This coming week could be very telling. China just ended a
disastrous week and finished just whiskers away from entering bear market
(-20%) territory http://www.zerohedge.com/news/2015-06-27/chin...ion-margin-call
. Credit markets all over the world are weakening and
yields are rising. Greece will not make their June 30 payment(s) and
probably go through a referendum to decide whether or not to flip their
creditors the bird in a meaningless vote. In fact, Greece will probably
“go boom” this week. Their banks and stock markets may not open Monday
morning target="_blank";http://www.zerohedge.com/news/2015-06-27/g...-officials-warn
. Two days later, some sort of plan will need to be concocted to
classify their bankruptcy as not a “DEFAULT”, otherwise a $3
trillion fuse to a $1.4 quadrillion bomb will be lit! These and more
will be very important “mid-term exams”, any failure will bleed over into
derivatives and become “final and terminal exams” with zero chance of a
passing grade!
We have all heard about the Greenspan, Bernanke and now the Yellen “put”.
It has been believed (and for good reason), the Fed would step in and save
the stock market should it begin to buckle. Magically, and time after
time as the stock market would hit critical levels, panic buying would
appear. This has been written about many times by many
authors. Would the Fed really buy stocks or even indices? I
would ask, “why wouldn’t they, it is actually even legal” after the plunge
protection team was created in 1988. This is not conspiracy theory, it
is FACT! All one needs to do is look at the Bank of Japan, they
openly buy stocks and even seem proud of it! As for equities, please
ask yourself these questions. How “sound” is a stock market that makes
continual new highs on lesser and lesser volume? &n target="_blank"bsp;http://www.zerohedge.com/news/2015-06-2...-warning-stocks
If you are a large holder, are you bigger than the available exit?
What if everyone at once took Ms. Yellen up on her “put offer”?
Another area where Fed buying looks to be very important is in our credit
markets. Unless they step up with some serious buying, and soon, our 10
year Treasury yield will take out 2.5% to the upside. U.S.
Treasuries and their “value” are what act as collateral or foundation
for everything the world “believes in”. Before going further, I do want
to mention another aspect of the ultra low rates we live with. When
rates are 10%, a 100 basis point move is only 10%, when rates are 2%, a 100
basis move is 50%! In other words, movements in interest rates when
rates are low have a hugely magnified impact. When rates rise,
collateral “shrinks” very rapidly from a low interest rate base which
means margin calls are more rapid and bigger in amounts. Higher rates
will make insolvencies that much more likely and will then occur
“systemically”.
This topic was suggested to me by Jim, as he put it, I
believe this chapter will be described as “The Phantom of the Fed Put
revealed.” Please understand what is meant here. There
is a “confidence” all over the world in not just the Fed but in ALL central
banks. This is a misplaced confidence because the markets themselves
are far larger than any single central bank or even ALL of them
collectively. Yes, The Fed can push, pull, support and suppress …for a
time. They cannot stop a broad tide from going out or prevent a tsunami
from coming in over a long time frame. The current timeframe is six
years, A LONG time for us Westerners, might as well be six days for
those from the East. Does a Fed (central bank) put really exist?
Or is it only the “belief” a put exists?
My point is this, the only thing holding markets together is confidence
…and the only thing keeping confidence from being shattered is the belief
central banks are and will provide a “free put” to all markets.
Take the three examples I started with up top. If the Chinese market
continues to implode, what will that say about the abilities of the
PBOC? Or when Greece defaults and triggers others, what will that say
about the ECB or IMF? Were Treasury yields to rise through 2.5%
amongst the other turmoil, what will that say about the “safe haven” status
of Treasuries and thus the dollar? It will be a reflection of Fed
impotence. The skeptics who say “they will do this forever” …can
say what they say at their own peril!
Let me finish this with the BIG BAZOOKA. I am sure you remember Hank
Paulson talking about $700 billion TARP as a bazooka? The reality is
this amount will not even be a spitball this next time
around. There are over $1.4 quadrillion worth of notional value
derivatives outstanding. The apologists say “notional” value has no
meaning, it is only the “margin” that counts. They are correct during
“normal times”. Normal times being defined as being “trusted enough”
and being able to breathe. Seriously, if you can breathe today you
can borrow money. What comes next is a change of thought and a massive
phase of global distrust. When trust and confidence break, “margin
call” will become a familiar term to nearly all.
This you MUST understand, when trust evaporates, credit will cease
entirely. Without credit, the world will stop spinning.
Everything finance and many things real will be gone. The financial
house cannot stand with a worthless foundation and distribution of real
products will cease as the supply chain breaks. Over $1.4 quadrillion
in derivatives is a larger number than “everything is worth” …not to mention
far larger than the money supplies to settle the trades or put up the
margin. You see, “putting up the margin” will equate to 100% of all these
contracts because in default …notional and real value are one and the
same! Settlement is not an option! It is this $1.4 quadrillion
margin call that hangs over the entire system each and every day.
Margin calls are almost never issued into calm. They are almost always
issued into panics and by definition ALWAYS at the wrong time! The only
way to shed all margin is to get G.O.T.S.!
I have said all along and stand by my statement “when this thing gets lit,
it will only take 48 hours to engulf everything”. If this is truly the
“beginning of the ending sequence”, many markets will go no bid while a
couple will go no offer! Meaning you will have what you and that’s all
you will have… I leave you with this horrible thought for the weekend.
How better might $100 be spent? A nice dinner with your spouse or on
200 lbs. of parboiled rice?
Regards, Bill Holter
Holter-Sinclair collaboration
Comments welcome! target="_blank" bholter@hotmail.com
