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It’s Not Time to Sell Everything – Yet

25 | By Shah Gilani

One of my favorite lines is “I’m not the kind of guy to say I told you so – but if I was, I’d sure be saying it now.”

As far as saying “I told you so,” back in the summer of 2008, in my “Friday Night Illumination” emails to my banker and trader friends, I screamed, “SELL EVERYTHING!”

People thought I was nuts. Literally, that I’d lost my mind. Sell everything – no one ever says that, ever.

But I said it, over and over. SELL EVERYTHING! It was an insanely bold call. At least that’s what everyone said to me after the fact.

It wasn’t a bold call. It was telegraphed. And I wasn’t the only one who read it right.

Now for the really bad news. It’s going to happen again. The time to sell everything is approaching. It’s not here yet.

And we’re not inching forward. Nor are we dashing.

We’re jogging.

Today I’m going to show you how it will not only be different – but also a lot worse…

Casino Capitalism

That’s because the rescuing armies this time – the U.S. Federal Reserve and the globe’s other central banks – are the ones going under. If that happens, we’re going to have a global depression of biblical proportions.

There is time to stop it. However, those central banks are stoking the locomotive’s furnace to the tune of “Old Charlie stole the handle, and the train, it won’t slow down.”

The crash is coming because central banks’ engineered low-to-no interest-rate policies grossly distort free markets. That makes true price discovery impossible, and front-running, financed by flimsy carry trades, has become a perpetual-motion trade.

If you don’t get that, don’t worry – you’re not alone. The central banks don’t get it, but they’re starting to. It’s not complicated at all. It is what it is. It’s about casino capitalism.

Here’s the game that’s being played, plain and simple. And here’s how it’s going to end.

Central banks artificially lowered interest rates, which causes market distortions, which leads banks and households to leverage themselves up, up and away. When the housing market and mortgage securities imploded, the pain spread around the world.

But the pain wasn’t all about mortgages.

It was all about “credit” in the system and how easy credit, courtesy of low interest rates, facilitated cheap financing of real estate and heavily margined and leveraged securities positions. Easy credit also aided and abetted counterparties wagering trillions of dollars on bilateral derivatives contracts that they folded up and tossed about like paper airplanes.

Confidence in the system collapsed when credit evaporated and players crapped out.

The credit crisis was a global phenomenon. That’s because credit stems from banks. Banks everywhere were in trouble. By trouble, I mean insolvent. Central banks had to rescue them.

That’s where “stimulus” came in. Zero interest rates don’t matter if you’re a bank with zero money to lend. So what if you can borrow from the Fed at zero interest? If there’s no one borrowing from you and you can’t make money by lending, you’re toast.

That’s where quantitative easing came in. QE was a desperate measure. Plain and simple, if you’re a central bank and your banks don’t have any money and you work for them, you find a way to give them money so they don’t have to close down for good.

The Fed and other central banks (using different names, though the European Central Bank just went ahead and called its latest $1 trillion giveaway QE) printed money and steered it directly onto banks’ balance sheets so they wouldn’t be insolvent.

Stay with me here, because this is the part that will blow your mind if you don’t know it.

This Year’s Front-Runners

The Fed and the world’s other central policymakers manage this balance-sheet bloating trick by buying bonds from banks. But there’s no difference inside the bank if they have bonds (which are worth something) on their balance sheets that they sell for cash. It’s just a switch. There’s no addition to the balance sheet.

What really happens is that banks (I’m talking about big banks, the too-big-to-fail banks that all failed in the credit crisis) buy government bonds from governments that always have to roll over their debts. Sure, they pay full price for the bonds, but they don’t put up the full amount. They buy them on margin.

It’s done with clicks on electronic ledgers, so don’t sweat the mechanics. Anyway, central banks then buy those bonds from the banks and pay in full (credit them in full on another electronic ledger). And presto!

The Fed stuffed its big banks with more than $4 trillion. That’s enough to make them not only solvent but very profitable again. And the folks in the government? They love it because they don’t have to worry about selling their debt. They’ve got a readymade syndicate to take all they have to offer – at very low rates mind you!

Bank balance-sheet bloating has been going on around the world.

