Global financial institutions have been playing a game of musical chairs since the financial crisis of 2008. In a normal game of musical chairs there are rounds in which the music stops and one player at a time is eliminated due to a deficit of chairs. In this game of financial musical chairs even eliminating one player has been an unacceptable outcome to policymakers for economic and primarily political reasons. However, the chairs have continued to be removed while everyone continues to dance around and the players have convinced themselves either that there will always be a chair for them or that the music will never stop. As a result, we are looking at a final round day of reckoning for the current global financial system of a magnitude that cannot be fully grasped. Not only is there just one chair left and dozens of players still in the game: the game is being played on the deck of the sinking ship of fiat currency. Where does the Brexit fit into this apropos yet admittedly clunky analogy?
It means the music has stopped.
Here’s what Friday (06.24.2016) looked like:
This is just the tip of the iceberg. The immediate reaction was a flight to safety in order to hedge risk or take it off the table. Such moves are not ending but have only just begun. Gold closing for the week above $1,300/oz at two year highs is a bullish signal. That the dollar rose significantly at the same time makes the move even more potent. Silver is lagging, but I expect it to catch up and after stabilizing above $18/oz to eventually begin leading.
In terms of stock markets, the UK actually outperformed the rest of Europe on the day losing a few percent as opposed to drops of more than 10% for Italy, Spain, and Greece. More importantly the bank stocks were crushed.
Barclays down 20% on the day:
Credit Suisse down 16% on the day:
Deutsche Bank down 17% on the day:
These were not the only institutions to suffer massive drops in their equity, but take a look at where CS and DB in particular are in relation to the financial crisis lows from March 2009. Don’t think this means trouble? Think again. Still not sure? Check back in at the end of next week.
Deutsche Bank in particular has tens of trillions of dollars worth of derivatives, and with the large moves in debt and currency markets there might be a Custer’s Last Stand or a Pickett’s Charge going on behind the scenes this weekend. Derivatives get out of hand when major price dislocations occur, and I’m expecting the follow through moves to be even more substantial when they do happen.
Of course central banks will do ‘whatever it takes’, but given the virtually zero credibility that they have we may finally be watching an Emperor Has No Clothes moment also. This could all be an order out of chaos approach, but if enough stalwart people are aware and paying attention then the order that will arise out of the chaos can be one of peace and freedom as opposed to war and tyranny.
So what do we do when the music stops? Let’s take a cue from Rudyard Kipling:
If you can keep your head when all about youAre losing theirs and blaming it on you,If you can trust yourself when all men doubt you,But make allowance for their doubting too;If you can wait and not be tired by waiting,Or being lied about, don’t deal in lies,Or being hated, don’t give way to hating,And yet don’t look too good, nor talk too wise:If you can dream—and not make dreams your master;If you can think—and not make thoughts your aim;If you can meet with Triumph and DisasterAnd treat those two impostors just the same;If you can bear to hear the truth you’ve spokenTwisted by knaves to make a trap for fools,Or watch the things you gave your life to, broken,And stoop and build ’em up with worn-out tools:If you can make one heap of all your winningsAnd risk it on one turn of pitch-and-toss,And lose, and start again at your beginningsAnd never breathe a word about your loss;If you can force your heart and nerve and sinewTo serve your turn long after they are gone,And so hold on when there is nothing in youExcept the Will which says to them: ‘Hold on!’If you can talk with crowds and keep your virtue,Or walk with Kings—nor lose the common touch,If neither foes nor loving friends can hurt you,If all men count with you, but none too much;If you can fill the unforgiving minuteWith sixty seconds’ worth of distance run,Yours is the Earth and everything that’s in it,And—which is more—you’ll be a Man, my son!