar an acquaintance, that Truth, when discovered, comes upon most of us like an intruder, and meets the intruder’s welcome.”

“In February 1720 an edict was published, which, instead of restoring the credit of the paper, as was intended, destroyed it irrecoverably, and drove the country to the very brink of revolution…”

Let’s hope this is the beginning of a fundamental purge of decades of rot that has built up in the global financial system, and not just another one-day wonder. Some of us have been waiting a long time for that purge.

‘Hi, I’m Uncle Sam and I’m a War-oholic’, by William Astore and Tom Engelhardt

From Tom Engelhard and William Astore at tomdispatch.com, via antiwar.org:

It was the summer of 2002. The Bush administration’s top officials knew that they were going into Iraq in a big way. They were then in planning mode, but waiting until fall to launch their full-throttle campaign to persuade Congress and the American people to back them. As White House Chief of Staff Andrew Card, who oversaw the selling of the invasion, put it at the time, “From a marketing point of view, you don’t introduce new products in August.”

For them, it was a complete no-brainer. The U.S. military against Saddam Hussein’s rickety army? It would be, as a neocon supporter put it, a “cakewalk.” In fact, they were already thinking about where to turn next. As the insider quip of the pre-invasion months had it, “Everyone wants to go to Baghdad. Real men want to go to Tehran.” One key figure, however, had his doubts. According to the Washington Post’s Bob Woodward, Secretary of State Colin Powell offered this warning to the president: “You are going to be the proud owner of 25 million people. You will own all their hopes, aspirations, and problems. You’ll own it all.” Woodward noted as well that “privately, Powell and Deputy Secretary of State Richard Armitage called this the Pottery Barn rule: You break it, you own it.”

In fact, Pottery Barn had no such rule, but what might be thought of as the Powell rule turned out to be on the mark in ways even he couldn’t have imagined. Once things began to go desperately wrong, there was, of course, no way to roll back the invasion and “ownership” of Iraq would prove to be inheritable. The next president, who came to power in part by opposing the war and swore that, once in the Oval Office, he’d end it and get the U.S. military out for good, is now the less-than-proud owner of Iraq War 3.0. And if ever there was a nation that was broken, it’s Iraq.

In the end, the Powell rule turned out to apply to every country the U.S. military touched in those years, including Afghanistan, Yemen, and Libya. In each instance, hopes in Washington ran soaringly high. In each instance, the country was broken. In each instance, the U.S. ended up “owning” it in some increasingly horrific way. Worst of all, in no instance could Washington bring itself to stop fighting in one fashion or another, whether with Special Forces, drones, or in the case of Iraq all of the above and thousands of new trainers dispatched to stand up a broken army created by the Bush administration and into which Washington had sunk $25 billion. Failure across the board would be the story of Washington’s twenty-first century in the Greater Middle East and northern Africa, and yet somehow the only lesson that seemed to be learned was that, militarily, more – never less – had to be done.

Retired Air Force Lieutenant Colonel and TomDispatch regular William Astore suggests that, were the U.S. an individual, we would immediately recognize what such behavior was – addiction – and act accordingly. ~ Tom

America’s Got War
Poverty, Drugs, Afghanistan, Iraq, Terror, or How to Make War on Everything
By William J. Astore

War on drugs. War on poverty. War in Afghanistan. War in Iraq. War on terror. The biggest mistake in American policy, foreign and domestic, is looking at everything as war. When a war mentality takes over, it chooses the weapons and tactics for you. It limits the terms of debate before you even begin. It answers questions before they’re even asked.

When you define something as war, it dictates the use of the military (or militarized police forces, prisons, and other forms of coercion) as the primary instruments of policy. Violence becomes the means of decision, total victory the goal. Anyone who suggests otherwise is labeled a dreamer, an appeaser, or even a traitor.

War, in short, is the great simplifier – and it may even work when you’re fighting existential military threats (as in World War II). But it doesn’t work when you define every problem as an existential one and then make war on complex societal problems (crime, poverty, drugs) or ideas and religious beliefs (radical Islam).

To continue reading: ‘Hi, I’m Uncle Sam and I’m a War-oholic’

Systemic Turmoil, Structural Reform, James Howard Kunstler

From James Howard Kunstler at kuntsler.com:

“The problem with the post-2007 world is that we are not in a cyclical recovery; we are in a structural depression defined as a sustained period of below-trend growth with no end in sight. The U.S. has caught the Japanese disease. Structural depressions are not amenable to monetary solutions, they require structural solutions.”
–James Rickards

Can anyone stabilize this bitch? At daybreak, anyway, the Federal Reserve governors were all bagging Z’s in their trundle beds. Maybe after a few pumpkin lattes they’ll jump in and tell their trading shills to BTFD. The soma-like perma-trance among those who follow markets and money matters appears to be ending abruptly with the recognition that sometimes robots and humans alike run shrieking to the exit. A pity when they get to the door and discover it opens onto a cliff-edge. Look out below.

