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Thanks to the Fed, the Patient Is Now Past the Point of No Return
Many commentators consider what the Fed has done to be akin to providing stimulus, morphine, juice to an ailing economy.
We believe Fed’s actions would be more appropriately described as permitted cancerous beliefs to spread throughout the financial system, thereby killing Democratic Capitalism which is the basis of the capital markets.
Today we’re going to explain what the “final outcome” for this process will be. The short version is what happens to a cancer patient who allows the disease to spread unchecked (death).
In the case of the Fed’s actions we will see a similar “death” of Democratic Capitalism and the subsequent death of the capital markets.
We are, of course, talking in metaphors here: the world will not end, and commerce and business will continue, but the form of capital markets and Capitalism we are experiencing today will cease to exist as the Fed’s policies result in the market and economy eventually collapsing in such a fashion that what follows will bear little resemblance to that which we are experiencing now.
The focus of this “death” will not be stocks, but bonds, particularly sovereign bonds: the asset class against which all monetary policy and investment theory has been based for the last 80+ years.
Indeed, basic financial theory has proposed that sovereign bonds are essentially the only true “risk-free” investment in the world. While history shows this theory to be false (sovereign defaults have occurred throughout the 20th century) this has been the basic tenant for all investment models and indeed the financial system at large going back for 80 some odd years.
The reason for this is that the Treasury (US sovereign bond) market is the basis of the entire monetary system in the US and the Global financial system in general. Indeed, US Treasuries are the senior most assets on the Primary Dealers’ (world’s largest banks) balance sheets. To understand why this is as well as why the Fed’s policies will ultimately destroy this system, you first need to understand the Primary Dealer system that is the basis for the US banking system at large.
If you’re unfamiliar with the Primary Dealers, these are the 18 banks at the top of the US private banking system. They’re in charge of handling US Treasury Debt auctions and as such they have unprecedented access to US debt both in terms of pricing and monetary control.
The Primary Dealers are:
- Bank of America
- Barclays Capital Inc.
- BNP Paribas Securities Corp.
- Cantor Fitzgerald & Co.
- Citigroup Global Markets Inc.
- Credit Suisse Securities (USA) LLC
- Daiwa Securities America Inc.
- Deutsche Bank Securities Inc.
- Goldman, Sachs & Co.
- HSBC Securities (USA) Inc.
- J. P. Morgan Securities Inc.
- Jefferies & Company Inc.
- Mizuho Securities USA Inc.
- Morgan Stanley & Co. Incorporated
- Nomura Securities International Inc.
- RBC Capital Markets
- RBS Securities Inc.
- UBS Securities LLC.
You’re bound to recognize these names by the mere fact that they are the exact banks that the Fed focused on “saving” thereby removing their “risk of failure” during the Financial Crisis.
These banks are also the largest beneficiaries of the Fed’s largest monetary policies: QE 1, QE lite, QE 2, etc. Indeed, we now know that QE 2 was in fact was meant to benefit those Primary Dealers in Europe, not the US housing market. The same goes for QE 3 and QE 4.
The Primary Dealers are the firms that buy US Treasuries during debt auctions. Once the Treasury debt is acquired by the Primary Dealer, it’s parked on their balance sheet as an asset. The Primary Dealer can then leverage up that asset and also fractionally lend on it, i.e. create more debt and issue more loans, mortgages, corporate bonds, or what have you.
Put another way, Treasuries are not only the primary asset on the large banks’ balance sheets, they are in fact the asset against which these banks lend/ extend additional debt into the monetary system, thereby controlling the amount of money in circulation in the economy.
When the Financial Crisis hit in 2007-2008, the Fed responded in several ways, but the most important for the point of today’s discussion is the Fed removing the “risk of failure” for the Primary Dealers by spreading these firms’ toxic debts onto the public’s balance sheet and funneling trillions of dollars into them via various lending windows.
In simple terms, the Fed took what was killing the Primary Dealers (toxic debts) and then spread it onto the US’s balance sheet (which was already sickly due to our excessive debt levels). This again ties in with my “cancer” metaphor, much as cancer spreads by infecting healthy cells.
When the Fed did this it did not save capitalism or the Capital Markets. What it did was allow the “cancer” of excessive leverage, toxic debts, and moral hazard to spread to the very basis of the US, indeed the entire world’s, financial system: the US balance sheet/ Sovereign Bond market.
These actions have already resulted in the US losing its AAA credit rating. But that is just the beginning. Indeed, few if any understand the real risk of what the Fed has done.
