Introduction & Context:
Over the past 6 months, in various publications, I have voiced serious concerns about how the global economy would react to an aggressive US Federal Reserve (FED) raising interest rates to combat multi-decade high inflation. Although it is nearly impossible to predict precisely what would break first and where the actual crisis will originate from. We are starting to witness extremely vivid signs that the global financial system is starting to crack under the weight of the FED policy. The past two weeks alone have seen various “once-in-a-generation” moves in financial markets. So in my opinion it is just a matter of time before global central banks reverse course and start easing policy again, this in an inflationary backdrop.
From the utter 26% collapse of the Japanese Yen versus the US Dollar.
To the largest global bond market decline in recorded history.
To now never before seen moves in the 30-year United Kingdom bond market.
Lastly, the 60% collapse of Credit Suisse stock
The global financial system is starting to show profound signs of strain.
Yield Curve Control in Japan and the United Kingdom:
Japan with its debt-to-GDP ratio above 200% simply can’t afford higher interest rates and as a result, the Bank of Japan has been capping yields on 10-year Japanese Government Bonds at 0.25%. This has caused the utter collapse of the Japanese Yen, which according to various analyses is causing profound cross-country economic effects in the South Asia region. This incident is not isolated as just today the Bank of England has announced a 65 billion pound a day for 13 days operation to cap 30-year United Kingdom Government Bond yields. Let this sink in, the bank of England is buying 845 billion pounds of bonds while UK inflation is at 10%.
If the US FED were to persist on its current path it will only be a matter of time in my view until the European Central Bank will be forced to do the same as the Bank of England. Note that the European currency has already plunged circa 18%, outright yield curve control would further erode the value of the Euro.
Echoes of 2008: Credit Suisse on the Brink of Collapse.
The 2008 great recession was caused by a series of banking collapses in the United States. This time around we are seeing that Credit Suisse is under extreme pressure with its shares down 40% in just 6 months and investors actively starting to speculate on a potential bankruptcy.
With Credit Default Swaps of Credit Suisse trading at the highest level since the Lehman Brothers collapse.
Only a Matter of Time before Central Banks Ease again:
In my view there is simply too much debt in the global financial system and as a result real inflation-adjusted interest rates simply can not go higher for prolonged periods of time before causing outright market stress followed by an “unexpected” collapse somewhere in the global financial system. With the recent capitulation of the Bank of England, today being the ultimate symbol, that given enough market pressure central banks will ease into a high inflation environment. The end result in the coming years as predicted will be stagflation, where global inflation rates will remain higher than economic growth, this will slowly suffocate the global economy until we get a historic global debt restructuring and a re-peg of a global currency to a gold or commodity basket.
Real asset holders aka “the smart rich” will be the clear winners in the coming years, creating even more inequality and political turmoil over the next 36 months.