The Market’s Set to Be Trumped!
by Bill Bonner, DailyReckoning:
The market’s melt-up since the Feb. 11 interim low has been positively surreal. But there’s nothing sustainable about it.
This latest rebound was the work of eyes-wide-shut day traders and robo-machines surfing on a thinner and thinner cushion of momentum. What comes next, in fact, is exactly what happens when you stop pedaling your bicycle. Momentum gets exhausted, gravity takes over and the illusion of stability is painfully shattered.
The simple truth is, the Fed’s long-running interest rate repression policies have caused systematic, persistent and massive falsification of prices all along the yield curve and throughout all sectors of the financial market.
The Fed is just systematically juicing the gamblers, and thereby fueling ever greater mispricing of financial assets and ever more dangerous and explosive financial bubbles. What we’re seeing now is the illusion of stability.
During this year’s final pulse of the great stock market bubble of 2009–2016, the illusion of stability was reflected in the complete collapse of the VIX Index or, as it is often called, the fear gauge. It spiked above 18 briefly in mid-September… but it’s back down now.
Take a look at a chart from the last cycle, culminating in the crash of 2008:
The Greenspan housing, credit and stock market bubbles were inflating. At the same time, volatility was steadily drained out of the market by increasingly more bullish and complacent traders.
Accordingly, between the stock market’s bottom in September 2002 and the first hints of the subprime crisis in February 2007, the VIX Index dropped relentlessly. In fact, it was then down by 75% to a bottom index value of 10.2 on the eve of the mortgage crisis.
When the financial bubbles began to implode, however, the VIX exploded. By Oct. 28, 2008 it had risen by 550%. Traders who saw it coming and got long volatility, or “vol,” made a fortune.
It just so happens that recently, the VIX came close to its early 2007 low, touching 10.8 on an intraday basis. That meant that it had declined by 62% from its Feb. 11 level — and it had declined by 58% from its dramatic late-June spike at the time of the Brexit surprise.
In a word, by mid-August, the casino had become so complacent and fearless that you needed a motion detector to identify signs of life. At approximately noon on Aug. 16, in fact, the VIX Index literally did not move for upward of an hour.
Things were almost laughably quiet.
September was a bit of a roller-coaster month for market volatility. And as we enter the final months of the year, there are potential catalysts that could trigger an ever bigger spike in volatility before year-end. The election is a big one.
But the larger question is why a tiny bump in interest rates should even matter at all.
After seven years of zero or next to zero interest rates, it must be truly wondered how supposedly rational adults can obsess over whether the another tiny smidgen of a rate increase should be permitted this year or next, or whether the economy can tolerate a rise in the funds rate from 38 bps to 63 bps when it finally does move.
The difference is just irrelevant noise to the main street economy. It can’t possibly impact the economic calculus of a single household or business!
But then, again, the Fed doesn’t serve the main street economy. It lives to pleasure Wall Street.
Having pinned the money market rate at the zero bound for so long and with such an unending stream of ever-changing and silly excuses, the occupants of the Eccles Building are truly lost.
They do not even fathom that they are engaging in a word-splitting exercise no more meaningful to the main street economy than counting angels on the head of a pin.
Indeed, if they weren’t mesmerized by their own ritual incantation they would not presume for a moment that fractional changes of the money market rate away from ZIRP would have any impact on main street borrowing, spending, investing and growth.
So why does the Fed persist in this farcical minuet around ZIRP?
The principal reasons are not at all hard to discern. In the first instance, the Fed is caught in a time warp and fails to comprehend that the game of bicycling interest rates to heat and cool the macro-economy is over and done.
The credit channel of monetary transmission has fallen victim to “Peak Debt.” This means that the main street economy no longer gets a temporary pick-me-up from cheap interest rates because with tapped out balance sheets they have no further ability to borrow.
The only actual increases in household debt since the financial crisis has been for student loans, which are guaranteed by Uncle Sam’s balance sheet, and auto loans which are collateralized by over-valued vehicles.
Stated differently, home equity was tapped out last time and wage and salary incomes have been fully leveraged for years. So households have nothing else left to hock.
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The article, "The Market’s Set to Be Trumped!", was syndicated from and first appeared at: http://sgtreport.com/2016/10/the-markets-set-to-be-trumped/.
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