The reality is that the Fed has done the following:
1) Set itself up for a collapse: at $4.4 trillion, the Fed’s balance sheet is now larger that the economies of Brazil, the UK, or France. And with capital of only $63 billion, the Fed is leveraged at over 69 to 1 (Lehman was at 30 to 1 when it failed).
2) Called the risk profile of US sovereign debt into question: foreign investors, now fully aware that the US’s balance sheet is suspect (the US has lost its AAA credit rating), are dumping Treasuries (see China and Russia).
3) Put the entire Financial System (not just the private banks) at risk.
The Financial System requires trust to operate. Having changed the risk profile of US sovereign debt, the Fed has undermined the very basis of the US banking system (remember Treasuries are the senior most asset against which all banks lend).
Moreover, the Fed has undermined investor confidence in the capital markets as most now perceive the markets to be a “rigged game” in which certain participants, namely the large banks, are favored, while the rest of us (including even smaller banks) are still subject to the basic tenants of Democratic Capitalism: risk of failure.
This has resulted in retail investors fleeing the markets while institutional investors and those forced to participate in the markets for professional reasons now invest based on either the hope of more intervention from the Fed or simply front-running those Fed policies that have already been announced.
Put another way, the financial system and capital markets are no longer a healthy, thriving system of Democratic Capitalism in which a multitude of participants pursue different strategies. Instead they are an environment fraught with risk in which there is essentially “one trade,” and that trade is based on cancerous policies and beliefs that undermine the very basis of Democratic Capitalism, which in the end, is the foundation of the capital markets.
In simple terms, by damaging trust and permitting Wall Street to dump its toxic debts on the public’s balance sheet, the Fed has taken the Financial System from a status of extremely unhealthy to terminal.
The end result will be a Crisis that makes 2008 look like a joke. It will be a Crisis in which the US Treasury market and sovereign bonds in general implode, taking down much of the US banking system with it (remember, Treasuries are the senior most assets on US bank balance sheets).
We cannot say when this will happen. But it will happen. It might be next week, next month, or several years from now. But we’ve crossed the point of no return. The Treasury market is almost entirely dependent on the Fed to continue to function. That alone should make it clear that we are heading for a period of systemic risk that is far greater than anything we’ve seen in 80+ years (including 2008).
The Fed is not a “dealer” giving “hits” of monetary morphine to an “addict”… the Fed has permitted cancerous beliefs to spread throughout the financial system. And the end result is going to be the same as that of a patient who ignores cancer and simply acts as though everything is fine.
That patient is now past the point of no return. There can be no return to health. Instead the system will eventually collapse and then be replaced by a new one.a
This concludes this article. If you’re looking for the means of protecting your portfolio from the coming collapse, you can pick up a FREE investment report titled Protect Your Portfolio at http://phoenixcapitalmarketing.com/special-reports.html.
This report outlines a number of strategies you can implement to prepare yourself and your loved ones from the coming market carnage.
Best Regards
Phoenix Capital Research
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"The Fed took what was killing the Primary Dealers (toxic debts) and then spread it onto the US’s balance sheet (which was already sickly due to our excessive debt levels)."
When did the assets of the Fed, a private institution, end upon the Treasury's balance sheet? This guy has no idea what he's talking about.
Yet another Phoenix 'research' note about Fed printing and how the market is doomed. Sadly he's been writing these since 2009...
A banking system based on Full Reserve will not a fool preserve.
Until somebody ... anybody ... comes to know what money really is, we'll have this continual handwaving. Read "When money dies" by Fergusson.
at $4.4 trillion, the Fed’s balance sheet is now larger that the economies of Brazil, the UK, or France. And with capital of only $63 billion, the Fed is leveraged at over 69 to 1 (Lehman was at 30 to 1 when it failed).
That doesn't make sense -- the Fed can print US dollars so they can't run out...
That's exactly what the Weimar monetary specialists, economists and Reichsmark managers did : try to print their way out. History showed what happened.
I fear we have been lulled into complacency by the extraordinary actions taken by central banks and governments over the last six years. It is important that we ask ourselves have these actions really worked or merely masked over major flaws and problems? For fun consider that by not demanding the right kind of growth and by throwing money at problems we have only delayed and added to festering issues that face us in the future.
