Weekly Article 06-27-2018
Over the past few weeks I have been challenged to find anything new to write about because it appears that the “print”, buy and manage the “markets” theme has just continued unabated.
That is, until the last week or so, where many signs are appearing that there are some reasons to be concerned about. Some of the gyrations taking place in most financial markets both here and across the globe I believe are worth taking note of.
One of the most telling in my opinion is that the major banks- those that have been called SIFIs (Systemically Important Financial Institutions) have seen their share prices fall for a record 12 consecutive days. According to Zerohedge Globally Systemic Important Banks are down 22% from their January highs. This sounds like the liquidity spigot for the global economy may be in a bear market.
Most have probably heard the news regarding Deutsche Bank and the massive layoffs and falling stock price. This however, may not just be an outlier, but may be the leader of the pack. All of these massive banks are tied together in a financial web (David Stockman, Martin Weiss) that even the most expert analysts cannot comprehend.
Back in 2008 I remember reading that Citigroup had to “take back” $40 billion on to its books. My immediate question was “Where was it in the first place?” Of course, we got a crash course (no pun intended) in derivatives and just how dangerous they can be. It was these bets that almost took the entire financial system down. Actually, it appears to me that they DID take the system down- hence the $16 trillion given to the banks in 2009 (GAO) and $24 trillion overall since to, it appears to me, pretend it didn’t happen. This is why we find ourselves in our current situation and not in a sustainable recovery that we would likely be in if the situation was left alone and played out.
In another related development the BIS (Bank for International Settlements), the central bank of central banks, is now warning that banks are inflating the value of their assets by borrowing short term funds from central banks when the banks report their leverage ratios at the end of each quarter. In other words, according to the BIS, they are far more levered than they admit and hide it by borrowing short-term funds against assets from the central bank to meet the leverage requirements 4 times per year.
(As noted in the article below)
Why is this important? It is the same scheme used by Lehman Brothers in the past that they used to hide the actual amount of risk they were taking. Actually, in a Zero hedge article on 6-24-2018 titled BIS Confirms Banks Use “Lehman-Style Trick” To Disguise Debt, Engage in “Window Dressing”.
Many times this has come back to bite those who use these tactics. It was reported that Goldman Sachs helped Greece disguise the real amount of debt to get Eurozone entry. In a July 2015 article by Robert B. Reich (Former Labor Secretary) at thenation.com “In 2001, Greece was looking for ways to disguise its mounting financial troubles. The Maastricht Treaty required all Eurozone member states to show improvement in their public finances, but Greece was heading in the wrong direction. Then Goldman Sachs came to the rescue, arranging a secret loan of 2.8 billion euros for Greece, disguised as an off-the books “cross-currency swap”-a complicated transaction in which Greece’s foreign-currency debt was converted into a domestic-currency obligation using a fictitious market exchange rate.” “By 2005, Greece owed almost double what it had put into the deal, pushing its off-the books debt from 2.8 billion euros to 5.1 billion euros.” “In the late 1990s, JP Morgan enabled Italy to hide its debt by swapping currency at a favorable exchange rate, thereby committing Italy to future payments that didn’t appear on its national accounts as future liabilities.
Think about that last statement. There are future liabilities that DON’T appear on its national accounts.
That is kind of like our promises of Social Security, Medicare and Prescription Drugs which may add $200 Trillion to our actual liabilities but are not counted because they are “off the books”.
Both of these countries- and many others- are in deep trouble with mounting debts, declining economic activity and little hope to grow their way out of these problems. Many major corporations are also issuing debt in dizzying amounts to repurchase shares, pay dividends and in general for non-productive uses. Short-term it provides a boost to the stock price but longer term it may cause a terminal event.
The recurring theme is “off the books”. To me, this is nothing but intentionally misleading anyone who is looking for information about what a correct valuation may be for the risk involved with either an entity or government. Of course, in the last few years, little matters other than what whomever is “printing” the money decides they are going to buy and prop up, or sell and keep compressed, to fit their story of the day.
In the end, however, anyone who has purchased debt whether it is “on the books” or “off the books” expect to get repaid. The problem is that, in looking at “the books”, I believe you may be getting not only an incomplete picture but maybe one of pure fiction.
This leads to decisions being made not only with incomplete information but may lead to future bankruptcies that no one sees with the current “books” but would be more than obvious if full information was being made available. Think Lehman, Enron and many others.
Despite the massive amounts of stock that have been bought back by corporations, the continued buying of stocks by central banks- most notably Swiss and Japanese Central Banks the overall stock markets have failed to move much in 2018. The volatility has been high but the actual returns are near flat. It appears that the air is being let out slowly but surely here.
Despite massive interventions in the bond market central banks have kept rates low but have not stopped them from moving up. Most central banks are purchasing sovereign bonds and some, like the ECB, are also buying corporate debt. Rates are still overall rising-albeit at a slow pace.
The big question here is do you trust these entities to pay you back when you expect payment? Do you still believe the Fed and other central banks “have your back?” I would suggest that if you are not too sure anymore that you should consider assets that are not someone else’s liability. In other words- real stuff like food and the companies that produce it. Oil, gas and energy and the companies that produce, refine, transport and sell it. Silver and gold and the companies that mine it.
It appears to me that the days of financialization are coming to a final crescendo in the near future. I believe those that have purchasing power at this time will have the opportunity to create life-changing wealth and purchase assets at pennies on the dollar. Of course, it will take guts at that time but, as history teaches, after every boom there is a bust and after every bust will come a recovery. While there are never any guarantees history is full of success stories of people buying assets “on sale” and doing very well.
In any case it can’t hurt to … Be Prepared!
Mike Savage, ChFC, Financial Advisor
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