Thursday, January 9, 2020

Extreme Bubble Phase: The Fed Trapped in Repo, then QE. Either Inflate Bubbles or World Economy Blows Up

Fed "Emergency" Liquidity Injections since Sep 2019
We are clearly in the extreme (and maybe terminal excess) phase of the multi-decade easy money bonanza. The Federal Reserve is once again trapped as lender of first resort in Repo, a market that they rarely enter (except prior to previous burst equity bubbles in years 2000 and 2008). It's becoming clear that they can't exit these markets or the financial system blows up.

Try as they might the Fed will be forced into quantitative easing soon and the markets know it. The stock market is melting-up into uncharted valuations, even exceeding the Dot.com bubble valuations on the back of endless tsunamis of liquidity and confidence in Central Banks. And barely a correction in stocks for 11 years straight!  Worse, they must keep the liquidity taps on or else the whole scheme falls apart.


Stock market at the highest valuations in history
Every segment of the stock market is overvalued including "value" stocks, as retirees keep searching for ever-shrinking yields in stocks and bonds. There's literally no value left. The entire "game" has been to re-inflate the housing, bond and equity bubbles to create some kind of trickle down to the majority of people with no stocks or bonds.

One or more big banks or hedge funds are in trouble somewhere and RIGHT NOW the Fed is  bailing them out via Repos. Interest rates are trying to rise but the Fed is fighting the market. The fight is one of desperation and ultimately futile. QE is coming again or interest rates rise and the financial system blows up!

In my post, Rising Risk of Financial & Economic Crisis, Part 2, I indicated that the EU banking system was a major source of dollars (Eurodollars) to the world from the late 1980s to 2008.  After 2007 (cause of the GFC?), that system has been in reverse for 11 years now as EU banks are slowly going bankrupt and can no longer take the risk. EU banks are in a slow motion failure, which will ultimately spark a world-wide financial crisis that no one can escape. The US Federal Reserve probably can't even save them since it's not really their job.

So the Fed and all the world central banks have been on a nearly non-stop QE treadmill, emergency measures for 11 years now, to support the "markets" in order to create some sort of "recovery" in the world economy after the great financial crisis of 2008/2009.  That and $58 trillion of total world debt (since 2008) spending produced a decade with a measly 2% growth in the US and even less in Europe. Much of the world's recovery came from an unprecedented debt-fueled spending spree in China. But China is running out of dollars now.
Income Inequality is back to 1929 Levels

After 40 years of super-easy (unsound) money, we have wealth inequality back to 1929 levels. Unsound money has tore up our country's (and world's) social foundations. US Government corruption is off-the-charts, socialism is gaining traction with young people. Debt is soaring as government spending tries to compensate for a poor economy for most people. There are populist movements springing up around the world. The entire elitist Globalist agenda is being reversed after decades of Western de-industrialization. It was all enabled by unsound "funny money." Now, even China is severely tightening it's totalitarian grip as they can see that there is a very rough road ahead.They are recently seeing bank runs and corporate bond defaults in their hideously bloated financial system. They are so indebted that they can no longer support the world economy as they did post-2009. Latin America is falling apart. The Middle East and Africa are falling apart. China is struggling to avert financial chaos. Europe is destroying themselves, their financial system and probably the world economy. Much of the US is suffering with stagnating local economies with low wages and enormous inflation in rent, housing, food and medical insurance costs. Meanwhile the rich enjoy their capital gains in the markets.

When the mother of all financial bubbles bursts, it's entirely likely that financial system fails for a longer time than in 2008. Eventually the Central Banks will lose the illusion of control, not like in year 2000 and 2008, because now there are very limited ammunition to fight the downturn since interest rates are already very low. The only tool that central banks have is QE, which is proven to be ineffective to support the real economy--only market prices.

From GSN Economics:  In their efforts to “save” the world economy, central banks have created a monster: a dysfunctional, extremely-speculative and highly-leveraged financial sector. All that is needed for it to unravel are rising rates in an some important, if obscure, corner of the capital markets—just like the repo-markets.  Doug here:  or a rise in sovereign bond yields (drop in price) in an important market like the EU to tip EU banks into a crisis.

1 comment:

OilFieldExecutive said...

Outstanding!!! Bravo 👏 Bravo 👏. I will be putting this on Facebook and Twitter!!!