What If Stocks, Bonds and Housing All Go Down Together?

Tyler Durden's picture

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

About the claim that central banks will never let asset bubbles pop ever again--their track record of permanently inflating asset bubbles leaves much to be desired.

 
The problem with trying to solve all our structural problems by injecting "free money" liquidity into financial Elites is that all the money sloshing around seeks a high-yield home, and in doing so it inflates bubbles that inevitably pop with devastating consequences.
 
As noted yesterday, the Grand Narrative of the U.S. economy is a global empire that has substituted financialization for sustainable economic expansion. In shorthand, those people with access to near-zero-cost central bank-issued credit can take advantage of the many asset bubbles financialization inflates.
 
Those people who do not have capital or access to credit become poorer. That is the harsh reality of neofeudal, neocolonial financialization. Neofeudalism and the Neocolonial-Financialization Model (May 24, 2012).
 
Injecting liquidity by creating credit and central bank cash out of thin air is not a helicopter drop of money into the economy--it is a flood of money delivered to the banks and financial elites. The elites at the top of the neofeudal financialization machine already have immense wealth, and so they have no purpose for all the credit gifted to them by the central banks except to speculate with it, chasing yields, carry trades and nascent bubbles (get in early and dump near the top).
Life is good for the kleptocratic financial Aristocracy: for debt-serfs, not so good.
 
 
No wonder the art market and super-luxury auto sales have both exploded higher. Thanks to the central banks' liquidity largesse, the supremely wealthy literally have so much money and credit they don't know what to do with it all.
 
If you want to borrow money to attend college, the government-controlled interest rate is 9%. If you want to speculate in the yen carry trade or buy 10,000 houses, the rate is near-zero or at worst, the rate of inflation (around 2% to 3%). If you want to borrow money for anything other than a socialized mortgage to buy a single-family home, tough luck, you don't qualify. But if you want to speculate with $10 billion--here's the cash, please please please take it off our soft central-banker hands.
 
If your speculations end badly, then no problem, we transfer the toxic trash heap of debt and phantom assets onto the balance sheet of the central bank or onto the public (government) ledger.
 
Given this reality, it was inevitable that the stock, bond and housing markets would all be inflated into bubbles by this monumental flood of free money. Please consider these three charts:
 

 
 
Verdict: bubble.
 
 
Verdict: bubble.
 
 
 
Verdict: bubble popping.
 
It is widely accepted as self-evident that all these bubbles will not pop because the central banks won't let them pop. That's nice, but if this were the case, then why did stocks crater in 2000-2001 and 2008-2009, and why did the housing bubble implode in 2008-2011? Did they change their minds for some reason?
 
No; they assured us right up to the moment of implosion that everything was fine, there was no bubble, etc. The only logical conclusion is that bubbles pop even though central banks resist the popping with all their might.
 
In the past, central banks were pleased to inflate one bubble at a time, enabling money both smart and dumb to flee one smoking ruin and get busy inflating the next bubble-ready asset class.
 
But now, thanks to essentially unlimited liquidity and credit, the central banks have inflated three bubbles at the same time: stocks, bonds and housing. That raises an interesting question: what if all these bubbles pop in unison? Will the central banks be able to place a bid under all three markets simultaneously? If so, where will all that freed-up cash go next?
 
One possibility is gold, another is commodities such as grain and oil. The latter is especially interesting, because central banks and governments hate energy speculators with special intensity because the "Brent vigilantes" have the power to boost inflation where it matters, i.e. energy.
 
Once energy takes off in a speculative bubble, the rising cost of energy sucker-punches the already-anemic global recovery, and the responsibility eventually lands on the laps of the central banks who created all the bubbles. Their quantitative easing policies discredited, the central banks will have to restrain their liquidity hand-outs, and that will undermine what's left of the various speculative bubbles they've blown.
 
Those who argue bubbles won't be allowed to pop ever again should look at history from 1999 to the present again.

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Headbanger's picture

Then put your head between your legs and kiss..... you know the rest.

insanelysane's picture

I don't know about the rest of you but I feel wealthier just knowing that Ben and the Banksta buddies are getting wealthier.

The Thunder Child's picture
What If Stocks, Bonds and Housing All Go Down Together?