Modern Monetary Theory often referred to as MMT to its many believers removes much of the risk ahead and guarantees that we will always be able to muddle forward. MMT is an economic theory that details the procedures and consequences of using government-issued tokens and our current units of fiat money. Newly acquired tools like derivatives and currency swaps are suppose to allow us to print and manipulate away problems. What I'm seeing develop is an "almost surreal" feeling of indifference towards reality. More on this subject and the fatal flaw in MMT below.
http://brucewilds.blogspot.com/2014/01/have-we-been-lulled-into-complace...
When the FED removes QE, there will be something else. QE in Europe or some other plan that it will take a while for people to catch onto. This game will continue well past your time horizon.
Don't you get it? What comes after QE is war.
Massive meltdowns do occur and it has been a while since we have seen a big one. What happened in 2008 may just be a preview. I'm amazed at how our day of reckoning is always being kicked out a year or two and never going to happen tomorrow. It is as if we can't handle what is coming at us and need more time.
I agreed ugliness lies ahead. I love the way it is always being kicked out a year or two and never going to happen tomorrow. It is as if we can't handle what is coming at us and need more time.
For a long time I have been trying to develop a scenario for a market "super crash" and a reasonable map that would arrive at such a situation. Below is an article looking at how it could happen sooner rather than later.
http://brucewilds.blogspot.com/2013/01/flash-crash-on-steroids.html
QE is not politically acceptable in Europe because the Europeans KNOW that QE is nothing more that free money taken (stolen) away from the public and given to the bankers to reward them for destroyng the global economy with unregulated risk. In America, we buy any story the capitalists give us, because Capitalism is our religion -- a dying religion. It's much less poitically-correct in Europe for a wholesale transfer of billion or trillions fromt he public to the banks.
QE is not politically acceptable in Europe because the Europeans KNOW that QE is nothing more that free money taken (stolen) away from the public and given to the bankers to reward them for destroyng the global economy with unregulated risk. In America, we buy any story the capitalists give us, because Capitalism is our religion -- a dying religion. It's much less poitically-correct in Europe for a wholesale transfer of billion or trillions fromt he public to the banks.
So whats going to happen when the FED removes the stimulus?
Massive defaults on the QE money will occur in 2015-16 is my prediction. The losses will be epic.
After the next big economic crash we go on a one world currency. Its coming !
does the Fed have a Trustee? If so, shouldnt the trustee pull the pin on the operation at 69 to 1 leverage
snigger snigger azif
Both people and governments have lived beyond their means by taking on debt they cannot repay. Over the last several decades we have created entitlement societies built on the back of the industrial revolution, technological advantages, capital accumulated from the colonial era, and the domination of global finances. Promises were made on the assumption that the advantages we enjoyed would continue.
Ever greater prosperity and entitlements were to be sustained through debt financed consumption growth. In that eerie fantasy world, debt fueled consumption was to be the catalyst to bring about evermore growth. Now reality has begun to come into focus and it is becoming apparent that this is unsustainable. The entitlements and promises that have piled up have become overwhelming. More on why this system will fail in the article below.
http://brucewilds.blogspot.com/2014/08/modern-monetary-theory-is-wrong-d...
Are we beyond the statute of limitations for all of the control fraud that went into Real Estate Bubble 1?
Mission accomplished?
What I really like here at 0 is the relentless doom and gloom. If you're starting to feel better, just visit the Hedge and you'll be disabused of your well being.
Optimism is cowardice.
- Spengler
Doc Fed is providing chemotherapy to all and sundry - whether they need it or not.
Those who hold US$ are the most affected.
Chemotherapy, plus the original tumors. Asset bubbles are tumors in the social/economic body.
Good piece, except for the use of the ridiculous phrase "Democratic Capitalism."
What the author is really referring to is a "Free Enterprise" economic system, which can only exist under the rule of law in a "Republic" political system.
Right now, the United State_ has an economic system with elements of fascism, socialism & communism under a political oligarchy.
Watch the 29-minute, professionally-produced JBS video "Overview of America" on YouTube to fit the missing pieces into your puzzle.
You beat me to it. You commented on exactly what I questioned. What is "Democratic Capitalism"?
A very good reply to his statement.
We are not in a fight to preserve our republic but rather in a fight to restore it.
jb
Good analysis. Your only mistake is the reference to Democratic Capitalism. Democracy is the problem (read Plato, always leads to demagogues and demagogues always lead to inflating away the debt --or untenable promises-- ), Republic is the better form.
The Kingpin is rotten.
Another Kingpin will emerge. Hold on to your Gold bars hard.... It won´t be pretty.
