Thursday, June 28, 2018

2008 part deux: Global financial system rushing headlong towards a combined debt and liquidity crisis

For all intents and purposes the global financial system died in October of 2008 following a liquidity crisis that was only stemmed through the interventions of governments and central banks.  But in the aftermath of that crisis, these same entities would need to continuously fuel the system with ever increasing amounts of debt and liquidity just to prop up the dead financial corpse.

10 years later the world once again appears to be standing on that same liquidity precipice, only this time it is much, much worse since it is being coupled with a global debt crisis that is exponentially spiraling out of control.  And sadly because central banks themselves are virtually insolvent by having so much debt on their balance sheets, it is not only the banks that stand to lose when the whole scheme starts to collapse.

Emerging-market debt crises are as predictable as spring rain. They happen every 15–20 years, with a few variations and exceptions. 
It has been 20 years since the last EM debt crisis and 10 years since the last global financial crisis. EM lending has been proceeding at a record pace. Once again, hot money from the U.S. and Europe is chasing high yields in EMs, especially the BRICS (Brazil, Russia, India, China and South Africa) and the next tier of nations including Turkey, Indonesia and Argentina. 
Argentina’s ratio of debts and deficits to reserves is over 120%. The ratio for Venezuela is about 100%, and Venezuela is a major oil exporter. 
These metrics don’t merely forecast an EM debt crisis in the future. The debt crisis has already begun. 
Venezuela has defaulted on some of its external debt, and litigation with creditors and seizure of certain assets is underway. Argentina’s reserves have been severely depleted defending its currency, and it has turned to the IMF for emergency funding. 
Ukraine, South Africa and Chile are also highly vulnerable to a run on their reserves and a default on their external dollar-denominated debt. Russia is in a relatively strong position because it has relatively little external debt. China has huge external debts but also has huge reserves, over $3 trillion, to deal with those debts. 
The problem is not individual sovereign defaults; those are bound to occur. The problem is contagion. – Daily Recknoing
In just the past month Argentina received the largest bailout from the IMF in their history.  and Venezuela's attempt at an oil backed cryptocurrency appears to have stalled, with their inflation rate now sitting at 8100%.  In addition, the Fed is attempting to slow down expansion by raising rates and lessening their balance sheets, and Russia has just announced their are doing the same by raising taxes.

And then there is China... who's debt just reached $30 trillion earlier this month.

All this means of course is that the liquidity that helped spur on emerging market growth, and rebuild housing and equity bubbles around the world, is suddenly being shutoff.  And it was that same halt in liquidity back in 2008 that brought down the entire financial system in a little less than a week.
That whooshing sound you hear is the draining of $1.4 trillion worth of global liquidity.
Quantitative tightening, or the unwinding of central banks’ extraordinary stimulus, has been the primary driver of asset-class performance this year, Bank of America Merrill Lynch analysts say. The march higher in U.S. interest rates and tighter financial conditions mean securities that did well during quantitative easing, such as corporate bonds and emerging-market debt, are now underperforming, while “QE losers” have become stars. 
The year marks a shift in a tide of global liquidity that helped push up asset prices, according to Merrill Lynch’s analysis. Securities purchases from the Fed, European Central Bank and Bank of Japan are just $125 billion year-to-date, well below the $1.5 trillion run-rate of 2017, they estimate. That suggests markets are missing an injection of some $1.38 trillion thanks to policy makers changing tack. - Bloomberg
Central bank heads admitted back in 2008 they never saw the financial crisis coming, but contrary to the fact that as a whole they are telling the public that everything is fine, behind the scenes they are preparing for not only the collapse of the current system, but the advent of a new one.  And like back in October of 2008, it will come swiftly and nearly overnight, and if you aren't prepared now, you will not get the chance when the system you know today suddenly no longer exists. 

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