Sunday, February 7, 2021

The Economy is Nearing Collapse, Part 1: Exploding Government Desperation

This post is Part 1 of two parts meant to recap recent events that show just how fragile our rapidly inflating financial bubbles have become. Events are happening more rapidly as instability rises. We're getting closer and closer to a crippling, perhaps "terminal" financial crisis -the likes of which the world has never seen before since it's bigger and encompasses all markets---even the currency markets and money itself. It clear that the number of govt interventions are going parabolic in both frequency and magnitude. These latter points are the focus of Part 1--our exponential road to ruin.

In Part 2, I'll talk about a longer perspective of how we got here including our declining and inadequate returns of energy investment, our encounters with the finite limits of commodities, including energy products and the limits of growth itself.  I'll use a recent post by Gail Tverberg where she discusses how we have an affordable energy problem and she discusses various and ever more desperate and complex "work-arounds" to avoid collapse. But economic collapse is coming.

Part 1:  Recent Timeline of Exploding Government Desperation. The End Approaches

Debt and spending are going parabolic now with regards to government spending, the Federal Reserve QE and various bailouts-- all to preserve the appearance of prosperity and maintain the increasingly dangerous EVERYTHING BUBBLE caused by the hysteria/shutdowns related to the COVID virus. 

Let's  outline a timeline of the vast escalation of recent and desperate measures made to keep all of the various financial bubbles inflated (prevent collapse):

Sept 2019, The Repo Crisis:  a sudden financial crisis caused US short-term treasury and Fed Funds interest rate to spike from 0.25% to 10%. This was caused after a relatively paltry attempt to "normalize" (reduce) the Fed's balance sheet during the summer of 2019.  Another round of QE begins:

For perspective, note the extremely limited reduction (QT) of The Fed's Balance sheet toward the end of 2019 (upper right corner) triggered a major financial Repo Crisis in September of 2019.


The transition from a Quantitative Tightening to QE Again after the Sept '19 Repo Crackup

Dec 2019,  In addition to QE, the Fed ultimately had to extend $500 Billion dollars of short-term liquidity (repos) to rescue unknown entities from collapse. The stock market was soaring and treasury yields plummeted after these injections--worsening an already extended stock market bubble. 

Federal Reserve Actions (QE and Repos) from the Sept 2019 to early January 2020

January 2020, it became obvious that The Fed was 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). Repo balances subsided in the January and February, but the Stock market blew upward into the end of Feb 2020.

March 2020, with the sudden lock-down of the economy due to Covid,, the U.S. stock market went from all-time highs to an emergency FOMC meeting in just ten sessions. The S&P500 lost more than a third of its value in just 21 trading days. Q2 GDP collapsed at a 31% annualized rate after a -4% annualized decline in Q1 2020. ALL markets around the world plummeted including: most bonds, foreign and emerging market currencies, corporate bonds, commodity markets  in a synchronized fashion. The "Everything Bubble" appeared to be collapsing. The dollar soared as a safe haven. The Fed announced $700 billion in QE on March 11, 2020 and then ~$2 Trillion more by early April '20.

The Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act, is a $2.2 trillion economic stimulus bill passed by the 116th U.S. Congress and signed into law by President Donald Trump on March 27, 2020.

As seen in 2000 and 2008, it was impossible for "the government" to stop the bursting stock market bubbles once the selling commenced. However, in March 2020, with unprecedented "reserve creation" (QE) and outright direct buying of bond and stock ETFs by the Federal Reserve, the Fed WAS able to stop a 30% decline.  

Helicopter Money for Wall Street to Rescue the Stock Market

April 2020 to End of 2020, All markets soar with ongoing Federal Reserve QE of $120 Billion per month $3 TRILLION of US Govt Deficit Spending.   

The US Stock Market Soars in 2020 to the most extreme valuations in history as the Fed Reserve continues it's $120 Billion per month QE with ~$4 TRILLION of US Govt Deficit Spending

Dec 2020 The Trump Administration signed a $900 Billion Federal spending package at the end of 2020 that contained the paltry $600 stimulus checks.

Feb 2021  The Biden administration is on the verge of passing a spending package of $1.9 Trillion with $1400 stimulus checks.  

In that case, that will lift the cumulative amount of fiscal stimulus in the past 12 months to $5 trillion---three tranches $2.2 trillion, $900 billion, and $1.9 trillion. That's in addition to about $2 Trillion in Federal Reserve bond/etf purchases!  I believe that I've made my point regarding the desperation of the government to rescue the US economy after COVID.     

Ominously, the desperation of the US Federal Reserve and the US Government manipulations to maintain the "everything bubble" is truly exploding in scope, frequency and magnitude. It's became clear that they can't exit these various markets or the financial system blows up. Thanks to huge amounts of liquidity and intervention, the stock and bond markets vaulted to new highs at the end of 2019 and into early 2020.

The leveraged bubble continues to build to the most extreme in history: truly astronomic levels. Recently, retail enthusiasm for stock market trading, and especially call buying,  has become alarming in scope. Retail participation is usually the final straw of a bull market.  When the market blows-up, if it's "allowed to," the devastation will be enormous -- thus the desperate means employed by "government."  

Excess money tends to go "POOF" and to "money heaven." We could all be broke within days of market collapses.

When it stops, nobody knows.

1 comment:

Anonymous said...

Oil and gas prices are strongly outperforming the market. Historically that usually leads to large corrections.