THE RIGHT VIRUS AT THE RIGHT TIME
Can a virus arrive at the exact moment to be considered a real blessing? It would be almost a heresy to reply by saying yes. Instead, for financial operators, this is exactly what happened.
In June 2019 the REPO market was starting to collapse showing signs of systemic danger. Most people don't even know what REPOs are.
Practically, these are repurchase agreements (ready transactions) with which banks and major economic operators exchange assets (mainly government bonds) with transactions of very short duration in order to obtain instant liquidity for reasons related , especially the risk arising from highly speculative transactions in the derivatives market. The alarm bell started ringing in June. In September 2019 the situation was alarming. How alarming? Alarming "hands in hair and wide open mouth" type.
A report from the Bank of International Settlements (B.I.S.), the central bank that governs all the other central banks in the world, raised the alarm and "strangely" failed to mention the names of the 4 main Wall Street banks that were involved. They warned that the problem was also expanding, affecting the currency market.
This is the market in which European and non-European banks obtain dollars for their operational needs for transactions denominated in US dollars. This sector also works in a similar way to the ‘Repos’ and consequently the problem spreads and becomes a global issue.
The Federal Reserve responds to the heartfelt appeal of the banks that are in mortal danger due to lack of liquidity and opens an extraordinary supply line of $ 350 billion a day which in some cases even reaches peaks of over 800 and still that's not enough . Panic doesn't stop. To make matters worse, even the major Hedge Funds that use the money from the major pension funds (yes, also the INPS, the Italian pension fund and 401ks) enter the betting ground of the ‘Repo’ to make profits in this very fishy but high-risk ocean.
Weeks go by and banks no longer trust each other and a monetary collapse is approaching. Perhaps it is not clear what can happen in a monetary collapse. It is truly the worst case scenario. In a monetary collapse, all liquidity disappears because it no longer reaches the recipients. If this happens, the economy totally stops. Like a crashing plane: everyone dies! The top management of the banks, in agreement with the economic managers, converge on the fact that, if the plane crashes, they must avoid complete disaster and create a solution that can make the plane glide as smoothly as possible. This is not so much to save us, who they definitely could care less about, but to save themselves more than anything else and the paradigm that consents the elite, including the banks, to live like leeches off of the backs of everyone else.
In October 2019, like a bizarre coincidence, a summit took place between very influential entities, called EVENT 201. Just one month after the alarm bell of the B.I.S.
On this occasion, a global pandemic event was simulated. Where a low lethality virus would spread, with exact characteristics of that which was announced to have spread from Wuhan and we all know the story all too well. Participants from all over the world were given an operational handbook. A real protocol of action, on how to behave and what measures to take IF (in October we were still in the hypothetical phase) …… .. IF a virus of the coronavirus type had spread and containment measures to adopt in the event of a pandemic, were communicated to the entire world population.
January 21, 2020, the Davos Summit took place, where all the powerful figures of the world had a meeting. On January 23, China announced the lockdown. On January 30, 2020, W.H.O. proclaimed a global health emergency. The news of the virus which in October was only hypothetical and simulated, as if by a miracle, was materialized, precisely in the exact modalities foreseen by the EVENT 201 exercise. It seems that the exercise had been a general rehearsal before "going on stage ”as in a planetary play.
But let's take a step back and go back to the exploding REPO market, since everyone has talked about the virus to the point of nausea.
There are two ways and only two ways to take care of a short term money market:
1) Pump in it as much money as possible to maintain the demand fluid and prevent the interest rate demanded by lenders from going up.
2) Stop the demand for loans from the global economy.
Here you need to understand what the real risk is. The real risk is represented by the rising interest rate. During this entire period of interest rates close to or equal to zero, the derivatives bubble has swelled enormously. Everything is supported by a very thin thread. Very high risk transactions, based on virtual exchanges of collateral obtained by debt, almost always government bonds, which have a very precarious equilibrium . If for some reason rates start to rise, the value of the underlying warranty decreases which provokes a chain reaction, such as nuclear deflagration, where each operator looks for liquidity, which he does not have, to cover himself from instant bankruptcy.
I'll explain it in a boorish manner: if you lend me 80 euros and I guarantee you a bond worth 100, you feel safe. But if during the loan, its face value is no longer 100 but 70, then you ask me to be covered by the guarantee of the 30 that’s missing. Where do I get those 30€ I don't have from? And here the crisis begins. If these dynamics multiply by thousands and trillions of high-speed algorithmic exchanges, with tangles and intertwining of cross-collateral all supported by high-risk loans, (often the collateral is borrowed in turn and re-mortgaged innumerable times) it is clear how in an instant everything can explode if you don't intervene with buckets of money like the Federal Reserve did, reaching up to 1000$ billion a day.
Then, as if by a miracle, Covid-19 arrives. And what happens?
The central banks are therefore authorized to intervene in an limitless way. Thousands of millions or hundreds of billions of dollars are created from thin air and are distributed not only to banks but also injected directly into major companies. With this extraordinary measure, the flaw in the REPO market is moderated.
This step is a little more difficult to understand, but the overall amount of loans granted to individuals and companies also contributes to the calculation of the overall risk which affects the interest rate calculation. The higher the risk, the higher the rate. If the risk of the REPO market which is interbank, increases, the possibility of default increases as well. Let's say it once and for all: interest rates must not increase! If they do: it's the end.
The whole of the economy is denominated in a value which is a unit of debt. When you hear talks about Dollars, Euros, Yen, Francs, Crowns, Yuan, etc., we must always remember that currencies are nothing more than debt units issued on the basis of a debt economy. All money is loaned into existence. Money exists only after a bank creates it by indebting someone: states, individuals or companies. People focus mainly on the stock market, which has nothing to do with it, It has completely different dynamics and even in the case of a paralyzed economy like that of today, it could even break new highs, thanks to all the new liquidity created that has no other place to flow. The real issue is the debt market. People still hadn’t realized that a gigantic economic crisis was coming.
