RELAX everything’s going to be fine, if there was ANY chance of collapse all the “experts” on the main collapse subreddit would be all over this. /s
via realclearmarkets:
“In purely technical terms, all these together are betting heavily on lower interest rates all over the world in the not-too-distant future. As they’ve come to be this distorted and ugly, formerly aggressive central bankers who’ve been hiking rates as fast as they can are suddenly coming around to that possibility, too…An unhealthy dose of deflationary monetary conditions would aggressively lower growth and inflation while also triggering lower policy rates.”
Unlike 2007 and 2008, Jay Powell’s Fed hasn’t yet realized the full gravity of what’s coming. Even after SVB and Credit Suisse, policymakers at least in public remain committed to the nothing-to-see-here tactic downplaying recent developments. In private, though, they might already be like Bill Dudley pondering what is obviously “a new, dangerous phase of the crisis.”
Does it even matter, though?
This is the reason why officials have to keep inventing new tools as something else goes wrong in the monetary system, as they did just a couple weeks ago with that absurd BTFP. Yet another widely-heralded four-letter invention about to join all the others on the scrap heap. The list of these tools always expands though effective liquidity always gets worse, the most dependable inverse correlation in their kit.
For a system that a decade and a half later has no effective backstop (but does have trillions in excess reserves!) you begin to understand the extreme market positioning. You hedge the hell out of everything knowing the game here. Those at the Fed will say all the right things to a confused and disquieted public if only to quiet the public and prevent it from going too far.
Unlike Tech stocks, banks have been unable to manage any sort of meaningful rally. Compare 2008’s short-covering rally to this one. In addition, we see via the VIX there is no sign of fear in this market
The Powell Fed today confronts a historic dilemma. And it is uncomfortably reminiscent of how Federal Reserve officials faced in 1929 a confluence of a weakening economy, a fragile banking system, and a crazy stock market speculative Bubble. Ben Bernanke is fond of pointing blame for the crash and subsequent banking crisis to the “Bubble poppers”. More grounded analysis would recognize that Bubbles do inevitably burst, and the greater the inflation – the more protracted the “Terminal Phase” of excess – the more vulnerable the financial system and economy are to collapse.
Importantly, each bailout and reflation ensures only larger Bubbles – greater amounts of debt, financial system leverage, and speculative excess. The Fed’s $1 TN 2008 QE inflated to massive $5 TN pandemic reflationary measures. It’s distressing to contemplate how much the Federal Reserve’s balance sheet will inflate to accommodate the next serious de-risking/deleveraging crisis. And while most will scoff today at the notion of a systemic “fire”, the reality is that the system suffered bank failures and a run on deposits with unemployment at 3.6% and Q1 GDP growth expected at about 2.5% (Atlanta Fed GDPNow forecast). The massive liquidity response only exacerbates perilous market instability.
While the stock market might appear exceptionally resilient, the system is acutely fragile. There are clear risks of devastating market crashes, domino bank failures, a highly destabilizing Credit contraction, crises of confidence, and synchronized global financial, economic and geopolitical crises. Importantly, acute Bubble fragility ensures – as we witnessed over recent weeks – that the Federal Reserve and Washington will move quickly with extraordinary liquidity and stabilization measures.
Music to the ears of risk markets that have degenerated into hopelessly dysfunctional speculative Bubbles. Huge gains were enjoyed during the quarter by targeting large short positions and markets with outsized hedging and bearish derivative positioning. Short squeezes bookended a fledgling banking crisis – a major loosening of financial conditions, then an abrupt tightening and back to loosening. What is a central bank to do?
Fed officials recognize market propensity for front-running any Fed dovish pivot musings. Now, after a quick $700 billion shot of Washington liquidity, a downdraft in market yields, and a surge in stock prices, the Fed faces the possibility of loose conditions underpinning inflation dynamics. For now, their strategy appears to be to create whatever liquidity the banking system might require, while relying on rate policy to sustain a semblance of an inflation fight. Expect Fed officials to continue pushing back against market expectations of rate cuts this year. Meanwhile, rate markets have seen more than enough to double-down on pricing in an unfolding financial accident.
This “The Economist” article is a roller coaster of hopium and doomium.
h/t BoatSurfer600