The Stock Market Would Crash Without Central Bank Support

The mis-pricing of money and credit has also driven a terrible misallocation of capital and kept unproductive zombie debtors alive for too long. Saxo Bank, “Beware The Global Policy Panic”

“Mis-pricing of money and credit” refers to the ability of the Fed to control interest rates and money supply.  Humans with character flaws and conflicting motivations performing a role that is best left to a free market.   After the market’s attempt in December to re-introduce two-way price discovery to the stock stock market, the Fed appears ready to fold on its “interest rate and balance sheet normalization” policy, whatever “normalization is supposed to mean.

Tesla is the perfect example of terribly misallocated capital enabling the transitory survival of a defective business model. Access to cheap, easy capital has enabled Elon Musk to defer the eventual fate of the Company for several years. But as the equity and credit markets become considerably less tolerant, companies with extreme financial and operational flaws are exposed, followed by a stock price price that plummets.

The Stock Market Would Crash Without Central Bank Support – A few weeks after Fed head, Jerome Powell, hinted that the Fed may hold off on more rate hikes, an article in the Wall St. Journal suggested that the Fed was considering halting its “Quantitative Tightening” program far sooner than expected, leaving the Fed’s balance sheet significantly a significantly higher level it’s original “normalization” plan.

But “normalization” in the context of leaving the Fed’s balance sheet significantly larger than its size when the financial crisis hit – $800 billion – simply means leaving a substantial amount of the money printed from “QE” in the financial system. This is a subtle acknowledgment by the Einsteins at the Fed that the U.S. economic and financial system would seize up without massive support by the Fed in the form of money printing.

I suggested in the January 13th issue of my Short Seller’s Journal that the Fed would likely halt QT: “The economy is headed toward a severe recession and I’m certain the key officials at the Fed and White House are aware of this (perhaps not Trump but some of his advisors). I suspect that the Fed’s monetary policy will be reversed in 2019. They’ll first announce halting QT. That should be bad news because of the implications about the true condition of the economy. But the hedge fund algos and retail day-trader zombies will buy that announcement. We will sell into that spike. Ultimately the market will sell-off when comes to understand that the last remaining prop in the stock market is the Fed.”

Little did I realize when I wrote that two weeks ago that the Fed would hint at halting QT less than two weeks later.

When this fails to re-stimulate economic activity, the Fed will eventually resume printing money. Assuming the report in the Wall Street Journal on Friday is true, this is a continuation of the “mis-pricing” of money credit alluded to above by Saxo Bank. Moreover, it reflects a Central Bank in panic mode in response to the recent attempt by the stock market to re-price significantly lower to a level that reflected economic reality.

7 thoughts on “The Stock Market Would Crash Without Central Bank Support

  1. “The Stock Market Would Crash Without Central Bank Support ”

    The question is how effective can the be in preventing it from crashing? Or for how long?

  2. Thank you Mr. Powell. I will take the proceeds from todays
    trading and buy more gold. I almost forgot, you are a magnificent
    bastard Mr. Powell

  3. I agree that Tesla is another Enron. Jim Chanos and you may be the most vocal people in an attempt to warn about this one brand auto company that burns cash at the rate our Federal government does.
    As for Thykonos revealing the Enron fraud, Mr. Chanos can thank Doug Millett who was their first employee to discover the fraud. Doug was a brilliant man and very good athlete who unfortunately passed away due to cancer.

  4. China is playing a similar game to the U.S. It has been reported that Chinese Corporate debt has risen to $30 Trillion. China has alot of zombie companies that should be or have already gone bankrupt and out of business but their Communist Government won’t allow it to happen.

    How long can China play this extend and pretend game.

    1. Because China has at least 25,000 tonnes of gold and $3 trillion in foreign reserves to offset its debt.
      The U.S. no gold and $40 billion in foreign reserves.

      The U.S. debt in agggregate (Govt, Corp, Household) as a percentage of GDP is the highest in the world

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