Memphis: "Change Is Coming To America" Part 2 of 3
BIG BANKS HAVE PLAYED THEIR ROLE
As we progress thru any cycle there appear certain events that define and serve as a marker as to where we are; what path is to be followed next. Last December we got a big marker that was a "canary in the coal mine" event. If you caught this event and still remember it then you get extra credit.
This is when I knew that I had to write today's blog as it pointed to the certainty of America's path as our Congress (against all prudence) removed the shackles from the big money center banks and handed them all the freedoms from restraint that had been imposed after 2008.
This moment of clarity told me that despite all hopes to the contrary, our leaders (who deserve to have entire chapters devoted here) had chosen the path of "self" (of greed) and that, at the expense of the people, America's economy would in fact be allowed to crash and burn.
In the days leading up to this vote our leadership rolled up their sleeves alongside Jamie Dimon (J.P. Morgan Chase) and worked the phones, buying votes for PASSAGE!
This legislation (attached to the continuing funding resolution bill) was so blatantly wrong that even some leading democrats opposed the president such as House Minority Speaker Nancy Pelosi who called it a loosening of financial regulations that amount to “a ransom and a blackmail”.
Sen. Elizabeth Warren of Massachusetts branded the changes as a “bailout” for big banks at taxpayers’ expense and Minority Whip Steny Hoyer said on the House floor it was “better to pass it than to defeat it.”
Our elected leaders have been punting for years on doing the right thing guys, I get that, but at this moment in history when we, as a nation, were at a critical crossroads? This (in it's totality) spoke volumes and sadly gave me confidence that the worst possible course (that of least resistance) was yet again being chosen.
[note: It was also this event that birthed my blog about the great need for "character" in our Land.]
Briefly we can point to one other event that set our nation on a course to financial ruin. It involved the REPEAL of certain restraints on banking that were imposed under Roosevelt known as Glass-Steagall (The 1933 Banking Act).
This became a yoke around the necks of the big banks (who wanted to be traders) such that our leaders voted the repeal of Glass-Steagall on November12, 1999 setting the course for the 2007 financial crisis.
Martin Armstrong had this to say of that event:
"The bankers have sold this panacea of a new world financial order to Washington and with this vision Glass Steagall was repealed opening the gates to financial hell."
I have catalogued many hundreds of blogs by Armstrong into 25 subsets and the 2nd most populated category is on big banks and is titled "On The Oligarchy" so YES we could say much more here but let's leave it with this prophetic warning:
"I believe that banking institutions are more dangerous to our liberties than standing armies.
If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered.
The issuing power should be taken from the banks and restored to the people, to whom it properly belongs." ~ Thomas Jefferson
THE FINANCIAL MARKETS (all asset classes)
Many are concerned that Fall2015 will be our worst nightmare. I do not see a single financial event happening yet that will bring sudden destruction or turmoil. That said tho, the next several weeks may certainly have some big headlines! There are plenty of opportunities for a large event to occur that would cause some financial panic.
What seems most likely is that beyond 2015.75 will mark a period of sharp declines followed by less sharp rebounds. This is already manifesting in equities (the Dow index) but we must be clear that this will touch all three asset classes, bonds included.
The shift in confidence past Oct01 will be sharply away from gov't until it eventually becomes reflected in the bond market.
I have no solid timeline but follow the trend closely thru Armstrong.
For the near to medium term it is very much so a discussion of stocks and commodities contracting and thus creating the last big push into government securities. Beyond this the cracks will become evident (the bubble in bonds) as sovereign states (those large holders of our debt) begin to either default and/or warn of impending default.
To connect things here it is important to see that growing civil unrest and the coming decline in confidence in government issued debt are connected. Both are a reflection of the peak in big government to be followed by it's decline as capital will shift sharply away from public debt back into equities and eventually commodities.
At the time of this writing Armstrong has just released a very relevant blog that I will insert a portion of here. Although it is just a part of the whole, it illustrates well the realities in the globe as to what is truly driving capital flows:
World’s top 5 miners lose $540 BILLION market worth
Posted on September 7, 2015 by Martin Armstrong
"The World’s top 5 miners lost $540 BILLION market value as the Age of Deflation grips all asset classes helping to send cash running into the open arms of government borrowing [bonds]. Market values of the top 5 miners have collapsed between 60% and 88% from the major high in 2011.
After copper, coal has been the big mining commodity and here too we have seen a crash from nearly the $200 a tonne level back in 2008 to now where it is averaging in the low $60 range.
[No commodities get special treatment here] Despite the shouting that the dollar will crash, stock market will crash, and hence, gold will rise, that scenario does not hold up even looking at the Great Depression era. There too, commodities peaked in 1919 and underwent a 13 year bear market bottoming WITH stocks in 1932.
The scenarios painted by so many to sell precious metals are just not true. Commodities and stocks rallied out of the 1932 low TOGETHER.
