Lenin famously said there are years where nothing happens and weeks where years happen. That was last week, especially in geopolitics. Let’s start small with an article from Zerohedge discussing the latest H.4.1 data from the Fed’s balance sheet.
The editors at Zerohedge continue to balk at the script that is playing out in front of them: the Fed of Greenspan/Bernanke/Yellen years is not the Powell Fed. They took a small thing about the Fed’s balance sheet and blew it up to be the headline. I get click-bait titling, but this is something deeper than that
While Zerohedge is naturally and predictably skeptical about that change, there comes a point where you have to throw in the towel when confronted with the evidence.
The End of the End of History
Zerohedge’s mission early on was to explain markets in ways no one else was.
They did (and still do) a fantastic job calling bullshit on the promises of central planners. Zerohedge made their bones during the ZIRP years, educating an entire generation on the intersection of Austrian Economic-style critical thinking, the plumbing of capital markets, and central banking.
It was truly disruptive in ways we’ll never fully quantify.
And on this front no one can have asked for a more noble mission from a bunch of Wall St. exiles. That said, no one is perfect and no one is immune to their own success.
This is as much a warning to myself as anyone else.
One must be willing to constantly as Ayn Rand put it, “Check your premises.” That means, ultimately, constantly re-evaluating the incentives of those who have the power and capacity to move capital markets.
Politics and markets today are inextricably linked in ways that are too complicated for anyone to map. Martin Armstrong tries to do this by farming out the cross-market analysis to his AI algorithm, Socrates.
But even there his work is based on mathematical models constantly shifting with new data inputs. He’s forever trying to hit moving targets, and gods bless him for trying.
It reminds me a lot of Hari Seldon’s Psychohistory from Issac Asimov’s “Foundation” books.
Strauss and Howe’s Fourth Turning models attempt this same predictive macro analysis from a purely historical perspective, no Greek letters in evidence. Both have their limitations because once humans know they are being observed in this way, they alter their behavior to avoid or lean into these predictions.
Marty’s even commented on how WEF High Klingon Klaus Schwab is using his 2032 predictions to force Schwab’s vision onto it.
But, that said, there is something unarguably interesting about these attempts at understanding the flow of history.
It’s hard to ignore them, honestly. Not because they are purely predictive…. they aren’t. But because they spur us to think about events differently as they unfold. They give us new frameworks for looking into the future.
The Powell Turning
For me, both Armstrong and Strauss/Howe were bouncing around in my head in 2021 when Jerome Powell went off the reservation and began what I called ‘stealth tightening’ by raising the Reverse Repo Rate 5 basis points above the Fed Funds Rate.
I had a choice in that moment, stick with my reflexively ‘anti-Fed’ personal opinion or consider the discordant nature of what Powell had just done.
At the time one could argue that he did this to stave off the 30-day T-bill nominal rate going negative. There was so much demand for short-term US paper that Powell had to do something lest the specter of negative yields coming to the dollar would undermine its global reserve currency status.
But he could have also understood this was the one lever he could pull to begin draining the world of Yellen’s horror show and the ravages of the COVID monster.
The result was a massive inflow into RRP, draining the world of more than $1 trillion in base money net of treasury spending. This was a global event. You can argue it was done out of desperation or you could argue it was strategic given the political realities of the day.
The net result was the same.
Inflation was coming. Everyone knew it. But the Democrats were desperately trying to push through their Davos-demanded “Build Back Better” spending bill, to “help us overcome COVID-19,” a crisis they created to create their preferred future outcome per Herr Schwab.
Powell had to weather a political storm that no Fed Chair, even Paul Volcker, ever had to face. Because this was for all the future marbles. This was the Fed facing its Jungian shadow. Face the evil you’ve done as an organization or turn away and be obliterated.
Honestly, it was never even a contest in doubt if Powell was for realz. He’s been for realz.
So, going back to Zerohedge’s article about capital movements through the US system. As expected, the money is flowing out of the RRP facility and bank deposits into higher-yielding money market funds thanks to the Fed’s historical tightening.
The Fed is just as aggressive as ever, shrinking their balance sheet, allowing USTs to run off on schedule.
The Bank Term Funding Program (BTFP) hit a record usage of $106 billion. This is where Zerohedge loses the plot. Somehow they think this is the lede and not the afterthought. It betrays where their head is, editorially.
