In the aftermath of the 2008 financial crisis, many of us in the hedge fund industry expected continuing fallouts from the unresolved imbalances that were papered over with monetary and fiscal stimuli by governments and central banks. These measures failed to address, let alone resolve the systemic causes of the crisis. One of their consequences was a further weakening of large western banks, particularly the European ones. A new banking crisis was widely anticipated. Last June, Alasdair Macleod wrote that the "Next significant event therefore will almost certainly be the failure of a G-SIB if not in America, then elsewhere." [G-SIB = global systemically important bank]. In my recollection, Deutsche Bank for one, has been on a death watch at least since 2016, but the list of banks that should have collapsed already is long and full of household names.
Indeed, things looked very bleak when the Coronavirus pandemic struck and they deteriorated sharply from there. Yet, the banking system is limping along and no crisis has yet materialized. How to explain this? Last September I gave an interview on Renegade Inc. and went out on a limb with a hypothesis that only dawned on me about that time. Namely, I grew up in former Yugoslavia in the socialist regime under a one party system (Communist party, of course). The world I grew up in was pretty much one chronic crisis of stagflation which ultimately led to hyperinflation. My 'eureka!' moment happened when I realized that in spite of that state of affairs, we never had a banking crisis! No major bank failed and we had no bank runs at any point.
Namely, our government and the central bank simply QE-ed their way through the crisis and conjured up the money needed to cover the bad debts of our zombified corporations and kept the system going. By now this should all sound curiously familiar. The socialist zombie companies continued in operation and kept millions employed, many of them in bullshit jobs and thus the whole system limped along until it ultimately imploded. The money printing kept the system undead but the ultimate consequence of unchecked QE - hyperinflation and currency collapse - could not be avoided.
Once I realized that this is where we are headed presently, I looked up again Mario Draghi's 25 March 2020 Financial Times OpEd and sure enough, it was all there. At the time I took Draghi's article merely as a reassurance to the markets in his own "whatever it takes" style. But upon revisiting his words it is clear that he was actually announcing and justifying a new financial regime: a full and permanent transition from whatever was left of a free market system to a full socialist system where political expedients and central planning replace market mechanisms.
My interview with Renegade Inc. is below and almost seven months later it has aged well:
It is interesting that second guest,Tuomas Malinen predicted that the banking crisis would happen as a matter of weeks or months. Malinen's, as Alasdair Macleod's analyses are beyond reproach. Their only error may be in the assumption that we are still operating in a free market system where failing enterprises actually fail. Under the new normal, failing enterprises keep going on fiscal and monetary largesse, so long as they remain useful in furthering the central planners' political and social engineering agendas.
Mark Carney himself pretty much let that cat out of the bag in his 18 November 2020 interview on Bloomberg TV when he said that "... it's really about looking for .. the transition plans from all companies and backing those who are part of the solution and taking capital away from those who are part of the problem." In the old normal, we'd allow the markets to gravitate toward 'solutions' that made sense. In the new normal this will be done by a politburo of the brightest and the best among us. Rejoice!
Alex Krainer - @NakedHedgie is the creator of I-System Trend Following, founder of Krainer Analytics and publisher of TrendCompass reports, based in Monaco. He worked as a market analyst, researcher, trader and hedge fund manager for over 25 years. He wrote “Mastering Uncertainty in Commodities Trading," rated by Financial-Expert.co.uk as #1 book on their list of “The 5 Best Commodities Books for Investors and Traders.” In March 2021 he published "Alex Krainer's Trend Following Bible." His second book, "Grand Deception: The Browder Hoax" was twice banned on Amazon by orders of swamp creatures from the U.S. Department of State. He writes at ISystem-TF.com and occasionally also on his blog, TheNakedHedgie.com. His views and opinions are not always for polite society but they are always expressed in sincere pursuit of true knowledge and clear understanding of ideas that matter.