THE GLOBE IS ON THE EDGE OF ANOTHER GLOBAL FINANCIAL CRISIS, SO THE UPCOMING WEEKS ARE IMPORTANT - FOREXMAILER

 

This week, Britain and, by extension, the rest of the world were in financial trouble. It's difficult to quantify how bad it was.

We were only a few steps away from a "second global financial crisis." This is not a hyperbole.

By the end of 2008, it was clear that many Wall Street investment banks were on the verge of failure.

They were sitting on worthless assets worth tens of billions of dollars, such as mortgage-backed securities tied to falling property values.

When the US government allowed Lehman Brothers to fail, it triggered a credit crisis. It had a lot of these things that were worthless.

It was suddenly difficult to determine who could and could not repay loans.

We were just about to enter a similar situation.

The issue is that the flirting continues.

INTERESTING MISSTEPS

Liz Truss, who succeeded Boris Johnson as Prime Minister of the United Kingdom, took over a country that was on the verge of a long, deep recession.

Truss presented a "mini-budget" last week that included significantly increased government spending as well as the largest package of tax cuts in 50 years. These were intended to benefit the economy.

Isn't that great? No, not at all. Because the UK's budget deficit (or net borrowing) is already in the hundreds of billions of pounds, financial markets naturally asked, "How are you going to pay for this?"

According to the BBC, conservative MPs were "shocked" after the mini-budget was passed.

The last thing the money markets did was vote "no confidence" in the fiscal package. The bond market "sold off." Bond prices fell sharply in the fixed income market.

Bond yields rise when bond prices fall. Understanding how the bond market works isn't critical, but understanding the next point is.

That is, in order for Britain's pension plan to function or remain viable, interest rates cannot rise too quickly or too dramatically. But that is exactly what occurred.

Because their investments were losing money, the pension funds were unable to pay out pensions.

To prevent this, the Bank of England intervened and purchased a large number of bonds, raising bond prices and lowering interest rates.

"To accomplish this, beginning September 28, the Bank will purchase long-term UK government bonds for a limited time. The goal of these purchases is to restore market order "The Bank of England stated.

"Purchases will be made in whatever amounts are necessary to achieve this goal. HM Treasury will bear the entire cost of the operation."

But it's this line that really sells the story.

"The UK's financial stability would be jeopardized if this market's problems worsened or remained the same."

According to Henry Jennings, a former London City trader, the Bank of England was saying that these pension funds could face margin calls if the bond market moved violently against them.

That is, many funds borrowed money in order to increase their profits. They went into a lot of debt in order to increase their profits.

They'd have to "pay up" soon.

They would have had to sell their assets if they had been asked to pay. According to him, this would have resulted in a "death spiral" in the financial markets.

The amount of assets sold around the world, according to Jennings, would have caused a "confidence crisis" around the world.

The issue is not going away anytime soon.

The Bank of England can only do so much to assist in the preservation of Britain's pension plans.

The BofE stated that these bonds will only be available for a limited time. "They are intended to address a specific issue in the market for long-term government bonds. There will be auctions from now until October 14."

So, what happens if they stop buying gilts, also known as British bonds?

According to the National Australia Bank's head of economics, the factors that pushed Britain's financial system to the brink of collapse remain in place.

"The markets are starting to worry a little bit," says Alan Oster.

He believes that interest rates in the United Kingdom will continue to rise, and that they may rise quickly in the coming months.

"The markets are talking, and it's frightening because they're starting with a cash rate of around 2% and talking about raising interest rates by 1.25 or 1.5% at the next Bank of England meeting."

"It's insane, and the pound is, of course, being slaughtered."

In other words, the issue that the pension fund scheme is attempting to address is likely to resurface.

Trade With Our Recommended Broker - AssetsFX

It's serious business.

So, let's just take a moment to check, because this is important stuff.

Because a major investment scheme is still vulnerable to a bond market that is still at risk of falling due to the UK's economic problems, the UK is still at risk of a financial crisis (in part created by a dire mini-budget).

