mor·al haz·ard
"lack of incentive to guard against risk where one is protected from its consequences"
Here we see the risk adjusted S&P 500 as imputed by price / volatility. In markets, volatility is a proxy for risk. The VIX is always elevated in bear markets, as it is now. However, compliments of the central bank Jedi Mind Trick, we are now in a "bull market" making recent new highs, attended by recession-level volatility. Something we've never seen before. For a reason. Investors are convinced they can get bailed out of any magnitude of crash.
We are about to put that fantasy to the ultimate system test.
"Gambles said this could cause a “systemic event” if brokerages begin to fail, highlighting Robinhood’s trading restrictions in various stocks last week. The commission-free trading app introduced the new controls after receiving a $3 billion security deposit request from the National Securities Clearing Corporation on Thursday, its CEO Vlad Tenev revealed on Monday.
However, Gambles also suggested that there could be a systemic risk from the hedge fund side."
What this chart above foretells is the end of the line for monetary euthanasia. The papering over of economic depression using massive amounts of liquidity. Those buying into this con job are happily oblivious to the economic devastation wrought by COVID. Four times as many jobs have been lost globally as were lost during the Great Recession. The S&P / VIX above visibly depicts the unprecedented amount of risk investors are willing to accept due to their lethal faith in central banks.
“This has been the most severe crisis for the world of work since The Great Depression of the 1930s. Its impact is far greater than that of the global financial crisis of 2009,” said ILO Director-General Guy Ryder. The fallout was almost equally split between reduced work hours and “unprecedented” job losses, he said.
In addition, and more lethally, investors point to depression-level interest rates to justify ludicrous valuations. Stocks can no longer be properly valued in this Disney environment, because forward profit estimates now have the veracity of a Magic 8 ball. Which is why fundamentals no longer matter. All that matters is the daily drip feed of central bank dopium into the arms of monetary heroin addicted momentum chasers.
Unfortunately, zero interest rates - in addition to inducing infinite stock prices, also means that conventional monetary policy has no economic impact. Hence, the erstwhile "economy" is now entirely dependent upon the U.S. Congress, and the weak majority held by Democrats.
When this all explodes unexpectedly, the bailouts that follow will not be market friendly. They will be targeted at the middle class. They will be inflationary, and they will cause a paradigm shift in the investing landscape at a time when the market is scraping rock bottom. At that point, it will be impossible for central banks to both monetize the chasmic deficit aka. "GDP", and lubricate markets back to all time highs. The paradigm shift to middle class reflation won't allow it.
Which means that gamblers will be trapped owning bankrupt stocks in a dead-end stock market, which will be extremely volatile. They will be end-of-cycle bagholders, in the Wall Street tradition.
Over the past three decades, Japan has already amply proven that none of this stimulus chicanery works. They've also proven that central banks buying stocks directly doesn't offset zero economic growth.
December 2020:
This is what we can expect when this charade ends - a big sideways chop and many false promises.
Until such time as policy-makers figure out that there is no such thing as free money.
