Market Crash

There is one vitally important number that everyone needs to be watching right now, and it doesn't have anything to do with unemployment, inflation or housing.  If this number gets too high, it will collapse the entire U.S. financial system.

In the classic fantasy rom-com The Princess Bride, the beautiful maid Buttercup orders the farm boy Westley to perform numerous tasks to test his servitude. No matter the magnitude of the request, Westley simply answers "As you wish" and makes it so. Buttercup eventually comes to view Wesley with similar devotion, and true love is born. Similarly, investors have fallen back in love with the capital markets, whose continual response their increasingly irrational hopes has been "As you wish." It's inconceivable!

Marc Faber noted recently, "markets will punish the interventionists one day," and while we are already seeing 'accidents' occurring in JGBs, Gold, EM debt, and now US Treasuries; US equities remain immune. However, given the current uncertainty of macro-economic data, high-leverage, fear of rising interest rates, and instability of currency markets, all of the same conditions that led to the 1987 crash are now present in financial markets. Does this mean the markets are going to crash? Certainly not; but the conditions may be right for another 'market accident' to happen.

The volatility of recent weeks is but a mere small taste of the volatility in store for all markets in the coming months and years. The global debt crisis is likely to continue for the rest of the decade as politicians and central bankers have merely delayed the day of reckoning. They have ensured that when the day of reckoning comes it will be even more painful and costly then it would have been previously.

At the end of the day, Friedman jettisoned the gold standard for a remarkable statist reason. Just as Keynes had been, he was afflicted with the economist’s ambition to prescribe the route to higher national income and prosperity and the intervention tools and recipes that would deliver it. The only difference was that Keynes was originally and primarily a fiscalist, whereas Friedman had seized upon open market operations by the central bank as the route to optimum aggregate demand and national income. The greatest untoward consequence of the closet statism implicit in Friedman’s monetary theories, however, is that it put him squarely in opposition to the vision of the Fed’s founders. As has been seen, Carter Glass and Professor Willis assigned to the Federal Reserve System the humble mission of passively liquefying the good collateral of commercial banks when they presented it. Consequently, the difference between a “banker’s bank” running a discount window service and a central bank engaged in continuous open market operations was fundamental and monumental. In short, the committee of twelve wise men and women unshackled by Friedman’s plan for floating paper dollars would always find reasons to buy government debt, thereby laying the foundation for fiscal deficits without tears.

How bad is the situation? Quite bad. As as of last night, courtesy of SMRA, we know that the amount of ten-year equivalents held by the Fed increased to $1.608 trillion from $1.606 trillion in the prior week, which reduces the amount available to the private sector to $3.603 trillion from $3.636 trillion in the prior week. There were $5.211 trillion ten-year equivalents outstanding, down from $5.242 trillion in the prior week. After the Treasury issuance, maturing securities, rising interest rates, and Fed operations during the week, the Fed owned about 30.86% of the total outstanding ten year equivalents. This is above the 30.63% from the prior week, and the percentage of ten-year equivalents available to the private sector decreased to 69.14% from 69.37% in the prior week.

Gold has gone down Friday to under $1, 200 an ounce and that means it’s reached its lowest point for the past three years. Worse than that: it’s been the worst quarterly performance for gold for 45 years!

The late 20th century was a jam-packed time for stock-market crashes that would change, shape and alter our lives in so many ways.

The Federal Reserve has had $1.2 million swiped from a flight somewhere between Switzerland, the land of secret banking, and New York City. Now, in the ranking of thefts that have taken place in history, this one seems like it is rather untimely! Has anybody seen Ben Bernanke lately?

It was bound to happen some might say. We were warned! Chinese banks have stopped lending due to pressure from liquidity deposits. Some branches of the Bank of China and the Industrial and Commercial Bank of China have issued statements in which they announce that they are halting lending for a temporary period.

The Financial Times has revealed that Italy is facing losses of €8 billion due to derivative contracts that were taken out in the 1990s and that were restructured during the Eurozone crisis.

Jean-Claude Trichet, the former head of the European Central Bank, in an interview with CNBC stated that there was only so much that central banks could do to save the economic situation at the present time.

What magic Chinese rabbit has been pulled out of the hat now?

China’s central bank issued a statement that the Chinese banking system had liquidity levels that were “reasonable” today. There by hangs a tale. ‘Reasonable’ is that which may fairy and properly be required of an individual (a case of prudent action observed under a set of given circumstances).