We’ve Known That This Was Coming

The fact that the US stock market has had its worst year in half a century is commonly highlighted in the MSM news, but everyone in finance knows that the same is true for bonds and associated currencies. The Euro, Yen, AUD, GBP, and the Yuan have all dropped as inflation has reached lifetime highs.Treasuries (and mortgage rates linked to the 10 yr.) are now tanking. The housing market now looks to be rolling over. Investment-grade corps are tanking (worst annual performance in 50 years). Junk bonds are tanking. The BOE had to intervene in UK debt markets to prevent London’s financial complex from seizing up. EM debt has obviously also been, along with the aids of insane, destructive government policies, been falling apart. CDS spreads have swelled. We’ve seen so much of this before: the 2008 crisis, like others, was preceded by a lending liquidity dryup. We are now seeing a global systemic liquidity crisis.

Markets are ‘faith (confidence)-based’ systems, and when they being to act like a turtle pulling its limbs and head into its shell, they anticipate something rough is coming. This time it is not a crisis caused by shit mortgage debt that was falsely overrated AAA, packaged into in structured debt products, then sold and embedded into the books of banks and financial institutions worldwide. This time the much-bigger debt shit pile is worldwide sovereign debt. Fourteen years ago it was government-from-above that bailed out the financial system. This time it will be much less publicly-acceptable and realistically viable for bankrupt governments to bail out their insolvencies by printing more vapor cash or going still further into debt, obviously.

No, like in all of the preceding times in history when each great civilization went into decay due to the single cause of government profligacy, their only recourse now is to go-after the people their businesses, particularly those who vote resist them, to tax and asset-strip them. That is set to go to next-level: Governments never admit their mistakes. Instead, they have already been perpetrating noxious and deadly schemes, including warmongering, to take more power over the people and their wealth, and that will only accelerate. Adding 87,000 new IRS agent to the existing 62,000 is one, and this new batch of federal tax-accountants will the first one to carry pistols with them as they drive around paying their visits to people. Look for electronic federal money to be the next big control move to them to impose, perhaps the scariest one so-far. Gold soon will likely finally ‘have its day’.

Confidence in government has (justifiably collapsed); noone wants to buy sovereign bonds. But society-wide, confidence has also cratered: People cant trust that city streets are safe, that government is being cooperative with rather than predatory upon them, that medical/pharmaceutical institutions still aim primarily at healing them, that schools still aim to educate young people to make them self-reliant, etc., etc. When people lose faith in these things, society devolves: they start to carry weapons for their own security, stockpile food & water, move off-grid and into black markets, and they no longer trust and cooperate with each other in the ways that have mutually-benefitted everyone. So this time its not only the biggest financial crisis we’ve seen, but also a crisis in confidence that extends well beyond the markets.

We may be seeing the end of tightening. After getting wild calls from pension-fund managers throughout England saying that their systems were about to collapse the BOE did an about-face on this with announcement that it would start buying $65 Bn in UK public debt. Contagion risk throughout the international banking system in the face of such a UK collapse is substantial. This reversal shows that central banks are no longer in control of much and are becoming more reactive. They have to navigate a tough set of constraints: Raising rates deepens the annual servicing cost on their nations’ debt, and isn’t terribly effective against inflation since it is largely driven by supply-shortages this time. Emphasizing financial repression to pay down government debt loads instead, by taking real interest rates more negative, looks to also be the more stabilizing move in the face of this current liquidity panic. But it will drive faltering economies further toward recession/depression. Also, keeping rates low persistently has been a prime reason why these pension schemes have underperformed so badly, and so many fixed-income retirees relying on them have been hurting.

Meanwhile, just to highlight the atrocious silliness behind all this very serious stuff once again, the CBO just reported the Biden’s student loan forgiveness edict, by itself, will likely cost $400 billion over the next 30 years. As Vonnegut used to write: “And so it goes….”.