DAVID HAGGITH: Fed talks “catastrophe.” JPMorgan talks “second wave” of banking collapses. History says the Fed NEVER makes it past the present depth of tightening — not ever!

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via thedailydoom:

silhouette of people overlooking San Francisco during 2020 fires
San Francisco skyline | Photo by Patrick Perkins on Unsplash

In the past, I’ve called this event the “Epocalypse” because it will be epic in scale and will eventually be seen as a new epoch in humanity’s economic history that will be apocalyptic in its level of economic destruction. That became the only thing Forbes ever quoted me on when I warned it was coming. It is a lot to pack into one word as a claim on the times we are now entering … until you read the report of Fed policy wonks who warn the Fed internally it is “engineering” a “catastrophe” and then start assembling the basic logic for all the events we KNOW are happening, as I laid out in detail in my last “Deeper Dive,” which I’ll give you a quick summary of here.

Sometimes, on Mondays, I open the headlines of The Daily Doom up to all readers so free subscribers, who get all the editorials for free each weekday, can also see what they are missing in the headlines and hopefully decide that their great desire to support the writing in these daily editorials, once coupled with recognition of all they could also gain from this curated collection of news stories each weekday, practically compels them to to add their support. However, this Monday is a triple treat because you also get a quick summary of the claims made in last week’s “Deeper Dive,” written for paying subscribers.

To put the cherry on top, I’ve included as the top headline in today’s edition a video by Danielle DiMartino Booth that practically hits all the major predictions of that “Deeper Dive” from her own perspective as a former Fed advisor who went rogue with her own reasons for why these things are going to happen.

“Deeper Dives,” of course are filled with my most detailed analysis to support the claims that are made from the data. Those are way too rich in facts for a lazy morning editorial, but here is a summary of the main points made because they are certainly the events that are coming (and I have Danielle to back me up on that), and you’ll want to know what those cratering events are even if you don’t know why: (It may also be a helpful quick, recap for all paid subscribers.)


Highlights from “The Deeper Dive: On the Brink of a Banking & Business ‘Catastrophe’!”


  • We’ve entered a worse environment for bank reserves than we had back in March-April when three banks failed under the most extreme tightening the Fed has ever attempted. Bonds held in bank reserves are more devalued now than they were in March, and the US Treasury is also removing cash held in bank reserves at its fastest rate in history, which it was not doing at all back when reserve problems collapsed those banks.
  • We know the Treasury plans to keep vacuuming cash out of bank reserves for several months to come to make up for lost time during the debt-ceiling crisis, driving bond prices down harder (yields up) as money gets sucked from bank accounts to hose up US Treasuries at higher and higher interest rates. Plus Bidenomics requires a lot of additional debt financing, so even more treasury issuance, sucking more cash out of bank reserves.
  • As a result, all Treasuries across the yield curve are already priced the lowest they have been in years (have the highest yields in years) and will plunge further in value in the months ahead.
  • The yield curve is already more severely distended into inversion (the most reliable indicator there is of recession) than it has been since 1981 when it presaged a painful double-dip recession!
  • All previous efforts by the Fed to reduce its balance sheet beyond the present amount have failed and had to be aborted abruptly as the Fed jolted back to QE; but the Fed, at least, had the option of aborting during those times because it had no serious inflation to fight.
  • The Fed has made zero success all year on battling down the only inflation measure it uses to determine its 2% target in spite of the steepest, deepest Fed tightening ever.
  • Defaults on commercial real-estate mortgage-backed-securities have almost tripled just during the first half of this year. These defaults are ascending along the steepest trajectory in history, and this is due to the start of a long-term structural economic transition in office space, not some temporary economic blip. We remember MBS as the cause of the Great Recession.
  • The properties behind these CMBS are deeply underwater, so banks are grossly under-collateralized. JPMorgan Chase’s CEO Jamie Dimon has stated that this one area alone is serious enough to assure a second wave of bank collapses soon.
  • Business bankruptcies have doubled since the Fed started tightening.
  • The US savings rate is in steep decline, adding even more troubles to bank reserves that are built largely from bank deposits as much less money is flowing into reserves while much more is being taken out.
  • US consumer credit card use has hit an all-time high, and debt service costs on that credit are rising quickly as everything is driving interest higher. That plus the reduction in the savings rate means the financial resources of consumers are finally getting tapped out.
  • US money supply is plunging faster than any time since the Great Depression!
  • As a result of all the above, we are certainly near or even at the point of that second wave of major bank crashes; yet we have months of additional financial destruction still scheduled in by the Fed, and the crashes, themselves, will create numerous new stresses.
  • Jobs are barely showing any sign of turning over, so the Fed’s second mandate is not likely to cut it slack anytime soon from continuing to doggedly pursue its first mandate — keeping inflation down, which is what is driving this economic destruction — the corner I said for several years the Fed was painting itself into.
  • Global and US factory output has been slouching significantly into contraction all year (with only a one-month blip to neutral in the US that immediately dove back into contraction). Demand for goods has fallen equally. So, we are already in a manufacturing recession.
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The actual “Deeper Dive” that summary comes from, of course, gives loads of data and logical analysis to back all of those summary statements up, while the previous “Deeper Dive” gave the report by two of the Fed’s own economists — the kind who probably work down in the basement somewhere who feed critical information and analysis up to the top — who warned the Fed that it is engineering an economic “catastrophe.”

