This morning both the NYSE broke (canceling all open orders) and China outlawed selling stocks for large investors.
These two items seem completely unrelated… however, the reality is they are both based on a them we outlined back in May 2015.
That theme is as follows: that as the next Crisis unfolds, it will more and more difficult to get your money out of the financial system.
The reason for this concerns the actual structure of the financial system. As we’ve outlined previously, that structure is as follows:
1) The total currency (actual cash in the form of bills and coins) in the US financial system is a little over $1.36 trillion.
2) When you include digital money sitting in short-term accounts and long-term accounts then you’re talking about roughly $10 trillion in “money” in the financial system.
3) In contrast, the money in the US stock market (equity shares in publicly traded companies) is over $20 trillion in size.
4) The US bond market (money that has been lent to corporations, municipal Governments, State Governments, and the Federal Government) is almost twice this at $38 trillion.
5) Total Credit Market Instruments (mortgages, collateralized debt obligations, junk bonds, commercial paper and other digitally-based “money” that is based on debt) is even larger $58.7 trillion.
6) Unregulated over the counter derivatives traded between the big banks and corporations is north of $220 trillion.
When looking over these data points, the first thing that jumps out at the viewer is that the vast bulk of “money” in the system is in the form of digital loans or credit (non-physical debt).
Put another way, actual physical money or cash (as in bills or coins you can hold in your hand) comprises less than 1% of the “money” in the financial system. Suffice to say, one of the biggest concerns for the Federal Reserve is what would happen if a significant percentage of investors decided to move into physical cash.
Indeed, this is precisely what happened in 2008 when depositors attempted to pull $500 billion out of money market funds.
A money market fund takes investors’ cash and plunks it into short-term highly liquid debt and credit securities. These funds are meant to offer investors a return on their cash, while being extremely liquid (meaning investors can pull their money at any time).
This works great in theory… but when $500 billion in money was being pulled (roughly 24% of the entire market) in the span of four weeks, the truth of the financial system was quickly laid bare: that digital money is not in fact safe.
To use a metaphor, when the money market fund and commercial paper markets collapsed, the oil that kept the financial system working dried up. Almost immediately, the gears of the system began to grind to a halt.
When all of this happened, the global Central Banks realized that their worst nightmare could in fact become a reality: that if a significant percentage of investors/ depositors ever tried to convert their “wealth” into cash (particularly physical cash) the whole system would implode.
As a result of this, the Fed and the regulators are looking to implement moves that would make it much harder to move money OUT of the markets and into cash.
Consider the following… the SEC has actually implemented regulations to stop withdrawals from happening should another crisis occur.
The regulation is called Rules Provide Structural and Operational Reform to Address Run Risks in Money Market Funds. It sounds relatively innocuous until you get to the below quote:
Redemption Gates – Under the rules, if a money market fund’s level of weekly liquid assets falls below 30 percent, a money market fund’s board could in its discretion temporarily suspend redemptions (gate). To impose a gate, the board of directors would find that imposing a gate is in the money market fund’s best interests. A money market fund that imposes a gate would be required to lift that gate within 10 business days, although the board of directors could determine to lift the gate earlier. Money market funds would not be able to impose a gate for more than 10 business days in any 90-day period…
Government Money Market Funds – Government money market funds would not be subject to the new fees and gates provisions. However, under the proposed rules, these funds could voluntarily opt into them, if previously disclosed to investors.
In simple terms, if the system is ever under duress again, Money market funds can lock in capital (meaning you can’t get your money out) for up to 10 days. If the financial system was healthy and stable, there is no reason the regulators would be implementing this kind of reform.
This is just the start of a much larger strategy of declaring War on Cash. Make no mistake, it is a full scale war that will involve regular tactics such as “breaking” the market so you cannot sell stocks… all the way up to the nuclear option: OUTLAWING physical cash altogether.
Indeed, we've uncovered a secret document outlining how the Fed plans to incinerate savings to force investors away from cash and into riskier assets.
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Phoenix Capital Research