For those that are new to my work, please allow me to remind you that we are dealing with a currency lifecycle issue. And because this event has happened over 4800 times in the past, there are clear repeatable patterns that have occurred 100% of the time. It goes something like this.
It always starts with real money gold, then governments and bankers degrade the money and create speculative bubbles and inflation, went those bubbles pop, governments and bankers attempt to reflate them but ultimately fail, as the public pays the biggest price, confidence is ultimately lost. In order to get that confidence back, governments put a component of gold back into the money to generate confidence again.
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At this time central bankers and governments are desperately propping up popping bubbles and have been since 2008. But on the fractional reserve system, which is based on constant debt and leverage growth, the problem and the cure are one in the same. More debt and more leverage.
Leverage is really just another word for debt. Corporations use borrowed money (debt) for investment, hoping the profits made will be greater than the interest owed. Derivatives are a tool of leverage. In Fact, according to some BIS (Bank for International Settlements) reports, some derivatives used in mutual funds, leverage equity up to 1,000%. Additionally, there are leveraged and reverse leveraged ETFs. The point is that wall street does what they do best, creating opaque risk products for the naïve public, privatizing profits for the few while transferring risk to the public.
Now the Federal Reserve is concerned about “Excessive leverage within the financial sector” but with interest rates anchored at zero since 2008, central bankers inspired massive debt and leverage growth in their attempt to reflate targeted markets.
Additionally, only looking at bank leverage is truly misleading since banks have been inspired to loan to nonbanks, like; financial transactions processing companies, private equity, insurance companies, REITs, investment funds, hedge funds and special purpose entities. Much of this debt is then turned into financial products and sold to the unsuspecting public. This is call “Securitization” and as stated in this financial stability report “Securitization allows financial institutions to bundle loans” and “represents a form of credit risk transformation whereby some highly rated securities can be produced from a pool of lower-rated underlying assets.” Sounds like CDO (Collateralized Debt Obligation) derivatives that overwhelmed central banker tools at the time and toppled he real global economy.
The fallout of which we continue to deal with today.
But in typical central bank fashion, don’t change behavior, change how we account for that behavior.
In 2013, new accounting tools (netting and compression) were created to offset the number of notional derivatives visible to the public. This enabled banks to hold less in reserves and have more money to gamble with. But it also hides the real risk we are all facing. (See special blog “Derivatives: The Hidden Dangers of Compression and Netting by Eric Richter)
Additionally, the global financial markets are now attempting to transition from the IBOR (Interbank Offer Rate) interest rate benchmark (itself a derivative), into newly created interest rate benchmarks (also derivatives). In the US it’s SOFR. That transition was supposed to be final on December 31, 2021. While some IBORs will cease to exist at that time, after testing the transition in October, those tied to the US LIBOR have been extended to 2023.
Pretend, cover up and conceal, that is the motto. So, while some think crisis averted, I think crisis heating up because that postponement means the test was a huge failure. (I will be going into that in more detail next week.)
In the current Fed Financial Stability Report they state, “Excessive leverage within the financial sector increases the risk that financial institutions will not have the ability to absorb even modest losses when hit by adverse shocks.”
This transition away from LIBOR is likely to prove to be a BIG adverse shock. It doesn’t seem that the Fed thinks banks can survive this and that’s likely the reason for hyperinflating the money supply. I’ve become my own central banker by holding most of my wealth is tried and true money. I encourage you to do the same.
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Chief Market Analyst, ITM Trading