Prepare For The Collateral Death Spiral

When the Europeans decided to put in the legislature to steal all assets of corporations (check out last week’s issue), what they did was destroy a portion of the eurodollar market.

The Eurodollar Market

As a very brief recap, the eurodollar market is one of the world’s primary international capital markets. They require a steady supply of depositors putting their money into foreign banks.

These eurodollar banks may have problems with their liquidity if the supply of deposits drops.

And you know what underpins these loans?

Well, collateral. In the form of treasuries.

Fine, but also in corporate debt and sovereign debt outside of the US.

Well, if you look at how Italian BTPs, British gilts, and German bunds have been trading, you realise that this debt is… ahem, no longer viewed as pristine.

Now, consider the corporate debt of, I dunno, say Uniper, the massive German utility company.

Germany Nationalizes Uniper

German Government Nationalizes Uniper in Move to Secure Energy Supply

In its latest outlay to secure energy for Europe’s largest economy, the German government on Wednesday announced the nationalization of Uniper, a company responsible for providing more than a third of Germany’s natural gas.

Oops! That collateral isn’t what it was.

But now you realise that any company within the EU can, under the laws being passed, be effectively seized in the blink of an eye.

Here are a few questions bankers in the eurodollar market are presently grappling with:

1. What value do you think the bonds of such a company should trade at?
2. How do you price this risk?
3. How do banks in the eurodollar market price existing risk with respect to European assets?

I honestly don’t know, but I know this.

It ain’t what it used to be. This is effectively sucking all the collateral out of the system.

In this environment, the central banks can piss about all they like with yield curve control and “managing interest rates,” but when you go and destroy the functioning of the largest money market funding system in the world none of that really matters.

So what do these dealer banks do now?

How do they go about pricing their existing book?

And how do they determine counterparty risk with respect to European assets?

The answer is they probably don’t know how to price it because, just like you and I, they’ve no earthly idea. And that, my friends, is where we are today.

It is also why the only “pristine” collateral now left is actually US treasuries.

I know, I know. They’re bankrupt, blah, blah, blah. They’re still the cleanest shirt in a dirty pile of washing.

In fact, they’re the only shirt.

I don’t frankly see this stopping any time soon. You can’t repair the damage done by these bureaucrats.

The markets are now very gun shy… as they should be.

Instead, sadly, I think it just gets worse and the dollar continues to run like the police are after it.

You will know — because we’ve been yabbering on about it for a while now — of emerging markets sovereign defaults incoming.

Well, that seems assured, but also we’re about to see massive corporate defaults.

Look, you can’t have the kinds of moves we’ve seen in the big boys.

The currency of “Great Britain” is not looking so great.

In fact, it just fell by over 5%. In a day!

For those of you unfamiliar with currency markets, let me make this clear.

This isht is NOT meant to happen.

No wonder the pointy shoes are now freaking out as this came across my feed.

Take a look at this for misinformation. From none other than the UK chief propaganda outlet, the BBC:

The Bank of England has announced that it will step in to calm markets after the government’s tax-cutting plans sparked a fall in the pound and caused borrowing costs to surge.

Did you get that?

It’s because of tax-cutting plans.

Hahaha! Queue the increase of taxes… because if cutting taxes causes the pound to collapse, then surely raising them will “fix” this problem. Easy!

Why on earth didn’t we think of this before?

But don’t worry, the absurdity continues.

It warned that if the market volatility continued there would be a “material risk to UK financial stability”.

What is “material risk” is that the BOE exists at all. It should be abolished, preferably with the assistance of C4.

The Bank will start buying government bonds at an “urgent pace” to help restore “orderly market conditions”.

Right, because by buying bonds, at a frantic… urgh, I mean “urgent” pace this will restore “orderly” conditions.

No it won’t.

This is like running down the road waving your arms madly while screaming at the top of your lungs, “help, my house is on fire,” in order to encourage your neighbours to come over for a BBQ.

The pound hit a record low on Monday following the chancellor’s mini-budget.

Ha! Of course it did, because the budget is put together by people who you wouldn’t trust walking your dog.

For those of us with a memory of BOE pha-cups this harkens back to 1992 when Soros slaughtered the pound.

Markets have also warned interest rates could spike after borrowing costs jumped, leading hundreds of mortgage products to be taken off the market.

Just in time for Blackrock to come in and scoop up all those assets for pennies on the dollar.

Remember folks, ”You will own nothing.”

The Bank said the bond – or “gilt” – purchases would be “time limited” and carried out on “whatever scale is necessary” to ease investor concerns.

No. What is happening is that the BOE had to intervene to stop the collapse of pension funds across the UK, because those same pension funds and myriad insurance contracts tied to the gilt market will all be obliterated as gilts collapse.

So the BOE is stuck with the problem of either holding up the bond market or holding up the currency market. They’ll choose the former and so QE it is.

Prepare for sterling to continue to fall.

Moving on…

Here’s the other big boy. The yen.

Again,this shit is NOT supposed to happen.

Now, realise this.

There is no way — none, nada, zip — that we don’t see significant fallout from this.

Anyone levered with currency risk not hedged is currently contemplating which floor to jump from and who will attend the funeral.

In the coming weeks and months we will be reading headlines of large financial institutions (insurance and pensions likely) having… ahem, “liquidity issues.”

Smart investors are already preparing for what’s coming…

For those looking to prepare and profit from this mess, we can show you how. Just click on the links (below my name) to find a solution that works best for you.

– Chris MacIntosh
Capitalist Exploits | Glenorchy Capital Macro fund | Subscribe to Insider | Rebel Capitalist Pro