We've been asking the wrong question in these here parts going on five years now. It's not "how does one stop a debt crisis by creating more debt" but far more importantly "how does one solve the problem of bubbles by creating another one?"
This is what is meant by he term "moral hazard"...not "giving the banks all the money" but "giving the banks all the money so they can do the same thing with it again."
This is a raging bull market...and Detroit et al go belly up????
What happens to the recovery if the market merely corrects?
We needed to slowly begin raising interest rates in 2001. And we should be raising interest rates until 2019. The argument of the one-eye blind leaders is that highter interest rates will kill growth. These people believe that perennial growth is possible. But nothing in nature (and man is in and a part of nature, as are man's creations) grows continuously. There are growth seasons, and rest seasons. From 2001-2019 we are in a rest, decay, gestation season. Higher interest rates destroy bad debt, reward savers, and prepare us for the next growing season, scheduled to run from 2019 through 2037. Trouble is, our leaders still think they can resist nature, that they are smarter than neature (and nature's patterns) -- they think they can 'outwit' Nature's seasons. So they make everything worse by attempting to inflate for ever. We need highter interest rates now, even though we are 13 years late.
Japan should have raised interest rates in 1989, as their housing bubble burst. If they had, they would have bottomed in 2007. But they protected old useless debt, instead of destroying it. Look at Japan today. They are us; they are the coming world.
I know that writing style - MC.
How about no more usury, greenbacks?
If we are honest then we'll admit we are all like the security guard watching Austin Powers and Mini me as they prepare for the physical exam. We see the shadows and are curious and disgusted. ...but what we see is not what is really happening...we are only seeing the shadows.
Some imagination and a bit of guidance can help to figure out the real action behind the screen. For me fofoa has provided that. We still don't know any more facts than anyone else (and honestly almost no one who is talking knows anything with certainty) but we have a different narrative. The facts that do come out, the major movement in the monetary system, seem to fit with the storyline we follow.
I have no skin in your game but if you are tired of being forced to believe in a huge evil conspiracy, rather than the natural consequences of human nature as being the driving forces behind our crazy world you might consider picking up on the ongoing analysis and head scratching.
Freegold, it is what's for breakfast...soon.
Humans optimize on their grandchildren .
Predictions of disaster engendered a real sickness in the human noo-sphere .
Those who have , scrabble to keep it . Those who don't , scrabble to survive .
See http://andreswhy.blogspot.com/2009/03/negative-pressure-important-update...
The healing of the noo-sphere will release enormous amounts of capital . Also , entrepreneurial energy .
Where have all the promises gone , long time passing ?
No comment.
This concludes this comment.
Where is Graham Bummers?
"the subsequent death of the capital markets."
THEY ARE DEAD
How many of the primary dealers are or are controlled by alien entities? please complete the list.
Hongkong Shanghai Bank Corporation
only one?
Or, are you adding the parent to the list?
"Democratic Capitalism" aren't those words the opposite of each other?
Capitalism is only democratic when they are forced to be. Too bad Clinton sold the Democratic Party to Wall Street in 1989. That was the end of our democracy. Now we need to create a new democracy, with a straight-jacket for Wall Street, and a new party that will enforce democracy on the Plutocrats in New York and Washington.
Capitalism is committed to destroyiing democracy and securing the system that serves capitalism best: the tyranny of money; and a social system or serfs, debt slaves, that serve their masters silently, without comment. In America today, this is apparently what we have.
Nice ... but the US is a Constitutional republic. Not a democracy.
Well, at least it used to be.
How can our capitalism be democratic when it lacks equality the main ingredient of a real democracy.
No. They are strongly, but not completely correlated.
All planned. When they all board their private jets and swarm the El Al counter I'd predict Air Force one will not be available, nor will any other mode of transportating. The Fall Guy, but it was nice while it lasted.
Imagine 10 thousand yachts sailing out to sea at the same time.
The Fed in 2008 just had to prop the Ponzi long enough so on the way out the door they had time to turn their US bonds into hard assets. Booyah! Take that debt slave bitchez!
beep... beep... beeeeeeeeeeeeeeeeeeeeeeeee
OMG the economy is flat linning!
quick, we need hard money STAT!
Injecting gold!
http://www.bgasc.com/product/2014-1-10-oz-gold-american-eagle-5-coin-bullion-brilliant-uncirculated-gem/gold-eagles-1-10-oz
Oh god we dont have enough gold, we might have to cut back on the fractional reserve banking.
...no we cant do that... just let the economy die.