Mark Grant On The Dangerous Road Ahead

Tyler Durden's picture

From Mark J. Grant, author of Out of the Box

The Dangerous Road Ahead

“The last time Quantitative Easing was stopped the equity markets dropped precipitously. There is no reason to think that will not occur again though the severity may be less. Today's FOMC minutes are quite significant in my view. They also said, for the first time, that the pledge to hold short rates at near zero was "conditional." This is another very meaningful statement. I would be taking money off the table now in both equities and bonds as the stock market will probably head lower and yields will begin to rise in fixed coupon securities.”
                                                                                      -MJG, April 3, 2012, 2:16 pm

This was the note that I put out to the readers of “Out of the Box” sixteen minutes after the Fed released their monthly report. That was as fast as my fingers could type what was going on in my mind. I thought it was good advice to the 5,000+ institutions that receive my commentary and I have become more positive about it as the days have rolled along as the Dow Jones Index has dropped 350 points since I typed my musings. In fact, we are just at the beginning of a great divergence where credit assets, risk assets, decline in value and where Treasuries head in a quite separate direction as driven by U.S. data in part but, more significantly, by the travails in Europe. The CDS for Spain reached an all-time high on Friday reflecting the financial issues in Spain as the Spanish bond yields creep higher held back, in part, by the threat of intervention from one of Europe’s stabilization funds.

We have just been presented with one very red flag signaling the seriousness of the issues in both Italy and Spain. Spain just announced that its banks borrowed $415 billion from the LTRO funding while net borrowing stood at almost $300 billion and accounted for 63% of the net borrowing at the ECB. For Italy the number is $354 billion in LTRO borrowing and they are not that far behind Spain in needing aid. The actual debt to GDP ratio, which I detailed on March 29, is 133.8% for Spain, not the official 79% number, and is getting worse as their economy shrinks and as the country guarantees ever more bank debt to be used as collateral. It is not much better in Italy as the combined national debt and their share of the debts at the ECB and the EU peg Italy’s actual debt to GDP ratio right at 200% and while Italy’s ability to self-fund is appreciably better than Spain; their funding needs are becoming appreciably larger as the country sinks into recession.

For the moment both the Fed and the ECB are not engaged in Monetary or Quantitative Easing. This has been the driving force for both equities and for bonds for the last four years. Yields have been lowered, spreads have compressed but I think we are now in the early stages of a massive reversal where stocks decline and where yields rise and a widening takes place between Treasuries and every other asset class. In my view, during the next several months, the situation will continue to deteriorate and so I continue to advise taking profits in both equities and bonds and re-deploying the money. I would stick with various structures that float or step-up and I would avoid bullets as losses will accumulate both from the absolute rise in yields but also from the widening in spreads.

The one other area I am becoming quite concerned about are the banks; in particular the European Banks. Of the twenty-five largest banks in the world there is only one that does not need to raise additional capital to de-lever to a 20x leverage and a 5% of Tangible Capital Ratio and that is Citigroup which has a current leverage of just 13 times and I also point out that Wells Fargo with a 14 times leverage needs a minor amount of capital to accomplish these goals. At the far other end of this scale is Deutsche Bank which is levered 62 times and would need a massive amount of new capital and tremendous shrinkage to accomplish these goals. The assets of DB are also equivalent to the entire GDP of Germany so that the bank could devour the country if Deutsche Bank were to hit the wall. Then the most leverage can be found at Credit Agricole at 66 times which would also swamp France, given its size, if asset values continue to decline or if Spain or Italy need to be bailed out and the contagion worsens.

“It is in the uncompromisingness with which dogma is held and not in the dogma or want of dogma that the danger lies.”

                                             -Samuel Butler
                                                                                                             -Mark J. Grant

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DormRoom's picture

ECRI still stands behind its recession call.


Keep in mind the equity markets were rallying hard right before the EPIC 2008 financial collapse.  Deja vu.

