Loans in the shadow banking system are now larger and a bigger threat to economic stability and our economic system than the subprime mortgages that nearly collapsed our financial system in 2008.
The unregulated shadow banking system is now responsible for at least half of all credit creation here in the US and around the world. There is a lot of corporate debt using collateralized loan obligations (CLO) and other forms of credit that do not go through the normal regulated banking channels. This is known as shadow banking.
What does it mean?
What lurks in the shadows is something no federal or state regulator can properly supervise. This can put the economy, your job, and wealth at risk EVEN if the regulated banks are not at risk.
At the beginning of the year, the Bank of England published a report that showed an astonishing growth in leveraged loans. The amount of leveraged loans outstanding around the world had grown to 2.2 trillion dollars.
To put that amount in perspective, it is almost double the size of the US subprime mortgage market in 2006, two years prior to the economic collapse. Of course, the subprime market nearly collapsed the US banking system, Congress had to bail out the banks, and homeowners lost their homes in droves.
Bank for International Settlements tells Central Banks to save your ammo
Agustin Carstens, the head of the Bank for International Settlements (BIS) sometimes known as the central bank to the central banks presented the BIS annual report and told reporters that
Monetary policy should be considered more as a backstop rather than as a spearhead of a strategy to induce higher sustainable growth.
If you are just trying to save for retirement, you need to ask yourself, what is my backstop?
These days, cash earns you very little to nothing. What happens if the banks do go bust?
Gold, silver, and platinum all appear undervalued. Investing in precious metals such as gold, silver and platinum offer ways to offset risk caused by unusual financial engineering since the world left the gold standard back in the 1970s. This is a wise safety measure just in case Wall Street blows it again. We all know they have a habit of doing that more often than they admit. Gold has already hit multi-year highs this year and could go much higher before the year is out.
Carstens also said
We would stress that it is important to preserve some room for maneuver for more serious downturns, and that policies by central banks around the world have
potential risks in terms of asset misallocation and asset mispricing and financial stability risks as we move forward.
Another official at the BIS, the head of the Monetary and Economic Department said that financial markets were dependent on accommodative monetary policy and removing the accommodation (you can call it the punch bowl) could cause “withdrawal symptoms.”
Within the report, the BIS implies that the ballooning use of instruments like collateralized loan obligations (CLO) is like the use of collateralized debt obligations (CDO) that accelerated the US subprime crisis into a real mess a decade ago, and it is not healthy.
Carstens also warned constantly using policies like negative rates or quantitative easing makes the policies less effective. He said
How much more stimulus will you get if rates are reduced by another 25 basis points? That will produce a lower profile of bang for that buck.
Maybe buying some insurance would be a good idea.
The former head of FDIC warns of Shadow Banking Bust
During a recent interview Sheila Bair, former head of the Federal Deposit Insurance Corporation (FDIC) said,
I do think that we are going to see distress in the corporate market, which can have a very strong and significant impact on the real economy.
Blair said that the speed of job losses due to corporations trying to preserve earnings or capital during a downturn would be faster than the problems from the housing bust, which was like a slow-moving disaster.
Wall Street wants the Fed to give them an insurance rate cut
Wall Street is eagerly waiting for the Federal Reserve and other central banks to cut interest rates or print more cash. The Wall Street economists are calling it an insurance rate cut.
Insurance against what? Usually, you buy car insurance in case you get into an accident or health insurance and other types for your family.
What type of accident is the Fed and Wall Street expecting?
Maybe it is time for you to buy some insurance to protect your portfolio, way of life and diversify.
The price of gold rose from a low just around $700 per ounce to about $1,900 during the last accident that Wall Street had. Where will the price of gold and other precious metals head to the next time Wall Street has an accident?
Investing in precious metals allows investors to offset risk posed by central banks, corporations and a banking system that is using a vast amount of financial engineering. There is nothing wrong with having your own backstop and precious metals can provide that backstop you may need. Doesn’t your legacy deserve a safety net?