When a currency rises, that creates the deflation for exports become dirt cheap and local business cannot compete [thus] increasing unemployment. As money rises in purchasing power, all assets must fall.
Indeed, this was [the environment in] 1935 when Roosevelt created even the 30 year mortgage desperately trying to revitalize real estate. The collapse in commodity prices are on schedule..."
ON INTEREST RATES, DEFAULTS, AND BANK FAILURES
The coming rate hike by the FED will help accelerate this trend despite it's being a small change (.25% expected). Have you wondered why there is so my talk about this? So much fear about the days following a rate hike? Many are even predicting the sky to fall!
This is important because despite all that we hear, market driven interest rates are not only a good thing for any economy they are a prerequisite. Without THAT? Price discovery (the question of what are asset values) becomes simply whatever we say it is.
note: for more on the connection between rising interest rates, the external USD debt, and the no win scenario that this poses for the FED see:
Advice for the Fed
Posted on September 14, 2015 by Martin Armstrong
One good way to visualize this is that in an economy that is "right side up" (without all the interventions) then prevailing interest rates are REFLECTIVE of the economy such that steady (or even trending higher) denotes a growing, expanding and, HEALTHY economy. Why?
Because it promotes (incentivizes) commerce! The past 7yrs of zero interest rates has been more destructive than most people realize.
note: Today's blog is not about solutions, that is an entirely different discussion for another day but let me insert here that any new system of economy that allows governments to accumulate debt will not be a solution. If allowed it assures that we will revisit the present day problems, it's THAT central to this whole discussion.
To better understand interest rates, what is money, why a gold standard has never worked, why Julius Caesar had the best solution to resolve our debt problem, and more, I would suggest the following as it is one of Armstrong's most insightful blogs ever released:
Money: What Is It? What is Interest? What is the Wealth of a Nation?
Posted on September 7, 2015 by Martin Armstrong
So why all the fear over a good thing? Well, as the world reserve currency our central bank must consider much more than our own domestic needs and externally this rate hike will cause added hardship to what I outlined in my blog of Sept05 titled: "The Rising USD - Look Out Below". This rate hike would be of no concern if it were not for one thing; the USD debt held around the world.
Because our currency is the global reserve and because we have sold so much of it cheaply the world is now stuck and quite anxious to be divorced from this relationship. Very much a driver in the war cycle which comes later.
The world's economic forces, their swings from high to low, are largely unseen and yet nearly any big global event or shift in society can be traced by a straight line directly back to them.
THIS is why we are going to see a detached reserve currency in the near term (the SDR) as it will not be subject to the whims (the domestic needs) of a single nation. It will be phased in over years to foster large movements of money and accumulated as reserve but will in no way be a panacea to the debt issue that is just now beginning to manifest. Slightly simplified, it is the long term solution to avoid a repeat.
Make no mistake, there is to be a rebalancing of the worlds ledger and the debt will be reduced back to normalcy; the undoing, if you will, of all these years of man's greed thru manipulation of the business cycle and none of this event will take place because it was wanted or was planned. (again, no conspiracy at work here! there is no all powerful force steering the ship.)
I hate to be technical all the time but it needs to be made clear that the present debt problem is called "misallocation of capital" and this simply means that the world's money supply has risen sharply in the form of debt and has not been put to productive use into industry and business growth.*
It has instead landed on the balance sheets of governments who know NOTHING about the productive use of capital. THIS is the debt that we will see simply vanish...poof. A massive cancellation of debt thru default.
* [note: A business will pay 10% interest all day long if assured it can invest and grow producing even a 12% gain. This basic math eludes government which knows nothing of economy but only how to take, to consume. It is a discussion of thrift.]
As these debts are defaulted on the losses will land largely within our shores as the issuer of the debt** and certain banks will not be able to survive it as this paper has been sold into many levels of derivative; a world wherein risk is not always a known element.
We are told that the big banks (especially in America) are now well capitalized, flush with money. This will be proven untrue and the capital reserves will prove to be but a drop in a very large pool.
I only see one segment of banks that are truly well capitalized and they reside in the Far East. Anticipating questions here, I do place some level of confidence in small community banking and localized regional banks. Just an opinion.
As crazy as it sounds (post 2008 meltdown) there is still a large element of debt in the world that is not settled thru one clearing house (market maker) thus allowing risk to be properly accessed, and this weakness, this exposure to undefined, unquantified risk, will be both exposed and undone as the business cycle is finally allowed to have it's day. [And yes, the floodgates to this were opened wide last December by our elected leaders.]
**[note: this shift in bonds is already has been underway for a few years now; heavily weighted into short term treasuries reflecting the coming shift in confidence. China was often found feeding at the trough during QE as they exchanged 30yr paper for short term.
If you have read "The Big Short" then you will readily accept that there are certainly people in the world of finance who see this shift (misallocation of capital) and are preparing. Not everyone in finance will have a life raft but more on that later.]
He gave a talk in which he argued that the way they measured risk was completely idiotic...