As Danielle Dimartino Booth put it to me in our last podcast together the BTFP is really emergency money. At 5.5% it’s really expensive. It’s not a bailout facility but an emergency fund facility. And a $106 billion balance is a rounding error at this point. If this were QE or a real bank bailout then it would have been lower cost, say FFR minus 3% or something like that. It’s not.
It’s telling the banks get your houses in order. And if need be, go out and raise some capital.
Because, if Powell was giving them a deal, the balance would be $2 trillion, not $0.106 trillion.
This isn’t a replay of the RRP move of 2021.
There’s no denying that we are headed for an ugly credit crunch here in the US. We are.
The fact that the BTFP balance is still rising is saying that banks can’t raise deposit rates for savers yet. That is itself something very worrying. But they are offering better terms on CDs to keep the money from flowing out fast. And for most people with a couple of thousand in the bank that should be enough.
I’ll use a local credit union as an example. I can get a 4.9% 7-month CD with a $1000 minimum from them. I can get better rates from Wells-Fargo, but they want $5000 minimum. That minimum tells you Wells doesn’t want the small depositor. And frankly, if the credit unions can be more flexible here, they can attract more capital.
Sure, their basic savings account is still paying just 0.15% but these CD rates are telling you they can attract small depositors with competitive yields and zero complications.
This is what we should expect when things shift as radically as they have in the past 18 months. Capital rotation is a good thing and badly run banks who continue to bet on Powell pivoting are going to go out of business.
That’s going to create a lot of fear-porn headlines across the financial Twitterati. But should it be something we react to or something we should expect?
The bigger question isn’t whether or even when a credit crunch will hit for real, but whether we have the balance sheet capacity within the banking system to weather it when it does hit. No one really knows but Powell still has plenty of liquidity on both sides of the balance sheet — USTs and RRP savings — to provide the market whatever it needs.
Now, overseas? Well, that’s something else entirely, which has been my point for over two years now.
So, the bottom line here is that domestically I don’t see any panic in the banking system or a dangerous drop in liquidity. Long-term rates are going to rise here. The yield curve is normalizing rapidly. The 2/10 spread is under -70 bps today.
The Fitch Downgrade Runs through Niger
So, now that we’ve set the background in the US, bad but not terminal. In short, the real problems lie elsewhere.
Let’s tie together two big events this week to make bigger point. — the Fitch US downgrade and the coup in Niger.
Fitch downgraded US sovereign debt, now the second of the big three ratings agencies to strip the US of its AAA status. To remind everyone S&P downgraded the US. in May of 2011.
Fitch put the US on credit watch downgrade and had to follow through within 90 days. They did so.
But, it is interesting that once Fitch followed through, this article ran in the UK’s Telegraph on Wednesday, August 2nd, after the coup in Niger threw open the possibility of France having to pay *gasp* market rates for strategic commodities like Uranium and gold.
But, the implication here is even broader and that. This was a direct threat to the European Union.
The EU’s European Stability Mechanism (ESM) is effectively their ‘lender of last resort’ facility. Because of the ECB’s moronic structure (and that extends even farther for the euro) they don’t have the same facility most other central banks have, the ability to blithely print money and create flexible and temporary reserves.
Because of this they need the ESM fund to lend money out to those countries that get into budget trouble. This is why the EU are such hawks during debt restructuring talks. Now this structure served them well for the past 15 years because it gave them (along with negative rates) the hammer to beat on the heads of those countries that got into fiscal trouble thanks to an overly-strong euro.
You can thank a compliant Fed under Ben Bernanke and Janet Yellen for this.
The net effect, for example, is that Italy runs a consistent trade deficit with Germany while having its exports to the world choked off. It’s a form of ‘internal mercantilism’ where capital flows within the euro-zone towards the country with the under-valued currency and away from the one with the over-valued currency
Think California and Mississippi in the US.
Germany then buys Italian BTPs with their trade surpluses and holds them as collateral against Italy leaving the euro-zone through TARGET2. When Italy comes to the EU for relief, Germany grinds their old axe against Italy and says, “We’ve already given you enough, now we want XXX.” And XXX is always physical infrastructure or collateral.
It’s not much different than you going to the bank after you lose your job and the bank turns you down for a refi and says, “Nope, we’ll just take the house.” The bank sells your house because they don’t want it. Germany wants Italy’s ports because they are productive assets they can write debt against.
