Volcanic
Tremors: Escalating Signs of Market Crashes and Volatilities!
If
you haven’t noticed, there have been three major tremblors that
have hit global financial markets in a span of almost just a year.
Let me repeat three events in ONE year!
First
was in August
2015 (this was blamed to China’s weakening yuan), the second
was in January
2016
(also blamed on yuan and on oil price weakness) and the seeming third
would represent last Friday’s Brexit inspired selloff.
Or
haven’t you noticed of the growing frequency and intensity of
tremors that has been afflicting global financial markets?
Well,
one way of predicting volcanic eruption is to identify what they call
as “harmonic
tremors” or a series of minor earthquakes (or an increase in
pressures within the system) that serves as precursor to a major
eruption.
So
if I am not mistaken, given the amplifying frequency and intensities
of market turmoil, the real thing—the equivalent of a major
financial eruption—may not be so far ahead.
As
I recently
wrote, the
increasing
incidences of market crashes (since 2013), the ongoing deepening
strains in wholesale finance, the $10 trillion+ and growing negative
yielding bond markets, sustained crashing of European-Japanese
banking stocks, the Chinese yuan's weakening, US dollar strength and
more, all combine to look like preliminary manifestations of
"volcanic or harmonic tremors" in motion, only that these
applies to the sphere of the global financial markets.
And
Brexit could just be the one of the probable spark. Or Brexit could
be one of the aggravating factors that will contribute to an eventual
financial market eruption soon.
Brexit:
Another Pin to the Gargantuan Global Financial Bubble
My
late Dad used to lecture me that I should develop a keen sense of
observation. Well, unless I am missing something, predicting
earthquakes and predicting financial catastrophe may have
similarities. Besides, as noted above, there are many fundamental and
market footprints that has been pointing at such direction.
Just
take a look at how central banks and financial authorities responded
to Brexit. Central banks have essentially panicked!
The
G-7 announced
that their central banks “have taken steps to ensure adequate
liquidity and to support the functioning of markets. We stand ready
to use the established liquidity instruments to that end.”
In
short, global central banks have already launched a massive tsunami
of stimulus to forestall Friday’s black swan…yet these measures
has initially failed to calm the markets.
But
why shouldn’t it fail?
At
the week’s inception, global markets have essentially powered
significantly higher in anticipation of a status quo through the
expected victory by the “remain” camp. Such optimism had mainly
been based on misleading (or perhaps manipulative) polls and bookies
odds.
In
other words, the financial market consensus bought hook line and
sinker the political kool aid which served as motivation to spike the
markets up. Or Bremain was seen as having entrenched the
establishment’s position.
Yet
the portrayed factitious relationship was majestically debunked!
Financial markets didn’t represent the majority! Or England’s
majority voted against the establishment’s interests!
Thus
massive trade and arbitrage positions that had been built on this one
way trade had to be unwound…violently!
In
essence, the
mirage of asset inflation through central bank policies of invisible
wealth redistribution to the establishment institutions was exposed
as the emperor with no clothes.
Brexit
served as another pin to have popped
the humungous global asset bubbles that have been spawned, fostered
and nurtured by central bankers.
While
central banks have inflated asset prices, they cannot manipulate
people in perpetuity. Such policies have only been widening the wedge
between centralized political institutions benefiting from such
policies and the average people. Hence, the backlash from invisible
wealth transfers has virtually hit a critical inflection point!
Brexit
Exposes Central Bank’s Existential Crisis
By
a continuing process of inflation, governments can confiscate,
secretly and unobserved, an important part of the wealth of their
citizens. By this method they not only confiscate, but they
confiscate arbitrarily; and, while the process impoverishes many, it
actually enriches some. The sight of this arbitrary rearrangement of
riches strikes not only at security but [also] at confidence in the
equity of the existing distribution of wealth.
Those
to whom the system brings windfalls, beyond their deserts and even
beyond their expectations or desires, become "profiteers,"
who are the object of the hatred of the bourgeoisie, whom the
inflationism has impoverished, not less than of the proletariat. As
the inflation proceeds and the real value of the currency fluctuates
wildly from month to month, all
permanent relations between debtors and creditors, which form the
ultimate foundation of capitalism, become so utterly
disordered as to be almost meaningless; and the process of
wealth-getting degenerates into a gamble and a lottery.
Lenin
was certainly right. There is no subtler, no surer means of
overturning the existing basis of society than to debauch the
currency. The
process engages all the hidden forces of economic law on the side of
destruction, and does it in a manner which not one man in a million
is able to diagnose.
