OK, right up front: What I know about high finance, investment banking, and so on, you can write on the back of a postage stamp. In other words, I know next to nothing, and am writing this blog as an "outsider", looking at the unfolding spectacle. And - while I'm laying all my cards on the table - I have to admit I'm utterly and totally bewildered by some if not most of it. We're in some sort of weird financial Alice in Wonderland, where like the Queen of Hearts, we're being asked to believe a few impossible things before breakfast. And one of the weirdest things we're being asked to believe is "negative interest rates," especially on bonds.
I freely confess, when I heard that one, my discomfort passed from the "slightly confused" state to the "totally bewildered." It didn't help that most of the people that I know who do know something about finance, money flows, and so on, were also somewhere on the spectrum between "slightly confused" and "totally bewildered." To paraphrase Churchill, we're looking at a riddle wrapped in an enigma shrouded in mystery, and (to add to Churchill) taken totally black by FASAB56. You can shake the box, listen to what's inside of it rattle and roll, but you're not allowed to open the box and see what's inside.
So when J.K. sent along the following article, I had to sit up and take notice, because there were two things it said that got my high octane speculation motor running in high gear. Here's the article:
So what were the two things that caught my attention?
The first was the question addressed to the author of the blog by one of his readers:
Few questions regarding the future disruption:
1) Could the pledging of negative-yielding bonds as collateral be causing the liquidity problems? As a private lender myself, how can a central bank (or anyone) lend against its par value (even overnight) when held to maturity you receive less than par?
And the second was the answer, which is even helpfully labelled "answer":
ANSWER: There is about $17 trillion in outstanding negative-yielding bonds. It is far too complicated to go into great detail on a mere blog post. Suffice to say that the negative-yielding bonds are going to crash like something not witnessed since 1931. While a complete default is not likely prior to 2025/2026, we are going to witness the start of the collapse in 2020. These bonds have been bought by PUNTERS who are just trading them back and forth like a game of musical chairs. When the music stops, a lot of people will get caught holding these new 2.0 versions of financial debt bombs. Nobody is buying these things to actually hold. It is more akin to trading commodities where people are not actually interested in taking deliveries of lumber, hogs, silos of wheat or bars of silver. These are trading instruments only. (Emphasis added)
Add in negative mortgage rates, bundle these "trading instruments" together like the derivatives of a a couple of decades ago, and voila!, one has a nifty way of repossessing real assets when the game of musical chairs comes to an end, and whoever is playing the music suddenly stops it.
And when the music stops, there will be, the author implies, a "bail-in" of whoever gets stuck as the custodian - i.e., as actually holding - those "trading instruments", and it comes with a warning:
Judge Martin Glenn presided on M.F. Global bankruptcy and created the first BAIL-IN without Congressional Authority. He was the first one to engage in FORCED LOANS by abandoning the rule of law to help the bankers and protect Corzine from losses by taking client accounts to cover M.F. Global’s losses. That is no different from what we saw in Cyprus. He simply allowed the confiscation of client funds when in fact the rule of law should have been that the bankers were responsible and M.F. Global’s losses and it should have been reversed. Never should the clients’ funds be taken for M.F. Global’s losses to the NY Bankers.
What Judge Martin Glenn’s ruling warns is you should NOT trust any company based in New York City.
Now, "bail-ins" are a fancy financial crony crapitalist's euphemism for "theft," in this respect, it's much like socialism; it's a "rules for thee but not for me" sort of thing, but the point is made and has to be connected to the author's earlier analogy of musical chairs: it's a the latest financial capitalist's method of theft of real assets, and in the case of clients' accounts, theft of liquidity, of cash. And the warning he gives about not banking with "any company based in New York City" should sound familiar to those who have been following Catherine Austin Fitts' Solari quarterly wrap ups, and her warnings about getting out of big banks.
But there's an implication to the author's comment about 'Musical Chairs" and whoever ends up as "custodian" of those negative interest rate "trading instruments", and herewith a bit of high octane speculation, because this speculation is an obvious implication of that analogy: negative interest rates were a deliberate concoction of the financial capitalist sector designed precisely to soak up real assets, and thus the financial musical chairs game is very real.
There's another aspect to this story though, but for that we'll have t0 wait until tomorrow...
See you on the flip side...