The ESM’s lending capacity depends fully on its major members maintaining their AAA rating. So, note Germany has a AAA rating. France a AA. Click here for the full list of sovereign credit ratings. You’ll notice a preponderance of Davos-controlled countries on the AAA list.
Like I said, the US was downgraded by S&P in 2011 touching off the era of “Coordinated Central Banking.” The monetary system, known as the “Dollar Reserve Standard” ended with this downgrade by S&P. It kicked off the blow off top in gold and by September we had announcements that all the major central banks would come together to pool capital to keep each other liquid and coordinate policy.
What we had for ten years was ’round-robin QE’ with each central bank going on a bond buying binge in turn to keep the system solvent. This ended in June 2021 when Powell raised the RRP rate by 5 bps and in my read of geopolitics began the negotiations on what the next monetary system will look like.
Fitch goes out this week and uses the “get rid of the debt ceiling” talking point to justify their downgrade of US debt. The threat is this: Give Yellen a clear course to flood the market in perpetuity with Treasuries to deficit spend the US into oblivion and you can have your AAA rating back.
Seems counter-intuitive. Seems contradictory. Seems really, well, treasonous.
Now, this downgrade is coincides with the coup in Niger, which itself is just a week after 30 African leaders went to St. Petersburg, Russia and declared themselves enemies of the old Western Colonial System. Putin happily egged them on.
Wagner Group is the real deal in North Africa. And Yevgeny Prigozhin himself gave away the script in a recent video statement.
PMC Wagner leader Yevgeny Prigozhin gave comments regarding the situation in Niger for the African edition of l’Afrique Libre. Here are some excerpts from his interview:
▪️Economics is the main reason for the coup and anti-French sentiment in Niger, as the population is in poverty and France exploited their resource abundance.
▪️France only gave 5% of all profits from the resources in Niger to the people of the country.
▪️The people of Niger, if they controlled the resources themselves, would be rich and happy.
The telegram post linked goes even further into detail about what Prigozhin said. But this emphasizes just how important all of this is.
Putin, as I’ve pointed out 100 times, believes in parallel aggression. This means he will escalate not directly to a particular act of aggression (i.e. blowing up the Kerch Strait Bridge a second time or drone attacks in Moscow). No, he’ll set things in motion somewhere else to strike even harder at the root of his enemies’ power.
In this case, I think it is France’s credit rating.
So, help back a coup in Niger, long overdue, and force France to deal with its insanely profitable colonial extraction system there. The CFA Franc ensures the profit all goes to France, while the people of Niger starve. It’s brutal and it’s exactly what I expect from the progeny of Europe’s exploitative ruling classes. I’m not singling out the French here. The US is just as guilty of this today in other places, if not providing the real military might for these situations.
France gets yellowcake at pennies on the dollar. They produce a surplus of electricity. They export it, especially during times of duress in Europe, making their forex reserves and trade balances look far better than they should be if they were paying anything close to market price for Uranium ore and other commodities from the 14 CFA Franc nations.
And yet, electricity in France averages €0.21 or $0.23 per kilowatt-hour for the consumer. France should have, by far, the lowest electricity costs of any EU nation and yet, they sit firmly in the middle of the pack.
The takeaway is someone is making a mint on France’s nuclear power generation and it isn’t France’s people. The French government is skimming on both ends here, getting the raw commodities cheap and selling the value-added product at a premium.
When you look at it this way, it’s hard to argue that France’s entire AA bond rating is based on this modern version of colonial slavery in North Africa while price gouging its citizens at home.
No wonder the French are so insufferably leftist. They have no idea what things are actually supposed to cost because of the cheap commodity inflow.
So, if I’m Russia and China and Macron is making nicey-nice noises about ending the war in Ukraine, I’m stuffing that down his throat harder than Justin Trudeau does. “Make good on this promise Manny, or France goes tits up financially.”
Now, we know why Davos is trying to kill off the Ukraine war. If they lose their money machine in North Africa, France loses its AA rating.
Germany should already be there given the Bundesbank’s balance sheet, regardless of their Gold Revaluation Account. The amount of money owed to the Bundesbank cannot be overcome with $1900 gold if rates keep rising. And they will.
As the Telegraph article points out, if France loses its AA rating the ESM’s funding capacity drops precipitously.
