Welcome to Finance and Fury, The Furious Friday edition
What has created a system where the share market can go down so quickly?
The perfect storm – Panic, OPEC agreement breaking down – computer algorithms kicking in, mass sell-offs of index funds
- The recent collapse in the stock market – speculation is rampart with discussion of a new crash looming on the horizon – even with Monday’s record breaking drop – market into retreat
- Important context – that a chain reaction collapse was only kept at bay due to massive liquidity injections by the Federal Reserve’s overnight repo loans should not be ignored
- Began in September 2019 – has grown to over $100 billion per night… all that to support the largest financial bubble in human history with global derivatives estimated at $1.2 quadrillion – or 20 times the global GDP
- Thanks to media – and not to be offensive – but general financially illiteracy – the underlying reasons as to why the economic system is so fragile and crash has been misdiagnosed as the coronavirus
- Today – want to give a bit of context around the structural issues to a financial collapse – if it does manifest into one
- Similar to a virus spreading – and killing people – depends on the hosts health – healthy wont die
- the nature of the modern financial system with panic and collapses is very similar – the US economy catches a cold – the world markets collapse
Big topic – so where to start – first with some background
- In some previous episodes – Quoted Franklin Delano Roosevelt in his Inaugural Address of 1933 – “The money changers have fled from their high seats in the temple of our civilization. We may now restore that temple to the ancient truths. The measure of the restoration lies in the extent to which we apply social values more noble than mere monetary profit.”
- This was in reference to the ‘money changers’ only being able to create the bubble of the 1920s (roaring 20s) via access to the commercial deposits of banks – leveraging these using margin loans and debt instruments for profit over investing into productive side of economy
- Roosevelt – for all his faults in socialising the US system – wanted to take on Wall Street – Didn’t have the publics best interest in mind – but rather nationalising (taking over) the banking system – wasn’t able to so instead created the banking Act of 1933 – especially the “Glass-Steagall” section of the act – forced the absolute separation of productive from speculative banking, guaranteeing via the Federal Deposit Insurance Corporation (FDIC) only those commercial banking assets associated with the productive economy, but forcing any speculative losses arising from investment banking to be suffered by the gambler
- This focus on the now rather than later ushered in the system of “post-industrial monetarism”.
- This would be a system ushered in by Richard Nixon’s announcement of the destruction of the fixed-exchange-rate Bretton Woods system and its replacement by the “floating rate” system of post 1971 fame.
- During that same fateful year of 1971, another ominous event took place: the formation of the Rothschild Inter-Alpha Group of banks under the umbrella of the Royal Bank of Scotland, which today controls upwards of 70% of the global financial system
- The intentions of this group were well laid out in the 1983 speech by Lord Jacob Rothschild: “two broad types of giant institutions, the worldwide financial service company and the international commercial bank with a global trading competence, may converge to form the ultimate, all-powerful, many-headed financial conglomerate.”
- Wanted to get commercial and investment banks back into bed with each other – to use debt and financial instruments to make themselves filthy rich
- This policy demanded the destruction of the sovereign nation-state financial system – nothing really new – the age-old scheme of controlling the money system – but this time it would be on a global level
- At around the same time – had Milton Freedman’s economic theories – around shareholder theory – argues that a company has no “social responsibility” to the public or society; its only responsibility is to its shareholders – revolutionised wall street to focus on maximising profits in the short term – long gone is the long term focus of companies with what is best in 10 years – now it is quarterly based – hence why share buybacks are so prevalent – what can be done now to boost prices – even at the detriment of the long term
- A record number of CEOs resigned right before the crash – around 220 in total I believe – but major companies
Due to the Interconnection of the financial system and share markets
– Deregulation of the Financial system – whilst regulation of every other business increased
- Deregulations – Two major financial centres of London (UK) and New York (USA)
- London – 1986, the City of London announced the beginning of a new era of economic irrationalism – known as the “Big Bang” deregulation – swept aside the separation of commercial deposit taking and investment banking
- The “Big Bang” set a precedent for similar financial de-regulation into the “Universal Banking” model in other parts of the western world
- USA – In September 1987 – the 20-year market gain through speculation resulted in a 23% collapse of the Dow Jones
- Within hours of this crash, international emergency meetings had been convened with former JP Morgan tool Alan Greenspan introducing a “solution” which would have the future echoes of hyperinflation and fascism written all over it.
- The creation of a new instrument – “Creative financial instruments” was the Orwellian name given to the new financial asset popularized by Greenspan, but otherwise known as “derivatives” – Came up with the derivative instruments as a concept and the time bomb is set –
- Still had the problem of separation of commercial and investment banks – but by 1999 a politically castrated Bill Clinton found himself signing into law a treaty authored by then Treasury Secretary Larry Summers known as the Gramm-Leach-Bliley Act, which would be the final nail in the coffin for the Glass-Steagall separation of commercial and investment banking in the United States.