And, as if not a single lesson was learned from the last credit crisis, speculators have leveraged up their “risk-on” positions because they can finance them for next to nothing.

Almost all of the big bets being made, in the tens of trillions of dollars, are front-running bets. Front-running central banks, that is.

Take any example you like, the front-running trade works the same everywhere.

Let’s take Europe, because it’s the latest example of massive front-running.

Hedge funds, institutional traders, mutual funds and banks all bought the sovereign debts of beleaguered European Union member countries back in 2012. They were all paying big interest-rate spreads over better quality bonds, like U.S. Treasuries.

But when ECB President Mario Draghi famously said, “Whatever it takes,” (to support the euro, the EU and its banks), the front-running began.

Buyers paid higher and higher prices for government bonds, driving their yields down. As of this morning, the 10-year yield on German Bunds is 0.34%; 0.57% for French bonds; 1.46% for Spanish ones; and 1.62% in Italy. And the Swiss 10-year yield is negative 0.08%.

Why so low? Because, just like in the United States, bond buyers (speculators) knew the central bank would have to come and buy their inventory from them. The ECB just announced a 1 trillion euro QE program. So, the speculators who drove up bond prices and drove down yields to insanely low levels will make a fortune selling their stockpiled government bonds to the ECB at the bloated prices they drove them up to.

That’s front-running.

But, Houston, we have a problem.

Ghosts in the System

Somewhere, probably in Europe, maybe in Japan, maybe in Russia, banks are going to fail, probably because they loaned too much money to beleaguered oil and gas companies. Or worse, a European crisis could erupt from a Greek implosion and contagion – and then what?

After everything central banks have done to save the credit system, in the end they leveraged it up even higher with even lower interest rates.

A break anywhere in the credit system could cause contagion. If the central banks have done all they could do and are themselves leveraged well beyond being insolvent (none of them have real capital – they’re all ghost lenders), confidence in the system will evaporate.

That’s when it will be time to sell everything.

It could happen. It’s going to happen.

Only by immediately addressing the structural problems facing indebted countries and still shaky banks can we veer off in another direction. But the likelihood of that happening is precisely between slim and none.

I’m not saying I told you so.

25 Responses to It’s Not Time to Sell Everything – Yet

  1. gdd says:

    How does selling everything help? It seems you only end up with a pile of worthless currency, unless you buy something like gold, for example. Why not hold on to shares of rock solid companies that produce, say, food or something else people have to have and hold until the currency debacle resolves itself?

  2. horst says:

    brilliant anaysis Shah, and a great read!
    so, it will happen! the obvious question is: WHEN? or, if that is too difficult to answer, : how much upside are we going to loose, by selling now?
    or how much money are we going to loose by selling too late?
    we are waiting for your call!

  3. Craig Steele says:

    Shah you couldn’t be more correct, in my humble opinion anyway. One only needs to observe what transpired today with precious metals to understand that the same slight of hand trickery is again rampant with the way banks conduct themselves. Yesterday massive PUT options were placed against silver and gold. Today the banks did their thing to create value for those options. Joining together to drive the paper futures prices into their own waiting arms.
    Where are our overseers? Who is watching to prevent Act ll from occurring? Why did we allow a change in language regarding banks use of derivatives become part of an unrelated bill passed by our legislature recently? We are America, the tax payers, not the Vampire Squid and their cohorts. They damn near bankrupted the globe last time out. Please step up to the plate Robin Hood or Captain America. We need you more than ever.

  4. Zohar says:

    Shah’s article is spot on. Accurate and with concision. Best synopsis I have read in months. We all need to prepare our ‘go bags’. Shah keep us informed my man and let us know when to pull the pin. Regards The ‘Z’

  5. J M Schroeder says:

    So, we’ve been hearing from some folks that a crash is imminent….with in
    6 months, etc. This has been the forecast for years. Meanwhile, the U.S. stock market keeps on a positive tear.
    Will you tell us when to sell if we really are about to see a Titanic sinking?
    Or will be all enjoy another crashing roller coaster ride?
    Best.
    JMS

  6. Rob Martyn says:

    well then,I guess I better learn your material and get my options account up and running sooner than later,thx

  7. Louise Cave says:

    You explained the mechanics of this economic disaster area in a manner that’s easier to understand. Many of the newsletter people haven’t taken the time to do that. They just continue predicting financial collapse, giving one date after another, until they sound like the little boy who cried “wolf!” It impairs their credibility because Jan. 28 just came and went. Now they’re pointing to April 29…it goes on and on. Thanks for explaining the situation more clearly.

