One day this bull market will end and the age of the central banking enabled debt bubble will be exposed for the hubris that it is and all the sins of “potential side effects” that central bankers warn about but never do anything about will come back to haunt all of us. It’ll be the age of the great unwind. Nobody will tell us in the moment when it peaks and I suspect it will not start with a bang, rather a whimper, but only end with a bang.

And this great unwind will not last a month or a year, but many years as all the excesses will have to work themselves through the system and all the systematic buy programs will turn into systematic sell programs that will be just as relentless on the way down as they were on the way up.

They very notion of the permanent can kicking we are witnessing now will reveal itself to have been a fantasy. People forget that 2019 and into 2020 came about because of systemic failure of epic proportions. The single one time central bankers tried to tighten blew up in their faces. And the Fed’s forced re-expansion of their balance sheet has now bestowed this blow-off top that has pushed asset prices the farthest distance above the underlying size of the economy that we’ve ever seen. A perversion of the financial system that has created wealth for the few not seen since the 1920s.

I can’t know when this process begins. Nobody can. For all I know it begins today. Or it could be months from now. The price action will tell us. Economically, technically, structurally it’s all set up for it.

Global growth keeps structurally weakening. Plain obvious fact. Demographics are changing and have been changing and continue to change and they are not conducive to new organic growth. Technology remains deflationary. Debt burdens keep exploding and ALL of it is held up by central bankers, none of it would be sustainable at this point without all these interventions that we keep seeing. It’s a crisis. Full stop. If you have to intervene you are fighting a crisis. And they are intervening as much as they did in the depths of the financial crisis.

The Fed’s now been exposed by all the major banks to be the driver of this rally. Even last week when I was personally being arrogantly dismissed as a “swashbuckling pirate QE conspiracist” by a US Fed president on twitter (sometimes all one can do is laugh) major banks have all come out and have called the Fed’s action QE and directly responsible for goosing asset prices.

Even today the CEO of Morgan Stanley called it QE:

People have resigned themselves to believing that central banks will forever prevent downturns and busts. No literally.

Here’s Bridgewater’s Prince declaring the boom-bust cycle to be over while in the same breath admitting that central bank tightening is a virtual impossibility as it causes market pain:

Why is that? Because central banks are trapped, the entire world is trapped.

This part of the cycle is the most dangerous. Why? Because it has now produced the most dangerous investor behavior. Chasing vertical charts irrespective or price or valuations, $TSLA being an example of many.

While many investors and participants may not have been around during the bubble in 2000, they may well end up re-learning its lessons that hard way.
This is not a rally born from strength and growth. It is born out of desperation, fear and failure. Failure to normalize balance sheets and interest rates. Fear of a larger market downturn. Desperation to keep a liquidity starved overnight market under control.

In process multiples have massively expanded over the past year:

While profit margins have continued to decline:

None of these concerns will matter until complacency gets punished for in the end math matters, valuations matter and technicals matter. And then the age of hubris will come undone.

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Categories: Opinion

10 replies »

  1. You really nailed it. The Fed’s plan must be to keep monetizing all our debt until it holds equal to 100% of GDP just like Japan. They would love to have a population as controlled as Japan. So this is no problem for them. And Trump is trashing them but for keeping rates NOT LOW ENOUGH. Do we collectively give up on this debt and monetization takeover? This will have to be played out in the next election and following policy moves. Will we stay American and true to American free market principles and others?

    • The free market basically ended when Nixon ended the gold standard in 1971….now we are in the biggest financail delusion ever…and even most intelligent don’t see it or don’t want to admit it. It’s absolutely crazy. For most, debt simply doesn’t matter anymore….just bring on more debt…and debt…and debt….this is what the US, EU, Japan, China have been doing now for ages!!!! When I speak to most people about debt….they simply do not understand my utter concern. They simply don’t.

  2. Yes it goes way back, and in a way theres so much inequality that there are many who take on unsustainable debt bc they know things actually have value and the currency doesnt. It breeds irresponsibility. In the end, money is paper and things are real. So only the distribution and power to distribute goods matter. Debt jubilee, restructuring, taxes, whatever, it could be fixed but the pain in the meantime. But I do not expect monetizing the debt to stop any time soon to avoid just that, absent a policy shift. The March of our time drags us towards a global world. Questions like how will government change while keeping sovereignty etc. These are questions. All with big ramifications. All to keep control over YOU.

  3. As you said it may begin slowly…but when the Main Street crowd who have been “participating” through index funds begin to pull their money out if will be a mad rush for the exits…and the true game of chicken (as to who will BTFD or just stay the course) will be those who can tolerate the most pain…

  4. “There is an invisible but real confidence boundary on the Fed’s balance sheet. After printing $4 trillion in response to the last financial crisis, how much more can the Fed print without risking confidence in the dollar itself?” – James Rickards

    Good question…. I won’t be the one holding the bag when this monstrosity blows up.
    Good luck to all those cowboys riding this wild bull…

  5. Would be interesting to hear your opinion about the aftermath? How will it play out? 1929 or a lost decade like Japan?

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