AldousHuxley's picture

Screw this guy.


All of these financial wizards cry "dangerous road ahead" when Fed takes away stimulus because the real magic to their success is Fed's money printing not any ability to predict anything.


Capitalism during bonus time, Fed Reserve's socialism during recession time.



Mugatu's picture

Every mirage has an ending.

Ahmeexnal's picture

every rose has its thorn,

just as every night has its dawn

just as every cowboy sings his sad, sad song


Oh regional Indian's picture

Hey, I always wanted to know, is that Avaatar you? Or Rasputin? Rather intense...

You can't solve a solvency issue with liquidity, the system can only absorb so much...

But oh yes, choppy waters ahead. Did people read about the 4 feet of hail in Texas? And then a flash flood that followed....

It's getting w e i r d....



Ahmeexnal's picture

Hey ORI, it's Jim Morrison.
Yes, getting weird as the ring of fire is coming online again:

The powerelite have lost control. SHTF is coming very soon:

Oh regional Indian's picture

Aha, the wooly Lizard King! 

And wow! That truck is Crazy! 


DormRoom's picture

Large Hadron collider @ higher energy beams = Improbability drive. 

Oh regional Indian's picture

yup DormRoom. Try telling that to a group of normally biased folks though..... instant switch-OFF.


Milestones's picture

I gave you a greenie but it didn't register.                   Milestones

Hedgetard55's picture

Does that Citi number of 13x include off balance sheet "assets"?

narnia's picture

The FDIC & Fed have the multi trillion nominal derivative exposure covered.

Vince Clortho's picture

So we got that goin for us!

jcaz's picture

LOL- yeah, when they start using Citi as an example of the good, we're got trouble....

vast-dom's picture

i assure you the shadow books were not factored in, and that's unfortunate that the author would make such glaring omission.

MFL8240's picture

Who then is buying US treasuries?  The answer is the Federal Reserve so while they are talking one game, one needs to watch what their actions are.  If they stopped buying bonds, rates would hit 10% overnight with this debt load.

Bay of Pigs's picture

"Hey, look over here"

Uncle Shalom

TBT or not TBT's picture

Well actually "Hey look over here" is the purpose of the Trayvon sob/injustice story, which the media and the usual race hustlers have distorted and ginned up.   Meanwhile enormous amounts of debt have been printed, and the data indicates hitting debt ceiling around election time rather than in 2013.   One scrape that turns badly somewhere among the 300 million individual stories in the USA should not be a national matter consuming presidential or justice dept bandwidth, but it is, because they intend to exploit distractions to the max.   We have to learn to ignore bullshit stories like this and speak with one voice on the ICEBERG dead ahead.

CrashisOptimistic's picture

This meme doesn't fly anymore.  QE2 ended June 2011.  There is no direct, NET buying of US T's by the Fed right now.   There has always been GROSS buying of such because they roll over holdings as the holdings mature.  But there is no new NET buying right now.

Buyers of US Ts right now are pension funds, mutual funds, hedge funds, foreign entities and banks, and those banks are using money borrowed from the Fed.  They buy US Ts because there is nowhere else to go with that much money.  Simply that.

Meremortal's picture

Intruding with reality here is usually not well-received.

Bay of Pigs's picture

Depends on your definition of "reality".

"borrow from the FED"?

Yes, they are monetizing/counterfeiting 24/7. How's that?

OpenThePodBayDoorHAL's picture

On the contrary, bring it, there are plenty of ideologues in here but reason has a good chance to win the day, unlike in the MSM where resistance to the received wisdom is futile. Your "meme" implies that all is normalized since Mr. Fed is not buying most/all issuance right now. But isn't the effect the same if The Bernank is just passing out free money to banks so they can turn around and buy USTs? The questions is, where is the leverage and where/what is the collateral? The Fed is levered 89:1, and the "1" is some fantasy MBS...oh, yes and a supposed nice little pile of shiny stuff. So the point stands.

