Brave New World

It’s hard to watch these Fed things anymore.  The FOMC knows all too well the damage it’s doing to market integrity.  But, it has no choice, given that higher interest rates or a serious correction would nuke the economy.  We, as a country with $17-18 trillion in debt (actually $60 trillion), can’t afford higher rates.  And, global financial institutions, with $1.5 quadrillion in derivatives, can’t afford another market meltdown.

This brings me back to Japan.  I focus on Japan so much because the US is heading down the exact same path:

  • central bank suppressing interest rates out of necessity
  • central bank supporting equity prices
  • no mathematically viable exit, as the growth in debt is exponential

The talking heads are right in the sense that Yellen’s comments are bullish for stocks.  She brushed off inflation as “noise” and complacency/over-valuation as non-existent.  Investors are right to expect no tightening anytime soon.  So, the only risk to markets is, theoretically, from macroeconomic, geopolitical, or earnings surprises that are so significant that TPTB can’t quickly counteract their effects on stock prices.  Think another Lehman, Fukushima, oil shock, war, etc.

BTW, these things are happening now.  There are numerous Lehmans in the world, but they are being propped up by central banks rather than being left to fail.  Fukushima isn’t fixed, even though the mainstream media pretends it is.  An oil shock is a pretty good bet — with crude light already up 20% since January.  And, wars…take your pick.

The “market” simply doesn’t care anymore.  Dips are quickly bought, crushing short sellers.  Nightly ramp jobs keep things on an upward trajectory.  And, the yen carry trade is always available to ramp up prices for no reason whatsoever at any time.

2014-06-19-SPX log chnls

Like the FOMC, the BOJ effectively buys all new debt issued, keeping interest rates near zero.  And, they’ve demonstrated their willingness to not let the USDJPY drop below 101, nor the Nikkei below 14,000 (they hold 4 trillion yen in stocks now and are adding another trillion per year.)

It’s not so much a market anymore, but a slot machine with a guaranteed payout.  TPTB will let the air out when they feel like it, and are correctly positioned in advance.  This cartoon posted 4 years ago has proven to be the best prognosticator of market behavior around.  BTFD indeed.

We can’t know when the music will stop, only that it will.  With extremes in sentiment, margin debt, P/Es, volatility (lack thereof), it’s pretty apparent that something wicked is waiting in the wings.  VIX under 10 is a pretty good sign.  There are many others.  And, given the extent of the runup and the quadrupling of the derivatives market since Lehman, the unwinding will be much, much worse.

2014-06-18- VIX 60 1300




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