G-SIBs And Jay Powell

How many trillions are involved worldwide? We can only guess, as there are 29 G-SIBs, whose direct and notional derivatives balances are estimated to total between $200 and $400 trillion.  A back of envelope guess takes the global cost into the billions.

Bottom line: It cost a lot to comply with a rule that could be adjusted to smooth out the spikes. We can see the spike effects in the composition of the Fed’s balance sheet at each quarter end and yearend.

Second bottom line: This is highly technical stuff, and most investors don’t understand it. So they panic, which is why the stock market crashed and the bond market hiccupped in December. It wasn’t because default risk actually rose; the selloff was triggered by a rule.

Third-bottom line: Knowledgeable investors took advantage of the whipsaw, while panicked investors lost trillions in market value.  We can only guess at negative economic costs from negative wealth effect shocks.

Fourth-bottom line: Investors didn’t see much explanation of these developments from some of the TV talking heads, many of whom don’t understand the intricacies of the transactions involved. Others have trouble explaining them on TV or radio or in Twitter message sound bites, especially given time and media constraints. Read through the tutorial links above to discern how hard it is to put this issue in layman’s terms.

Fifth-bottom line: The 29 G-SIBs are the global giants of the world’s banking system. All the rest are nice folks, but they really don’t move the markets. They are the Lilliputian banks. The 29 are the Brobdingnagian giants (Gulliver’s Travels). Because they are governed by their country’s national central banks, they form the linkages among all major central banks.  To understand global central banking one must understand the GSIBs and how they interconnect with each other.

The Christmas Eve Massacre was rough on investors.  Our US ETFs rode through the waterfall and V-shaped recovery without suffering panic selling. We’ve had a very good start to 2019. Recently we raised some cash reserve, as markets have galloped away from the Christmas Eve massacre and may have gotten ahead of valuations.

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Disclaimer: The preceding was provided by Cumberland Advisors, Home Office: One Sarasota Tower, 2 N. Tamiami Trail, Suite 303, Sarasota, FL 34236; New Jersey Office: 614 Landis Ave, Vineland, NJ ...

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