Many people including myself try to understand what might be a role of Central Banks rigging the stock market. Of course it is huge, we all know, and we don’t have to dig to find evidence :
FED openly admits in 2012 they had short volatility position. Is this just a mistake or not? I have no idea if this report should have been released, that FED openly admited they rig the market, but that happened. CBs everytime market drops try to rig the market to lift up the prices forcing people to believe the market will never go down just because FED’s got our back. People in general behave as a herd, so over the long run the herd is always wrong, but complacency created by “FED put” might turn out to be one big disaster.
The financial community is now secure in the knowledge that the most powerful banks in the country stand ready to prevent a recurrence of panic NY Times, 10/24/29 (via Galbraith’s “The Great Crash of 1929”)
Market went down record 40% from that day in just 4 days
The general analysis shows that :
90% of analysts did not see a recession, and even 70% of them did not see a crisis it was already in place.
Remember 2008? Officially recession started in December 2007. Still 2 months later economists were so much bullish despite first macro data were very weak, but denial phase is something strictly correlated with bear market bounces. Now imagine a month later after huge macro drop recession kicks in, ATMs are closed and your broker account has been frozen. Impossible? No.
In 1Q2019, we had big surprise in almost everything. Retail sales dropped, global PMI reaching almost below 50. Germany manufacturing record slump, China bans housing selling, despite first rumors show -60% drop due to lack of demand, Philly FED Manufacturing Index notices record monthly drop since October 2008, same time FED can’t find in their history when consumer credit collapsed most and car sales inventories start to piling up. Tons of economists said – “must be a glitch” because it is impossible for the economy to drop like this. Ignoring basic data most people expose themselves to the popular phrase :
Because this time is different, QE4Ever.
We all should understand there is a point in deflationary expansion (since 1980) where debt saturation is reaching a wall and QE is not working anymore. The economy needs to clean up and will be doing everything to blow up 10 years of ZIRP/NIRP and QE bubble and restore low and middle class. All CBs instead of fixing up 2008, they just added a fire to the economy chasing Phillips curve inflation measure which is not working, not understanding why, and being trapped on ZIRP/NIRP when consumer debt reached saturation, exposing the economy to its Minsky Moment, or Kondratieff Winter leaving themselves without ammo.
95% of companies created on QE and ZIRP won’t be able to sustain themselves being during next slow-down (don’t want to know what recession will cause to them)
The same time magic Phillips Curve which is telling the relation between unemployment vs inflation tells something weird :
The big cycle clearly tells one thing. Since 1980 we are in deflationary “mode” what means we are taking debt to infinity until system will blow up to switch to inflation. Capitalism loves deflation and 0.1% of wealthiest benefits from it. It means 99,9% got debt and weakening wages, while 0.1% got big wealth. It’s not a mistake of any CBs, it’s more complex. People need to take debt to grow or buy things same time economy punish them with lower wages. We can say – people are idiots because they they take debt. True, but it’s just a psychology of deflationary period. Consumption and show off rules. It’s a herd psychology. If I won’t have new 1000$ phone I will be and outsider from a group. Those people who claim people are stupid to buy things on credit, they have enough money to understand it.
We go to work which we hate, buying things we don’t need, for money
which we don’t have, trying to impress people who we don’t like,
pretending to be someone we are not.
Deflation works until 99,9% start to understand what’s going on and start to promote socialism, because they just can’t live from pay-check to pay-check on 12-15$ wage while home prices are skyrocketing and stock market tells economy is booming, but they just can’t see that.
The Economist says it’s not the answer to capitalism, but history shows it’s the only one answer to capitalism as nobody has invented anything better. If we’ll see our Phillips Curve example we can see that in 1971-1992 lower unemployment created higher inflation. That is quite obvious as we were just on the beginning of deflationary phase (1980 start) and middle and low class were well paid so they could have spend a lot creating inflation. Between 1993-2007 we see much lower growth of inflation. That is a pure deflationary phase. Tons of debt = wages are going lower. Middle/Low class feels the pain. The gap between 0.1% and 99,9% is going higher. 2008-2019 is another answer how low rates and more QE slaugher 99,9% – the debt is so heavy and wages are going down, they just can’t afford to buy almost anything. Each deflationary bust in deflationary cycle forces middle/low class to go poorer. In 2001 they had money to invest in stock market, in 2008 they had money only for subprime mortages, in 2019 only for subprime auto loans. Does it mean in 2025 they will have delinquencies which will blow up the banking sector for subprime tosters loans?
