Mutual Assured Destruction
The punchline, and what is by far the scariest, is that rising from 19% to a record 30%, and by far the biggest use of funds, is finance, the one industry that doesn't actually lead to growth but merely finds ways to mask the lack of growth with pro-forma adjustments and stacks leverage upon leverage on ever declining underlying equity and cash flows, until the entire system crashes as it did in 2001, 2008 and, well, soon.
Today the FSB was kind enough to explain in two short paragraphs and one even simpler chart, just how the aggregate leverage for the participants in even the simplest repo chain promptly becomes exponential, far above the "sum of the parts", and approaches infinity in virtually no time.
Five years ago, when QE first started, we blasted the Fed's "Plan Z" systemic rescue "policy" - which was merely a tried and true dilutive fallback plan used by every collapsing monetary regime starting with the Romans - stating it does absolutely nothing to resolve the biggest underlying threat to the economy and the western way of life, namely the epic accumulation of debt (most of it bad), courtesy of a Fed which has now unleashed a perpetual "buyer of only resort" QE (as we predicted months before QEternity was revealed), which instead only redistributes wealth from the middle class to the wealthiest 0.01%, while providing scraps to the poorest to keep them occupied and away from very violent thoughts. Enter the FT, which in an Op-Ed today titled "QE has stigmatised the well-off" says that "despite it being entirely justified as a save-the-world policy in its first round, it is still at best an unfair and at worst an evil policy. Why? Because of the way in which it redistributes wealth" And now we lean back and await for even more of the incisive mainstream media to suddenly come up with this timely, non-conspiratorial observation.
One reason why the US has been able to extend its true "drop dead" cash exhaustion date has been due to an increase in tax revenues due to the payroll tax cut as well as cash inflows from the GSEs (which are set to reverse and become outflows once the latest housing dead cat bounce reverses), and cash remittances from the Fed. However, the capacity under this extended "revolver" is rapidly running out, and as of August 31, 2013, approximately $108 billion in extraordinary measures remained available for use. In a report released today, the Bipartisan Policy Center has released another analysis of just when the US will hit the "X Date" or the date on which the Treasury will not have sufficient cash to pay all of its bills in full and on time. Should there be still no deal on the debt ceiling by this date, the Treasury will be forced to prioritize payments to avoid a debt default. According to this estimate, the X Date falls anywhere between November 5 to as recently as October 18, or just over a month from now (and there has been zero real discussion in Congress over the debt ceiling hike with all the excitement over Syria).
The rise of Tomahawk force began in 1983 during the Reagan buildup, but the demise of the Evil Empire did not slow down its development one bit. By the end of the century the United States had about 150 surface ships and attack submarines that could launch these deadly cruise missiles and an inventory of nearly 5,000 missiles. Tomahawks have a range of seven hundred miles. This means that from their offshore platforms they can reach three-fourths of the world’s population. And during the last two decades they have been used in just this “stand-off” manner against targets in Iraq, Bosnia, Afghanistan, Sudan, Libya, and others—teaching presidents that they could meddle freely without getting bloodied.
Jackson Hole Presenter Warns: "Bottom Could Fall Out Of The Economy As It Did In The Great Depression"Submitted by Tyler Durden on 08/23/2013 11:49 -0500
"So far, inflation has fallen only slightly and remains in positive territory. Fears in early 2009 that rapid deflation might break out and cause the economy to collapse as in 1929 to 1933 proved unfounded, luckily. I have advanced the hypothesis that rampant price-cutting has failed to appear because businesses are in equilibrium and perceive that price-cutting has bigger costs than benefits. If the hypothesis is wrong and businesses are finally responding to five years of slack by cutting prices, the generally optimistic tone of this section could be quite mistaken. The bottom could fall out of the economy as it did in the Great Depression."
Following up on yesterday's essay comparing Walter Bagehot to a modern-day shadow banker, we have received numerous requests for more information on this fundamentally critical financial topic. So without further ado, we present a full and unabridged map of the modern shadow banking system.
Those who think back to November 2011 will recall that it wasn't Jon Corzine's wrong way bet on Italian bonds that ultimately led to the bankruptcy of MF Global, well it did in part, but the real Chapter 11 cause was the sudden liquidity shortage due to the way the trades were structured as a Repo To Maturity, where the bank had hoped to collect the carry from the bond coupons, thereby offsetting the nominal repo cost of funding. The kind of deal which is the very definition of collecting pennies in front of a steamroller, as while the funding cost may be tiny and the capital allocated negligible (due to the nearly infinite implied leverage involved when using repo), when the underlying instrument crashes, and the originating counterparty has to fund a massive variation margin shortfall, that is when the shadow transformation cascade triggers an immediate liquidity crisis, which can result in liquidation cascade in a few brief hours. It happened with MF Global, it happened with Lehman too. And, we now learn, it also happened with Italy's most troubled and oldest bank, Monte Paschi (BMPS), whose endless bailouts, political intrigue, depoit runs, and cooked books have all been covered extensively here previously.