Nobody says it because they are difficult things to explain and few have the desire or competence and people do not want to make the effort to understand these things, which therefore can go on, almost secretly without anyone worrying about it. But it is absolutely necessary to understand that the virus has stopped an economic crisis far worse than the one we are experiencing now.
We can say that the virus really arrived at the right moment. If it had not arrived, interest rates would have shot up and the debt market and that of derivatives (2.5 million billion - B.I.S. estimate) would have exploded into a supernova with proportions much, much worse than what happened. A crisis for which there is no tool to manage it.
Stopping the economy and therefore the demand for loans and flooding banks with fresh liquidity seemed to be the least harmful solution. At least for them. The slogan "we will be okay" that they put in the mouth of the headless zombies, served to reiterate that it will be all right for them, not us, and that for now, the monetary collapse will not happen because they stopped the economy by immobilizing us in a corner, like in a planetary prison. Saving the REPOs also saved the hedge funds and therefore the pension funds. For now, retirees can rest assured. Their pension is assured.
Many then ask: what will happen now? Will there be a recovery?
Absolutely not! I'm sorry to say so, and I'm sorry for myself as well, but I have my plan and I will dedicate a special newsletter as soon as it is ready.
The economy will not restart. It will be an L-shaped graph where after the vertical collapse of now, a long period of slow and prolonged stagnation will follow, on levels much lower than the previous ones. 2019 was the last year of the world as we knew it. With 2020, we will be faced with a new reality and whether we like it or not, it will be with us at least until 2032. If we were to decide to reopen everything and return to the previous situation, we would find ourselves in a moment at the starting point, or in September 2019, with the explosion of the REPO market. This choice was inevitable. It is the most colossal case of "BETWEEN A ROCK AND A HARD PLACE" in the history of humanity.
The economy will not restart because with the total blockade due to the lockdown and restrictions to contain the pandemic there will be many failures. Many will no longer be able to pay their debts. Many will no longer be able to pay the rent. If on the one hand someone does not pay, on the other hand there is someone else who does not collect. The game sums up to zero. Overall, there is no economic gain because the sum is sterilized. What are the possible solutions? How do you get out of it? It is very difficult. We need a game of great balance and slow and cautious procedures. There will be periods of "tighten and loosen" always with the pandemic risk used to nausea, to limit people's freedom by granting short bursts of freedom like this summer, to return to tighten the noose this coming autumn, and so on.
To describe this moment, I am reminded of a fishing adventure in the Bahamas, which I consider my second home. I had gone fishing with the kayak during the high tide. High tide can be understood as a sufficient liquidity cover that allows you to navigate floating over the perils of the depths of the seabed. On my return, the tide had gone out by many meters and to follow the direction, to go home, I had to cross a stretch of very low water with sharp rocks and surfaced corals as well as sea urchins. All this with unsuitable sandals that provided me with only partial protection. The risk was to injure my feet, to slip, to break the kayak or to lose the fish I had caught.
I had to find a way to get my fish, my feet and my kayak back to safety. The only way was to proceed slowly. By probing the ground before taking a step. Then, once advanced, pull the kayak behind me on the veil of water where it was possible, or load it by force of arms, moving it to a safe point. And so on for several hours, under the tropical sun, this is what I did until I got to safety. It was a test of patience, strength and ability, of calculating the risk to be carried out before each step, taking advantage of every pool of deeper water and every safe spot where I to rest my feet without cutting or slipping.
These are the qualities that should be possessed by those who are in the position to establish the best strategy to get the whole of humanity out of this insidious "low tide" in which we find ourselves, knowing that by taking the wrong steps, we risk not only doing irreparable damage, but also sinking and losing everything.
So the question arises: do we have this type of leader in the world? Are there men or women capable of taking the reins in hand and wisely guiding humanity towards safe ground on which to rebuild a more solid and sustainable economic model? And the leaders we have: will they want to do it?
The solution now would be to undertake colossal public infrastructure works that would give people jobs, and by adopting adequate fiscal measures to guarantee the stability of the monetary flows. The merger between Central Banks and the Government that is taking place would facilitate the financing mechanism necessary to put these works into the pipeline. Donald Trump is a bankruptcy master having experienced several himself as an entrepreneur in the casino sector, therefore in gambling. Ironically, he seems to be the right person to handle a global bankruptcy caused by the betting casino on the REPO market. Given his successes and his previous experiences: he is one of the job!
The next steps will see the implementation of a crypto world currency which will initially only serve as compensation between Central Banks. It will be a crypto currency based on gold standard. The countries with the largest gold reserves will be the dominant ones. This is why they wanted to reduce Italy to zero. The goal is to make us sell our gold, which is still in 4th largest reserves in the world. We hope to resist. The USA in first place as the Country with the most gold. China and Russia started buying all the gold that is produced ten years ago. They didn't buy it to sell it over for profit. They bought it because they want to play as protagonists.
Gold will then return to its leading role in the new economic system. This is also because gold which is scarce, will prevent the economy from exponentially expanding, creating imbalances and providing a solid base on which to start again in a more sustainable way, which is also synonymous with everything organic or "green" which is now so fashionable. Let's get used to all of this and carefully calculate our steps to get out unscathed from the "low tide" that will characterize the next few years. There will be an adjustment between now and 2025. Then a slow pace until 2032. So: this is the new reality: more with less! We need to do more with less. Sharpen your wits and get busy. Otherwise there will be state subsistence universal basic income and slow death in a corner, out of the game.