The Wall Street Earthquake of April 22 Could Be Followed by a Tsunami
The financial earthquake that hit financial markets on April 21-22 could be precursor to a real tsunami if the Federal Reserve, as hinted at the time by its chairman Jerome Powell, actually does raise rates by 50 points this week. He made the statements in a panel discussion hosted by CNBC, with co-participants ECB president Christine Lagarde, IMF Managing Director Kristalina Georgieva, Indonesian Finance Minister Sri Mulyani Indrawati, and Barbados Prime Minister Mia Mottley.
They provoked a bloodbath on Wall Street, with megabanks’ and insurers’ shares plunging dramatically two days in a row. The Dow Jones fell 368 points during the remainder of that day and 981 points more the next day.
“I try not to comment on specific market pricing for things, but I will just say this: at our last meeting — and this was in the minutes of the meeting — many on the committee thought it would be appropriate for there to be one or more 50 basis point hikes”, Powell said at the beginning. While he did not disclose whether he was among those many, he did assert the Fed’s commitment to “using our tools” to bring inflation back down to 2%. In line with that, he said that a 50 basis point rise “will be on the table for the May meeting.”
The website Wall Street On Parade points to the fact that the five U.S. megabanks that own 86% of the total derivative exposure (notional value) suffered the largest losses on the Wall Street crash that followed Powell’s statements. They are JPMorgan Chase, Citigroup, Goldman Sachs, Morgan Stanley and Bank of America. Together, their exposure is $200.18 trillion, out of the 234 trillion notional value in outstanding derivatives of the 25 largest US bank holding companies, according to the Office of the Comptroller of the Currency quarterly report (available at https://www.occ.gov).The report does not say who the counterparties are to those U.S. banks, but one of them is known to be Deutsche Bank.
The earthquake created on Wall Street by Powell’s words shows that even a minor increase of interest rates, although totally insufficient to curb inflation, is opening large cracks in the system. A major interest rate would not suffice either, it would bring down the whole shebang. As we have always insisted, the current system is hopelessly bankrupt and cannot be saved. Any attempt to bail it out will lead to totalitarian measures. Now, the war in Ukraine is providing the perfect pretext to escalate the state of emergency which has increasingly been imposed on transatlantic nations, and is needed to justify the next financial mega-bailout.