Prior posts on this channel dating back to August have re-addressed different angles of a common set of financial problems that have triggered meltdowns over the past quarter century. Those problems involve poorly enforced lending standards, internal risk management systems executives failed to update to reflect new risks they chose to take and a growing number of mini financial seizures occuring between banks as they balance nightly books and realize everyone's short or everyone is spooked.
Providing a full re-explanation of the underlying mechanics each time the markets incur a twinge of financial angina gets tedious for writers and readers alike. However, most keyboard economists and commentators have determined the easiest indicators of looming seizures boil down to two key metrics: sudden jumps in the dollar value of new overnight loans issued between banks and sudden jumps in the interest rates charged on those loans. Why are those factors so crucial?
As described in prior commentary, if Wall Street financial institutions are the economy's collective engine, then for the thousands of large and small banks to operate smoothly, they have to keep oil circulating throughout the engine and have some in reserve in the bottom of the pan as well. That oil in the pan at the bottom of the engine is equivalent to overnight lending between banks. Normal variations in customer activity make it NORMAL for banks to need to borrow money each night and NORMAL for other banks with extra cash to lend some out for short periods to make a few extra bucks.
If a particular bank's transactions "ran hot" on a given day and at the end of that day, it found it needed to replenish its oil by adding a half quart to a giant engine that takes 8 or 12 quarts, that might be perfectly, statistically normal. However, if the same bank checked its vitals at the end of the day and found it needed to add three or four quarts, that's a sign of trouble for that bank. If hundreds of banks came to the same conclusion on the same day, now the larger system has reason to be concerned. If that much lubricant has turned up missing across hundreds of banks, liquidity in the larger system is experiencing a major problem. When financial watchers note that overnight lending jumps from daily norms of from two to five billion dollars up to eight to ten billion with no obvious non-financial event to trigger a scare, that directly reflects surprise being registered among market players and surprise is virtually never a welcome factor in markets.
When banks encounter surprises and need money to tide themselves over, it's one thing to be one of a few needing an out-sized amount on an urgent basis. The market can help out but the market will exact a price for helping that institution by charging an interest rate reflecting the dollar magnitude of the amount needed and, to some extent, an interest rate reflecting the degree of the surprise itself. When MANY banks face large surprises simultaneously, the entire system not only has more trouble finding available funds to lend but it also has more difficulty processing the surprise and deciding on an appropriate interest rate. This triggers sudden jumps in those overnight interest rates that on one hand may look inconsequential compared to changes in mortgage rates or car loan rates. However, these rates are being charged on loans that might be half a billion dollars. And if a bank has trouble assessing the risk of ANOTHER BANK not paying the loan back in (typically) less than two weeks, that's a damning sign about the overall health within that market.
Another common theme being covered in recent commentary is that there ARE some recurring human-induced events baked into the calendar that routinely generate small liquidity crunches across markets. One example of this are end-of-quarter days where publicly traded banks and large mutual funds and hedge funds attempt to sanitize their end-of-quarter holdings to make it appear they are holding some of the biggest gainers over the prior quarter or two. Another example are quarterly tax days for businesses where companies have to have cash on hand to pay their quarterly share of their yearly tax bill. Another example involves the four "triple witching" days on the third Friday of March, June, September and December on which three different types of option contracts expire, causing traders to have to suddenly raise cash to settle trades and cover losses.
These magic stressful days have enough of a track record across decades that these relatively small credit crunches don't phase traders or watchers alike. It's just an accepted pattern in the larger dataset. The troubling sign in the increase in the number of these types of stories about recent market days is that all of these analyses are smart enough (jaded enough?) to point out that the event and the day they are describing was not one of these normally expected stressful days for markets. They were days or weeks away from "obvious" easy explanations like options expiring or quarterly "window dressing." What few of these analyses seem to have attempted to do is identify any new theme of common factors behind these events.
Hence this commentary…
The magnitude and number of these mini credit crunches are increasing over the past two years for the following related reasons:- Confirmation that most institutions lack sufficient internal controls to allow their own internal management to spot their own risks.
- Confirmation that executives of most institutions learned nothing from the 2008 crisis because virtually every institution is engaged in patterns of operation they KNOW are elevating risk yet feel obligated to continue participating as long as the cycle holds up.
- A complete failure of the US federal government to control, much less reduce deficits, triggering ever larger amounts of borrowing, competing with private needs for borrowing.
- Increased absolute levels of federal borrowing coupled with a strategy towards shifting VAST amounts of new and existing rolled-over debt into MUCH shorter maturities (most less than one year).
- Two recent bankruptcies reflecting circumstances where lenders to those firms had extended billions of NEW loans sometimes only days prior to bankruptcy, confirming those lending institutions did ABSOLUTELY ZERO due diligence before lending that money.
- One particular example within the First Brands bankruptcy debacle involves a bank that said it DID delivery the cash proceeds for the ill fated loan it chose to make yet accountants for First Brands cannot find any sign the cash reached their account. Where was this loan signed? On the hood of a '93 Ford Tempo outside a pawn shop?
- Nearly daily confirmation that the Trump Administration not only has zero intent to enforce securities law, it has every intent to extort a can't-lose position for Trump and his family in any financial boondoggle anyone can dream up.
- Trump not only has zero intent to enforce securities laws in his term, he is actually PARDONING people convicted in cases prior to his current term involving fraud and failure to enforce money laundering regulations that allowed drug traffickers, terrorists and child porn rings to operate using cryptocurrencies..
When all of those inputs are shuffled together multiple times through multiple feedback cycles then pulled out for analysis again, the following sequence of events isn't just POSSIBLE, it is virtually ASSURED at this point.
- Massive increases in weekly demand for short term lending and securities as collateral for obtaining cash for liquidity will trigger a larger number of days where supply and demand are out of sync.
- An increase in "stress days" will generate more volatility in those short term interest rates.
- Increases in short term rates are completely antithetical to the Treasury's bet on affording more debt by shifting more borrowing into shorter maturities it thought would have lower rates but now have HIGHER rates.
- This strategic catastrophe will reduce world demand for US Treasuries, limiting the ability of the United States to maintain such huge debt loads AND limiting the ability of the United States to offer Treasuries as "safe havens" for banks worldwide to steady markets during panics.
- The Trump Administration will be triggering more financial crises nearly every day as new tariff threats are made or implemented, as more corruption of Trump deals exposes more corruption in US markets in general.
All of which combine to inform anyone paying attention that the United States is throwing away every possible firefighting tool required in every crisis experienced since World War II. At the same time, the Trump regime is actively fostering corrupt deals likely to produce multiple crises of magnitudes that will make the 2008 crisis look like a blip in comparison. Prior to the September 2008 crisis, virtually no writers had stories or columns addressing looming risks even two or three weeks prior to a collapse that became the most damaging economic downturn to hit the world economy at that time. Today, you can find a handful of such reports nearly every day about new examples from that day pointing to all of the same factors seen in 2008 only after the fact.
WTH
