Financial Reset (or Bust)

  • A new economic reset: “a form of debt jubilee”
  • When the bough breaks?
  • Early tremors signal a market correction
  • SLR bullet dodged (for now)
  • (Sign of the times) Paying a premium for lumber
  • Reader praise for “The Commies Are Coming”… Womxn’s history month… And more!

“With a new U.S. administration, and the end of the COVID battle in sight with the vaccination rollout under way, now is a good time for the major economies of the West (and ideally the world) to sit down and devise a new international monetary order,” opines one Chris Watling.

Mr. Watling is CEO of the London-based institutional research outfit Longview Economics. The Financial Times gave him space last week for an Op-Ed with an ambitious headline…

Drone Strikes Saudi Oil

To be clear, this appears to be a different sort of “great reset” than the one envisaged by the World Economic Forum. That one is animated by a climate-change and surveillance-state agenda. This one is limited to the financial realm.

Watling’s thesis is familiar to anyone who’s been reading our pages for longer than a few weeks: The current global monetary system is getting long in the tooth — nearly 50 years old if you date it from President Nixon severing the dollar’s last tie to gold in August 1971. The system is under stress; the center can’t hold much longer.

What would this reset look like? “There should be widespread debt cancellation,” Watling writes, “especially the government debt held by central banks. We estimate that amounts to approximately $25 trillion of government debt in the major regions of the global economy.”

$25 trillion? Easy-peasy.

“Whether debt cancellation extends beyond that should be central to the negotiations between policymakers as to the construct of the new system — ideally it should, a form of debt jubilee…

“High ownership of government debt in that environment by parts of the financial system such as banks and insurers could inflict significant losses. In that case, recapitalization of parts of the financial system should be included as part of the establishment of the new international monetary order. Equally, the impact on pension assets also needs to be considered and prepared for.”

No biggie, right?

Here’s the thing: There’s no way such extreme measures can be implemented before the system breaks under its many stresses. But once it does break? Well, it’s the old saying about never letting a crisis go to waste.

Here’s the other thing: There was a time when the power elite circulated such ideas among themselves only in the most obscure forums — technical papers from, say, the International Monetary Fund or the Bank for International Settlements. “Warnings you’re not supposed to hear,” our colleague Jim Rickards called them in 2014.

But now that these warnings have migrated to the opinion pages of mainline financial media? That would suggest the anticipated crisis is drawing nearer.

Our point today is not to frighten you into paralysis. No need to curl up in the fetal position.

Nor would we suggest converting your entire portfolio to precious metals, ammo and No. 10 Mountain House cans. (Not that there’s anything wrong with those asset classes — heh.)

“The big one” is not nigh. But an early tremor can’t be ruled out — something in the coming weeks or months that would quickly knock the stock market down 15–20%.

Maybe your gut tells you we’re already overdue for such an event.

The good news is you don’t have to make major adjustments to your portfolio to prepare for that possibility.

Just one simple move — “disaster insurance,” we’re calling it — and you could offset the losses in your core portfolio positions. Depending on how events play out, you could even make as much as 40 times your money… and significantly pad your retirement account while everyone around you is losing his mind.

The best part about this disaster insurance? You won’t lose a fortune if the market keeps sailing higher — only the small “premium” you’ve plunked down as a hedge.

We were scheming on this “disaster insurance” all last week. It’s a project so important, I ventured to company headquarters in Baltimore for the first time in over a year.

Now we’re putting on the final touches, re-running the numbers to make sure this hedge delivers everything we promise.

Join me for a special video debriefing this Wednesday at 1:00 p.m. EDT. You don’t need to sign up in advance; we’ll send you an email reminder with an access link shortly before we get underway.

But whatever you do, make sure you can be there. If the market takes a dive, it could be the smartest thing you do all year.

For the moment, markets are shrugging off one potential catalyst for a big downdraft — the Federal Reserve adjusting the big banks’ “SLR.”

In this case, the term SLR has nothing to do with high-end photography, but rather the “supplemental leverage ratio” held by the so-called primary dealers — the two dozen banks that show up at every Treasury auction in return for special privileges from the Fed.

The SLR regulation requires the primary dealers to hold a set amount of capital against Treasuries and some deposits. The Fed gave these banks a break on this regulation a year ago when the virus and lockdowns were making markets go berserk. But on Friday, the Fed decided the regulation would come back into force on March 31.

Complicated? Yes, but here’s the gist: “Many congressional Democrats wanted this exemption to end, seeing it as a low-risk profit-padder for the big banks (which it was),” explains our Dan Amoss, senior analyst for Jim Rickards and Nomi Prins.

“Although the Fed wants to be liked by members of Congress who have the power to alter the Fed’s power and its mandate in the future, the SLR decision is the Fed’s to make. Since the Fed ended the exemption, primary dealers may have to dump more Treasuries or other trading securities to meet more stringent capital requirements after the end of March.

“However, the Fed also said that it will solicit feedback on the SLR regulation, and therefore may dilute it in the months ahead.”

With the Fed adding that caveat, any potential market freakout was averted.

Treasury rates edged down Friday and are falling further today, the yield on a 10-year note now 1.69%.

