Thursday, July 22, 2021

The Virtual Simulation Of Prosperity

Following the highly successful global financial bailout in 2008, central banksters were hailed by this Madoff acolyte society as the saviours of systemic fraud and criminality. Therefore it was inevitable these fake gods of modern alchemy would continue to overuse monetary policy until such time as their virtual simulation of prosperity did more harm than good. But not before it became widely bought and believed as the secret to effortless wealth, and the secret to eliminating all recessions. The only question being why did no one try this sooner?

Unfortunately, history will say that it never happened sooner, because it first took a populace with the average IQ of a gerbil to believe this would actually work. 

What is amazing at this juncture is the fact that so few pundits today are concerned about this self-evident policy failure. Any blind man can see above that the "reflationary" impact of monetary policy has declined for the past decade. Now, at this late juncture the intended economic effect of balance sheet expansion wears off immediately since asset reflation is skewed  entirely to the benefit of the ultra wealthy. The second order commodity reflation effect wears off next as over-leveraged speculators get margined out - a process that is well underway. Which finally leaves the direct financial effect of central bank bond purchases which is to drive bond yields lower absent higher inflation expectations. And as global bond yields decline, the hunt for yield ensures that ALL markets converge back to the global deflation impulse. Which means that fund managers are forced to rotate out of reflation trades back into long duration trades (bonds, Tech) as a result of the falling discount rate.

The impotence of monetary policy at the 0% bound, is often called "pushing on a string"

"Pushing on a string is a metaphor for the limits of monetary policy and the impotence of central banks. Monetary policy sometimes only works in one direction because businesses and households cannot be forced to spend if they do not want to. Increasing the monetary base and bank reserves will not stimulate an economy if banks think it is too risky to lend and the private sector wants to save more because of economic uncertainty"

Or, because interest rates have been at 0% for a decade and everyone is already maxed out on debt in the largest asset bubble in human history. 

It's clear that central banks will be the last to know that their policies have failed humanity. Not for lack of trying mind you. 

"We pledge to keep the deflation impulse stronger for longer"


Add in the central banks sponsored effects of record leveraged speculation, record valuations, and squandered stimulus buffer, and it's clear that monetary policy is now doing far more harm than good. It's putting the system that it sought to save in 2008 at far greater risk. Amid record wealth inequality driven by central bank policies, does anyone honestly believe there will be another Wall Street bailout this time around? We have reached the inevitable Humpty Dumpty phase of this NeverNeverLand economic expansion. The driving theory of the day is that as long as no one worries about risk, then there is no risk. Which is not exactly how it works.

The biggest risk to this entire gong show is now the sell order. All it will take is one cry of "fire" in this crowded theater to set off human history's biggest clusterfuck. Case in point, as the Delta variant spreads, another lockdown would render this market a smoking crater. And we know from past experience another lockdown is highly conceivable in this old age home. Regardless, when margin clerks are involved, the sell order doesn't need any more catalyst than the 200 day moving average.

Here we see that cyclicals are now becoming ever-more volatile as result of the imported global deflation impulse. These are not insignificant declines:

This chart below of NYSE breadth mirrors the disintegration of the reflation trade seen above. As the S&P 500 rolls higher, the internals of the market are in a waterfall crash lower:

Which leaves Tech stonks which are currently getting buried under an avalanche of new IPO issuance as Wall Street takes upon itself to underwrite another liquidation sale of Silicon Valley's mainstay output, junk stocks. 

But, like everything else in this Potemkin society, it's not what's taking place behind the curtain that matters, it's only the superficial that captures attention.

In summary, this society is deep under the spell of FOMC:

Fear of Missing Crash