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The same is true for central banks around the world – we're seeing it right now in Europe. Central bankers know that everything they do, and every statement they make, moves the markets.
That means they need to be careful what they say in public – or markets might move in unexpected directions.
And that leads to a lot of central bank game-playing… and if ordinary investors don't know the rules of the game, they're going to lose.
There are lots of market games being played all the time, but one in particular is deadly.
It's the Game of Lies. And it's "on" big time.
When central bankers tell the world that all's well with the banks they "regulate" (read: backstop and bail out) while those banks are asking for life-support systems, it's the beginning of the end for markets.
Here are some of the latest lies – fresh off the lips of central bank desperadoes – that are in reality a dire market warning of the first order.
Before I get to the big central bank lies we're going to look at today, I need to tell you about how the Game of Lies gets started.
You see, it's always preceded by the "extend and pretend" game. And the Game of Lies is really just a way to keep that game going.
When the "extend" play game becomes exhausted, and the "pretend" play starts being severely questioned, that's when the Game of Lies kicks in.
Here's how it works…
The most basic "extend and pretend game" played by banks is rolling over loans that borrowers are struggling with.
Struggling borrowers, including borrowers with currently non-performing loans (NPLs), meaning they're not paying anything on them, can be "helped" by banks extending borrowers more credit and a longer repayment schedule accompanied by a lower interest rate.
However – and this is something that's overlooked far too often – adding to the principal on a loan that a borrower's not able to pay back by extending them more credit and charging them less interest for a longer period of time is sometimes generous to a fault.
If the loan can't be paid back in the first place, extending terms isn't likely to accomplish anything for the borrower other than not forcing them to default on the loan, which may result in severe consequences.
But extending the loan is a necessary game for the banks.
Non-performing loans (I'm using NPL as a general term, though there are all sorts of names for when loans are "late," "delinquent," "in arrears," etc.) because NPL is the stage when it's a good guess the non-performing borrower isn't going to magically (without agreeing to the magic of having their loan extended) keep making payments, and those NPLs have to be recognized by banks.
That means banks have to "reserve" or "provision" for them, and that means setting aside cash to offset the expected loss. That, in turn, hits banks' profitability in all kinds of ways, and ultimately can cause banks to lose money and go under.
That's exactly what's about to happen in Italy…
Big Central Bank Lie No. 1: The EU Doesn't Need Formal Policy Coordination
The "extend and pretend" game is faltering all over Europe, but in Italy, things are even worse.
Italian banks have approximately $396 billion of NPLs. That's four times what the banks had to deal with in 2008!
So what has Mario Draghi, head of the European Central Bank, been saying about the dire condition of Italian banks and the rest of the European Union banks taking it on the chin?
On the heels of the Brexit vote and turmoil, in a major speech at an ECB forum in Sintra, Portugal last Tuesday, Draghi told participants: "We may not need formal coordination of policies but we can benefit from alignment of policies."
That's a lie.
The only way the European Union can survive is if there is formal coordination of policies – and Draghi knows it.
What policies is he not talking about?
The desperate need to "federalize" the debts of EU member banks and backsliding countries.
In other words, use the political and taxing power of a mega-enhanced Brussels to bail out all the EU's struggling and increasingly insolvent banks and buy member countries' government debts to keep them from repudiating their debt.
We're really there.
Big Central Bank Lie No. 2: British Banks Are Healthy
Earlier this week, Bank of England Governor Mark Carney said at a globally televised press conference, "Banks have more capital than they need for the economic environment they are in."
He went on to say, the BOE "strongly expects" banks to support the economy with fresh loans after the Brexit vote.
While some folks might call those pronouncements questionable, I call them lies.
First of all, if banks had "more capital than they need," why did the BOE just reduce the reserve requirements British banks were told to add to as recently as March?
The BOE's Financial Policy Committee, in calling the outlook for the stability of financials "challenging," lowered bank capital requirements to free up over $200 billion of cash to, as they said, keep the economy flush with credit.
Lower capital requirements allow banks to finance and roll over loans, but more importantly and more to the real point, it allows banks to carry assets on their balance sheets with more borrowing and less equity.
In effect, lowering capital requirements allows banks to further leverage themselves by borrowing from other banks, or in the credit markets, to continue to finance their books.
That's fine in good times, when bank equity (their share prices) is increasing. But adding leverage at the exact time bank share prices have been plummeting is a desperation move.
It's proof that Mark Carney is lying about banks having more capital than they need.
His lies are about to get revealed.
As of last Wednesday morning (July 6), three UK property funds with more than $9 billion in real estate assets have suspended redemptions by investors. They've stopped investors from cashing out. They lowered the so-called "gates" on folks wanting to sell shares.
That's a sign of severe stress, which will extend and ripple through the banks.
If investors can't get out of their property investments, and others will try to liquidate other property investments so as to not be barred at the gates themselves, the underlying value of the property held by funds and throughout the country will likely come under pressure.
Guess who lent to the buyers of all those properties? That would be the banks.
If the UK economy's not doing well and about to get hit further by property depreciation, perhaps on a huge scale, saying the banks have enough capital for the economic environment they're in, is, in my book, a lie.
The bottom line is this: Central bankers in London, Brussels, Washington, and around the world are telling lies so markets don't panic.
We heard these kinds of lies over and over again from all of America's big bank CEOs leading up to the 2008 meltdown, during the meltdown when all the big banks were technically insolvent, and every day since the crisis.
Now the lies are at the central bank level.
That means the markets are teetering on the edge of a knife. All that remains is another "Lehman" moment to trigger Humpty Dumpty falling off the wall again.
Next I'll tell you what could trigger the next Lehman moment, how that could cause a NIRP (negative-interest-rate policy) explosion here in the United States, and how to prepare yourself for the fallout from all of it.
How to Profit from the New Post-Brexit Paradigm: While the Brexit vote has come and gone, market turmoil, globally, is here to stay. And if you understand what the vote was about and what's changed across the world, you'll be able to spot plenty of profitable trades – like this one, for example…
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.