Tuesday, July 25, 2017
"The Elites Are Privately Warning About a Crash"
by Brian Maher
"We heaved up evidence last Wednesday that foreign central banks could be the true source of liquidity floating stocks to record heights. While the Federal Reserve is goosing rates and preparing to tuck into its $4.5 trillion balance sheet... Foreign central banks have flooded markets with a record $1.5 trillion of liquidity so far this year. Bank of America terms it a “supernova of liquidity”… and the “flow that conquers all.”
But if stocks have risen on the cresting waters, atop the “flow that conquers all,” mustn’t they fall when the flooding recedes? That is, when central banks start draining liquidity out the sluices… it seems stocks should wash away with it. Ah, but when… when does the liquidity start draining away? We have the all-important answer, revealed shortly.
A deluge of central bank liquidity post-2008 lifted the Dow from 7,000 in early 2009… to over 21,600 last week. That is why, as Zero Hedge notes: "It is safe to say that the topic of the liquidity injection by central banks, or rather its removal, has become one of the most discussed topics within the financial community. Citigroup reminds us that the market’s been at flood tide for nearly a decade - the combined balance sheets of the world’s main central banks haven’t contracted since 2008. Not for a minute."
But maybe not for much longer... As we noted last Wednesday, the Federal Reserve intends to start draining its oceanic post-crisis balance sheet in September. This, as word comes that foreign central bank asset purchases (which add liquidity to the financial system) are beginning to slacken. For example, Bank of America's top strategist, Michael Hartnett, notes that central bank asset purchases have fallen from $350 billion in April... to $300 billion in May… to less than $100 billion last month. The Bank of Japan’s (BoJ) asset purchases in particular have fallen substantially in recent months.
Now our well-placed agents forward us unconfirmed rumors… salacious whispers… and snatches of overheard conversation indicating the European Central Bank (ECB) will begin tapering its asset purchases in September. September, once again, happens to be when the Fed starts draining its own balance sheet.
So the “flow that conquers all” will soon slow to a trickle. Declining central bank liquidity means the tide will eventually stop rising, level off, and finally recede. But again, when? At what point does the tide finally reverse?
The answer, coming by way of Credit Suisse's Andrew Garthwaite: "The inflection in central bank balance sheets comes in Q3 2018. Q3 2018, sometime between next July 1 and Sept. 30." That’s when this Garthwaite fellow says: "The contraction in the Fed's balance sheet will start to exceed the purchase of assets by the ECB and BoJ."
“As Credit Suisse pointed out and as Citi confirms,” says Zero Hedge, “In roughly 12 months, the world is about to have its first period of aggregate central bank balance sheet contraction, even as the flow is already shrinking at a rapid pace.” At that point, the tidal “flow that conquers all” will start receding, possibly dragging stocks out with the ebbing tide.
But the before-mentioned Michael Hartnett thinks a rout could start long before the tide rolls out Q3 next year. Beware not the 12–18 months, says he, but the next three–four months. He thinks peaking liquidity - twinned with peaking corporate profits - is leading right to peak market: The most dangerous moment for markets will be when rising rates combine in three or four months’ time with an inflection point in corporate profits. Big [market] top likely occurs when peak liquidity meets peak profits. We think that's an autumn, not summer, story. Then Harnett thinks investors will finally see what lies ahead in Q3 2018… and get out ahead of the tide, before it washes away their money.
Jim Rickards also turns his gaze to the shorter view…Markets are complacent right now and are not expecting any sudden moves to the downside. But it’s when markets are most complacent that sudden drops are most likely. Another drop could be right around the corner.
Do we forecast a stock market collapse in Q3 2018… or within the next four months? We shall not rise to that bait, dear reader. We’ve been hooked too many times before by gaudy but false lures. No, the answer is on the knees of the fickle gods, where it shall remain, until the gods themselves render their verdict. But this much is certain: We’ll be keeping a watchful eye on the tides for the next several months. You may want to as well.
Below, Jim Rickards shows you why elites are “privately warning about a crash.” Read on."
"The Elites Are Privately Warning About a Crash"
By Jim Rickards
"Many everyday citizens assume powerful global financial elites operate behind closed doors in secret conclaves, like the scene of a Spectre board meeting in the recent James Bond film. Actually, the opposite is true. Most of what the power elite does is hidden in plain sight in speeches, seminars, webcasts and technical papers. These are readily available from institutional websites and media channels.
It’s true that private meetings occur on the sidelines of Davos, the IMF annual meeting and G-20 summits of the kind just concluded. But the results of even those secret meetings are typically announced or leaked or can be reasonably inferred based on subsequent policy coordination.
What the elites rely on is not secrecy but lack of proficiency by the media. The elites communicate in an intentionally boring style with lots of technical jargon and publish in channels non-experts have never heard of and are unlikely to find. In effect, the elites are communicating with each other in their own language and hoping that no one else notices.
