Saturday, March 14, 2020

Margin Call In Trump Casino

Trump's incessant demand for depressionary low interest rates and oil prices will be met in spades this coming week. Central banks have lost control over the casino. The age of central bank omnipotence just ended. This week, the Idiocracy learned that printed money is NOT the secret to effortless wealth. Who knew?

Yesterday was the largest rally since the TARP bailout was passed (October 2008). After that short but violent rally, the collapse accelerated. It turns out the bailout was too little too late. Just like the one that passed yesterday.

This era proves one thing in spades - you CAN fool the exact same morons every time: 

The scariest thing that happened this week wasn't the fall in the stock market, it was the collapse in the Treasury market. Despite the largest Fed bazooka in history, the Treasury bond market ended the week with massive losses. Goldman Sachs via Zerohedge attempts to understand the total collapse in liquidity in stocks and bonds that took place this week. They appear to be at a loss as to how this could happen, however the answer is blatantly obvious: Central banks created the illusion of one-way markets. Which meant that entering this market sell-off everyone was on the same side of every trade. Now, as they are panicking to get out, there are no buyers - even for Treasury bonds. This liquidity collapse is extant in every asset class outside of cash/money markets. 

Earlier this week (Tuesday), I predicted this one-way collapse would happen and I said that any asset that needs a bid won't find a buyer. The one exception I said was Treasuries. I was wrong. Even Treasuries went bidless despite outright central bank purchases. In other words we've reached a point at which it's not enough to have central bank backing, now central banks have to be on the other side of EVERY trade in order to prevent asset prices from falling. When long-term t-bonds got bid up to the point where their yield was the same as cash, they got liquidated on a scale that dwarfed central bank buying. 

What is happening in t-bonds is a mild version of what is taking place in every other asset class now going bidless. Which is why volatility is rising across the board, because bid/ask spreads are blowing out to record wides.

I have little doubt that the Fed will eventually take over the entire Treasury market. The same way the Japanese government now controls JGBs and holds them to the zero bound. However, gamblers in other asset classes won't be so lucky. The Fed is not going to take over the Miami condo market. Nor are they going to bail out Tesla gamblers. We are entering the zone of extreme deflation.

Larry Summers - who I give a 5 out of 10 on the IQ scale, now says that the U.S. has reached a point of Japanification - intractable deflation trapped at the zero interest rate bound. Negligible GDP growth. He calls for more fiscal stimulus. Which is what EVERY economist is saying. Christine Lagarde who now heads the ECB basically said that monetary policy has reached its limits this week:

"Lagarde spooked markets by saying it was not the ECB’s job to help virus-stricken countries struggling in the debt markets, such as Italy"

“We miss Mario Draghi” 

How can countries that are struggling with massive debts now add more fiscal stimulus? It's impossible now that credit markets have slammed shut. Which means that we are far beyond the point of Japanification. Continually bidding up debt markets will do nothing to prop up collapsing demand. We are in an extreme deflationary vortex now.

Next, faith in central banks will now collapse. However, it's clear that today's "leaders" are not willing to reach for the nuclear MMT option yet.

Why? Because today's bailed out elites view heli money for the people to be "socialism". And the only type of socialism they will abide is socialism for the rich - bidding up asset values. Now, however that gambit is failing catastrophically as the everything bubble goes bidless.

What we will now see over the coming days and weeks is a paradigm shift regarding the term "socialism". However, I highly doubt that Trump, Kudlow, and McConnell will make that shift willingly. They are currently nowhere near that way of thinking. 

In the meantime, the gathering forces of deflation will continue to ravage every asset class outside of cash. The selloff has only started.

When the Coronavirus outbreak finally subsides - weeks or months from now. Quarantined sheeple, many of whom believe this is a free vacation, will emerge to a world of deflated asset bubbles. Contrary to what every economist is saying right now, there is nothing temporary about this economic downturn.

The asset bubble WAS the economy.