Category Archives: Financial markets

Underestimating Them and Overestimating Us, by Jim Quinn

People, including SLL, have been saying a cataclysmic crisis is coming for years. It hasn’t happened yet, but that doesn’t make them wrong, just early. From Jim Quinn at theburningplatform.com:

“Do not underestimate the ‘power of underestimation’. They can’t stop you, if they don’t see you coming.” ― Izey Victoria Odiase

Image result for bernanke, yellen, powell

During the summer of 2008 I was writing articles a few times per week predicting an economic catastrophe and a banking crisis. When the biggest financial crisis since the Great Depression swept across the world, resulting in double digit unemployment, a 50% stock market crash in a matter of months, millions of home foreclosures, and the virtual insolvency of the criminal Wall Street banks, my predictions were vindicated. I was pretty smug and sure the start of this Fourth Turning would follow the path of the last Crisis, with a Greater Depression, economic disaster and war.

In the summer of 2008, the national debt stood at $9.4 trillion, which amounted to 65% of GDP. Total credit market debt peaked at $54 trillion. Consumer debt peaked at $2.7 trillion. Mortgage debt crested at $14.8 trillion. The Federal Reserve balance sheet had been static at or below $900 billion for years.

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Mauldin: Social Security Is Screwing Millennials, by John Mauldin

The older generations like to rag on millennials, but spend little time thinking about the ways it’s indubitably screwing them, even though the screwees may be their own children or grandchildren. From John Mauldin at realinvestmentadvice.com:

Social Security is a textbook illustration of how government programs go off the rails.

It had a noble goal: to help elderly and disabled Americans, who can’t work, maintain a minimal, dignified living standard.

Back then, most people either died before reaching that point or didn’t live long after it. Social Security was never intended to do what we now expect, i.e., be the primary income source for most Americans during a decade or more of retirement.

Life expectancy when Social Security began was around 56. The designers made 65 the full retirement age because it was well past normal life expectancy.

No one foresaw the various medical and technological advances that let more people reach that age and a great deal more, or the giant baby boom that would occur after World War II, or the sharp drop in birth rates in the 1960s, thanks to artificial birth control.

Those factors produced a system that simply doesn’t work.

A few modest changes back then might have avoided today’s challenge. But now, we are left with a crazy system that rewards earlier generations at the expense of later ones.

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Will the Federal Reserve Make Trump a New Herbert Hoover? Is the US Economy Primed for a 1929-Style Shock? by F. William Engdahl

The US has so much debt that even a minor economic perturbation can cause an cataclysm. From F. William Engdahl at lewrockwell.com:

In recent months US President Trump has pointed repeatedly to his role in making the American economy the “best ever.” But behind the extreme highs of the stock market and the official government unemployment data, the US economy is primed for a 1929-style shock, a financial Tsunami that is more influenced by independent Fed actions than by anything that the White House has done since January 2017. At this point the parallels between one-time Republican President Herbert Hoover who presided over the great stock crash and economic depression that was created then by the Fed policies, and Trump in 2019 are looking ominously similar. It underscores that the real power lies with those who control our money, not elected politicians.

Despite proclamations to the contrary, the true state of the US economy is getting more precarious by the day. The Fed policies of Quantitative Easing and Zero Interest Rate Policy (ZIRP) implemented after the 2008 crash, contrary to claims, did little to directly rebuild the real US economy. Instead it funneled trillions to the very banks responsible for the 2007-8 real estate bubble. That “cheap money” in turn flowed to speculative high-return investment around the world. It created speculative bubbles in emerging market debt in countries like Turkey, Argentina, Brazil and even China. It created huge investment in high-risk debt, so called junk bonds, in the US corporate sector in areas like shale oil ventures or companies like Tesla. The Trump campaign promise of rebuilding America’s decaying infrastructure has gone nowhere and a divided Congress is not about to unite for the good of the nation at this point. The real indicator of the health of the real economy where real people struggle to make ends meet lies in the record levels of debt.

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Gold’s long-term gains have even outperformed Warren Buffett… by Simon Black

Whatever its faults, gold generally holds its purchasing power. Historically, an ounce of gold has bought a man’s suit, and it still does. From Simon Black at sovereignman.com:

Warren Buffett, despite his extraordinary investment success, has a rather famous and long-standing love/hate relationship with precious metals.

Maybe it started with his dad– Congressman Howard Buffett of Nebraska– who, as a staunch advocate for the gold standard, argued to his colleagues on Capitol Hill that “paper money systems have always wound up with collapse and economic chaos.”

Warren himself acquired a record-setting 128 million ounces of silver back in the late 1990s… which he later sold at a profit in the early 2000s.

But to listen to him talk about precious metals these days, he’s always negative.

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Capital Flight Is Killing The US Shale Boom, by Nick Cunningham

Just like Silicon Valley investors are backing away from unprofitable unicorns, shale patch investors are backing away from unprofitable shale drillers. From Nick Cunningham at oilprice.com:

The growth in U.S. shale production is grinding to a halt as low prices put drillers in a financial vice.

The slowdown has been unfolding for much of 2019, but the latest slide in oil prices is another blow to cash-strapped companies. Share prices for many E&Ps are down sharply. For instance, Devon Energy’s stock is down 20 percent since mid-September; EOG Resources is off by 17 percent and Pioneer Natural Resources is down by more than 13 percent. Many other companies have seen similar declines.

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Federal Reserve’s Latest Bailouts More Proof Bad Times Ahead, by Ron Paul

The Fed’s bailout of the repo market looks ominous. From Ron Paul at ronpaulinstitute.org:

Since September 17, the Federal Reserve Bank of New York has pumped billions of dollars into the repurchasing (repo) market, the first such intervention since 2009. The Fed has announced that it will continue to inject as much as 75 billion dollars a day into the repo market until November 4.

The repo market provides a means for banks that are temporarily short of cash to obtain short-term (usually one day) loans from other banks. The Fed’s interventions were a response to a sudden cash shortage that caused interest rates for these short-term loans to climb to 10 percent, far above the Fed’s target rate.

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The Repo Market Incident May Be The Tip Of The Iceberg, by Daniel Lacalle

Unfortunately, Daniel Lacalle may be right. From Lacalle at dlacalle.com:

The Federal Reserve has injected $278 billion into the securities repurchase market for the first time. Numerous justifications have been provided to explain why this has happened and, more importantly, why it lasted for various days. The first explanation was quite simplistic: an unexpected tax payment. This made no sense. If there is ample liquidity and investors are happy to take financing positions at negative rates all over the world, the abrupt rise in repo rates would simply vanish in a few hours.

Let us start with definitions. The repo market is where borrowers seeking cash offer lenders collateral in the form of safe securities.  Repo rates are the interest rate paid to borrow cash in exchange for Treasuries for 24 hours.

Sudden bursts in the repo lending market are not unusual. What is unusual is that it takes days to normalize and even more unusual to see that the Federal Reserve needs to inject hundreds of billions in a few days to offset the unstoppable rise in short-term rates.

Because liquidity is ample, thirst for yield is enormous and financial players are financially more solvent than years ago, right? Wrong.

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