Still, there are some exceptions. Mohamed A. El-Erian is a bona fide member of the global power elite (a former deputy director of the IMF and president of the Harvard Management Co.). Yet he writes in a fairly accessible style on the popular Bloomberg website. When El-Erian talks, we should all listen.
In a recent article he raises serious doubts about the sustainability of the bull market in stocks because of reduced liquidity resulting from simultaneous policy tightening by the Fed, European Central Bank (ECB) and the Bank of England. He says stocks rose on a sea of liquidity and they may crash when that liquidity is removed. This is a warning to other elites, but it’s also a warning to you. But it’s not just El-Erian who’s sounding the alarm...
You’ve heard the expression “the big money.” This is a reference to the largest and most plugged-in investors on Earth. Some are mega-rich individuals and some are large banks and institutional investors with a dense network of contacts and inside information.
At the top of the food chain when it comes to big money are the sovereign wealth funds. These are funds sponsored by mostly wealthy nations to invest a country’s reserves from trade or natural resources in stocks, bonds, private equity and hedge funds. As a result, sovereign wealth fund managers have the best information networks of any investors. The chief investment officer of a sovereign wealth fund can pick up the phone and speak to the CEO of any major corporation, private equity fund or hedge fund in the world.
Among sovereign wealth funds, the Government of Singapore Investment Corp. (GIC) is one of the largest, with over $354 billion in assets. So what does the head of GIC say about markets today? Lim Chow Kiat, CEO of GIC, warns that “valuations are stretched, policy uncertainty is high” and investors are being too complacent. GIC allocates 40% of its assets to cash or highly liquid bonds and only 27% of its assets to developed economy equities.
Meanwhile, the typical American small retail investor probably has 60% or more of her 401(k) in developed economy equities, mostly U.S. But it may be time for everyday investors to listen to the big money. They are the ones who see financial crashes coming first.
The bottom line is, a financial crisis is certainly coming. In my latest book “The Road to Ruin,” I use 2018 as a target date primarily because the two prior systemic crises, 1998 and 2008, were 10 years apart. I extended the timeline 10 years into the future from the 2008 crisis to maintain the 10-year tempo, and this is how I arrived at 2018.
Yet I make the point in the book that the exact date is unimportant. What is most important is that the crisis is coming and the time to prepare is now. It could happen in 2018, 2019, or it could happen tomorrow. The conditions for collapse are all in place.
It’s simply a matter of the right catalyst and array of factors in the critical state. Likely triggers could include a major bank failure, a failure to deliver physical gold, a war, a natural disaster, a cyber–financial attack and many other events. The trigger itself does not really matter. The exact timing does not matter. What matters is that the crisis is inevitable and coming sooner rather than later in my view. That’s why people need to prepare ahead of time.
The new crisis will be of unprecedented scale. This is because the system itself is of unprecedented scale and interconnectedness. Capital markets and economies are complex systems. Collapse in complex systems is an exponential function of systemic scale. In complex dynamic systems that reach the critical state, the most catastrophic event that can occur is an exponential function of scale. This means that if you double the system, you do not double the risk; you increase it by a factor of five or 10.
Since we have vastly increased the scale of the financial system since 2008, with larger banks, greater concentration of banking assets in fewer institutions, larger derivatives positions, and over $70 trillion of new debt, we should expect the next crisis to be much worse than the last. For these reasons the next crisis will be of unprecedented scale and damage. The only clean balance sheet and source of liquidity left in the world will be the International Monetary Fund, which can make an emergency issuance of Special Drawing Rights, which you can think of as world money.
On the level of the individual investor, losers will fall into two groups when the next crisis strikes...
The first are those who hold wealth in digital form, such as stocks, bonds, money-market funds and bank accounts. This type of wealth is the easiest to freeze in a panic. You will not be able to access this wealth, except perhaps in very small amounts for gas and groceries, in the next panic. The solution is to have hard assets outside the digital system such as gold, silver, fine art, land and private equity where you rely on written contracts and not digital records.
The second group are those who rely on fixed-income returns such as life insurance, annuities, retirement accounts, social security and bank interest. These income streams are likely to lose value, since governments will have to resort to inflation to deal with the overwhelming mountain of debt collapsing upon them. The solution to this is to allocate 10% of your investable assets to physical gold or silver. That will be your insurance when the time comes.
Meanwhile, demand for secure vaulting space in major financial centers like London and Frankfurt is soaring. There are plenty of bank safe deposit boxes in those cities, but investors are insisting on non-bank vaults because investors understand that the banks cannot be trusted in a panic. As a result, proprietors of non-bank vaults can’t build them fast enough.
This is one indicator that reveals three important facts. The first is that investors feel a panic may be near and the time to act is now. The second is that investors don’t trust banks. And the third is that investors are buying gold to protect themselves since that’s the main tangible that people put in their private vaults. Don’t wait until the panic hits to secure your gold and make arrangements for safe storage. The time to act is now."