The Great Recession Blog
by David Haggith
The question begs for conspiracy theories to satisfy it, but one might more aptly say that central banks beg for conspiracy theories to explain them, since they operate in the shadows while being given charge of all the financial systems of all the world’s greatest economies. Central bankers have the unchaperoned power to create the greatest fortunes ever known to mankind at will and to invest those fortunes wherever they want. With trillions of dollars or euros or rubles or yuan at their disposal and trillions more whenever they want to conjure them into existence, what is to stop them from cornering every market on earth now that they have been unleashed?
The price of oil has been rising, no matter how bad the oversupply news gets. Even as Saudi Arabia increased its supply in April and all of OPEC began gearing up for more production, oil prices rose. US oil companies have started to resume mothballed production because prices are going up, and still oil prices rise in the face of expanding oversupply.
Once Dohaha failed, nearly everyone started doing what they could to ramp up production, and prices still rose. When prices go up, even as oversupply noticeably worsens all over the globe, a logical person will wonder if the market pricing is seriously rigged.
Capitalist central banks have become ultimate central planners
Why would we even think central banks wouldn’t manipulate all markets to the benefit of their own member banks when two Fed officials have stated that by intention the Fed’s FOMC was front-running the stock market to create a “wealth effect”? (Apparently the “wealth effect” is to make the wealthy vastly wealthier because that’s what happened; I certainly haven’t seen any wealth trickling into my bank account as a result of this overt manipulation of markets.)
We used to have regulations in the US that prevented banks from investing in stocks (and thereby central banks from indirectly manipulating the stock market by giving money to their member banks to invest). Next, the Fed will be deciding what companies to favor. Maybe they already do.
What if another corporation like GM that is too big to fail is failing, say a big oil corporation? Is there any reason this time around that central banks should tell us they are going to bail it out by buying up its stocks now that central-bank intervention is standard procedure? (The Fed would argue to congress, “It was important we did that quickly and secretively so as not to create a massive market scare that could have jeopardized the recovery.”)
Anything is justifiable if it necessary for “the recovery.” The Fed, of course, wouldn’t buy those stocks directly; but will it’s member banks suddenly start sweeping up some company’s stocks with money the Fed creates as it nudges them to spend the money in that direction?
How would we know? Nudges that happen between major bankers at Federal Reserve board meetings are unseen as they are not a part of corporate reports that would explain why a large national bank suddenly bought a great deal of one company’s stock. “It just looked like a good investment for us.”
How today’s oil prices are really determined is done by a process so opaque only a handful of major oil trading banks such as Goldman Sachs or Morgan Stanley have any idea who is buying and who selling oil futures or derivative contracts that set physical oil prices in this strange new world of “paper oil….” The Senate committee staff documented … a gaping loophole in US Government regulation of oil derivatives trading so huge a herd of elephants could walk through it. (GlobalResearch)
Maybe a hole so big the Fed could lumber through it.
Persons within the United States seeking to trade key US energy commodities – US crude oil, gasoline, and heating oil futures – are able to avoid all US market oversight or reporting requirements by routing their trades through the ICE Futures exchange in London instead of the NYMEX in New York. Is that not elegant? The US Government energy futures regulator, CFTC opened the way to the present unregulated and highly opaque oil futures speculation…. This is not an OPEC problem, it is a US Government regulatory problem of malign neglect. By not requiring the ICE to file daily reports of large trades of energy commodities, it is not able to detect and deter price manipulation.
“Persons” or entities. From the very start of the present oil price war, Russia has claimed the price war is a nationally rigged game:
The head of Russian energy giant Rosneft and right-hand man of President Vladimir Putin launched an extraordinary attack on the entire global system for the supply, pricing and control of the world’s energy resources…. According to Mr Sechin, energy markets are being manipulated by a powerful alliance of forces, from Washington to Riyadh and Vienna, which present a long-term risk to the global economy. (The Telegraph)
Russia believed prices were being rigged by the US and its consort, Saudi Arabia, to hurt Russia’s economy. If so, those prices can just as easily be moderated back the other way once it becomes evident they have reached a point where they are also destroying major US banks. And what entity has more power to do that in an “opaque” system than the Federal Reserve with its infinite money supply?
