That is, we saw an: 1) inevitable liquidity crisis which would take our 2) zombie bond markets to the floor, yields (and hence interest rates) to new highs and 3) debt-soaked nations and markets tanking dangerously south into 4) the dark days of stagflation.
And that is precisely where we are today—no longer warning of a pending convergence of crises, but already well into a market disaster within the worst macro-economic setting (compliments of cornered “central planners”) that I have ever experienced in my post-dot.com career.
But sadly, and I do mean sadly, the worst is yet to come.
The Ignored Hangover
For well over a decade, the post-2008 central bankers of the world have been selling the intoxicating elixir (i.e., lie) that a debt crisis can be solved with more debt, which is then paid for with mouse-click money.
Investors drank this elixir with abandon as markets ripped to unprecedented highs on an inflationary wave of money printed out of thin air by a central bank near you.
In case you still don’t know what such “correlation” looks like, see below
For years, such free money from the global central banks ($35T and counting) has merely postponed rather than outlawed the hangover, but as we are seeing below, the hangover, and puking, has already begun in a stock, credit or currency market disaster near you.
Why?
Every Market Crisis is a Liquidity Crisis
Because the money (i.e., “liquidity”) that makes this drunken fantasy go round is drying up (or “tightening”) as the debt levels are piling up.
That is, years and years of issuing IOU’s (i.e., sovereign bonds) has made those IOU’s less attractive, and the solution-myth of creating money out of thin air to pay for those IOUs is becoming less believable as inflation rises like a killer shark from beneath the feet of our money printers.
The Most Important Bond in the World Has Lost Its Shine
As we’ve warned, the UST is experiencing a liquidity problem.
Demand for Uncle Sam’s bar tab (IOU’s) is tanking month, after month, after month.
As a result, the price of those bonds is falling and hence their yields (and our interest rates) are rising, creating massive levels of pain in an already debt-saturated world where rising rates kill drunken credit parties (i.e., markets).
Toward this end, Wall Street is seeing a dangerous rise in what the fancy lads call “omit days,” which basically means days wherein inter-dealer liquidity for UST’s is simply not available.
The Fed—Tightening into a Debt Crisis?
As all debt-soaked nations or regimes since the days of ancient Rome remind us , once debt levels exceed income levels by 100% or more, the only option left is to “inflate away” that debt by debasing (i.e., expanding/diluting) the currency—which is the very definition of inflation.
And that inflation is only just beginning…
Open & Obvious (i.e., Deadly) Bond Dysfunction
The West & Japan: Overplaying the Sanction Hand
As we warned in February, Russia is squeezing the sanction-makers with greater pain than history-and-math-ignorant “statesmen” like Kamala Harris could ever grasp.
From here in Europe, Western politicians are beginning to wonder if following the U.S. lead (coercion?) in chest-puffing was a wise idea, as gas prices on the continent skyrocket.
In this cold reality, the geniuses at the ECB are realizing that the very “state of their European Union” is at increasing risk of dis-union as citizens from Italy to Austria bend under the weight of higher prices and falling income.
As of this writing, the openly nervous ECB is thus inventing clever plans/titles to “fight fragmentation” within the EU by, you guessed it: Printing more money out of thin air to control bond yields and cap borrowing costs.
(By the way, such monetary policies are an open signal to short the Euro and GBP against the USD…)
Looking further east to that equally embarrassing state of the union in Japan, we see, as warned countless times, a tanking Yen out of a Japan that knows all too well the inflationary sickness that a non-stop money printer can create.
Like the UST, the Japanese JGB is as unloved as a pig in lipstick. Prices are falling and yields are rising.
By the way, and as part of our continued warning and theme of the slow process of de-dollarizationwhich the sanctions have only accelerated, it would not surprise us to see Japan making a similar “China-like” move to buy its Russian oil in its own currency rather than the USD.
Just saying…
Don’t Be (or buy) a Dip
As indicated above, trying to combat inflation with rate hikes is not only a joke, it creates a market disaster when a nation’s debt to GDP is at 120%.
To fight inflation, rates need be at a “neutral level,” (i.e., above inflation), and folks, that would mean 9% rates at the current 8%+ CPI level.
That aint gonna happen…
At $30T+ of government debt and rising, the Fed can NEVER use rising rates to fight inflation. End of story. The days of Volcker rate hikes (when public debt was $900B not $30T) are gone.
But the fickle Fed can raise rates high enough to kill a securities bubble and create “asset-bubble deflation,” which is precisely what we are seeing in real time, and this market disaster is only going to get worse.
In short, if you are buying this “dip,” you may want to think again.
As June trade tapes remind, the Dow dipped below 30000, and the S&P 500 reported an ominous 3666, already losing more than 20% despite remaining grossly over-valued as it slides officially into bear territory.
In short: These bear markets are not even close to their bottom, and today’s dip-buy may just be a trap, unless you think you can time a one-day rally amidst years of falling assets.
Markets won’t and don’t recover from the bear’s claws until spikes are well above two standard deviations. We are not there yet, which means we have much further to fall.
As we’ve warned, mean-reversion is a powerful force and we see deeper lows/reversions ahead:
Toward that end, we see an SPX which could easily fall at least 15% lower (i.e., to at least 1850) than the “Covid crash” of March 2020.
Based upon historic ranges, stocks won’t be anywhere near “fair value” until we see a Shiller PE at 16 or a nominal PE of 9-10.
In the 1970’s, for example, when we saw the S&P lose 48%, or even in 2008, when it lost 56%, U.S. debt to GDP levels were ¼ of what they are today. Furthermore, in the 1970’s the average consumer savings rate was 12%; today that rate is 4%.
Stated simply, the U.S., like the EU and Japan, is too debt-crippled and too GDP-broke to make this bear short and sweet. Instead, it will be long and mean, accompanied by stagflation and rising unemployment.
The Fed knows this, and is, in part, raising rates today so that will have something—anything—to cut in the market disaster tomorrow.
But that will be far too little, and far too late.
the real cause of the greatest market bubble and bust in the history of modern capital markets lies in the reflection of central bankers and politicians who bought time, votes, market bubbles, wealth disparity and cancerous inflation with a mouse-click.
History reminds us of this, current facts confirm it.
For now, the Fed will tighten, and thereby unleash an even angrier bear.
https://goldswitzerland.com/the-2022-market-disaster-more-pain-to-come/
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