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The Fed has created a monstrous bubble that it can no longer control – Investment Watch

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by Charles Hugh-Smith

The Fed must now accept responsibility for what happens in the final game of the Bubble of the moral danger monster it created.


Contrary to popular opinion, the Federal Reserve did not set out to create a Monster Bubble that escaped its control. Contrary to popular opinion, the Fed cannot "never let the shares fall again!" for the simple reason that the monster he created: a monstrous moral hazard mania in which all risk has vanished because The Fed will never allow the shares to fall anymore!–Now it's beyond your control.

And that's a problem for the Fed, which, above all, needs control of interest rates, financial markets and the economy.

The problem is that bubbles always explode, and explode regardless of what central banks do. This is contrary to popular opinion that if the Fed had saved Lehman Brothers, the global financial collapse of 2008 would never have happened.

Incorrect. Bubbles explode when too much risky debt is issued without guarantee backing to marginal borrowers who inevitably stop paying, which caused massive losses in the financial sector, an equally massive melting of speculative debt and risky bets and a deep recession as all the bad investment fueled by the debt runs out and disappears.

The global financial crisis of 2008 was the inevitable result of the bursting of high-risk bubbles and other debts which then triggered panic to get rid of billions of dollars in high-risk speculative bets on stocks, real estate, junk bonds, etc.

The Fed has another problem that it has not been able to solve despite 12 years of trying: To save the financial system from collapse, the Fed has to re-inflate the speculative mania fueled by debt that has just emerged from unstable debt excesses, leverage and speculative moral hazard fever, all accumulated on a declining basis. of real guarantee.

We can see the manic progression of each Fed rescue in this graph: Consider the compression of time as the periods between each Fed rescue are reduced and the spectacular rocket trip of debt, leverage and speculative moral hazard fever adds another 1,000 points to the S&P 500 in manic stampedes every Shorter from the front. The Fed will never allow the shares to fall anymore! bubble.

The advances that recently took years now take months. The advance of 700 points that required 4.5 years ago in the previous bubble of 2003-2007 now required only 4.5 months. The next iteration is 700 points in 4.5 weeks, then in 4.5 days, and then forgetting the collapse.

The Fed's balance sheet has not gone anywhere for eight weeks, while the stock bubble gained a manic impulse from The Fed will never allow the shares to fall anymore!:

12/25/19 $ 4.165 billion
1/1/20 $ 4,173 billion
8/1/20 $ 4.149 billion
1/15/20 $ 4,175 billion
1/22/20 $ 4.145 billion
1/29/20 $ 4,151 billion
5/5/20 $ 4,166 billion
12/2/20 $ 4,182 billion

That is a total range of $ 0.017 billion, essentially signal noise. This strongly suggests that the Fed waits, foolishly, of course, while stumbling on a fantasy soaked in arrogance that it can really control the moral hazard monster it created, keeping stocks on a "permanently high plateau." "That somehow avoids the two disasters that history records as inevitable: either an immediate bubble collapse or a "rescue" fed by the Fed that adds another 1,000 points in six months, and then another 1,000 points in three months, and then a collapse that cannot be rescued, since the entire financial system implodes.

Federal Reserve managers are dumb but not stupid. They realize that they cannot let the mania of moral hazard pass to the stage in which an unrecoverable collapse becomes inevitable.

The problem here is that history has never recorded a bubble that has magically settled on a "permanently high plateau" and remained there for months or years. Then, the Fed has finally reached the point of no return: or accepts a painful burst of the monster's moral hazard bubble that it has created or lets the monster lead the stampede over the cliff towards a financial collapse that the Fed cannot rescue With the usual tools to lower interest rates and rescue banks.

It is worth remembering that the Fed cannot force insolvent lenders to lend more money to insolvent borrowers. Nor can he squeeze the blood from the stones; Insolvent borrowers default, period. Losses can be buried in the Fed's balance sheet, but that does not generate revenue for closed businesses or laid-off workers, nor does it generate taxes for local governments that see their tax base melt.

Even fools drenched in arrogance at the Fed realize that this bubble has disconnected from financial realities. A look at Apple's operating income shows that everyone's favorite actions have skyrocketed even when operating revenues have been essentially flat for years. There is a phrase for this: disconnect from reality, all driven by manic certainty that The Fed will never allow the shares to fall anymore!

After 12 long years of increasingly risky bubbles, the Federal Reserve is now locked.Instead of assuring the markets that the next 1,000 points are guaranteed and all in just a few more months of mania, the Fed will have to offer false guarantees while attempting an impossible "soft landing," that is, a controlled deflation of Monster Bubble. , or grimly accepts that a 1,000-point decrease in the S&P 500 is now a better option than an implosion later if Monster Bubble is released completely and triggers even more when the Fed disconnects.

The moral hazard monster bubbles cannot be controlled. Human greed guarantees that The Fed will never allow the shares to fall anymore! It will generate self-reinforcing stampedes of speculative mania that no longer respond to the Federal Reserve balance signals.

At this point, the Fed will hoist on its own firecracker: By claiming divine control of interest rates, financial markets and the economy, the Fed must now accept responsibility for what happens in the final game of the Moral Danger Monster Bubble that it created: whether to allow a removal of the 25% to 30% speculative excess now or feed the final stampede to financial collapse.

It is not a happy choice, but if we are honest (panting), there really is no other option:The Federal Reserve cannot let the moral hazard mania run to complete the collapse, which is now only an iteration away.


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