With all the recent chatter about an overhaul and dismantling of Too Big To Fail banks (spoiler alert: it will never happen, but it will take a lot of theater before that is made quite clear) many can be excused for believing the balance of power has shifted away from the megabanks (and their tens of trillions in over the counter derivative "weapons of mass financial destruction" so ably facilitating the Stockholm Syndrome of global mutual assured destruction with each passing day) and in the favor of the people, represented by the legislative and the judicial. Last night we got a quick reminder that absolutely nothing has changed in the true lay of the land, that the adjusted golden rule is still in place (yes, the banks still have all the gold and set all the rules), and that banks are still the undisputed rulers of the land when U.S. District Judge Naomi Reice Buchwald agreed to dismiss claims that the 16 banks targeted by various LIBOR lawsuits broke federal antitrust laws. In so ruling, the potential cost to the banks from an adverse overall resolution would be crippled. The ruling also is likely to reduce the financial inventive for new plaintiffs to join investors, cities, lenders and other parties that have already filed lawsuits. In brief, the banks won again just when it mattered, just when it seemed they may, for once, be on the defensive, and just when the concept of accountability and responsibility for years of conspiratorial and criminal collusion to manipulate a rate impacting hundreds of trillions of IR-sensitive instruments, was about to rear its ugly head. Because in the New Normal crime and punishment is simply a book by Dostoyevsky.
My generation, born during or near post World War II, has been quite fortunate. Those of us lucky to have been born in the US during this period hit a sweet spot of both place and history. The economy thrived, standards of living soared and many avoided the numerous wars that dominated the Twentieth Century. Today, the future does not look so bright. Economies are stagnant, standards of living are declining and the threats of war increase. Younger generations will have more difficult lives than my generation. Life has its own ways of ensuring that TANSTAAFL (“There ain’t no such thing as a free lunch”) is enforced. My twilight years now present major challenges. Because high inflation and a market collapse are real possibilities, I (and millions of others who believe similarly) am forced into playing the wildly dangerous game of financial chicken. When we should be enjoying our retirement and grandchildren, government has forced us to take risks that even wild teenagers likely would avoid.
MARTIN SMITH: Is that really the job of a prosecutor, to worry about anything other than simply pursuing justice?
LANNY BREUER: Well, I think I am pursuing justice. And I think the entire responsibility of the department is to pursue justice. But in any given case, I think I and prosecutors around the country, being responsible, should speak to regulators, should speak to experts, because if I bring a case against institution A, and as a result of bringing that case, there’s some huge economic effect — if it creates a ripple effect so that suddenly, counterparties and other financial institutions or other companies that had nothing to do with this are affected badly — it’s a factor we need to know and understand.
In the recent aftermath of the US just concluding its fourth consecutive fiscal year with a $1 trillion+ deficit, we have been flooded with requests to show how the current fiscal situation stacks up in a big picture context. Very big picture context. For all those requests, we present the following chart showing total US Federal debt/GDP as well as Deficit/(Surplus)/GDP since inception, or in this case as close as feasible, or 1792, which appears to be the first recorded year of historical fiscal data. We can see why readers have been so eager to see the "real big picture" - the chart is nothing short of stunning.
A month ago every single bank was delighted when Bernanke proudly announced QEternity. What they did not realize is that by doing so, and by "getting to work" as Chuck Schumer had previously requested of the Chairsatan, Congress suddenly has no impetus to do anything over the fiscal cliff, i.e., to lose face with the electorate by compromising over difficult fiscal issues, because, guess what, Bernanke is on top of it. After all look at the market - no risk is allowed ever again. Because since the Fed is now in charge the market, and of fiscal policy, why bother with protection or Plan B. The banks, however, know better, and know that without hundreds of billions in continued stimulus from D.C., the musical chairs game is about to end and the market will implode. Which is why the warnings of Mutual Assured Destruction (M.A.D.) were only a matter of time. Sure enough, here comes JPM with the first of many official GDP revisions (don't worry - JPM's Mike Feroli will promptly revise everything much higher if a fiscal cliff deal is done... some time in March long after the S&P has tumbled by 20% in a replay of August 2011), in which he sees the fiscal cliff now reducing 2013 GDP growth by 1%, up from the previous estimate of 0.5%, and specifically sees Q1 and Q2 GDP of 1.0% and 1.5%. And it's all downhill from there...
Earlier today we casually wondered whether the US stands to lose more by supporting China or Japan in their escalating diplomatic spat, considering the threat of a US Treasury sell off is certainly not negligible, a dilemma complicated by the fact that as today's TIC data indicated both nations own almost the same amount of US paper, just over $1.1 trillion. In a stunning turn of events, it appears that China has taken our thought experiment a step further and as the Telegraph's Ambrose Evans-Pritchard reports, based on a recommendation by Jin Baisong from the Chinese Academy of International Trade (a branch of the commerce ministry) China is actively considering "using its power as Japan’s biggest creditor with $230bn (£141bn) of bonds to "impose sanctions on Japan in the most effective manner" and bring Tokyo’s festering fiscal crisis to a head." I.e., dump Japan's bonds en masse.