Now, in today’s headlines, Powell admits to congress that the Fed had no idea it was going to create a major repo crisis (which I and, I think, some others called “the Repocalypse” back when I predicted it was coming half a year in advance) from its much slower quantitative easing back in 2018-2019, but he’s sure they have the appropriate watchful eye on the problem this time!

(Never mind the number of things financially assaulting bank reserves is far greater than it was back then and never mind that the Fed has had many opportunities to learn that it always over-tightens into recessions and always comes out of them by creating new bubbles, but that has never stopped them from repeating those mistakes. Former Fed chairs have been infamous for not seeing our biggest recessions coming … even after they had already begun!)

Tucked away in hours of congressional testimony by Federal Reserve Chair Jerome Powell last month was an admission that the central bank was blindsided by the impact of shrinking its balance sheet four years ago.

While Powell assured lawmakers the Fed is committed to avoiding a repeat of 2019 — when the repo market, a key part of US financial plumbing, seized up — Wall Street economists and strategists caution that quantitative tightening remains complex and hard to predict.

In the coming months, the full brunt of the Fed’s current QT program is set to be felt….

“You don’t want to find yourself, as we did a few years back, suddenly finding that reserves were scarce,”Powell said….

Gee, didn’t they just find themselves in that position a mere three months ago when shortages in available bank reserves managed to sneak up on them from a different angle than they did back in 2018-2019? Instead of too much cash being sucked out, this time it was too many bonds being devalued — something the Fed should easily have seen coming, since it was creating all of the devaluation, and bonds are the Fed’s core mechanism of financial control, and the Fed is the bank regulator with full access to information about how banks were positioned in bonds. Yet, Powell assures us the Fed is being much more watchful for trouble from its QT right after it just got blindsided … again!

Why does anyone even continue to listen to these blind guides? Powell tells congress the Fed is doing a better job of watching now, so everything sits fine with congress. No one barbecues his bones over why on earth the Fed failed to catch the problems in reserves that rose to the surface as recently as March. Congress should have tenderized him like a pounded steak, questioning why he should be trusted now. Yet, as the latest “Deeper Dive” clearly laid out, we are now deeper into QT than we were in March because all of the Fed’s emergency QE-that-wasn’t-called-QE (so, let’s just call it “temporary reverse QT”) has been taken back off the Fed’s balance sheet. That leaves bank reserves lower than in March. That “reverse QT” was deployed to save those crashing banks, much like “not-QE,” with its massive and continual doses of rescue funds, was deployed to save banks during the 2019 Repocalypse. So much for the Fed doing a more watchful job now.

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For the moment, there is some buffer from all the “reverse repo” loans the Fed stashed into the system during its QE phase, but those will rapidly be hosed up by the government’s accelerated and long issuance of new Treasuries as it makes up for six months of frozen financing plus all the new demands from Bidenomics where hundreds of billions being spent on new factories — Fascist style — and on infrastructure will all be funded with additional debt.

An article just out today on CNBC affirms many of the problems coming for banks that I laid out in that “Deeper Dive,” reinforcing the bleak claims made there, particularly from rising problems in commercial real-estate debt, tightening regulations and rising interest that will force many banks out of business or force them to merge with the big boys to make sure all of our banks that are “too big to fail” are, again, made all the more morbidly obese.

The whirlwind weekend in late April that saw the country’s biggest bank take over its most troubled regional lender marked the end of one wave of problems — and the start of another….

As the dust settles from a string of government seizures of failed midsized banks, the forces that sparked the regional banking crisis in March are still at play.

Rising interest rates will deepen losses on securities held by banks and motivate savers to pull cash from accounts, squeezing the main way these companies make money. Losses on commercial real estate and other loans have just begun to register for banks, further shrinking their bottom lines….

What is coming will likely be the most significant shift in the American banking landscape since the 2008 financial crisis. Many of the country’s 4,672 lenders will be forced into the arms of stronger banks over the next few years, either by market forces or regulators, according to a dozen executives, advisors and investment bankers who spoke with CNBC.

Half the country’s banks will likely be swallowed by competitors in the next decade, according to Fitch analyst Chris Wolfe.

Unsaid there is that much of that will come through bankruptcy and fire sales! It’s not going to be pretty. We know from 2008 what the reality of that shark fest looks like.

To understand the roots of the regional bank crisis, it helps to look back to the turmoil of 2008, caused by irresponsible lending that fueled a housing bubble whose collapse nearly toppled the global economy.

Ahh, yes, because we never learn … so, we’re going to do it all over again just like I predicted in my little book DOWNTIME: Why We Fail to Recover from Rinse and Repeat Recession Cycles.


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