In Jim Cook's Archive


Not many people believe that they should hedge against a financial panic. They think the future will be rosy and the government can stop any crisis that unfolds. That’s been the case with the last few recessions. If you kept holding your blue chip stocks and bonds, they eventually returned to their former value. Nevertheless, a lot of people were hurt and didn’t recover. Our past recessions were domestic affairs spawned from excess debt and speculation. We managed to inflate our way out of these economic crashes.

Now our central bank policies have spread worldwide and monetary easing and inflating are standard procedures everywhere. China happens to be the biggest offender. Recently two big banks in China appear to be failing because of credit excess. Zero Hedge reports, “While the western world has been preoccupied with predicting the consequences of Trump’s accelerating global trade/tech war, Beijing has had its hands full with avoiding a bank run in the aftermath of Baoshang Bank’s failure, scrambling to inject massive amounts of liquidity last week in the form of a 250 billion yuan net open market operation to thaw the interbank market which was on the verge of freezing, and sent overnight funding rates spiking and bond yields and NCD rates higher.

“Unfortunately for the PBOC, Beijing is now racing against time to prevent a widespread panic after it opened the Pandora’s box when it seized Baoshang Bank two weeks ago, the first official bank failure in a odd replay of what happened with Bear Stearns back in 2008, when JPMorgan was gifted the historic bank for pennies on the dollar. And with domino #1 down, the question turns to who is next, and will they be China’s Lehman.”

A raging bank run in China will have a profound impact on the world economy. Almost every nation is so levered up with debt, they cannot stand a liquidity crisis. Our lives go on smoothly, at times almost carefree, and then suddenly “up jumps the devil.” Not being hedged against the many things that can go wrong in the world seems unwise.

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