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2019-10-18 07:00 by Karl Denninger
in Market Musings , 1223 references Ignore this thread
WeStupid Everywhere
[Comments enabled]

There are plenty of people who think the WeWork saga is a singular thing and not systemic.

They couldn't be more wrong.

How do you wind up with $47 billion in lease commitments with only $2.5 billion in cash on hand, NO actual hard assets and zero guaranteed income on a forward basis?

There's only one way: Either you lied to the people you signed the leases with or they were terminally stupid and driven by a mad scramble for money that doesn't exist.

One of those is criminal fraud at a grand scale.

The other is the outcome of "free money" policies by central banks around the world, along with identical "free money" fiscal policies leading governments to run cash deficits as high as 25% -- such as what the United States is doing right now.

The problem with such on the come financial arrangements is that they're simply not grounded in reality.  They're fictitious, and anyone with two nickels to rub together in their heads knows this.  They chase it anyway on the premise that if the government is doing it, and all the companies are doing it, and thus asset prices continue to rise there's no risk in doing it as there is always someone with more who will pay up.

Of course the truth is something else entirely; there is no magical source where funds expand without boundary on an indefinite basis.

The Fed thought there was.  Then the repo storm hit and now, suddenly, they're expanding their balance sheet, monetizing the new Treasury issuance once again, which is QE whether they wish to call it that or not.

Why does any bank need more "liquidity" in the repo market when there is over a trillion dollars in allegedly "excess" deposits at The Fed itself?  It would appear that those alleged "excess" reserves are either fictitious or whatever said institution intended to post as collateral was in fact worthless, as otherwise you'd have to be factually insane to insist on collecting a tiny "excess reserve" interest payment instead of a larger one for participating in a repo.

As a result either the Fed is lying about what's actually on deposits or the last ten years have been spent accumulating garbage collateral that is worth nothing in exchange for "printed" money emitted by The Fed as our government has run 25% fiscal deficits, effectively turning the government and private banks into cash furnaces.

That's sort of like signing a long term lease with a company that has essentially no money, no assets and no reasonably-guaranteed source of revenue either while claiming these deals are "money good" and support your loan at some syndicate of banks for ever-higher commercial real estate prices.

This sort of bull**** is exactly what led up to 2008 and in fact 2000.  Except this time it's a lot bigger -- just like 2008 was much larger than 2000.

Of course the mantra is that the economy is strong and that there's no sign of a recession.

Meanwhile nobody is talking about who, or what set of "who's", wound up paying crazy interest rates in the repo market and it wasn't a one-day event while some cash cleared from one institution to another either.


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