Yellen Against the Gods

Even God Himself could not sink this ship.

– Titanic crewman…the ship sank four days later

It is our will that this state shall endure for a thousand years.

– Adolf Hitler…10 years before the Reich was destroyed

‘Long-Term Capital Management’

– Hedge fund headed by Nobel Prize winner, bet against things that ‘couldn’t happen in a billion years’… Four years later, the fund blew up

I have returned from Germany with peace for our time.

– Neville Chamberlain…11 months before the start of the Second World War

‘Argentina Plans to Offer 100-Year Bond’ (priced to yield only 7.9% until 2117)

– Bloomberg, 19 June, 2017

Ring the bell. Open up the gates. Unleash the hounds of hell.

Here’s Janet Yellen’s latest contribution to the Famous Last Words club:

Would I say there will never, ever be another financial crisis? You know probably that would be going too far but I do think we’re much safer and I hope that it will not be in our lifetimes and I don’t believe it will be.

This must be what the gods have been waiting for… What bread doth Ms Yellen eat? What ale doth she drink? What is she thinking?

The weather has been so nice Ms. Yellen is building a house without a roof!

Stacking blocks of wood

We don’t know any more than the Fed chief about when the next crisis will come. But we’re not fool enough to tempt fate. And not vain enough to think we could do anything to stop it.

Financial crises come around from time to time. Generally, they come when you least expect them… That is, when they can do the most damage.

Our guess is that a crisis will begin before the end of this year. Why?

First, because falling oil prices and bond yields signal a slowing economy. A recession is already overdue.

Second, debt levels are higher than ever. There is said to be more than $250 trillion worth of debt worldwide. And running up debt is like stacking blocks of wood. The higher you stack them, the more likely they are to fall over.

Ms Yellen says the banks are better regulated and less likely to fail in a crisis. But the latest stress test shows bank vulnerability to credit card debt has actually increased.

Besides, bank debt is only a part of the picture. The US government is bumping up against a debt ceiling, for example.

What will happen when the feds run out of money…with the ceiling still in place? Will Congress raise it in an orderly way?

Or will it be another circus of tweets and recriminations…like Russiagate or Obamacare…leading investors to quietly take their money off the table and head for the exits?

A giant debt depot

Consumers are running into a debt ceiling of their own. They’ve got $14 trillion of household debt.

Without real job and income growth, they can only maintain standards of living by borrowing more. But they already owe more than they did on the eve of the 2008 financial crisis; their knees are beginning to buckle.

Used auto prices are falling, putting the whole structure of $1.2 trillion worth of auto debt in danger.

Student loans — another $1.2 trillion of debt — are increasingly uncollectable.

And states and local governments have $5 trillion worth of unfunded pension liabilities.

Corporate debt is at record levels, too, near $8.5 trillion.

In the next crisis, many marginal borrowers will have trouble paying back their loans. Write-offs, defaults and bankruptcies will blow up.

And don’t forget that the whole world economy is interconnected.

That whiff of smoke you smell could be coming from China. That country has become a giant debt depot.

And somewhere…in the corner of some abandoned warehouse, a small pile of debt-soaked rags smoulders.

When the flames break out…sparks will fly across the Pacific in a matter of seconds. Minutes later, the entire world’s finances will be aflame.

Imperial decline

But the flash point in the coming crisis could also be US asset markets.

There, price discovery by honest and diligent investors has given way to price manipulation by conniving Fed (and other central bank) employees.

Now, with little connection between price and value, just a little bit of selling is likely to set off a ‘sell cascade’ as these ‘smart systems’ hit automatic stop-loss orders and begin selling trillions’ worth of ETFs, robo-trader pools, algo-driven hedge funds, and quant-managed accounts.

There will be no calm walk to the exits…but a catastrophic surge, with millions of investors crushed on the carpet.

What will be the trigger? Again, we don’t know any more than Ms Yellen. But she might want to turn on the TV news. She is likely to be appalled. Every day brings new reasons to head for cover.

She might want to look out the window, too.

For all we know, it will never, ever rain again. But we keep an umbrella next to the door, just in case.


Bill Bonner,
For Markets & Money

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.

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