Global markets remain haunted by the specter of an unwind of unprecedented speculative leverage. When markets break to the downside, there is clear potential for another episode of derivative-related selling that would panic buyers.
The Chairman’s rambling (non-answer) reply could be summarized in four words: “The Fed is trapped.” It’s trapped by Bubble Dynamics – a historic Bubble that either inflates or collapses. What the Fed labels as “markets functioning” is at this point a “functioning” speculative Bubble.
Daydream, fantasize or hallucinate – if you choose. But this is a fiasco – and rather tangible, at that. It started years – even decades – ago. The craziness turned extreme last year, with the Fed aggressively stimulating in the face of highly speculative markets. It was never going to end well.
Central Bank buying equities via the stock market does not help corporations, it merely protects the paper wealth of mostly the upper 10%. And that is the point of most of these programs.
We’re in the throes of an extraordinary upside global market dislocation. I do not recall such a ferocious globalized short squeeze – stocks, corporate Credit, currencies and EM sovereign debt. We can only imagine the behind the scenes fracas in derivatives trading.
We are in a hostile investing environment with poor long-term support for the current prices in the markets. The stock market is simply riding the Fed’s largest intervention in history. And every wave ends the same.
The global Bubble has been pierced, though unprecedented monetary inflation only exacerbates the epic divergence between inflating asset prices and deflating economic prospects. As I’ve written over the years – and as demonstrated rather conspicuously in March: contemporary finance seems to operate miraculously – so long as it’s inflating. It just doesn’t work in reverse. These days it’s even more frightening to contemplate how this all ends. The Scourge of “Whatever it Takes” Monetary Mismanagement.
It appears there are a lot of investors who do not know that stock prices get wiped out in bankruptcy.
Most retail investors have not experienced stocks and corporate bonds being wiped out in a restructuring. It will come as a shock to many. The reason a few mega companies are pulling the SP500 higher is a defensive move away from this restructuring risk.
Use common sense and look around. Earnings and cash flow determine stock prices after the corporate buybacks go away. The Fed is screaming DANGER and yes they “temporarily” provided liquidity (printed money) to halt the financial sell off. But they can NOT stop the economic damage that matters in the long run.