by David Haggith, The Great Recession Blog:
The sails are torn and fluttering fiercely like flags in a windstorm. The ship has stopped slicing through the waves, and its timbers are shuddering on the rocks. You can hear the stony teeth chewing into her planks, but the captain and crew are passing around sherry glasses and raising a toast to the fine weather, assuring the passengers that all is well.
You can hear the tearing of financial sails everywhere in the world right now, and that includes right here on the USS Bailout where Captain Powell reaffirms that the job market is strong and the economy resilient even as we hear the hull grinding under our feet. First Mate Yellen smiles her grandma grin from the tilting crow’s nest and assures everyone below she sees no land or rocks in site.
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Yet, on Friday (Sept. 30), all major US stock indices ended the quarter with a decisive thud at new lows for the year. They’ve pounded downward quarter after quarter after quarter, but “we’re not in a recession yet” is all we hear called out from the watch on deck. We are now nine full months into this stormy year, and every quarter has ended lower for all indices and for GDP, and we’re now taking on water faster than ever, but “all is well!” In fact, yesterday (Friday) delivered the S&P’s worst monthly decline since the Covid calamity of 2020.
I wrote a short article at the start of the day yesterday to sum our situation up, saying we were going “Down, Down, Down in a Burning Ring of Fire,” that fire being inflation, forcing the Fed to fight it with all it has. The Fed believes it needs to take an already crippled labor market and submerse it deeper to suppress the flames of inflation. It’s making the greatest mistake in Fed history. If you have to sink the ship to extinguish the fire, it’s not going to help. (If you want to know why, you can read all about it in an article that lays out the biggest Fed blind spot in history: “Everyone Sings the “Strong Labor Market” Tune in Unison as the Band Plays on, and They’re All DEAD Wrong!“)
We are also three full quarters into the year, and each of the first two quarters ended with GDP deeper below the waterline. The Fed’s GDPNow estimator, which looks ahead to guess where the present quarter will end, recently hit the deck where it lay at the end of the last quarter, too, and the one before that, both of which, then, sank further underwater as we got closer to the calculations of GDP actually being released. It has, however, bounced more erratically in the third quarter than I’ve ever seen, showing just how choppy the present seas have been.
Bonds behaving badly
Bond markets all over the world, including the US, are crashing harder by a number of measures than they have in forty years. The UK bond market became such a catastrophe this week, the Bank of England had to rush in with a major reversal from its plans to tighten the financial world by withdrawing quantitative sums of cash to, instead, creating quantitative sums of cash out of nothing “on whatever scale is necessary” all over again to ease the financial markets — a total reversal. We’re back to “whatever it takes,” and the BOE didn’t even get started with tightening! That’s how bad it is!
Why? Because pensions funds were self-destructing. As Zero Hedge summarized it:
Billions In Margin Calls “Death Spiraling” into a Complete Bond Market Collapse, Pension Fund Wipe Out
Noting the stem-rot in the brains of our leaders, they also commented…
It’s only fitting that literally hours after the most clueless dwarf in capital markets history, Janet “No crisis in my lifetime” Yellen said that financial markets are functioning well, that the Bank of England literally panicked, and shocked markets by resuming unlimited QE.
“We haven’t seen liquidity problems develop in markets — we’re not seeing, to the best of my knowledge, the kind of deleveraging that could signify some financial stability risks,” Yellen said in answering reporters’ questions
Then she fell out of her old crow’s nest and broke her head upon the rocks that were right beneath her … or … actually …
Then, a few hours later, the Bank of England saw liquidity problems that looked like a beach suddenly emerging as the first negative wave of a tsunami runs out, citing “significant repricing of UK and global financial assets” across the board.
According to the Financial Times the problem was,
Thousands of pension funds have faced urgent demands for additional cash from investment managers in recent days to meet margin calls, after the collapse in UK government bond prices blew a hole in strategies to protect them against inflation and interest-rate risks.
Billions of pounds in pension funds faced immediate collateral risks, forcing them to sell off various assets to raise cash to cover their bets. Those sales were crashing the value of all those other assets like a fire sale. The demand for collateral was large enough to crash the entire bond market in another twenty-four hours if the BOE didn’t step in as the new emergency buyer of first resort.
How did that come out of nowhere? Well, I’ll tell you. It didn’t. Funds, of course, were over-leveraged again because we’ve been feeding leveraged greed for years with cheap credit, and now we’re raising the cost of credit everywhere. It should be self-evident that is impossible to pull off. Whatever rises on the flood tide of QE, subsides on the ebb tide of QT. Oh, but who would have thought that greed would have caused investors to over-leverage their risks or keep them from adjusting their risks ahead of clear central-bank schedules? After all, we were assured there was no moral hazard building up from all the bailouts in the past.
But that’s how it is with these “black swans.” They are more like black sea monsters, shadows that move beneath the deep. They are often things our financial leaders and even investors could have and should have seen as reasonably high likelihoods — shadows sliding right beneath our sails — but didn’t. Suddenly, they burst as monsters out of the sea right in in front of us. Janet’s colleagues in the UK certainly should have seen the potential for this bond bust building, but they didn’t … probably because no one wanted them to. Greed is so profitable if you just let it happen. Until it isn’t. But that’s what bailouts are for.
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