Nothing Changes - The Next Mortgage CrisisWe all know it's going to happen, just a matter of when, it seems.
Day after day, I come across different traders who have their own narratives about when this debt crisis will finally rear its ugly face and we will be faced with a sober reckoning of decades of monetary irresponsibility and irresponsible allocation of scarce resources to state capitalist companies that veer further and further away from sensible business decisions. Some of us seem to think that it is right around the corner, and that we've got to stack gold, silver, and/or bitcoin to prepare ourselves. Others believe that it's just a deflationary downspiral from here. Most of us seem to be inbetween.
For me, I think it is pretty easy to see. And though my indications would otherwise be seen arbitrary or even nebulous, I think there are some important facts that we have to make clear so that the future isn't as unclear.
The first thing I want to bring to everyone's attention is the growing mortgage-backed securities (MBSs) owned by the Fed, and what this means, put simply, for the rest of the economy and our private banks.
After the pandemic scare, among everything else dropping, one thing didn't see a drop, but a stark, parabolic rise: MBSs owned outright by Federal Reserve Banks. We saw a nearly 30% rise since mid-march:
fred.stlouisfed.org
A rise, which had been seeing a gradual, but steepening, fall since February or March of 2018.
This means two things:
1. Creditors who owned these MBSs held little faith that they could make passive income from the interest off of these MBSs, and sold them to the highest bidder (always the good ole ' Fed).
2. Creditors, also, had little faith in the outlook for these MBSs since any hope for rising interest rates were put to an end, and the narrative that they will be higher doesn't seem to be coming back for a long time. In my opinion, these hopes will never come back.
So how does this affect the banking sector? There's no way they can compete with the Federal Reserve, at this point. If you are inflationary about the future, then you will understand that the Federal Reserve is very deadset on making sure no bubble pops. They will do this by buying up all the debt that they can to avoid default. Unfortunately, this doesn't last forever, and at some point, the Fed is guaranteeing the debt of the whole country, and banks cannot compete with the ultimate market maker and the ultimate currency-producer. For debt-ridden, irresponsible Americans, it will be a wolf in sheep's clothing that seems like a Godsend as every bit of their debt is turned into an asset by the Fed, and even further, as the dollar continues to be debased and "realligned", they will see a steep drop in the strength of their buying power. That's what happens when all of your manufacturing and resources have been imported for decades, and a majority of your skilled workers are foreignborn who have an easy ticket back home where it is much less zany.
I think it is a joke to be deflationary with facts like this. The one needle of deflation in the inflationary haystack is that GDP will slow, and the Fed and Congress will be powerless to stop Americans from saving and paying off their debt, which would be a fair point, if every bit of info was against this. Americans are still the worst savers, incredibly indebted, and will look to any handout that they can get. I think the inevitability that negative interest rates are coming will end up benefitting Americans in the mediumterm.
Negative interest rate policy, NIRP, will be a reckoning for Americans' lifestyle, that will whither down to look much similar to those in Cuba or Albania during communist rule. Debt will be basically turned inside out into credit, and your debt will be used as a backing to the currency. The more you spend, the better. Anyone who has read about government cryptos and NIRP/ZIRP will understand this. Our monetary system will be backed by debt, much like it already is, but the velocity will be kept up so high that in order to maintain your standard of living, you will have to keep purchasing. Put simply, every month you'll get however many dollars, and there will be a timer on it that will expire after however much time, and you will have to spend it all, or it will disappear. Much like vacation days at a lot of your jobs at the end of the year.
Now why would we take a step in this direction? It's only because the Fed and gov't have all interest to do so. Sure, all of our standard of living will diminish, but the Fed will be heroes and be seen as the saviors who helped uphold American lifestyle while the greedy companies tried to steal from us. Everything is in their favor - the government and government-owned media control the placement of the Overton Window.
So to clarify, the main reason the Fed will inevitably be the last bank standing will only be due to the fact that they will do everything they can to stop this Everything Bubble from popping, and will gradually, own every bit of debt out there, and have to rely on NIRP to keep anyone from defaulting. The average American, who can't even tell you where France is on a map, or who Robespierre was, will laud NIRP because it allows them to maintain whatever leveraged lifestyle they've been maintaining for decades, without any attempt at saving or financial planning.
www.cnbc.com
Americans raiding retirement savings to avoid defaults and to stay afloat.
www.marketwatch.com
"One-third of homeowners have less than $500."
"25% of Americans have no emergency savings... 16% have taken on more debt... nearly 1/3 report having lower income than at the start of the pandemic."
"Some 95% of workers in low-income households — making less than $36,000 per year — have either been laid off as a result of the coronavirus (37%) or have experienced a loss in income (58%). A quarter of workers earning between $90,000 and $180,000 a year saw an income loss."
This is a huge point that deflationists and inflationists alike will use to push their narrative, but only the inflationists are right when it comes to how the Fed will act. Sure, the initial onset of Americans jumping into the dollar is a magnificent tailwind for the DXY, but the Americans who have to endure a new loss of income who are extremely frustrated with how things are going, in tandem, with politicians who are steadfast in trying to bring whatever relief will not bide well for deflationists. We either see growing unemployment, growing social unrest, and everything under the sun that is perfect for a violent revolution and exponential drop in standard of living, or we see what we've been seeing for years - Fed and gov't action to maintain status quo and freebies for as long as their fake currency can stand it.
So as unemployment stays steady, standard of living sees a drop, and more Americans save, there will be more of a rush for the Fed to take action and prop up what corporations they can and back whatever debt possible to keep the rusted, empty freight-train rolling at mach speeds.
And in short, the markets see no signs of dropping. We might see another big drop soon as people draw from their pensions and 401ks, but technical indicators see further moves up for the major indexes. The time for a big drop is now, and it just hasn't happened - not as violently as many of us initially thought. Going short is a good way to get screwed super quick in a bubble that is everinflating.
