Submitted by Gordon T Long via FinancialRepressionAuthority.com, A FALLING MARKET CANNOT BE ALLOWED – at any cost! The Central Bankers have clearly painted themselves into a corner as a result of their self-inflicted, extended period of “cheap money”. Their policies have fostered malinvestment, excessive leverage and a speculative casino approach to investments. Investors forced to take on excess risk for yield and scalp speculative investment returns, must operate in an unstable financial environment ripe for a major correction. A correction because of the high degree of market correlation that likely would be instantaneously contagious across all global financial markets. Any correction more than 10% must be stopped. As a result of the level of instability, even a 10% corrective consolidation could get quickly out of control, so any correction becomes a major risk. What the central bankers are acutely aware of is: If Collateral Values were to fall with the excess financial leverage currently in place, it would create a domino effect of margin calls, counter-party risk and immediate withdrawals and flight to areas of perceived safety.
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Submitted by Gordon T Long via FinancialRepressionAuthority.com,
A FALLING MARKET CANNOT BE ALLOWED – at any cost!The Central Bankers have clearly painted themselves into a corner as a result of their self-inflicted, extended period of “cheap money”. Their policies have fostered malinvestment, excessive leverage and a speculative casino approach to investments. Investors forced to take on excess risk for yield and scalp speculative investment returns, must operate in an unstable financial environment ripe for a major correction. A correction because of the high degree of market correlation that likely would be instantaneously contagious across all global financial markets. Any correction more than 10% must be stopped. As a result of the level of instability, even a 10% corrective consolidation could get quickly out of control, so any correction becomes a major risk. What the central bankers are acutely aware of is:
As our western society continues to consume more than it consumes, productivity is not increasing at the rate that justifies the developed nations standard of living as well as the current levels of equity markets. A possible corrective draw-down to the degree shown in this chart is simply “out of the question”! The central bankers acutely aware of this. |
US Productivity, S&P 500(see more posts on S&P 500, ) |
MARKETS TEMPORARILY HELD UPThe markets are presently, temporarily held up due primarily to three factors:
Professionals, institutions, hedge funds etc have been steadily lightening up on equity markets (or simply leaving completely) leaving the public holding the back. It is estimated that the $325B that will leave the US equity markets in 2017 will be replaced by an artificial $450B of corporations buying their stocks. With corporate cash flows now falling and debt burdens triggering potential credit rating downgrades, this game is quickly slowing. The central bankers are aware of this. |
Ownership of US corporate equity market, Net US equity demand |
TECHNICALS INDICATING AN END TO THE DEBT SUPPER CYCLEThe Market Technicians of all persuasions are almost unanimously calling for a major correction. What is most troubling here is that their indicators are not just short and intermediate term measures but critical long term indicators.
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Macroeconomic Cycles |
The technicians who study Elliott Wave see clear evidence that we are now completing a multi-decade topping pattern in the form of a classic megaphone top. Chart courtesy of Robert McHugh The central bankers are aware of this. |
Dow Jones Industrial Average Index |
TECHNO-FUNDAMENTALSI could keep on illustrating the types of warnings we are seeing, but let me share what the central bankers likely most concerned about regarding Correlation, Liquidity and Volatility ETPs. The markets have become so correlated (think of this as everyone on the same side of the boat) with asset correlations not only being higher, but the correlations themselves are becoming more correlated. While traditionally rising cross-asset volatility has resulted in volatility spikes, that is no longer the case due to outright vol suppression by central banks. While central banks may have given the superficial impression of stability by pressuring volatility, they have also collapsed liquidity in the process, leading to less liquid markets, a surge in “gaps”, and “jerky moves” that are typical of penny stocks. The greater the cross asset correlation, the lower the vol, the greater the repression, the more trading illiquidity and wider bid ask-spreads, and ultimately increased “gap risk”, which becomes a feedback loop of its own. Global central banks are now injecting a record $2.5 trillion in fungible liquidity every year – in the process further fragmenting and fracturing an illiquid market which is only fit for notoriously dangerous “penny stocks.”
Even more concerning are Volatility ETPs (Exchange Traded Products) which are derivative of some underlying asset. Volatility ETFs are particularly strange animals since you’re buying a derivative (ETF) on a derivative (the futures contract) which itself is based on a derivative (the implied volatility of options) and those options themselves of course are derivatives which themselves are based on the S&P 500. Getting the picture? The folks at Capital Exploits warn:
Again, none of this is going unnoticed by t increasingly worried central bankers. |
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THE NEXT FED POLICY SHIFTSo what can the central bankers be expected to do? We laid out this road-map at the Financial Repression Authority well over a year ago. We anticipated in our macro-prudential research much of what has now become mainstream discussion:
We now believe the Central Bankers and Federal Reserve specifically is preparing for more in the way of Collateral Guarantees. We believe it will actually take the form of direct buying the US stock market similar to what the Bank of Japan is already doing with ETFs. |
Central Bank Options |
THE “MINSKY MELT-UP”My long time Macro Analytics Co-Host, John Rubino concludes in his most recent writing “Flood Gates Begin to Open“:
It is our considered opinion that the monetary policy setters are presently even more worried about the current global economic situation than we are – if that is possible? This is evident because over the last 14 days Fed Chair Janet Yellen, former Treasury Secretary Lawrence Summers and JP Morgan have all been out talking openly and publicly about the possible consideration of policy changes that would allow the Federal Reserve to buy US equities. These releases must be seen as trial balloons to condition expectations. Japan and Switzerland amongst others are already doing it (as we previously reported) , while the ECB is also floating its own trial balloon on the same subject. If you want to know what could create a Minsky Melt-up, this is it! Here is our latest Financial Repression Authority Macro Map illustrating what we see unfolding. |
Minsky Moment |
We believe the dye has been cast!
The US Federal Reserve can soon be expected to get congressional approval for equity purchases.
Of course this will take a post election scare and a new congress to receive.