The revelation over this past weekend by Hypo Alpe-Adria has been
called by some as Austria’s “Lehman moment”. This may very well be on a
micro scale, I believe it to be the Credit-Anstalt moment on a macro scale.
If you recall history, Austrian bank Credit-Anstalt was the first domino to
fall in 1931 which spread across the globe and tipped the banking system into
default mode.
There are many similarities to the world today as compared to that world
of 1931. Debt had become prevalent leading into the stock market panics
of 1929. Margin debt had exploded and caught many offside just as it
did in 2007-2009. The more recent episode had even more leverage via
the use of derivatives, I point this out because the “leverage
ratios” are far higher today than they were 80 years ago.
The world was also in the midst of currency wars. Back in the
1930′s, the global economy had slowed (just as it has today) and consumption
was not keeping up with production. This same anomaly exists today in
the zones (think China and Asia) where production has been moved to lower
costs. What happened in the 1930′s was considered a time of “beggar thy
neighbor”. Countries purposely weakened their own currencies in order
to undercut the sales price of goods produced by other countries. This
morphed into trade wars and ultimately WW II. Other similarities were
the fact that after 1929, unemployment rose, economic activity slowed and the
financial sector was being squeezed with weakening and defaulting
loans. Current day by no means is a carbon copy to where it was back in
1931, but there is a definite “rhyme” to it.
So, what exactly does the current “Hypo moment” mean? For
one thing, it means that nothing was really fixed from the last episode.
If “things” were good and getting better, how could a bank which was
recapitalized (at the bottom) …fall even further? The answer of course
is the economy and financial systems are not “better”. As I have tried
to write all along, the problems were glossed over and dead bodies swept
under the rug. Hypo, is simply the tip of the iceberg and a harbinger
of more, similar things to come.
I would be remiss if I did not mention one major difference between the
1930′s, the days of Lehman collapsing …and now. The most dangerous
“cure” undertaken in 2008 and onward is governments and their central banks
putting their own balance sheets on the line. You see, this did not
happen in the 1930′s, if a bank went bad …it went under. Yes, captains
of industry did make efforts to save things but the federal government
largely stayed out of it. Not so today. Almost nothing was
allowed to go under up and until Lehman was “allowed” to fail. No one
(very few) dreamed how quickly and completely credit dried up after Lehman
failed. THIS is the reason nothing else was allowed to fail afterward,
fear of a domino effect taking everything with it.
Last year, the U.S., Europe, Britain, Canada and others all figured out
they could not go another round of bailouts. It is not that they had a
come to Jesus moment and decided to let losers, lose. No, these
governments ALL figured out the simple math they could no longer AFFORD to
bailout insolvent institutions, especially the behemoths. This is why
the legislation of “bail ins” came forth. But, there is still a big
problem with governments allowing market forces to cleanse bad debt and bad
banks … the size and scope of the losses involved!
I am not just talking about the size of the losses although this is
certainly important. No, I am speaking of the “number” of losses and
what “investors” will then decide to do. Allowing bail ins to occur
will mobilize investors in a hurry. Once people figure out they are
creditors of their bank, they will begin to move. Even though the bail
in laws were passed last year, publicized and known about …no one cared
because it hadn’t happened to anyone. This will now most likely change
with Hypo and people will see a real case of real losses!
A move to “safety” is what we should begin to see shortly. The
previous moves had been that of moving to yield because very little was
available. Safety, or “risk” did not matter because no one was ever
allowed to lose. This of course has changed with the Hypo moment.
If made to wager, the Hypo moment may be very much like the Lehman
moment in that it may be the last insolvency allowed. This is a very
hard one to call because both choices lead to the very same “death” though by
different means. We can go the route of bail ins where depositors are
spooked into bank runs all over the world …or, resume more bailouts and fund
them with QE.
In reality, the original questions back in 2008-09 have not been answered
nor really even addressed. Nothing has been fixed, nothing has improved
and truth is, nothing has changed. The question, or more to the point
the reality of “inflate or die” is still there. Though we watched this
fade into the background by the “inflations” of the various and global QE
undertakings, the choice must be again made …inflate (again) or die… which
poison will be chosen?!
This is a very interesting crossroads because given the choice, inflation
will be chosen and thus further currency debasement and destruction.
The problem is deflation continues to gnaw away at bank “assets”, Hypo being
the first admission. If there are losses taken and “creditors”
made to pay, masses will decide they do not want to be in “creditor
status”. Bank runs will (and the sale of all sorts of financial
credits) follow. The global banking system will become unfunded so to
speak in very rapid fashion. All this boils down to is one very simple
choice, “choosing your poison”. The only question remaining is whether
the choice is allowed or do market forces rule and decide for the central
bankers?
What does this mean to you? It means you need to decide whether you
want to be a creditor, or whether you want to be an asset holder.
Currencies, and the institutions that “hold them” for you will be weakened
and “run”. Your obvious alternative is to become your own bank …holding
real money that cannot default. The key to this game is not to be
defaulted upon. The only way to do this is by having no
counterparty risk to your account nor your currency. Gold in hand is
your obvious solution, this decision will be obvious very soon.