ZIRP,
QE and NIRP has essentially represented “all permanent relations
between debtors and creditors, which form the ultimate foundation of
capitalism, become so utterly disordered as to be almost meaningless;
and the process of wealth-getting degenerates into a gamble and a
lottery.”
Asset
inflation, which has been signified as the principal channel of
central bank policies, have turned financial markets into a “process
of wealth-getting degenerates into a gamble”
And
because such “process engages all the hidden forces of economic law
on the side of destruction” even when “not one man in a million
is able to diagnose”, the indirect and incremental devastation of
the real economy through its various symptoms (inequality, Middle
East wars, refugees, sclerotic economies, mounting debt burdens,
systematic excess capacities on bubble sectors, stagnant wages, and
more) which has incited on the “overturning the existing basis of
society” has now boomeranged.
Brexit
and its potential
domino effect or contagion will likewise expose on the latent
fragilities brought about by central bank policies.
For
instance, Italy’s debt crisis will unravel again when bids on
Italy’s bonds dissipate. Importantly, any further “exits” from
EU will further undermine the ECB’s ability to conduct its monetary
policies. Such would magnify debt problems of crisis afflicted
nations as Italy.
Since
Italy owes upward of $2 trillion on it government accounts alone, its
bond market is an explosion waiting to happen. And that means its
bedraggled banks are, too.
That’s
because one feature of the Draghi Ponzi was that national banks in
the peripheral nations started buying up their own country’s
rapidly appreciating sovereign debt hand-over-fist. Italy’s
banks own upwards of $400 billion of Italian government debt.
That’s
the one and same Italian government that cannot possibly cope
with its existing 135% debt to GDP ratio. And that’s
also before the populists take power and are forced to bailout
the country’s already insolvent banking system. The latter will
suffer from a shock of capital and depositor flight after the current
government falls(soon), and Prime Minister Renzi joins Cameron
and Rajoy at some establishment rehab center for the deposed.
In
short, Brexit
and the political risks from further dilution
pose
as an EXISTENTIAL
crisis not only for the EU but importantly for the European Central
Bank. This would also present as a clear and present danger for
central bank policies around the world as the political economic and
financial infrastructure that has underpinned
the current policy transmission mechanism will likely undergo radical
changes.
What
is Unsustainable Won’t Last
Some
may deny to say that a day’s event may not signify a trend. Well,
while this may partly true, such perspective in essence would redound
to a reckless dismissal of swelling signs of impending disaster. Just
think of a dam whose walls have been affected by spreading of cracks
and crevices through increased leakages. Brexit is just one of them.
And
of course, expect the establishment to fight tooth and nail to keep
retain the status quo. Aside from a tsunami of stimulus of global
central banks, some segments of the British population have already
pushed for second
referendum.
Besides,
Brexit is bound to happen. As I wrote in
2012:
In
reality, EU’s economic integration serves merely a cover for covert
plans to establish political fantasyland.
Eventually the path towards centralization will lead to unnecessary
violence and the self-implosion of an unsustainable and unviable
political system
Also
in another of my Prudent Investor blog post in the same year:
Yet
political solutions (bank and sovereign bailouts, ECB’s
interventions, surging regulations, higher taxes and etc…) will not
only hamper economic recovery, they will lead to more social
frictions which increases the risks of the EU’s disunion—as
evidenced by the snowballing
secession movements—and
of the escalation of violence.
Finally,
financial math indicates that what is unsustainable will have to end.
Interviewed
by the Mises
Institute, Godfrey Bloom, a British
politician who served as a Member
of the European Parliament(MEP) for Yorkshire
and the Humber from
2004 to 2014 has this foreboding revelation: (bold mine)
The
ECB is broke 3 trillion pounds.
The Germans have 900 billion pounds owed to them by shadow banking.
The ECB are buying 80 billion pounds worth of junk bonds every month.
They’ve already bought something like 380 billion. You simply can’t
go on like this forever and our own government in the UK and nobody’s
talking about this, Jeff. Nobody is talking about this. We are the
second most indebted nation
in the world after Japan and I see pundits talking about our debt
being 80% of the GDP, but they’re not taking into consideration
unfunded public pensions and public funding initiatives which have
been running for about 10 years.
If you take everything into consideration and of course, the
businessman listening to the cast, will know that if you leave off
international accounting standards, your liability for your pension
fund and anything else, it’s illegal, it’s a criminal offense and
you’d go to prison. It doesn’t really matter what we vote on
Thursday. The clock is ticking and the whole thing will collapse in a
few years.
In
the movie series the Matrix, the Oracle counseled on the leading
character Neo on how to beat his opponent,
Everything
that has a beginning has an end
