Central Banks

Having told banks and investors "don't panic" in September, amid spiking interbank lending rates and surging default/devaluation risks, it appears the massive shortage of dollars that we warned about in December has washed tsunami-like ashore in oil-producing Nigeria. Following the Central bank's decision this week to halt dollar sales to non-bank FX market operators, black market exchange rates spiked to 282/USD (vs 199 official) and CDS spiked to record highs implying drastic devaluations loom.

A jump in the overnight cost for borrowing yuan in Hong Kong is "reflecting further PBOC efforts to stamp out speculation," according to Michael Every, head of financial markets research at Rabobank Group. Hong Kong-based Every told Bloomberg in an interview, following a massive spike in overnight borrowing rates for Offshore Yuan that "a 66% rate is murderous for others being swept up in this who are not speculating." PBOC advisor Han earlier warned that short selling the yuan "will not succeed," adding that "it is pure imagination that the Chinese yuan will act like a wild horse without any rein." But as Every notes, the unintended consequences could be a problem, "imagine you needed access to CNH for other purposes for a few days," concluding ominously that "in other EM crises we see that central banks usually win a round like this, but lose in the end."

The Fed is, indeed, a political, oligarchic force, and a key part of what looks and functions like a banking cartel. During the 2007-08 financial crisis, the Fed’s true nature was clear to anyone paying attention. We can’t really know what we don’t know until we look. We owe it to the “swindled futurity” of the next generation to take a long, hard look through a full and independent audit of the Fed.

Jim Cramer is so imbricated within the strictures of CNBC, so enamored of his guests, so genuflective and collegial that he has no critical distance to see the flaws of the very system of which he is a part. People like Cramer who are so invested (literally and figuratively) in the current financial system are loathe to realize that it is farcical, that it is built on toothpicks, that the corporate and government numbers are cooked, that the ‘recovery’ is a joke, that the ‘markets’ are rigged by central banks, that wrongdoing is epidemic, that there are no longer any rational connections between prices and fundamentals, that we have passed beyond reality into fantasyland. Cramer is the embodiment of a society awash in information but starved in meaning.

Risk is now everywhere. If you invest in the markets, there is risk of temporary or permanent loss of capital. Even if you do nothing and simply hold cash in a bank, there is bail-in risk and financial repression. This is our reality now...Nothing is risk-free in this system of chaos. In a way, today’s mad scientist central bankers have engineered financial dinosaurs back into our time. They think they can control the system. But judging just from the first chaotic week in financial markets so far in 2016, life is finding a way.

While some central banks prefer to stealthily 'manage' their markets, a bid here, a stick-save there, today's epic intervention, short-squeeze, carry-trade-carnage in Offshore Yuan is the most visible hand yet in the new normal world of central planning. USDCNH is now down over 850 pips on the day - a record 1.25% strengthening in the offshore Yuan...

"Shorter-term traders will feel that many moves have gone a long way very quickly and hence appear ripe for a brief rebound. The catalyst is that, in the height of a market panic, prices can become dislocated from fundamental valuations, as margin stops get triggered and “weaker” positions get cleaned out. The counter-argument is that distortions caused by the extraordinary monetary policies of global central banks mean markets might have been disconnected from traditional fundamentals for several years."

In principle, the BRRD, or “bail-in directive” as it is also known, is quite a good idea. The fact that lending money to fractionally reserved banks or even merely depositing it with them, involves risks needed to be firmly reestablished. One simply cannot expect that banks and their creditors will be bailed out by taxpayers at every opportunity. Besides, the admission that there are risks in banking that have hitherto been glossed over or have even been lied about was long overdue. However, Europe’s governments are now likely to find out that the current monetary system with its fractionally reserved banks is actually incompatible with this admission, so to speak.

It was an ominous beginning to what is poised to be a most tumultuous year. Market participants are quickly coming to appreciate that China does in fact matter. Few understand why. Most – from billionaires to fund managers to retail investors – will “Do Nothing.” This has worked just fine in the past – repeatedly. Not understanding and not doing anything will be detriments going forward.

how many billions (or trillions) did China's so-called "national team" spend to prop up stocks in recent months? According to Goldman not less than CNY1.8 trillion in the June-November period.

An unseen bubble at the heart of the financial system is deflating with unknown consequences. When bubbles deflate, and here we are talking about one in the hundreds of trillions, bad debts are usually exposed. Even though much of the reduction in outstanding OTC derivatives is due to consolidation of positions following the Frank Dodd Act, much of it is not. When free markets reassert themselves, and they always do, the disruption promises to be substantial. We appear to be in the early stages of this event. If so, demand for physical gold can be expected to escalate rapidly as a financial crisis unfolds.

Central Banks have employed virtually all of their ammunition including policies that would have been considered "nuclear" in 2008. And the debt bubble is $20 trillion larger than it was in 2008!

"... what we are going to see next is a credit cycle, and in a credit cycle you see some losses, but if China's banking system loses 10%, you are going to see them lose $3.5 trillion."

Today, we bring our readers another RealVision excerpt of a reflexive "interview" in which Pal himself is in the hot seat, and goes into detail explaining the indicators he will be watching throughout 2016 that will suggest that a liquidity crisis is imminent.