US Now in Official Recession! May Lead To Debt Crisis Meltdown!
On August 13th, 2019, I said this in my recession analysis:
"I think will be born out of the next recession. And I believe that the next recession is most likely less than 18 months away."
-Referenced analysis attached blow-
Here we are, roughly seven months later, and my recession indicator has officially given the signal, showing that the economy is now firmly in the beginning stages of a recession. As, I've stated over the past few weeks, this signal was inevitable, especially when it became clear that the economy was grinding to a standstill.
So, while the coronavirus is a black swan event that has cast the global economy into a now confirmed recession, we have to keep in mind that there is an extraordinarily dangerous element that could make matters exponentially worse — the global debt crisis.
I've been sounding the alarm over and over of how dangerously unsustainable the debt crisis is, and that there is a relatively high chance that it would be born of the next major recession. For those that follow me, you know that I've talked at length about how we've already seen signs of the Fed losing interest rates here in the US, particularly in the overnight repo market, when rates spiked in minutes, from approximately 2% to 10%, despite the fact that the Fed had set the benchmark rate at 2.25%.
That happened because banks who actually had reserves, realized that far too many banks were scrambling to fill their reserves with loans in the overnight repo market. It was a huge red flag in the banking industry, and the banks that actually had reserves to lend in the repo market, would still do so, buuuuut at a 10% overnight rate as opposed to the Fed's set 2% rate. In a matter of minutes, rates exploded five fold. That could easily happen again, and in other areas of the economy, causing rates to explode out of control. In the case of the overnight repo market, the US Federal Reserve quickly jumped in, pumping some $800 billion into the repo market over the course of only a few days. Now, the Fed is basically doing the same thing, as it announced a few days ago that it inject up to $1.5 trillion into credit markets.
LET'S NOT FORGET, this is all on the back of the greatest stimulus the world has ever seen. During the course of quantitative easing (QE1, QE2, and QE3) the fed injected more than $5 trillion into the economy, the the form of bad mortgage backed security buybacks, and bond purchases. They were literally buying up toxic assets, in an attempt to manipulate the economy, and it has worked well, until now.
Now, we can see that the economy literally NEEDS continuous stimulus to survive. Despite enormous gains and "big growth" in the economy, it has all been smoke and mirrors, created by trillions and trillions of dollars of money printed by the Fed. Let's ask ourselves. When did the need to bailout the overnight repo market arise? It came after the Fed had been ever so slowly rising interest rates, in an attempt to return to a more "normalized" policy. However, they quickly reversed course, and here we are now back at a zero percent interest rate.
Here is why that is EXTRAORDINARILY DANGEROUS. It reduces the Fed's ability to react. In order to suppress rates, the Fed will usually buy bonds and drive up prices, which in turn pushes rates down. Remember, bond prices and interest rates have an inverse relationship. However, when rates are at zero, there isn't much room to push rates any lower, which is why it seems very likely that we will experience negative rates at some point before the debt crisis produces the greatest financial meltdown the world has ever seen.
It's not only the US Federal Reserve bank either. Most of the other reserve banks around the world are running at (or near) zero percent interest rates, following in lockstep with the US Fed. Japan, for example, has even taken rates negative. Well how "negative" can rates go?
As I stated above, global Federal Reserve banks generally control economic interest rates and the monetary supply. But with their rates at zero, and literally hundreds of trillions (possibly more than half a quadrillion dollars when you include all global unfunded liabilities) the ability of the global reserve banks to rescue the economy is severely diminished. They can't suppress rates much more than zero, so that's out. And they can't continue to reasonably print and print and print, without creating enormous amounts of inflation.
So, I think the economy is teetering on an extremely dangerous ledge, and all it would take, to create the worlds greatest financial collapse, would be the loss of interest rate control. We all know that corporate debt is dangerously levered right now, and that alone could cause massive problems in the US, not to mention the explosion of sub-prime lending that has occurred in the auto industry, or the constant depletion of US bank reserves.
I'll leave you with this. In the US, banks run on a system known as "fractional reserve banking." That means they literally only keep 10% of the depositors money in their accounts. The other 90% gets lent out. Oh yeah, and they don't even pay you any interest, or so much as send you a thank you letter, for lending out 90% of your money. So, lets see. The banks lend out 90% of the depositors money, and they have obviously have constantly depleting reserves, as evidenced by the overnight repo market's interest rate explosion and the Federal Reserve's intervention. So, if they lent out 90% of our money, and they have nothing in reserves, then where is the other 90% of our money? IT'S GONE! And, it's probably not coming back, because there is no escape plan to unwind the debt. It is unsustainable to run a fractional reserve banking system, in a debt based economic system. We are living in a house of cards. They have held it up and manipulated it for as long as they possibly could, but the market ALWAYS finds fair market value. Fair market value in THIS system, is massively lower.
I'm The Master of The Charts, The Professor, The Legend, The King, and I go by the name of Magic! Au revoir.
***This information is not a recommendation to buy or sell. It is to be used for educational purposes only.***
-JD-
This is the analysis referenced above, from August of 2019:
"I think will be born out of the next recession. And I believe that the next recession is most likely less than 18 months away."
