We are on the precipice of what can only be described as a rising systemic risk for all markets. The Fed is now hinting that banks should prepare for NEGATIVE INTEREST RATES. This insanity of following the crowd is undermining the entire world economy. The increasingly unstable footing that we find ourselves standing on is reflected in widening credit spreads that demonstrate that CONFIDENCE is indeed collapsing.
The EU Commission will no longer classify government bonds in bank balance sheets as “risk.” Banks would have government bonds on par with “equity” yet government bonds have proven risky and are inferior to what would, in some financial institutions, result in an increased capital requirement. Turning to Goldman Sachs, we saw the so-called world’s greatest trader close out its long USD trade against a basket of euros and Japanese yen with a potential loss of around 5%, which is being bantered about on the street showing they too got this all wrong. This early 2016 destabilization is stopping out short gold positions, but it is not replacing them with any buying conviction. The euro trade of long Italian 5-year against short German 5-year has also turned into a bloodbath as the euro finally rallied begrudgingly to reach our first resistance target in the mid-113 area.
Global economic growth has been anemic at best in the States, but it is clearly turning down since 2015.75. This new world order of NEGATIVE INTEREST RATES is so insane and focuses solely on trying to stimulate borrowing. This is undermining pensions for the elderly and creating the economic storm of the century that is on the horizon that will be far worse than the Great Depression of the 1930s. Even the Japanese 10-year bond has gone NEGATIVE, demonstrating the total collapse in CONFIDENCE. Why, you ask? Because this time, the defaults will engulf all governments at all levels. Like a drunk who just won the lottery, all is always lost in a matter of time.
Bankers in German and Italian banks are looking rather pale in the face. The question is: will the ECB bail out Deutsche Bank or let it fall? They will probably blink and this will be part bailout/bail-in. They have no way out of this mess created by the euro without surrendering their own power. We are looking at a European credit crunch beginning in the periphery and spreading to the core, just as we are looking at the emerging market debt imploding and spreading to the rest of the world. The Fed now sees the external threat as systemic and is considering abandoning domestic policy objectives for international policy objectives precisely as they did in 1927, which created a major crisis.