“By and large the wealthiest of the wealthy and their representatives have accepted that most managers are average, and the better ones are able to achieve average returns while exhibiting below-average volatility.
By this logic a dollar selling for fifty cents one day, sixty cents the next day, and forty cents the next somehow becomes worth less than a dollar selling for fifty cents all three days. I would argue that the ability to buy at forty cents presents opportunity, not risk, and that the dollar is still worth a dollar.”
He was greeted by silence and ate lunch alone...
Excerpt From: Lewis, Michael. “The Big Short: Inside the Doomsday Machine.”
SILENT FORCES THAT ARE AT WORK
In a broader sense, beyond 2015.75 and before we close the book on 2016 it will become evident to everyone watching that nothing is working; that the central bankers are not in control as many had hoped. I have pointed out often that central planners are not steering the ship but are simply reacting as the waves buffet it (picture a small sail being raised and lowered with little effect].
Their tools for manipulating markets are finite and have been nearly exhausted. The fact that they even attempt at going back into their tool box is beginning to smell of desperation.
While we are on banking, we can expect bank failures to become mainstream news by early 2018 (and sooner in Europe); this will CERTAINLY include many of the big banks. As their reckless bets (misallocation of capital) begin to bite them they will one by one become openly insolvent, unable to meet some huge margin call, but this time will be very different.
Government will turn it's back, it will have no choice. Why? Because you and I are watching this time. Any politicians greatest fear is what? Losing his/her position of power and money. Faced with no choice but to show fiscal restraint FINALLY they will tell the banks to pound sand.
Do these big banks know this already? If you cannot answer that question then you really need to stop skipping class and your 1st makeup lesson will be to review the bank bail-in legislation that is fully in place.
Capital controls are already increasing and will continue until the ULTIMATE is achieved, a totally digital currency. If we see bank bail-ins (and I believe we will) it will be a swift one-time event that most people will take no issue with as it will be sold to us simply as the rich doing their part in a time of crisis.
"Banking establishments are some of the WORST investors throughout history. They always go bust and government devours them every single time. Yes, the government has been protecting the bankers for they have also been fueling the debt and assisting governments to borrow. Therein lies their own demise. EVERY major banking house has been destroyed by this very same flirtation with power.
They are like moths attracted to the flame of a candle, hoping to dance by the light and never realizing their wings may get burned.
[But now] The cycle has changed. The wheel of fortune has completed its revolution. Governments are turning against the banks and looking to electronic currency.
The days of rumored banking conspiracies are coming to an end, as it always does. The banks will be a giant short. When the Sovereign Debt defaults become a contagion, the banks will not be supported by government."
Excerpt From: "A Question of Money — Interest & Bankers"
Posted on September 8, 2015 by Martin Armstrong
NO CONSPIRACIES HERE
"The problem ain't what people know. It's what people know that ain't so that's the problem." ~ Will Rogers
I have often encouraged folks to be slow in allowing your world view to change as in "do not carry around everything you pick up, lay it back down if it proves of no value". Well, as an example of my own journey (yes it has been a struggle at times) and evidence that I follow my own advice (practice what I preach) let me offer this about myself:
A few years ago I reluctantly and slowly began waking up to the truth that there is no evil force of powerful men behind the curtain directing the worlds economy to their gain. This thinking was ingrained into me more deeply than I realized. But thru education and careful observation my view today (my perspective) has changed considerably.
Are there attempts to manipulate financial markets for personal gain? You bet there are but this does not equate to actually having power to control them and the distinction here makes all the difference.
To those who still carry the mantle of conspiracy; thinking for example that the entire worlds financial system is being steered and controlled by grand puppet masters with really big strings who then manipulate at will and always to their gain? I would ask this:
Considering what we just covered in these few paragraphs, is this not evidence that, even tho individual markets are manipulated for a time (with mixed success) if such groups were all powerful (and half as smart as we need them to be) then they would not go bust with each crash and run to government for bailouts?
This brief visit into conspiracies is meant to inspire but even it fails I can still testify that my recent journey has been a much more liberated one.
This one small adjustment to my thinking has set me free from a limitation that I did not know existed and I am today seeing some things quite clearly that before were cloudy at best and at times just totally beyond my reach. To put it bluntly, as recently as a year ago I would have been largely disqualified from composing today's blog.
“...[Steve Eisman] got himself invited to a meeting with the CEO of Bank of America, Ken Lewis. “I was sitting there listening to him. I had an epiphany. I said to myself, ‘Oh my God, he’s dumb!’ A lightbulb went off. The guy running one of the biggest banks in the world is dumb!”
They shorted Bank of America, along with UBS, Citigroup, Lehman Brothers, and a few others. They weren’t allowed to short Morgan Stanley because they were owned by Morgan Stanley, but if they could have, they would have..."
Excerpt From: Lewis, Michael. “The Big Short: Inside the Doomsday Machine.”
Comments may be made at the end of Part 3 Thank You