We find ourselves in the Lap of the Gods.
A desperate economic crisis is not fate yet everyday we grind close to the abyss. The UK is the ‘Canary in the Coal mine.’ The UK is the smallest economy of the major non-haven currencies and as such it is feeling the boot heal of the US Federal Reserve on its neck the hardest.
The Truss debacle is simply the first market response to the new generation of ‘give away’ money politicians but the underlying problem is the legacy of debt from the ‘Covid response’ and the lack of a proper bounce back of economic affairs.
The revealed dead elephant in the room is the levering up of sovereign debt by financial institutions. This has the potential of turning the world into the ‘global financial crisis part 2’ but this time at a scale an order of magnitude bigger.
If you borrow money using government debt to buy more that seems pretty dangerous. …. but it is worse.
This will have been funding all these government debt issues and if you unwind that suddenly there is no one to buy government debt because the previous customers were buying 5-10 times the amount they should have and now, if they don’t go bust, certainly wont buy more than x1 of what they need. So who will buy government debt? It a potential death spiral for the way governments have been funding themselves, even a death spiral period. The only way out would be a huge inflationary print.
We will have to get months down the road before this nightmare vision is proven to be a dark hallucination.
So here is the FTSE chart and how the set up looks from the point of view of the hive mind of the market.
A bear will quickly see 6000.
…or worse
It is all down to the US. If the world settles in to a 5-7% inflation for a few years, the world economy won’t crack, but that means the US can not do a ‘Volker’ and go on the path of punishment as a cure to inflation, because that will undo the rescue that took place in 2020-21.
The damage was done by the Covid pandemic and flogging the dead horse won’t repair losses already made.
The only chance is that talks of austerity are just that, jawboning. If they are not then the downside really is truly titanic.
People are wishing the federal Reserve will pivot but I think that is just ‘TINA’ talk. If they do not pretty soon, then the markets will start to malfunction and that is close.
For FORBES
The FTSE cannot escape a runaway dollar
We find ourselves in the Lap of the Gods.
A desperate economic crisis is not fate yet everyday we grind close to the abyss. The UK is the ‘Canary in the Coal mine.’ UK’s sovereign bonds nearly imploded and it took unprecedented intervention to save the day. The narrative has been a political one, but in reality the whole global economy is hanging by a thread because the US Federal Reserve has created a runaway dollar which is crushing everyone elses currencies. The Federal Reserve is in effect exporting its inflation to the world via its reserve currency position where the ingredients of things are made are priced in dollars but made and imported in weakening non-USD currencies. Dollar up = commodities down. Dollar up = import prices down. The Federal Reserve’s hawkish anti-inflationary is dumping dislocation on any economy not prepared to hike its interest rates into an economic recession. Unlike the US that can vacuum up offshore dollars and funding, other countries find themselves in the position of ‘Emerging economies’ of suddenly being out of funding and out of luck.
The UK is the smallest economy of the major non-haven currencies and as such it is feeling the boot heal of the US Federal Reserve on its neck the hardest.
The Truss debacle is simply the first market response to the new generation of ‘give away’ money politicians but the underlying problem is the legacy of debt from the ‘Covid response’ and the lack of a proper bounce back of economic affairs.
The revealed dead elephant in the room is the levering up of sovereign debt by financial institutions. This has the potential of tipping the world into the ‘global financial crisis part 2’ but this time at a scale an order of magnitude bigger.
If you borrow money using government debt to buy more that seems pretty dangerous, if interest rates go up you get a margin call and likely you sell off your assets and then go bust. …. but it is worse.
This leveraged trade will have been funding all these government huge debt issues because the leverage creates a massive extra demand for government debt and if you unwind that process suddenly there is no one to buy government debt because the previous customers were buying 5-10 times the amount they should have and now, if they don’t go bust, certainly wont buy more than x1 of what they need. So apart from spiking interest rates to the moon the question is then, who will buy government debt. It a potential death spiral for the way governments have been funding themselves, perhaps even a death spiral period. The only way out would be a huge inflationary print-a-thon.
We will have to get months down the road before this nightmare vision is proven to be a dark hallucination.
So here is the FTSE chart and how the set up looks from the point of view of the hive mind of the market.
A bear will quickly see 6000.
…or worse
It is all down to the US. If the world settles in to a 5-7% inflation for a few years, after a Fed pivot, the world economy won’t crack, but that means the US cannot do a ‘Volker’ and go on the path of punishment as a cure to inflation, because that will undo the rescue that took place in 2020-21. Currently it is on that road.
The damage was done by the Covid pandemic and flogging the dead horse with high interest rates won’t repair losses already made.
The only chance is that talks of austerity are just that, jawboning. If they are not then the downside really is truly titanic.
People are wishing the federal Reserve will pivot but I think that is just ‘TINA’ talk. If they do not pivot soon, then the markets will start to malfunction and that moment is close.