Let's discuss the England / U.K. Banking & Bond Crisis, the chances of a global recession, and what this means for all of you watching - Enjoy! Add me on Instagram: GPStephan | FOLLOW MY NEWSLETTER FOR URGENT UPDATES HERE: http://grahamstephan.com/newsletter
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THE BANK OF ENGLAND:
This begins with what’s known as a “Defined Benefit Plan,” where employees are promised a proportion of their salary throughout retirement. To ensure that the Pension properly funded, there needs to be a certain amount of money to generate enough of a return to pay out their population - and, they do this by buying bonds.
In a normal market, a fund could very well borrow money - buy bonds - and then pay the loan back while making a little extra profit. But, in a 2022 market, where bond values are declining….those same funds would borrow money…collect less from the bond than they were expecting…and, OWE MONEY by the end of the term.
Typically, Funds like this have cash on hand to cover any type of unexpected emergencies, but when funds were losing money at such a fast pace - they ran out of cash reserves and couldn’t come up with enough collateral, which forced them to sell anything they could to stay afloat.
This led to a “Bank Run” where - pensions began selling UK Bonds to reduce their exposure to falling prices…which then…caused prices to fall…causing more pensions to sell…causing prices to fall further…and, pretty soon…they completely run out of liquidity.
As a result, the Bank of England made the choice to step in and PURCHASE falling bond prices to stabilize the market - essentially acting as a backstop to prevent prices to falling any further.
However, the LARGER issue isn’t so much the UK Bond Market Collapse - but, instead, the fact that the world is quickly losing faith in their government, who they believe may not be equipped to handle whatever fallout could come in the near future.
Because of this global turmoil, inflation has become a WORLD WIDE problem, and countries are constantly looking for a safe place to park their money. Since the United States raised THEIR interest rates the fastest, and is seen as the most secure, everyone is buying up the Dollar.
Even though this can be good for the United States, our imports become less expensive, and that can help drive inflation down, for the REST OF THE WORLD, they’re spending MORE OF THEIR OWN CURRENCY to buy those US dollars - and, that poses a substantial risk that - the dollar could simply become too expensive, and eventually do more harm than good.
In fact, based on one reported estimate from Credit Suisse, “every 8% to 10% jump in the dollar leads to, on average, a roughly 1% hit to U.S. companies’ profits.”
But, in terms of the impact HERE in the United States, for most of the SP500 that operates internationally…a strong dollar is seen as a NEGATIVE for revenue and growth - and, as a result - the market has fallen.
For example, it’s noted that “non-domestic sales of companies in the S&P 500 make up around 35% to 40% of total revenue” - so, a stronger dollar puts more strain on their international customers to make purchases. On top of that, it’s said that “industrials, materials, consumer staples and technology are the most sensitive to a stronger U.S. currency,” and - when they make up a large portion of the index - it’s inevitably going to drive prices down alongside with it.
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