The Mining GFC raged higher last night as the tension between falling commodities and the end of Fed tightening gave way to simple worries about global growth and commodity demand. The easing Fed dumped the US dollar:
Which boosted commodity currencies:
But oil was smashed anyway -7%:
And base metals were hit as copper was thumped:
A bus ran over big miners with BHP down -6% and RIO -5% in London:
And US high yield debt crashed to a new closing low though EMs held up on the falling dollar:
Banks fared little better with Deutsche Bank below Lehman levels as the bell tolls:
And here is what one Deutsche analyst had to say:
So back to the original question WHAT NEEDS TO BE DONE. Simple?
- Recognize the problem. It is not oil, it is not in the banks..it is a run on central bank liquidity, especially dollar based and there needs to be much more ($) liquidity. Keynes said to deal with overinvestment boom you cut you don’t raise rates. QE is impractical but getting the dollar down would greatly lift dollar based liquidity. So for a starter Fed shd stop raising rates and clearly signal an extended time out.
- Draghi shd follow up with a one 2 punch, not to get rates down but open the refi spigot to banks and ease liquidity concerns.
- China needs to come clean. Devalue, stabilize reserves and then allocate 1 tn+ to short up strategically important institutions. Stop intervening in equity markets.
- And Basel 3 (?4) should be delayed specifically regarding leverage ratios and threat of higher. As a token move there shd be deemphasis of the SSM/bail in rules until there is clarity from the ECB on liquidity sources for stressed banks.
- how about some fiscal stimulus
- on negative rates — instead of making them punitive on the banks allow the banks to earn the spread, make them punitive to savers. Cash shd be charged interest — put the micro chip in large denom notes/tax cash withdrawals.. encourage spending not saving .. mortgage rates can be negative and banks can still earn a spread. The spread is the problem not the rate.
That gives you some idea of why markets are in a panic. Recall that during the GFC the US had a Devil of a time coordinating its bailout program as markets kept crashing. It had to reach a point of imminent collapse to finally push through the rescue. Now imagine having to do the same across all of the major competing economies of the world.