Through the decades-long process of deregulating, we removed vital barriers between banks and markets and have created a free-for-all. Central banks have the power to create unlimited amounts of money in a single day, based solely on their own discretion, with no supervision by any other entity as to what they are doing. They create that money as deposits ex nihilo in banks that know where the money is intended to go. (Where the money should go can be agreed upon as gentleman and gentlelady over a martini and cigar with no public record other than “met to discuss corporate default problems.”)
Central banks run their national economies unsupervised by anyone
Seriously? You think they’re supervised? By whom? Certainly not by congress here in the US. Congress merely asks the head banker some questions and then lets the Federal Reserve continue on with whatever its bankers were doing. We audit corporations, and government even audits the government; but the largest financial institution on earth runs audit-free year after year, decade after decade, as congress grandstands in feigned outrage at times and at other times listens in awe, but always defaults to merely trusting the Federal Reserve. Always.
If you were corrupt, wouldn’t you naturally try to get on the board of the largest financial institution on earth that never gets audited and has the power to create as much money as it wants to out of thin air to give to your bank with one the provisos that it keep inflation in check and keep jobs looking halfway respectable?
There is nothing to stop the Fed — nor probably most central banks — from deciding to create $100 billion in the accounts of its member banks, saying, “We’ll deposit this money when you show us you’ve purchased that much in oil from companies being hit the worst.” There is no risk for the bank or the Fed because it was all free money anyway. They just suddenly own lots of oil.
If there are any barriers still standing to that sort of thing, how would we or congress ever know if those barriers were being respected when congress never audits the Fed and accepts anything it says as sufficient for congressional oversight? It is in that sense that I say there is really nothing to stop central banks from soaking up all the oil for sale in the oil market right now. How would anyone ever know if they bought oil through corporate banking proxies or through other central banks who used their own proxies?
That is exactly what the Fed overtly did with US government bonds, so why not oil? They were front-running the bond market by saying to their member banks, “If you buy these government bonds, we’ll buy them directly from you the next day. That way we are not breaking the law by directly buying the government’s debt, and then we’ll create as much money in your reserve account as what you spent on the bonds plus half a percent.”
What a joke! How is that simpleton’s shell game not directly buying the government debt? As soon as you start telegraphing to banks that you will buy government bonds off of them overnight for a half a percent profit to the bank (called front running the bond market) on a no-risk deal for the banks, you know banks are going to leap to do that.
You’re creating the market for the bonds. You’re not just soaking up the banks’ bonds. The fact that you passed the bond through someone else’s hands is no different than money laundering. It’s bond laundering. “NO, we didn’t finance the government. We bought up some old government bonds that some of our banks no longer wanted.” Yeah, right.
This the Fed did overtly for years.
What a charade … and no one cared … other than a few readers of The Great Recession Blog, Zero Hedge, and other similar sites. Most didn’t bat an eye. The same thing was happening with stocks for the entire past seven years (and still is happening as the Fed reinvests its money). Even though the Fed originally denied it was pumping up the stock market; recently two major Fed board members admitted the Fed was front-running the stock market, and still few cared. It’s no surprise to anyone because most people knew that is where much of the Fed’s free money was going.
Are central banks manipulating the oil market?
Therefore, it should not seem like any big conspiracy theory, when you see total nonsense pricing (bad news is good news) in the oil market to ask, are central banks now moving on to doing the same thing in the oil market?
Why wouldn’t they? 1) What’s to stop them? 2) Clearly US banks that are members of the Federal Reserve System are being hurt by the oil price war, so the Fed can justify this as another “intervention” they need to do to save their own banks from collapsing due to bad loans throughout the oil industry.