All this trouble with money comes from one meta problem: aggregate industrial growth has ended. It has stopped more in some parts of the world than others, while in the USA it has actually been contracting. The cause is simple: the end of cheap energy, oil in particular. At over $70-a-barrel the price kills economies; under $70-a-barrel the price kills oil production. The bottom line is that, in the broadest sense, the world can no longer count on getting more stuff, except waste, garbage, political unrest, and the other various effects of entropy. From now on, there is only less of everything for a global population that has not stopped growing. The folks on-board are still having sex, of course, which has a certain byproduct.

This dynamic was plain to see a decade ago, but the people who run finance and governments thought it would be a good idea to maintain the appearance of growth via the usufruct mechanisms of central banking: ZIRP, QE, market intervention, and universal accounting fraud. It’s not working so well. Debt was generated in place of the missing growth, and now there is too much of it that can’t be repaid on a coherent schedule. Many nations, parties, and entities are in trouble with debt and the prospective defaults are starting to pile up like SUVs on a fog-bound highway. Greece is just the first one fishtailing into a guard-rail.

To continue reading: Systemic Turmoil, Structural Reform

Collapsing CDS Market Will Lead To Global Bond Market Margin Call, by Daniel Drew

Liquidity: tight bid-asks spreads from multiple market participants, the ability to execute sizable trades without moving the market, in short, the ability to transact when one wants and in the size one wants, is crucial, especially in falling markets, which is when it usually dries up. One little-noted aspect of Quantitative Easing is its effect on liquidity. As central banks have become ever larger participants in bond markets, they’ve driven private participants out, reducing, and in some cases, like Japan, eliminating non-central bank participation and the liquidity it provides. Daniel Drew, at dark-bid.com, via zerohedge.com, analyzes the credit default swaps market and shrinking liquidity in bond markets:

As Zero Hedge previously noted, liquidity is there when you don’t need it, and it promptly disappears once it is in demand. Consider it “cocktease capitalism.” If liquidity lasts longer than 4 hours, call the CFTC because you may be experiencing a spoof. Right now, the ultimate spoof is setting up as the credit default swap market collapses, and a global bond market margin call is just around the corner.

The most serious risk at the moment is the lack of bond market liquidity. This problem was created by the Federal Reserve. By flooding the market with liquidity, the Federal Reserve paradoxically destroyed the liquidity it sought to create. Initially, the Federal Reserve’s actions helped stem the panic selling when it stepped in as the buyer of last resort. However, the Fed is quickly becoming the buyer of first resort. The CME even has a Central Bank Incentive Program to encourage foreign central banks to buy S&P 500 futures. It’s not a stretch of the imagination to presume the Federal Reserve is buying S&P 500 futures alongside the foreign banks.

As the Fed’s balance sheet expanded ever larger, they transformed from being a mere market participant to becoming the market itself. The Federal Reserve, along with the rest of the world’s central banks, are essentially engaging in a multi-year effort to corner the global bond market. As we have seen in every case, no one has ever successfully cornered a market indefinitely. From the Hunt Brothers in the 1980 silver market to the Saudi royal family in the modern fractured oil market to the Duke brothers in the frozen concentrated orange juice market, it simply has not worked. Running a monopoly is an uphill battle that eventually results in a spectacular blowup. Why would the central banks be any different?

As Zero Hedge pointed out recently, the run on the central banks has already begun. For the first time ever, QE failed. The first casualty was the Riksbank in Sweden.

The Swedes have shown there is a limit on how low interest rates can go. The limit may be different for every country, but it does exist. Investors will eventually revolt against the post-crash Bizarro bond markets that dot the global landscape.

The same problem that brought Long-Term Capital Management to its knees is what will bring down the central bankers: liquidity. They seem to have forgotten that without liquidity, there are no markets. You can’t be the only player in the game. It is often said that cash is king, but what that really means is liquidity is king. In the capital markets, investors will pay a premium for liquidity. Right now, liquidity trumps credit ratings in the bond market. As liquidity thins out dramatically, that premium is becoming smaller and smaller. One day, every central bank will have their Riksbank moment when, despite their best efforts, it all blows up.

To continue reading: Global Bond Market Margin Call