The Forecast: Despite public rhetoric, bankism will grow in 2015 because the financial system is unstable and quantitative easing is not over. For solvency and reputational reasons, both central and private banks need, and will collaborate on, low rates for liquidity and to inflate asset prices. This will keep bond and stock prices propped up for the first half of 2015. In the US, QE has morphed from being handled by the Federal Reserve to being executed by big banks that will double their already growing US Treasury purchases in 2015.
For solvency and reputational reasons, central and private banks need, and will collaborate to keep, the cost of money as low as possible. This will keep bond and stock prices propped up on average for the first half of 2015, but with scarier daily swings to the downside. The tide of rising volatility will accelerate as intermittent rate-hike rumors surface and the European Central Bank, Bank of Japan and People’s Bank of China run through their annual QE plans.
When rates finally do rise, global stock markets will tank. Leveraged loans will default, spreading losses through the big banks, especially, but not exclusively, in oil and gas industry loans being slammed by declining oil prices. This means collateralized loan obligations will blow up and inflame a worldwide credit crunch that will cause credit spreads to widen dramatically as liquidity shrivels up.
The Fed may step in with a QE4 if the situation gets really dicey, which is likely. Politicians will scratch their heads and wonder why big banks are still too big to fail, and big enough to cause another global Depression. And the whole cycle will begin again.
Update: Our trends prognosis for the year’s second half remains the same with this addition: Central banks will keep aiding private banks. Volatility will increase. So will credit defaults. Big banks will use the Greece situation as a means to argue for constricting cash or the flow of cash to people.
In June, the latest Bank for International Settlements report revealed the extent to which global-banking-system supervisory entities are worried. In their words, “Globally, interest rates have been extraordinarily low for an exceptionally long time, in nominal and inflation-adjusted terms, against any benchmark. Such low rates are the remarkable symptom of a broader malaise in the global economy.”
This is especially scary coming from the central bank of the central banks. The BIS also states, “Global financial markets remain dependent on central banks.” Dependent is a strong word. How quickly the idea of free-market capitalism was turned on its head in favor of bankism.
Elite central banks and the governments that back them are desperate to keep the bankism party going. Yet, after seven years of non-stabilizing policy, they have no Plan B to supplement the fragile nature of the global economy. Greece had to shut its banks to keep capital from fleeing too quickly (or conduct a ‘bail-in’). Places like Puerto Rico, as well as multiple states and municipalities, have crippled economies.