The Economy

The Fed lost control of the runaway bubble it had blown in late 2019 into 2020. The overnight repo market (intrabank lending) was imploding and short-term interest rates for bank repurchase agreements spiked. The banking system was starting to seize up. People have such short memories, even though at the time, most people were clueless. It had zero to do with Donald Trump, per se, everything to do with things that had gone on for a very long time post the financial crisis, where they hijacked the debt markets injected trillions of dollars of liquidity into capital markets and created an epic amount of malinvestment and. ... a bubble that was starting to pop.

Covid saved them, in a way (but to all of our longer term detriment). A bust was beginning (way overvalued stocks were buckling, for example), but Covid gave them a pass to do more of what had caused those problems n the first place -- they did it on steroids with Covid as the excuse, for example, buying corporate debt for the first time with money they created out of thin air, and junk debt to keep failure companies from going bankrupt (survival of the unfittest), not just mortgage-backed securities and treasuries the way they had with all of the quantitative easing that had injected trillions of dollars into the stock market and had created the bubble in the first place. That has provided more air back into the bubble and took the stock market even higher. It also, in turn, allowed politicians to keep spending like drunken sailors (why they do this) with trillions of dollars more of borrowed money, which Joe Biden and an idiot Congress has fully availed itself of, unleashing a consumer inflation problem because of how much monetary stimulus that entailed so quickly. It brings us to where we are today. Along the way, the stress shifted to the banking system itself, because they raised short-term interest rates really quickly from zero to try to deal with the "inflation" they spurred, and that destroyed anyone who had fallen into the complacency they encouraged and bought long dated treasuries for a little extra yield, to try to make something on what the Fed was robbing them of. But when banks started to fail, they stepped in and started taking on their debts, too, taking those treasuries at par and creating money out of thin air to reward their failure -- more liqudity injected into risk assets.

These stock market moves -- grinding up to the moon and then falling quickly -- have had nothing to do with some magic wand people think the president has. By the time you are getting a panic in the stock market, the conditions that created that bust were from things that happened over years (often prior to whoever is in office when the bust occurs). Jay Powell has 1,000 times more impact over these things than Joe Biden does.

 

U.S. households are piling on record credit card debt, says Fed report

 

It's really not that simple. What were those "local conditions"?

There has been so much borrowing in yen to support the carry trade, and even with that move two nights ago, it hadn't even come close to unwinding itl.

The reason it is a "good day to pick up some deals" would have been that with a move that extreme which was going to cause global financial instability, everyone immediately assume that the Japanese monetary mandarins would step in and support the yen and make money flow back into the casino. If you invest that way, you are gambling. That is a trader's mentality, and even if it works, you are putting your financial fortunes in the hands of whether the BOJ is going to destroy the yen to prop up markets. It's fine if that is a calculation anyone makes -- it's been a safe bet for decades now -- but it scares me that people don't understand that, and if NPR is giving people nonsense the way you said.

Which, btw, was what happened. Yesterday, it was the perfunctory "emergency meeting" of Japanese financial and central bank officials and the hint, hint that they will intervene (and that central bank intervenes in the off shore markets more than anyone, including China, but when they do it, Janet Yellen can somehow never bring herself to use the word "manipulation," cause, you know, it's different.) This morning, it was BoJ Deputy Governor Uchida overtly coming out and talking dovishly. ... how he believes the central bank needs to maintain monetary easing for the time being. Complete reversal.

And voila, risk assets begin to levitate back up. The yen is back to 147 to the dollar.

Maybe that was a good bet. ... market participants have been trained by central banks to know this is the game for the last 15 to 20 years. But it is now working to the extreme detriment of anyone not gambling on overvalued AI stocks. Like if you shop in a grocery store to feed your family and your wages have stagnated.

The response was very Japanese / BOJ. What they are doing conflicts with the health of the domestic Japanese economy which is in trouble, and it doesn't change the fact that there is an extreme level of leverage around the world because of the combined actions of them and other central bank that is a problem as long as they are remaining loose and the U.S. Central Bank is about to start easing again (in a panic because of that weak jobs report last week, if they listened to the hysteria on financial TV).

All this does is encourage more of the yen carry trade and leveraged bets on any dogshit a trader can get their hands on. It takes the extreme risk that introduces and puts the global financial system at risk instead of the trader.

And their response is like treating a heroin addict with more heroin to keep everyone calm, rather than trying to get him off the drugs. The painful, but right, response should have been to use it as an opportunity to unwind the remaining leverage (that they are responsible for in the first place) in as orderly fashion as possible, even if it meant some pain -- maybe a lot of pain. It should be a wake up call about doing what caused the pain in the first place and stopping already.

But this is not what they do. They set the conditions for malinvestment, which gets carried away and brings a lot of dangerous leverage to the global financial system. While it goes on, people suffer under low growth and high prices for it. And eventually their interventions to keep the artificiality propping it all up are going to fail anyhow, and we will get a credit crisis that gets the "How did that happen?" response. There are no free lunches. And when you gorge yourself and the bill shows up, it shocks you.

 

What people don't understand. ... the Japanese Central bank -- more than the Fed which went bonkers with quantitative easing -- has completely destroyed the Japanese securities markets. They own almost the entire JGB (Japanese government bond) market and they outright bought a huge percentage of the Japanese stock market. ... all with yen they created out of thin air to drive up asset prices artificially and pretend they were creating "growth." They have been running up debt at extreme levels, could never have found buyers for their debt, so they just printed money to have the central bank buy the debt and load up its balance sheet with things they way overpaid for because they themselves were driving up the prices artificially. They are the world's worst hedge fund, except unlike other hedge funds they are given the power to just create money to keep buying high.

Their rates have been negative in real terms for decades. The idea that they can ever get out of that now without VERY severe pain is absurd. But they have an "inflation" problem domestically, and were feeling the domestic pressure, so they actually tried to just raise their short-term rate 25 basis points (which is nothing) and it created the biggest drop in Japanese stocks since 1987 and would have brought down the rest of the world because gamblers elsewhere have been using their currency to borrow cheaply and drive up asset values in the U.S. Over a 25 basis point hike that still means negative real rates in Japan! It should frighten people, but there is no understanding of the mess they have made.

The BOJ's balance sheet -- all of the japanese bonds and equities they bought with the money they created to drestory the yen -- is at $20 trillion, or 500 percent of Japanese GDP. Their balance sheet itself is one giant carry trade that requires they print more and more yen and use them to prop up financial markets. There is no way out of that. It's just how long they can keep the scheme going before they lose control of it.

 

I don't have debt, thankfully, but I have 5 credit cards in my pocket. I never got into the miles or thank you points thing. I just focus on straight cash back. Each card has different terms, so I knowthat if I use one at the grocery store it's 3 percent cash back, one at the gas station it's 3 percent back, one at the drug store it's 3 percent, another for online purchases for 3 percent back, and one card that gives a straight 2 percent cash back for anything that isn't covered by the other cards. I run insurance bills, electric bills, internet and TV bills, etc. through cards, to the point where I rarely use cash for anything. I'm getting a 2 to 3 percent return for doing nothing on thousands of dollars every month. I might as well avail myself of it.