- The new age of unregulated trading and creation of over-the-counter derivatives caused these strange financial instruments to grow from $60 trillion in 2000 to $600 trillion by 2008 – But around $1.2 quadrillion today
- New problems of supercomputing and algorithm trading – creation of new complex formulas which could associate values to price differentials on securities and insured debts that could then be “hedged” on those very spot and futures markets made possible via the destruction of the Bretton Woods system in 1971.
- So while an exponentially self-generating monster was created that could end nowhere but in a meltdown, “market confidence” rallied back in force with the new flux of easy money – under the new Fiat system
- Interconnect nature – Globalism, trade and reliance on other countries for production – Nafta, the euro and the end of history
- During this same period of Clintons administration – another change to legislation occurred – was passed called the North American Free Trade Agreement (NAFTA). With this Agreement made law, protective programs that had kept North American factories in the U.S and Canada were struck down, allowing for the export of the lifeblood of highly skilled industrial workforce to Mexico where skills were low, technologies lower, and salaries lower still.
- With a stripping of its productive assets, North America became increasingly reliant on exporting cheap resources and services for its means of existence.
- Again, the physically productive sector of society would collapse, yet monetary profits in financial sector boomed
- Replicated in Europe with the creation of the Maastricht Treaty in 1992 establishing the Euro by 1994
- Universal Banking, NAFTA, Euro integration and the creation of the derivative economy in a space of just several years would induce a cartel of finance through newly legalized mergers and acquisitions at a rate never before seen
- Created mass monopolies over the economy – companies from the 1980s were absorbed into each other at great speed through the 1990s in true “survival of the fittest” fashion as regulations on domestic companies in the productive sector were introduced
- But counter parts in non-western countries didn’t have to abide by same regulations – so with companies working under the Freidman method of profit maximisation – production and jobs and contribution towards GDP left western nations –
- Free trade = factors of production like labour shift
- By the 2000s – the fundamental health of productive companies was diminished – whist the speculative side to the economy – investment banking and derivatives were let out of the box
When the first signs really all kicked off – THE 2000-2008 FRENZY
- With Glass-Steagall now removed, legitimate capital turned into speculation – nothing productive to invest in anymore in the economy – so looked for profits elsewhere. Billions were now poured into mortgage-backed securities (MBS), a market which had been artificially plunged to record-breaking interest rate lows of 1-2% for over a year by the US Federal Reserve – so borrowing was easy, and the returns on the investments into the MBSs massive in comparison
- The speculation also swelled as the values of the houses skyrocketed far beyond the real values to the tune of one hundred thousand dollar homes selling for 5-6 times that price within the span of several years – due to borrowing capacities increasing and the loss lending regulations
- As long as no one assumed this growth was ab-normal, and the unpayable nature of loans given – creating a leveraged rise in assets – then profits were supposed to just continue infinitely
- The stunning “success” of securitizing housing debts immediately induced a wave of sovereign wealth funds to come into prominence applying the same model that had been used in the case of mortgage-backed securities (MBS) and collateralized debt obligations (CDO) to the debts of entire nations – Australia is no different
- The securitizing of bundled packages of sovereign debts that could then be infinitely leveraged on the de-regulated world markets would no longer be considered an act of national treason, but the key to easy money.
- Regulators and politicians said they fixed the problems from 2008 – but Nothing changed though
- For all the talk of an “FDR revival” under Obama, speculation wasn’t actually regulated under the Dodd-Frank Act or the Volker Rule of 2010. No productive credit was created to grow the real economy under a national mission as was the case in 1933-1938.
- Banks were not broken up while derivatives GREW by 40% with the new bubble concentrated in the corporate/household debt sector now collapsing. During this time, nation states continued to be stripped, as austerity was rammed down the throats of nations.
- Western economies – Like Australia and USA started to struggle further – talking about the underlying health of countries and their productive output – speculative assets or hard assets like shares and property did well – but now suffer through large gains and large losses – most recently is a good example- ASX lost 27% in 3 weeks
- GFC from October 07 to March 09 – around 18 months for 50% loss – from Aug 08 to March 09 – 34% loss in 7 months – we are almost there in 3 weeks
- The ruling class, the media and many others were surprised by the 2016 Brexit and election of President Trump
- But when viewed from the point of those who were affected by these global focused policies and speculation over productivity – shouldn’t come as a surprise – why a lot of countries are seeing a new wave of nationalist spirit has become a fire which the technocrats have lost their capacity to snuff out.
- Economy and by extension the markets are fragile – No longer is the focus for the board members of companies to be productive – or for institutional investors to invest into companies long term that are productive in the economy – core of the post-industrial monetarism model
- Focus is in profit maximisation at any cost through speculation – The cost though is increased volatility in markets
- Nature of the new beast – have to ride it out – but thanks to the speculative nature – cheap shares are available every few years
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