  8. Phil says:

    Shah,

    First, thanks for all the insightful commentary you always post and tell it like it is whether people want to hear it or not (as very likely).
    Second, if this unfortunate circumstance actually becomes a reality, what is the best way to protect themselves in order to survive: cash, gold, food or what?

  9. Renee Lorenz says:

    When “the time comes” and we “sell everything” doesn’t that add to the problem? Did the bank runs @ the start of the Great Depression cause or exacerbate the situation?

  10. Kevin Beck says:

    I would love for the outcome to be that only the corrupt central banksters suffer the consequences for the damage they did to the world. But the way that socialized money works, everyone else is on the hook for the damage inflicted by the banksters upon them.

  11. Tony says:

    I think I got it. We should sell everything because the financial powers that be have destroyed it all by making everything worthless. Except everything they printed is owed to them and we are the debtors. They will then increase our payments to them by raising our taxes to pay off the worthless debt.

  12. Jac van Hout says:

    Dear Shah,

    Thank You for all your explanations.
    I live in Europe And like to know in wich currency i can go for the best in case of selling everything.
    It is clear not in usd,perhaps in euro.
    Do you prefer another or several currency to be in.?

  13. David Page says:

    Thanks, can you reply to me on these questions So shorting by going to cash now or soon would be a good move ? What about precious metal or gold move now or soon?

  14. Ann Coletta Doyle says:

    It does sound like a Huge Crap Game. Excuse my French,English, German,
    Russian, Japanese……..etc, etc, etc,
    HOW ABOUT SMALLER BANKS PROTECTING MONEY WITHIN SPECIFIED BORDERS. THE ACCOUNTING SYSTEMS COULD BE MORE HONEST IN ORDER TO PROTECT CREDIT.

  15. Greg F says:

    If everyone does it, it is only a matter of re-calibration. How does this reflect in relative value? If money freezes, goods and services freeze – temporarily. But oh what a tempest.

  16. Charles C. Harris says:

    An excellent job in explaining such an important and complicated situation.Just wondering; what if the politicians had not listened to the bankers in 2008 and had bailed out the mortgages owed by the American people? Not sure what the total amount would have been but I suspect much less than the trillions of dollars that was given to the banks. Maybe the “helicopter plan” of dropping money to Americans from the sky would have been better than just saving the banks that caused the problem in the first place. Aren’t we doing about the same thing with welfare, government grants and other social programs? Still taking from those that work and produce and distributing to the rest?
    I have determined that the most danger to our republic is from the big “too big to fail” banks, the world central banks and corrupt politicians. I understand that the same banks that we bailed out have grown about 35% larger than than before the bailout.
    Are the central banks of the world and the United Nations leading us directly into a One World Government?

  17. Charles C. Harris says:

    My concern is the same as others; what do we do to protect our investments? Physical gold and silver, cash, must-have commodities? Will any stocks be safe? Some writers discuss defensive stocks to hold when the going gets bad. Do you concur?

  18. MJ says:

    Thanks, too. It would be hard to believe if your narrative wasn’t so consistent with what appears to be happening.

    So what WILL happen to US Treasuries, I.G. corporates and bond funds, convertibles?
    The stock market will be thrown around and down for sure.
    What does that mean for interest rates, the dollar?

    This is uncharted territory, but since you can see what we can’t, can you lay it out for us?
    What happened to all classes of investments after 1929? Is it similar? Won’t we still be somewhat better off than we were then?

    With appreciation…..

  19. nicko says:

    I have been following this utter nonsense now for 7 years. yes the banks are putting it to everyone but that is the way it is planned to happen. when the SHTF there will be no opposition to the total takeover by the next ruling class. people will be decimated by 286 million. there is only room for so many people to survive.

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