That’s given a lift to tech stocks, with the Nasdaq rising Friday and rising more today — up 1.25% at last check to 13,378. The S&P 500 is up two-thirds of a percent at 3,938 and the Dow is up a quarter percent at 32,698.

Gold is sliding from Friday’s close, now $1,737. Silver is sliding harder, down 64 cents to $25.60. Crude is unchanged at $61.42. Bitcoin is edging lower to $57,121.

One economic number of note — existing home sales coming in way lower than expected. They fell 6.6% from January to February, thanks to rising mortgage rates. Even so, prices rose 3.1% to $313,000.

So… the SLR bullet’s been dodged, short term. Longer term, though?

Back to Dan Amoss: “The elephant in the room with the SLR issue is that trillions of dollars’ worth of future Treasury bonds, priced at real yields of zero or negative, will need to find a home.

“Who’s going to hold this hot potato, which is not an attractive asset to hold? The Fed, the primary dealer banks on Wall Street and ultimately the insurance companies and small banks will all need to join forces (voluntarily or involuntarily) to absorb the wave of Treasury bond issuance that is yet to come.

“Yet nobody wants to admit this reality, because it’s so embarrassing. It’s characteristic of an emerging-market financial system. A falling dollar coinciding with rising Treasury yields, which we’ve seen for the past several months, is a sign that foreign creditors no longer have a strong appetite for Treasuries. They can see the wave of Treasury supply on the horizon, and they want to be compensated with higher yields before buying.”

But again, that’s not a problem now. The Fed managed to make everyone happy. This time.

Sign of the times: We’ve run across the following meme twice already today, so it’s probably worth passing along in case you’ve not seen it yet…

Price of Lumber

We can’t vouch for the meme’s dead-on balls accuracy. But according to the industry website Random Lengths, lumber now costs $1,044 per thousand board feet — a record high and up 188% in the last year.

Meanwhile, the National Association of Home Builders estimates that current lumber prices are adding at least $24,000 to the cost of a new single-family home.

COVID restrictions at sawmills, people stuck at home taking on home-improvement projects, builders responding to rising prices by boosting production… it’s a perfect pandemic storm.

Any relief in sight? “I expect mill production to ramp up and distribution delays to start dissipating,” economist Dustin Jalbert tells Fortune. “Supply should increase in the coming months.”

But demand is still intense… so any relief might be shallow and short-lived.

“This was probably the best and most important 5 Min. Forecast I’ve read, and I’ve read almost every one since shortly after Agora began publishing it,” writes an appreciative reader after we reprised an episode from last summer this past Friday.

“However… Just kidding. No ‘howevers’ or ‘buts’ from me!

“I cannot thank you enough for releasing the Jim Rickards interview. What a generous bonus! I look forward to the day I can afford membership to the Financial Reserve and support your principled, insightful work at a higher and more direct level. In the meantime, I will greatly enjoy reading the interview!

“This is such good stuff. Thank you for everything you do!”

“Your best piece ever, Dave; I’m still waiting to see the ‘dictatorship of the proletariat’ and the withering away of the state.

“Doubt if our woke types know what that means or what they are espousing. Without exception, the ‘revolutions’ of the left merely replaced an existing totalitarian police state with another one mouthing all of the slogans as the masses were marched off into oblivion.

“Fools and their folly are dangerous to the folks just trying to live out their lives.”

“Paranoid or what?” reads a dissenting opinion.

“The problem is not left or right but the individualism and greed for money and/or power of politicians.

“Left or right had little to do with Stalin (power grab), the Cultural Revolution (power grab) or the disaster in Cambodia (power grab). Same for Belarus, Ukraine, Zimbabwe, Ghana and indeed wherever there are stolen elections in a ‘democratic state’ (hmm). Get your feet back on the ground.”

The 5: We concede: It’s an odd, odd sort of leftist takeover that’s been embraced so wholeheartedly by the power elite both in government and in corporate America — to wit, a tweet earlier this month from Mitt Romney’s old private-equity outfit…


We’ll leave it at that today. We’re sure we’ll have occasion to revisit the topic in the future…

Best regards,

David Gonigam

Dave Gonigam
The 5 Min. Forecast

P.S. Tomorrow marks the first anniversary of the Federal Reserve throwing the kitchen sink at the corona-crash — buying not only Treasuries and mortgage-backed securities but corporate bonds, municipal bonds, commercial paper…

If the aim was to stick save the stock market, it worked. A year ago tomorrow marked the bottom — after a sickening 34% drop in 33 days.

Could history repeat?

Maybe not as severely, but nonetheless soon?

If you’ve seen a headline or two that makes you nervous… or maybe you’ve just got an hunch that something’s amiss… now’s the time to take protective measures.

We’re talking about one simple trade that could give you peace of mind throughout this spring and summer.

We’ve organized a special debriefing for you this Wednesday at 1:00 p.m. EST. That’s less than 48 hours from now.

Again, no need to sign up in advance — we’ll send you a reminder with a link to the event shortly before we get underway. But now’s the time to get it in your calendar and clear your schedule. Because you won’t want to miss it.

Dave Gonigam

Dave Gonigam

Dave Gonigam has been managing editor of The 5 Min. Forecast since September 2010. Before joining the research and writing team at Agora Financial in 2007, he worked for 20 years as an Emmy award-winning television news producer.

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