James Grant's talk at The Fed called "A Piece of My Mind" contains more wisdom and insight than 1000 Dudleys or trolls that's for certain.

vast-dom's picture

correct. the buyer buys directly or by proxy, but the buyer does buy, more at GROSSLY intervene.

BlandJoe24's picture

Agreed - thanks for posting.

Also, what's your take on what the author means by Deutche Bank "devouring" Germany's assets?

Zero Govt's picture

the author is trying to shit everyone up with the nonsense if Deutsche Bank went tits up, with obligations as big as Germanys GDP, the country would also go tits up

this 'we need to support the banks because they're so big and important' myth is complete BS ..most of what banks write and do is financial froth and unimportant to the real (productive) economy

Banks are the biggest pile of worthless fractional reserve fraud ever devised in human history.. like my beef with Jim Sinclair claiming if the $700Tn in derivatives went 'Bang' it would be curtains for the global economy ...absolute rubbish

if all the car, boat, health and home insurance policies went bust tomorrow nobody on the planet would notice or give a crap.. ditto banks and derivatives

ok if DB goes tits up alot of Germans will have their wages and savings disappear overnight

but all the other crap DB writes and the global derivatives market is worthless and will only effect the muppets invested in it (declaration: i, muppet, own a couple of ETF's)

Winston Churchill's picture

So the banks,who own the Fed,are buying the UST's.

How is that not another banker shell game ?

Chuck Walla's picture

If the market tanks, thats the last nail in Obama's electoral prospects. He be gone and the Mitten be on.

R_Soles's picture

Even banks passing these stress tests are debateable as far as solvency goes. Christ, DEXIA passed with flying colours and all is well and lo, within 6 months they are Bankrupt! Imagine that bullshit happening to Santander in Spain. Royal Bank of Canada is so stupid they just bought some of the DEXIA it didn't own already. I have some ponds containing radioactive tailing in the oilsands for the idiots

Seasmoke's picture

boy when Citibank is the best bank on any list, the system is clearly doomed

Vince Clortho's picture

I thought he was joking when I read it.  But maybe your'e right, he may have been serious.

Amish Hacker's picture

The bar is set pretty low when the list includes Credit Agricole, leveraged 66 times. Which means that even a tiny, 1.5% decline in equity would render them insolvent. Too bad they're the largest banking group in France, second largest in Europe.

"Doomed" doesn't seem like a strong enough word.


Sudden Debt's picture

Amazin what constant stock dilution does to the credibility of a bank right?

TooBearish's picture

OK with that backdrop the ECB will provide more liquidity, continue to prop the overlevered balance sheets of the EURO mega banks, etc, etc, Central planning works!

Yellowhoard's picture

When banks are allowed to mark assets to fantasy, do these stress test numbers mean anything at all?

narnia's picture

Don't believe the Fed narrative. Interest rate spikes will destroy even the least thinly capitalized zombie banks. The Fed will sacrifice the currency before the FDIC will be put into the impossible position of taking over the financial system.

God Bless The Virtuous's picture

I think we overlook one big tell at our own peril, a paradox if you will.

As you state,"The fed will sacrifice the currency...." I have to spin a different web.

The fed is impotent and has lost all respect and creditability. Its QE debacle is right out of Japan's ongoing nightmare playbook.

Bernanke might want to QE forever, and take the dollar down the crapper, but what of the standard of living of the working man / woman? We will be decimated,and so I posit he will not only be forced to the sidelines, he will for a short period of time, defend the dollar. There is a reason why the U.S. dollar is referred to as King Dollar, it is known and accepted on every point of this planet. The dollar will become so valuable / sought after,(this is what drives depression / deflation) that at some point well north of where it trades today, then Bernanke and the central bankers of the world(Fools of the world) will bring it back down gently and with some form of recapitalization on a global scale, maybe something new called "cubits", who the hell knows. But one thing is for sure, this nightmare and the progressive / socialist powers that reside in this administration have a plan, they have been crafting it for years.