-Referenced analysis attached blow-
Here we are, roughly seven months later, and my recession indicator has officially given the signal, showing that the economy is now firmly in the beginning stages of a recession. As, I've stated over the past few weeks, this signal was inevitable, especially when it became clear that the economy was grinding to a standstill.
So, while the coronavirus is a black swan event that has cast the global economy into a now confirmed recession, we have to keep in mind that there is an extraordinarily dangerous element that could make matters exponentially worse — the global debt crisis.
I've been sounding the alarm over and over of how dangerously unsustainable the debt crisis is, and that there is a relatively high chance that it would be born of the next major recession. For those that follow me, you know that I've talked at length about how we've already seen signs of the Fed losing interest rates here in the US, particularly in the overnight repo market, when rates spiked in minutes, from approximately 2% to 10%, despite the fact that the Fed had set the benchmark rate at 2.25%.
That happened because banks who actually had reserves, realized that far too many banks were scrambling to fill their reserves with loans in the overnight repo market. It was a huge red flag in the banking industry, and the banks that actually had reserves to lend in the repo market, would still do so, buuuuut at a 10% overnight rate as opposed to the Fed's set 2% rate. In a matter of minutes, rates exploded five fold. That could easily happen again, and in other areas of the economy, causing rates to explode out of control. In the case of the overnight repo market, the US Federal Reserve quickly jumped in, pumping some $800 billion into the repo market over the course of only a few days. Now, the Fed is basically doing the same thing, as it announced a few days ago that it inject up to $1.5 trillion into credit markets.
LET'S NOT FORGET, this is all on the back of the greatest stimulus the world has ever seen. During the course of quantitative easing (QE1, QE2, and QE3) the fed injected more than $5 trillion into the economy, the the form of bad mortgage backed security buybacks, and bond purchases. They were literally buying up toxic assets, in an attempt to manipulate the economy, and it has worked well, until now.
Now, we can see that the economy literally NEEDS continuous stimulus to survive. Despite enormous gains and "big growth" in the economy, it has all been smoke and mirrors, created by trillions and trillions of dollars of money printed by the Fed. Let's ask ourselves. When did the need to bailout the overnight repo market arise? It came after the Fed had been ever so slowly rising interest rates, in an attempt to return to a more "normalized" policy. However, they quickly reversed course, and here we are now back at a zero percent interest rate.
Here is why that is EXTRAORDINARILY DANGEROUS. It reduces the Fed's ability to react. In order to suppress rates, the Fed will usually buy bonds and drive up prices, which in turn pushes rates down. Remember, bond prices and interest rates have an inverse relationship. However, when rates are at zero, there isn't much room to push rates any lower, which is why it seems very likely that we will experience negative rates at some point before the debt crisis produces the greatest financial meltdown the world has ever seen.
It's not only the US Federal Reserve bank either. Most of the other reserve banks around the world are running at (or near) zero percent interest rates, following in lockstep with the US Fed. Japan, for example, has even taken rates negative. Well how "negative" can rates go?
As I stated above, global Federal Reserve banks generally control economic interest rates and the monetary supply. But with their rates at zero, and literally hundreds of trillions (possibly more than half a quadrillion dollars when you include all global unfunded liabilities) the ability of the global reserve banks to rescue the economy is severely diminished. They can't suppress rates much more than zero, so that's out. And they can't continue to reasonably print and print and print, without creating enormous amounts of inflation.
So, I think the economy is teetering on an extremely dangerous ledge, and all it would take, to create the worlds greatest financial collapse, would be the loss of interest rate control. We all know that corporate debt is dangerously levered right now, and that alone could cause massive problems in the US, not to mention the explosion of sub-prime lending that has occurred in the auto industry, or the constant depletion of US bank reserves.
I'll leave you with this. In the US, banks run on a system known as "fractional reserve banking." That means they literally only keep 10% of the depositors money in their accounts. The other 90% gets lent out. Oh yeah, and they don't even pay you any interest, or so much as send you a thank you letter, for lending out 90% of your money. So, lets see. The banks lend out 90% of the depositors money, and they have obviously have constantly depleting reserves, as evidenced by the overnight repo market's interest rate explosion and the Federal Reserve's intervention. So, if they lent out 90% of our money, and they have nothing in reserves, then where is the other 90% of our money? IT'S GONE! And, it's probably not coming back, because there is no escape plan to unwind the debt. It is unsustainable to run a fractional reserve banking system, in a debt based economic system. We are living in a house of cards. They have held it up and manipulated it for as long as they possibly could, but the market ALWAYS finds fair market value. Fair market value in THIS system, is massively lower.
I'm The Master of The Charts, The Professor, The Legend, The King, and I go by the name of Magic! Au revoir.
***This information is not a recommendation to buy or sell. It is to be used for educational purposes only.***
-JD-
This is the analysis referenced above, from August of 2019:
Comment:
I don't know why it was deleted, but in the beginning, I wrote that I "think the debt crisis will be born from the next major recession."