Mr Lyddon continued: “This structure is hanging by a thread. Standard & Poor’s Global Ratings attached a ‘Negative Outlook’ to France’s AA rating on June 2, 2023. If at any point France’s rating drops to AA-, the ESM’s roof falls in.”
The ESM was now the Eurozone’s “only significant bailout mechanism”, Mr Lyddon, founder of Lyddon Consulting, stressed, with the European Financial Stabilisation Mechanism (EFSM) possibly being able to lend as much as £25billion (€30billion) and the European Financial Stability Facility (EFSF) closed to further lending, with £164billion (€191billion) of loans outstanding.
Mr Lyddon said: “The ESM is the Eurozone’s alternative to having genuine central bank money.”
As Alex Krainer taught me a few years ago, it’s all about collateral. Europe cut itself off from its energy collateral. It tried through the Iran Nuclear deal to get some collateral by investing in Iran. Who was the first to belly up to the trough in 2016 after the deal was signed? No less than France’s Total, with a $4+ billion deal.
Trump killed that when he tore up the JCPOA. That Total contract went to China.
The Syrian invasion was all about bringing in cheap Middle East energy into the EU, bypassing Russia. Russia killed that. Now they’ve outmaneuvered Europe in N. Africa.
While you see the Biden administration acting quickly to isolate Niger’s coup, mostly through the Davos-controlled State and Treasury departments did we see the Pentagon rush into action?
Not really. It’s the same kind of mealy-mouthed pablum Zelensky complains about daily. This is another tell.
Niger may further expose the rift at the top of the US power structure, especially while the walls are closing in on “Joe Biden.” The sheer number of stone walls going up around Capitol Hill to protect Biden and his people tell me there’s a bull market in bricks and mortar somewhere. But as fast as they erect them, their lies are getting exposed and a diffe. ent wall is torn down. So, it’s all a mess right now.
Leverage is stacking up all over the place and this is now getting very interesting.
Expect the full court press into US political clown show over the next six to nine months, feeding the ratings game and the global perception of the US descending into anarchy.
In my mind, S&P and Moody’s will ultimately do what they are told to do. S&P put France on ‘credit watch negative in June, so by September they will have to make a new decision.
This week, Fitch just gave away who they work for. The S&P 2011 downgrade was a Davos operation in hindsight, to bring on the coordinated CB policy and stay at the zero-bound forever.
When it failed, flip to CBDCs and expand the colonization strategy.
Back then the EU and the UK were, nominally, on the same side. Today, I’d argue that point, but to what end I’m not willing to speculate. S&P’s an interesting player in all of this. Do I also detect the hand of the UK behind this situation?
Ultimately, Europe chose to cut itself off from Russian energy. It gambled on a high-risk strategy to destroy Russia through economic isolation and military aggression, by partnering with US and UK neocons who will use anyone to get what they want.
Now it is staring into the abyss as rates rise, budgets collapse, and the people revolt. These are all self-inflicted wounds here. There is no way to tame both bond yields and inflation without the Fed willing to go back to the zero-bound.
There is no way to default on the whole of the euro-zone’s debt and issue perpetual bonds like Soros argues for if there is no long-term collateral backing the bonds.
France now has zero collateral without North Africa. Remember how it was Macron who was complaining earlier in the year about the US ‘gouging its partners’ over LNG. Now we know why.
If France’s energy cost structure changes drastically, its bond rating should as well.
And if you think Italy isn’t going to help France’s fall here by cutting their own deals, you are terminally naive. It was Giorgia Meloni who set off the fire over the CFA Franc, exposing France’s perfidy in North Africa.
The vast negotiations over what the next monetary system will look like took a right turn last week. Years happened in a couple of days. Premises have to be checked. Incentives reassessed.
So, it’s now go-time. If Niger’s coup holds and rest of the CFA Franc zone revolts over the next year while the US kinda stands by and picks its nose militarily, then we have our catalyst along with Japan ‘tweaking Yield Curve Control’ two weeks ago for the beginning of the end of the European Union.
Hungary just told NATO no on Finland and Sweden. The US State dept. retaliated immediately. But the EU didn’t. The Neocons are big mad because they still want war in Ukraine but Europe can’t afford it.
The splits in the oligarchy are now being laid bare. The collateral is returning to the control of those that produce it rather than those that finance it.
And it was all started by five little basis points in June 2021, five basis points that changed the world.
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