Submitted by Steve Brown…
For many years, monetary realists have predicted that the reinflated burst bubble of 2008-2009 will burst again. Not to make light of the health implications for billions, but another reality check for financial markets has been on the cards for at least nine years and herein is how that may occur.
Most US shares are traded by program on the New York Stock Exchange, where a group of fifteen or more stocks may be traded by electronic trading systems via a particular broker. Program trading curbs are enacted when the NYSE composite index falls 190 points during a trading session or the Dow Jones Industrial Average falls 2% below its previous close on program trades. But a program trading curb is quite different than a general trading halt.
Trading will halt on the New York Stock Exchange when the Standard & Poor 500 index falls either 7% or 13% during a trading session for a varying length of time. Trading will fully halt with a drop of 20% in the S&P 500 during a trading session. On March 6th the S & P 500 index ended down 51 points at 2,972. Since the S & P is at 2972 this means that the index must decline by 600 points during the next trading session for trading to be halted, and the market closed. A decline from 2972 to 2372 seems unlikely when the US Exchange Stabilization Fund has finely honed its ability — in conjunction with the Federal Reserve — to manipulate markets. But unlike 2008-2009 crisis, this crisis is somewhat different:
- a) All primary dealers are in trouble — not just one
- b) Federal Fund rates are already negative in real terms
- c) Fed is already locked and loaded with an enormous amount of Treasury debt
- d) Losses will be incurred at the high end of the market not the low, and losses will impact across the board so the largest funds will suffer
- e) Bail-outs will not be an option and bail-ins must be contemplated
- f) US treasury yields will decline further causing foreign capital to desert the US bond market
- g) Systemic Global market issues will become far more apparent than they were in 2008-2009
- f) Potential spin-off from the US dollar may be forced on the renmibi-yuan
- h) Troubled assets are not confined to just one sector as in 2008-2009
So, can the Exchange Stabilization Fund and Federal Reserve manage to address all of the above? The central tenet being that the globe is so hooked on US dollars that there is nowhere else for trillions in vaporized dollar assets to go (short term) than to other US dollar assets, whether cash or US Treasury debt instruments. That’s an arguable point. But if this situation continues to deteriorate my prediction is the following:
1. Continued flight from US stocks to Treasury bonds/notes/bills
2. Retention of cash until fed cuts again
3. Fed forced to cut rates again
4. QE4 beyond current fed purchases and repo injections
5. Fed/ESF must suppress gold
6. Fed/ESF must intervene in share markets
7. Fed/ESF must intervene in currency markets
US capital may flock to US Treasury debt instruments, but foreign capital may eventually balk when the numbers look unfavorable. All points 1 – 7 above represent a lot for the Fed to juggle. Whether it’s Twist or QE4 or suppressing gold or boosting repo operations well beyond the existing, the monetary challenges necessary to avoid a major global recession and perhaps financial collapse appear major.
Going forward, much will depend on how the rest of the world views this crisis – not just the United States. One option for ‘rogue states’ (or what Washington sees as rogue) is a major unprecedented leap into physical stand-for-delivery gold.
A concerted move to real gold (not paper) assets by Elites to the tune of billions will endanger the entire monetary system when the gold carry trade explodes higher and old leases cannot be hypothecated or satisfied at any price. Such an event will endanger the very foundation of Central Banks light on real gold assets, including the mother of all central banks, the Bank of International Settlements. Hedge funds and major scam operations across all derivative sectors – amongst which all Central Banks have been ensnared – would thus be threatened.
Put simply, while the aftermath of the collapse of 2008-2009 greatly enriched the far less than 1% this new potential for financial collapse promises to catch the Hedge Fund and wealth manager class out in the cold. There is no Hank Paulson to appear on our TV sets demanding $700 Bn from the public this time to save their shirts. Elites will be caught in a pickle where they cannot thieve their way back to fame and fortune via the public as they did in 2008-2009.. unless they bail-in. Bail in means the bankers will take money directly out of our bank accounts to save the system. And perhaps that is why Washington is having such difficulty addressing the current coronavirus and financial issues.
It will be interesting to see how markets react to these financial fears and viral panic on March 9th. If true to form, US share markets will be down significantly in am trading. Then Washington will be motivated to calm markets with positive public statements in the morning. The Fed/ESF will be prompted to act — probably later in the trading day — to show a decisive but not catastrophic loss to the DJIA and S&P 500 overall. If at any time share markets threaten to close early, the ESF will step in to save the day.
Soon, the Fed will be forced to announce another rate cut of 50 basis points. The Fed will announce QE4 (3 has already occurred) and any other stimulus measure that can be envisaged. While the foregoing is fairly predictable, at what point we will be several months from now certainly is not.
The statements, views and opinions expressed in this column are solely those of the author and do not necessarily represent those of The Duran.