Two more oil company’s declared bankruptcy this week. Week by week, a storm surge is building up against banks that are heavily invested in this industry:
The bankruptcies are continuing fast and furious across the energy sector. With the ill-effects spreading beyond just the oil and gas business — evidenced by major renewables firm SunEdison filing for Chapter 11 last month.
But the U.S. E&P [exploration and production] sector still remains one of the biggest unknowns when it comes to bad loans. With numerous observers having recently warned about a big wave of defaults coming in this space.
And a new data point late last week suggests we may be reaching a tipping point.
That came from leading American investment bank JPMorgan. Which said in an SEC filing Friday that its holdings of potentially bad loans took a major jump over the past quarter. JPMorgan reported on its holdings of “criticized” loans — a term used in the banking industry to refer to “substandard or doubtful” debts … leapt by 45 percent over the last quarter — to $21.2 billion as of March 31. (Oilprice.com)
Over twenty billion of bad debts — most of it in oil companies! That number beats many of the big bankster bailouts during the worst of the Great Recession for size. That’s just one major bank, and those are only the loans the banks is showing as bad. How many other loans does JPMorgan have that are not in some stage of default but that are with oil production companies that are sinking fast?
How bad is the pinch on other banks that invested in the oil sector? Read the “panic index”:
Little-reported but extremely critical data point for the oil and gas industry emerged yesterday. With insiders in the debt business saying that risk levels in the sector have risen to unprecedented levels.
That came from major ratings service Moody’s. With the firm saying that one of its proprietary indexes of credit problems in the oil and gas sector has hit the highest mark ever seen.
That’s the so-called “Oil and Gas Liquidity Stress Index”. A measure of the number of energy companies that are facing looming credit problems because of overextended debt…. In fact, that level is now considerably worse than seen during the last recession…. “This progression signals that the default rate will continue to rise as the year progresses.” (Pierce Points)
You may recall there was a commodities crash in energy prices running into the Great Recession, too. In other words, the pain is just beginning. The squeeze will get tighter.
At present oil prices, we are already at the highest default rate for high-yield energy bonds in energy industry’s history according to Fitch Ratings. What better way to keep some of these companies out of default (and thereby keep the banks who financed them out of trouble) than by getting the price of oil back up a little? So, would the Federal Reserve become proactive to support these American companies that are pressing major US banks into perilous situations, now that it is accustomed to massive interventions and financial inventions as daily procedure?
Might that explain why the price of oil goes up, regardless of what happened at Doha?
Maybe that is exactly what the surprise, “expedited” meetings of the Federal Reserve were about shortly before the Doha meeting and what the Fed’s rushed closed-door meeting with the president and vice president was about — what to do when Doha failed (as they knew it would, given Saudi Arabia’s overt statements). As anyone knew it would if they were willing to see straight.
If not the Fed, then why not some other central bank in some country where a major bank is being crippled by the oil price crush? A bank that could fall on others and create a domino effect if it fell.
Central banks are so grossly out of control with no elected oversight and unlimited financial power to create money and decide where it goes, that I have to ask, is it possible that there are no honest markets left anywhere? How would we know? No one ever gets to see inside the central bank’s inner workings to know. Just how completely have the banks taken control of every aspect of the economy — or, at least, of every aspect they care to control?
We … beyond any shadow of any doubt, are living in an environment where nothing is real, from the prices of assets, to what is going on with the big Wall Street banks, to Federal Reserve interest rates and everything in between. All of this is being played in a way to keep people believing that the system is working and will continue to work…. We are going to continue to see more fakery and twisting of this entire system. Right now, it’s upside down and nothing is real. We now are in an environment where the financial system has been flipped upside down just to make it function. That’s very scary. . . . We’ve never seen anything like this in the history of the world. (Financial analyst and stock trader Gregory Mandarin in USAWatchdog)
But you cannot manipulate markets forever
Suppose some central bank somewhere decided to buy up oil through proxies to keep the price rising, in spite of all risks, in order to keep a few of its major member banks from going bankrupt due to exposures even more extreme than the one known about and admitted above.
