Ben Davies - We are Seeing 2008 Style Crash Signals

With so much fear and uncertainty in markets around the world, today King World News interviewed Ben Davies, CEO of Hinde Capital.  Davies alerted KWN that his firm is seeing crash signals similar to those of 2008.  When asked about these signals, Davies responded,“We’re seeing that lending spreads are widening.  Certain rates are starting to look stressed.  Clearly there’s a funding issue brewing within the banking sector with what’s happening in Europe.  High yield spreads are beginning to widen as the corporate sector is getting crowded out by the needs of the sovereign nations, who keep issuing unbelievable amounts of capital or pseudo capital.”

“They need to keep rolling that over.  Just take Italy alone who’s got nearly $350 billion to do next year, that’s just one country in a 1.9 trillion debt market.  Over the next four years they will have to recycle 60% of their debt and this is the problem here.  So these crash signals are just showing us that there are severe stresses in the system and they are starting to get to the extremes that we saw in 2008, just before the Lehman crisis.

What is potentially different this time, is the Lehman crisis, in many ways, although we were building up to it, no one thought that they would actually let a bank go under at that stage because JP Morgan effectively had to buy out Bear Stearns.  

So I think the difference now is that we all understand that Greece is effectively defaulting, whether it’s orderly or disorderly is another matter and that the contagion is happening.  We can see it.  And policymakers are really at a loss for what to do.  

Take the Germans, do they really want to go into a fiscal union and pay for profligacy of the periphery?  This is the ultimate question.  Although I see these crash signals starting to go off, I cannot again get too bearish on risk assets because I really feel, at this point, that the ECB is going to acquiesce....

“I think they are going to go into full monetization.  I mean for all intents and purposes they have expanded their balance sheet over the last few years.  They may not be doing tacit purchases, but as far as I’m concerned they have been doing stealth QE for a long time.

But I think they are going to be overt this time and I think they are going to say, just like the Fed, ‘Look, we’ve got real deflationary pressures.’  A bit like the RBA cut rates, citing deflationary pressures.  Now I think that means they will come and buy bonds across the curve in the secondary market.  

I’m talking here about Europe coming in and starting their official program of quantitative and potentially qualitative easing.  Should they (the ECB) not do anything, the Fed will have to step in.  I think they would want to stabilize the threat to the banking system over there in the US.  I think there will be a form of QE coming in the US.

So they are going to have to introduce some financial repression tactics, which just means they will do some money printing.  Now if that happens I cannot be short risk assets, I cannot be short silver and I cannot be short gold.”

Davies also noted, “There is no doubt that we are hitting monetary and fiscal constraints.  The balance sheet of the Fed is 50 times levered relative to 2007 when it was 25 times levered.  That means that effectively 2% down on that portfolio and you wipe out all of the equity.  Effectively, without printing more money, they (the Fed) would be insolvent.”