All of this can be seen in the recent drop in the value of the pound.

According to analysts, a financial crisis in the United Kingdom would send the global economy into free fall.

IS AUSTRALIA PROTECTED?

No, it isn't.

The Australian dollar is approaching two-year lows against the US dollar, and the stock market is down 15% from its high point to its low point.

We're getting closer to a "bear market" for shares.

This has obvious implications for those who are retired or are about to retire.

Destabilization of the global financial system, on the other hand, would produce the same shock waves as in 2008 and 2009.

It leads to higher unemployment and a recession.

The problem this time is that both the Australian government and the Reserve Bank are unable to implement extraordinary economic stimulus measures.

So far, everything appears to be in order.

However, it appears that the majority of Australians currently have the financial means to live a relatively normal life.

According to the Australian Bureau of Statistics' Retail Trade figures released earlier this week, Australian retail turnover increased by 0.6% in August.

Following a 1.3% increase in July and a 0.2% increase in June, the August increase was the eighth in a row.

"This month's increase was driven by a combined increase in food-related industries," said Ben Dorber, ABS head of retail statistics.

The dark cost-of-living clouds looming over millions of Australians, according to NAB chief economist Alan Oster, are "being balanced by people saying, 'well, I'm not going to lose my job."

"The economy is doing extremely well."

But, and this is a big but, "the next four weeks will be interesting," he warns.

That refers to the fact that the majority of the Reserve Bank's previously announced interest rate increases will be reflected in bank accounts over the next few months.

Most analysts are unsure how this will affect the Australian economy.

However, work is already being done to better position policymakers to make the right decisions when it comes to pulling the levers.

For example, the ABS now publishes monthly inflation and cost-of-living figures.

The first monthly Consumer Price Index (CPI) indicator rose 7.0 percent year on year in July and 6.8 percent in August.

The largest contributors in the year to August were new dwelling construction (20.7%) and automotive fuel (15.0%).

The Reserve Bank is now in a better, or more timely, position to see how policy tightening affects economic prices.

This is done in practice to keep interest rates from rising too far.

The RBA will hold a meeting on Tuesday.

Whether the bank raises its cash rate target by 0.25 or 0.5 percentage points is currently a coin toss.

WHAT IS THE SIGNIFICANCE OF THIS SITUATION?

With any major financial event, the natural question is, "Do I need to worry about this?"

The answer is that you must keep reading this story.

According to Shane Oliver, chief economist at AMP, while the Bank of England's short-term effort to bring the UK financial system back from the brink of collapse was successful, the country's financial system is set to go right back there soon.

"The Bank of England's intervention to calm the gilt market (which was threatening financial difficulties for UK pension funds) by buying bonds (ie restarting QE) has helped calm things - directly in the UK and indirectly elsewhere by demonstrating that authorities will still intervene in a crisis," Dr Oliver said.

"Unfortunately, if QE [bond buying] is sustained for an extended period of time, it may simply add to inflationary pressures, necessitating an even higher interest rate hike when the BoE next meets in early November, with many expecting a 1.25 percent hike, leaving the BoE in the absurd position of easing and tightening at the same time."

So the options are for the Bank of England to keep rescuing the UK financial system, risking exacerbating inflation and leading to much higher interest rates, or for the market to take over, risking a full-fledged financial crisis if the bond market collapses again.

Australia appears to be in a good position to deal with a financial shock right now, but that may not be the case in a few weeks.

There are still serious dangers.

It was always risky to print trillions of dollars of money to support the global economy during the pandemic.

As things currently stand, we cannot remove that economic support without causing the entire system to collapse, but we must do so before causing additional economic problems.

It's an extremely unpleasant situation.

Read More

ROBOFOREX WINS AN INTERNATIONAL AWARD 

WHAT DOES IT IMPLY FOR A CHART TO HAVE "INVERSE HEAD AND SHOULDERS"?

META CONNECT WILL LAUNCH META QUEST PRO ON OCTOBER 11