Each deflationary tick push stock market to beat new highs. Corporations are merging, firing people and joining departments. CEOs thanks to easy money can benefit share holders by more buy-backs saving money to 0.1% rather than investing in productivity and people. Frustration of low/middle class is reaching the top – we want socialism – that is a common answer. Politicians start their narration.
In this mess CBs are trying to defend stock market. Some time ago Mr.Bernanke wrote an essey about “The Great Depression”
Where he tries to explain that if stock market won’t crash and homeless people will get a free lunch we will never repeat 1929-1933. I did not read this book (but need to) – the summary was taken from others’ people comments. Knowing Bernanke and his theories I truly believe he made those conclusions.
So what CBs trying to do to prevent the economy collapse? Imagine if they don’t understand how Phillips Curve works, can they prop up the stock market to infinity? Of course no. We live in economy cycles where CBs steers short term rates. It means CBs are creating deflationary cycles. They create boom and bust. We have cyclical bull market and cyclical bear market. By cyclical bear/bull I understand earnings recession. Companies grow earnings and suddenly their earnings collapse. If we have a company which made 100B$ profits and during next earnings season they post 55B$ profits, should this company be worth same? If during next quarter they post -25B$ profits and go bankrupt, should it be worth the same as it was when its profits were reaching 100B$?
In reality we can say CBs will buy the whole economy, but that is nothing more than socialism. They’ll buy stocks bonds, but will it change the economy? The debt needs to be unloaded. The more the CBs will try to rig the markets the harder the drop and our exposure to deflationary strong bust event is raising. The whole big cycle lasts around 90-100Ys and ends same with Minsky moment :
2019 is very weird on the stock market. Worst December since Great Depression, best January since 1987, best year start since 1964, and till today best weekly streak since 1995. This is called INSTABILITY and I do not believe it is something healthy depsite earnings are collapsing, PMIs dropping like a stone and nobody knows what’s going on. If we go back to 1929 and the big overcapacity that created big depression same 3 crashes occured with same technology deflationary break even in 1918, 1921 and big QE from 1924 till 1929. Translating it to our times. 2001, 2008 (QE), 2015 (super QE) and 2019 with big instability – all combined with China super-cycle.
The Minsky moment definition you can find here :
If we consider big debt supercycle we can see this :
and closer :
CBs want to avoid collapse, but bear markets start with sentiment change. One bankruptcy later another one, fraud exposure and narration is spreading around in line with earnings recessions and raising unemployment. CBs would love to find a work around to economy cycles, but they can only print money. Economy is not only money it’s a complex statement : people, homes, wages, productivity, births, healthcare, education, values, debt and much more. CBs understand it is all about the money. After 10Ys of “prosperity” we just don’t want to accept economy needs to clean by itself. Remove unhealthy businesses and replace them by new one. Economists just can’t believe, they are surprised, but they more they are surprised the harder landing the bear market will create. Counting on CBs PUT to bail-out everything again might create a paradigm as most of those things are “too big to be balied out”. Economy needs to unload the debt with or without CBs help. The more the CBs will be trying to reverse the course the harder economy will be trying, lifting up unemployment, frustration and crashing earnings. CBs will be active around trying to minimize the drop, but as long as unexpected data won’t switch to shocking data they still have a power trying to stablize the market begging it to buy “believing” (or just cheating everybody), thinking we all can remove the cyclical earnings bear with just a magic touch.
Remember – debt deflation super cycle bust starts always from OVERCAPACITY created by too long credit expansion, slaughering same time low/middle class who begs for help. Same time this debt saturation causing consumer spending drops directly to zero and business consumer confidence drops very fast in line with rapid parabolic drop in international trade. This forces credit contraction and forcing banks to raise rates to avoid any capital outflow to avoid currency collapse during recession, exacerbate the crisis. 2008 seems to be a warning. Next round is a trade war and question which currency will collapse?
Again. This is not to scary anybody. It’s just an observation of the economy cycles. I think most CBs know what’s going on and they are scared out to death, because it means it’s the beginning of end of the CBs era. And economy will have to loot CBs and probably jail them, pointing them as a key inequality driver. Just watch macro data if they are in line with debt super cycle news. Not only they should surprise to the downside a lot, but so many people will start to doubt if they are even RIGHT! All of us live in a conviction same as “Roaring Twenties”. Party like in 1929 – we will print money and prosperity will just skyrocket. Economy doesn’t know this kind of definition unforunately. You took debt – you have to pay for that.
Greg's blog ... When the crowd is always wrong 