As a result, the producers keep producing because someone keeps buying. The price keeps bubbling upward, which saves some companies and their banks for the time being; but also entices more producers to come back on line. Prices keep going up, regardless, and even though Saudi Arabia and Russia actually increase production, too.
In such a situation, you might expect to see headlines, such as the following:
No matter how much crude oils stocks around the world rise, prices keep rising because of the price intervention. Oil tankers stack up at sea, but the prices keep going up. You start to wonder if the market is rigged. Why are so many speculators betting that the price of oil can go up forever? You start to think of the US housing market in early 2007 when everyone thought housing could defy gravity and climb forever.
Then one day you read a headline like …
“Rotterdam Tanks are Full: All tankers being sent back out to sea”
A week later, you read the same thing in Oklahoma and other parts of the world.
Sooner or later reality butts in. Price manipulation causes distorted markets and only accelerates the problem when falling prices fail to happen and, therefore, don’t result in supply correction. Instead, the prices, themselves, get corrected by the banking central planners; and supply follows the money … until the money has nowhere left to go. You cannot buy oil at any price — regardless of how low — if you have nothing to put it in.
The manipulation is absolutely epic. We have never seen anything like it. There is going to be a horrible price to pay for this. Why? Because it will correct to fair market value. There is no doubt in my mind that all of this will correct to fair value. All these distortions can only go so far, and we know this…. It will burst because every single financial bubble in history, without exception, has burst before it. This one is going to burst too, but this one is going to engulf the world. (Mannarino continued in USAWatchdog)
Game over … just as it was for housing in the last half of 2007.
Speaking at a panel in the Milken conference titled “Monetary Policy: Out Of Ammunition” moments ago Pimco’s global economic advisor Joachim Fels … hinted what he, and/or Pimco, would prefer that the Fed should buy next. Stocks…. By the time it’s all over, central banks will be buying not just credit and equities, but virtually every asset class, both directly and indirectly through helicopter money. (Zero Hedge)
That’s right! Why create money in the reserve accounts of major national banks for them to buy stocks? Why not skip the middle man and just have the central bank buy stocks directly? It’s more efficient. Be like China: anytime a stock goes seriously down, the the central bank can just fly over in its helicopter and dump a lot of new money on that corporation by buying its stock. (No sense giving helicopter money directly to the poor when you can target the drop directly on the rich to prop up their stock values, trusting that a few dollars will drift away in the prop wash to help the poor, too, so they can glean their benefits.)
That kind of quantitative easing may be the new spin for our next dance in this whirling dervish of an economy. The Fed can buy stocks directly. Buy oil directly. (Maybe they already are.) Heck, buy anything that threatens to fall on us that is too big to fail in order to save us all from the tipsy rich. Because the Federal Reserve can create money at will, it can dance that dance forever … that is, until it collapses on the dance floor due to its own obesity.
You see, eventually nothing works in the land of total make-believe, so all things fall down. For now, however, the Fed’s next round of QE already has PIMCO’s vote. The only question that haunts my mind is how long the helicopter money of QE4 can work before the helicopter, itself, blows down the entire house of cards?
Bonds, stocks, the oil market — they all look as rigged right now as the Arizona Republican Convention where Trump, who won the vast majority of votes in the Arizona primary, got almost none of the delegates. The party establishment will make sure their guy wins no matter what in order to protect the establishment from being trumped by some rogue element. And “the establishment” is largely Wall Street — mostly banks.
That’s why it is is time to, above all else, vote against the establishment in either party, top to bottom. Ironically, even a socialist president would be better for our long-lost capitalist economy than the central-planning central bank’s Democrat and Republican choices for candidates. Nothing could be worse than the establishment’s make-believe economy.
Exxon, Chevron, PetroChina, Conocophillips, all reported heavy losses. Who are they banking with? Are they also too big to fail?