Do not mistake outcomes for control – remember, there is no such thing as control – there are only probabilities. – Christopher Cole, Artemis Capital
Central Banks globally have created a massive fiat currency fueled asset bubble. Stock markets are the largest of these bubbles – a bubble made worse by the Fed’s attempt to harness the “power” of HFT-driven algo trading. At least for now, the Fed can “control” the stock market by pushing the buttons that unleash hedge fund black box momentum-chasing and retail ETF buy orders whenever the market is about to head south quickly.
However, the ability to push the stock market higher without a statistically meaningful correction is a statistical “tail-event” in and of itself. The probability that the Fed can continue to control the market like this becomes infinitesimally small. The market becomes like a like a coiled spring. The laws of probability tell us this “spring” is pointing down.
The Fed announced in no uncertain terms that it was going to begin “normalizing” – whatever “normalize” means – its balance sheet beginning in October. Going back to 1955, the furthest back in time for which the data is readily accessible, the Fed Funds rate has averaged around 6%. But for the last 9 years, the Fed Funds rate has averaged near-zero. Back in May 2013 Ben Bernanke threatened the markets with his “taper” speech. More than four years later the Fed Funds rate is by far closer to near-zero than it is to the 62-year Fed Funds rate average. Can you imagine what would happen to the stock market if the Fed actually “normalized” its monetary policy by yanking the Fed Funds rate up to its 62-year average of 6%?
In September the Fed announced that it would begin reducing its balance sheet by $10 billion per month starting in October. Before the Fed began printing money unfettered in 2008, its balance sheet was approximately $900 billion. If we define “normalize” as reducing the Fed’s balance back down to $900 billion, it would take 30 years at $10 billion per month. But wait, the Fed’s balance sheet is going the wrong way. It has increased in October by $10 billion (at least thru the week ending October 18th). So much for normalizing.
The Fed is stuck. It has created its own financial Frankenstein. Neither can it continue hiking interest rates nor can it “normalize” its balance sheet without causing systemically adverse consequences. The laws of probability and randomness – both of which are closely intertwined – tell us that, at some point, the Fed will lose control of the system regardless of whether or not it decides to keep rates low and maintain the size, more or less, of its balance sheet.
Jason Burack invited me onto his Wall Street For Mainstreet podcast to discuss the Fed’s “Everything Bubble,” why the Fed can’t “normalize” its balance sheet and the unavoidable adverse consequences coming at the system:
Here’s the problem with bubbles. It’s in the wording. We all love bubbles. Bubble baths. Blowing bubbles Bubble machines. Bubble wands. People aren’t afraid of bubbles. Here’s a suggestion. Change the wording
Instead of bubbles, how about
The Fed Everything ‘You’re gonna die a horrible painful death when this market crashes’
That might get some people’s attention.
You’re gonna lose everything.
Your job, home, furniture, car, second car, RV, boat, jet, retirement plans, second home, business, condo on a warm island, place in the woods, pensions, kids educational fund, wife’s Botox treatment, third car, 2 week vacations to the islands, all your friends, million dollar trading portfolio, 401K, cash to help your parents, joint replacement, all the expensive crap you bought from Bed Bath and Beyond and Restoration Hardware. You start looking for the Dollar Store and think Wal Mart’s BOGO sales are a really big deal.
All kidding aside, I’m only speaking for myself.
Bubbles? Been there, done that. Getting hammered by one of those nice friendly little bubbles sucks ass.
Yes, it is possible to be this superficial and yes, it’s possible to be at epic fail when the bubbles, I mean you’re going to die a horrible painful death when these markets crash. Bubbles are not your friend. Neither is what is coming. We’ve been warned.
You always have well-thought out commments!
I just went to the Treasury Direct site and since 9/6/17, the debt has increased $600B in about 6 weeks. I have searched for an explanation, but have found none. Looks like hyperinflation has begun. Any thought or comments?
$300 billion of it is actually attributable to FY 2017 so the spending deficit was really over $900 billion. The Govt is burning money like a Weimar furnace now – especially on defense
> The Fed is stuck. It has created its own financial Frankenstein. Neither can it continue hiking interest rates nor can it “normalize” its balance sheet without causing systemically adverse consequences.
They just won’t normalize.
They will talk about doing it, but will never actually do it.
There won’t be any market crash, because they will inject tons of money at the first sight of panic.
They can hold it like it is for maybe another ten years…
And then, one day, of course, it will crash, spectacularly.
Is not the bond market an even bigger bubble than the stock market? It won’t be pretty when that one blows.