Congress has been irrelevant for a few years now. The "Apollo Alliance" crafted the so called rescue fund / 787 billion dollar fiasco we were force fed at the height of the crisis. Soros is the puppet master of this global "One World Order" and with him and Bill Cinton's "Clinton's GLOBAL initiative", Soros and his "Open Society Institute", we are all headed to a place where America gives up her role at the "Commanding Height" to some perverted form of a one world governing body ala the U.N.

I pray I am wrong, but nothing seems to make sense and the further down this cesspool we get flushed, anything this perverted seems possible....


May the good lord watch over this fragile little experiment in freedom / mans self rule we call America.


narnia's picture

Jerry, the men behind the biggest guns- which are increasingly more like video games than reality- will undoubtedly try to recapitalize with another confidence scheme- like the SDR- with their allies the political winners. If they succeed in selling it to a super majority peacefully, they can marginalize the "terrorist" resistance. If they can't, it will get ugly for those who choose or stare at the end of the barrel and fight.

Vince Clortho's picture

"Soros is the puppet master of this global "One World Order" and with him and Bill Cinton's "Clinton's GLOBAL initiative", Soros and his "Open Society Institute", we are all headed to a place where America gives up her role at the "Commanding Height" to some perverted form of a one world governing body ala the U.N."

You are on the right track, but you are going to piss off the CB Cartel, CFR members, etc if you try to give all the credit to Soros and Clinton.

citta vritti's picture

if not 1865, or possibly even earlier, with crushing of Shay's rebellion in 1787, under the Constitution's precedessor, the Articles of Confederation (in other words, there was self-rule only for a brief period after the British surrendered at Yorktown. Shay's Rebellion was about debt and money -- too much of the one and too little of the other. It turned out that it made no difference whether the form of government was monarchy (bad) or republic (good) - the creditors wanted to be repaid. 

Alcoholic Native American's picture

Quantative easing must be stopped.  The FED buying bonds and junk securities is downright criminal.  Save us Anonymous billionaires!  We need your legitimatlly aquired capital


11b40's picture

You mean all that capital they legitimately paid politicians for?  Spread a few thousand here & few thousnad there, and viola! - a newly revised regulation that adds billions to the "capital" base.  Sober up & get a clue, Native.

Eric L. Prentis's picture

It is IMPOSSIBLE to rekindle “animal spirits,” living on George Orwell’s Animal Farm—where “all animals are equal, but some animals (pig banksters) are more equal than others.” Ten thousand banksters deserve to be in maximum security prison.


But Wall Street banksters pay protection money to politicians, so we have a loss-of-trust and a shitty economy. I call this a lousy tradeoff.

God Bless The Virtuous's picture

I would settle for the few really dangerous progressives we have here and now influencing the powers that be,

Van Jones, Frances Fox Piven, George Soros, Al Gore, Bill Clinton, Valerie Jarrett, Bill Ayers, Warren Buffett, Stephen Lerner, Richard Trumka, Andy Stern and then the simpleton hate mongers Jesse Jackson, Al Sharpton, Jeremiah Wright, Louis Farrakan, and last but not least "The New Black Panther Party", thats a good start..

But we cant have a radical list without our own communist and chief himself,



Lord have mercy!

God Bless The Virtuous's picture

You know, I knew I was going to forget someone. Thanks Bam_Man!

I should have led off with Cass, he is the most dangerous man in America today!

He answers to no one and is the father of the 'NUDGE" movement.

Thanks again and we could go one step further and name his wife,whose name escapes me but is another Soros minion and the author of the U.N. 's new so called law," The need / right to protect" or some such garbage that will get this once mighty country into deep shyte in some god forsaken hell hole we have no business in to begin with!

Samatha Powers, that's her name. Another agent of God's work, right up there with Anita Dunn!


trying to make sense of it all's picture it safe to put cash back into my Wells Fargo acct?