The Economy

They are in trouble. 25 percent of their economy is the real estate sector, it's been the major source of phony "wealth" that has brought a lot of people into the middle class the last few years. ... and right now, the debt bubble is imploding in the face of their halting intervention efforts. At the same time, the covid shutdowns have really hampered any effort to kind of, sort of keep any actual growth intact. Apple just annouced they are making some of the iphone 14s in India, rather than China.

https://www.cnbc.com/2022/09/26/apple-starts-manufacturing-the-iphone-14-in-india.html

Here are some recent headlines on the property sector. ...

In China, home buyers occupy their 'rotting', unfinished properties
A Ponzi scheme by any other name: the bursting of China property bubble
China real estate crisis spills into property mad Hong Kong
China Has $501 Billion Bailout Ammunition for Property Mess

 

No. It's been a matter of degree, but central banks around the world spent the 1990s blowing bubbles and each time they bill has come due, they met a debt crisis with. ... more debt. It culminated with the financial crisis in 2007/2008, and they went all in.



Those arethe sizes of the balance sheets of the biggest central banks: US Federal Reserve, European Central Bank, Bank of Japan, Bank of England, Reserve Bank of Australia, Swiss National Bank and Bank of Canada. That graph doesn't include the People's Bank of China, which would add another $5.7 trillion to the world tally.

Prior to the financial crisis, the Federal Reserve's balance sheet was about $880 billion. Today, it is $8.8 trillion. That amounts to them having created close to $8 trillion out of thin air, and using it to buy debt -- mostly mortgage-backed securities and US treasuries. Them buying like that drives up the price (they are a forced buyer) and suppresses yields. At the same time, the traditional method of manipulation they have used, controlling the overnight lending rate to the banks they do their monetary policy through, has had those rates pinned at zero percent. The ECB? Their overnight rate had been negative. Same with the Bank of the Japan. The BOJ went in so deep, that they weren't just manipulating the debt markets. They completely took over their government debt market (there is no market anymore, they are the only buyer, essentially printing money and using it to buy whatever their government borrows), but at the same time, they took over a good chunk of their equity market with money they conjured out of thin air, to create a phony wealth effect (that hasn't worked -- the country just stagnates).

If you look at the graph above, combined those central banks had less than $3.5 trillion on their balance sheets in 2007. Today, they are pushing $24 trillion. It's been free money. ... and the world has gorged.

The emerging markets that can't manipulate their currencies that way, essentially follow the dollar, because it is the world reserve currency. So we are making "monetary policy" for much of the rest of the world. And those countries are getting killed now. ... when they could borrow in dollars and have to pay almost nothing, they gorged. Now that the Fed is raising rates here (ostensibly to fight inflation). ... it is creating conditions for a debt crisis. But this isn't coming out of nowhere. I have posted on here for years about the shit that was happening. ... In 2017 or 2018 when money was at its cheapest, Argentina, a country that had defaulted on its debt just a year before, and another two times in the prior 13 years. ... sold $2.75 billionof a 100-year bond!

You'd wonder why anyone would lend to a country like that, with the risk of default, let alone for 100 years at only 7.9 percent interest (not 1007.9 percent). The zero interest rate policy around the world and all of the asset buying to drive yields down made everyone so desperate for the yield they were being robbed of, that it created distortions like that. But now that that Argentinian Bond is going to default (predictably) that is $2.75 billionworth of wasted economic potential.

Argentina’s ‘Preposterous’ Century Bond Never Got Chance to Grow Old

Multiple that by the TRILLIONS of dollars of mispriced debt out there on the back of the fantasy the world lived (while people let the monetary mandarins act recklessly and had no clue what they were doing), and at some point (even if it isn't now) there is going to be a major debt bomb that has to explode. It permeates everything. You have companies that earn nothing, don't have viable businesses and have been carried along on trillions of dollars of debt. You have countries, like the UK right now, that are in trouble. And the consumer, whether it is the student debt crisis it enabled, or the trillions of other dollars of consumer loans that are going to cripple people and leave a wake of bankruptcies if rates normalize. And it is a worldwide thing. Some places will get hit harder than others, but everyone has been carried along by this stupidity. The safest places in the world are probbaly the more (relatively) free-market economies that haven't run up quite as much sovereign debt. ... Singapore and Hong Kong come to mind.

 

The Bank of England blinks first:
https://www.cnbc.com/2022/09/28/ban...ales-launches-temporary-purchase-program.html
To Calm Markets, Bank of England Will Buy Bonds on ‘Whatever Scale Is Necessary’

They announced that they will buy as much debt as necessary to stop the crash.

What people don't get is that the asset purchases are like feeding a heroin junkie more drugs. It feels good in the moment, and stems the crisis, but it is more of what caused the crisis in the first place! It's the arsonist riding in on the fire truck to save the day.

 

Well, there hasn't been $13 billion of QE.

But what their suppressing yields does is give rise to a lot of leverage with people treating it like the money has no value -- it magnifies the QE via frothy, speculative behavior. People borrow way beyond what a free market would have enabled, then need to put up only a fraction of the cost of the equity they are buying, and that has the effect of creating excessive leverage. It is what made the equity indexes go into bubble territory. ... and some of that leverage is starting to unwind in the face of higher borrowing rates.

If we get to the point of it really unwinding, then you will see a major crash. But that is a big if. As the BOE showed today, central banks always blink. They know how to print money, they are too cowardly to take the money back. Markets are still expecting the Federal Reserve to blink at some point when the panic levels get beyond where they are.

This is not a prediction, because if anything I would be betting that the Fed will blink and try to prop up the debt mess and accept high inflation to try to inflate away some of the debt problem they are responsible for. It's more of a "hidden" tax and they can pretend like they haven't done anything wrong.

They have done it multiple times since QE began and they tried to extricate themselves. They ended up doing a complete 180 several times, including Jay Powell's Fed in 2019 when the short-term lending markets were seizing up. But keep in mind that between 1928 and 1929, yields on 6 month commercial paper rose from 4 percent to 6.25 percent. Investment grade corporate bond rates rose from 4.5 percent to 4.8 percent. That is nothing to compared to the move in rates we have seen in the last year. The Fed was trying to tighten back then because they were afraid of the rampant speculation, except as it turned out they were tightening into a recession (that the country entered in 1929).

Compare that to now. ... and they have raised way more quickly, to a much greater degree. ... at a time that it looks like we are enterting a recession. So this could be a very treacherous time. Where several decades of stupidity comes home to roost.

That said, option put-call ratios are screaming to buy equities right now, and it has been 6 days of brutal selling in a row, which has happened only something like 20 times in the last 75 years. So I wouldn't be surprised if it tries to sucker people back in again. Bear market rallies are designed to take the most money from the highest number of people. So maybe we will get another bounce before the next leg down (unless they pivot, in which case the Fed put will be back and it will reinflate the bubble and throw this all out the window for the time being. The difficulty is that they have already lost all credibility, and after Powell's Jackson Hole speech and the last Fed meeting, they are going to have trouble turning tail that quickly.).