Then it would be the currency that connects them going down and not the individual items.

CrashisOptimistic's picture

Not particularly.  That's a narrative pushed by the gold nazis.

The concept of medium of exchange is definitely in play, but in a civilization based on transportation via oil, pretty much only oil matters.

All those parameters of equities and bonds and houses will have to price in BTUs.  Only BTUs have value.

MeelionDollerBogus's picture

don't forget LNG vehicles. They exist. They work well.

Also don't forget we need to trade non-energy things for energy since energy is merely the leverage upon which the rest of the economy operates. Without energy we obvious don't go very far & don't make many things but we do things, make things, other than energy storage & acquisition. All these things have needed value.

Panafrican Funktron Robot's picture

"What If Stocks, Bonds and Housing All Go Down Together?"

Given that the Fed has pumped all three, it would make sense that they would go down together based on Fed actions.  That's the problem with not allowing any major asset class to be an effective short; there's subsequently no effective price floor.

daveO's picture

Exactly. The FED is buying 70% of Treasuries, on their way to 100%. Their Banking buddies are buying stocks. Their Hedgie stoolies are now buying housing. This ends with a few rich 'controllers' and a nation full of peasants. We have witnessed the death of Free Markets under Ben Shalom (or is it Lenin) Bernanke. 

j0nx's picture

I'm doing my part for those who are doing God's work. It's a win win for everyone involved.

caconhma's picture

What If Stocks, Bonds and Housing All Go Down Together? Well, this is exactly our inevitable bright tomorrow with military trying to control our towns and cities..

So, be ready!

 

TheEdelman's picture

I dont think anyone is arguing they "wont be allowed" to pop.  Its more like they are arguing they "cant be allowed" to pop.  

Jekyll_n_Hyde_Island's picture

The answer is clear, and the question is relevant.  https://en.wikipedia.org/wiki/Dialectical_materialism

 

  Tapering and quantitative easement, sequestration and the such are all complex labellings for how the government 'fixes' the market.  Double entendre there.

 

  There will be no popping this time around.  Sorry fellow ZH'ers.  It will be a controlled dialectical materialism inspired wind down.

viahj's picture

even "the best laid plans of mice and men"...

-Robert Burns

thisandthat's picture

Plan: the guaranteed way things won't happen.

-me

daveO's picture

Tea Party in Congress is the only hope, short of a bloody revolution. They did manage to trim the deficit, this year. That's the same as capping Bernanke's theft, since money and debt are the same. 

maskone909's picture

no offense but the title of this article is called

What If Stocks, Bonds and Housing All Go Down Together?

this article goes on to describe what the authors definition is of the current financial bubbles but doesnt even attempt to back up the question poised in the title of the paper.

this is more of an attempt to plug gold.  which is fine by me i own the shit.  but please, next time, title the article to meet the description of its contents more appropriately. 

spinone's picture

what if stocks bonds and housing go down together?  I think thats called deflation.

Go Tribe's picture

If they only go down in pricing in dollars, then there may be inflation of other assets.

fonzannoon's picture

What if they don't? Non pomo day and we are about to go green.

Dr. Engali's picture

They have to put a lot of lipstick on this pig going into a long weekend. Japan will have to trade with the U.S market closed Monday. It should be interesting.

fonzannoon's picture

Doc something tells me the fed has a call into every major institution worldwide already reminding them that anything other than a well bid market is essentially the same thing as global market suicide. I have a feeling you and I and a lot of other people should just enjoy the weekend because more of the same bullshit is on the way.

 

Dr. Engali's picture

Yeah I agree they will be on the horn all weekend long, and if they don't cooperate then they will be the first experimental take down under Dodd-Frank.

RSloane's picture

Hi Fonz and Doc. The lipstick has been liberally applied to the pig and we are green. A lot of phone calls are going to be made between now and Tuesday morning, I agree. No doubt they will be deciding what is 'best for us'.

Dr. Engali's picture

Hi Sloan. It should be an interesting weekend. I'm pretty sure I know what they would like to do with us, but there is still a little meat on the carcass they need to pick off before they are finished.

fonzannoon's picture

Hi RSloane,

Did taking that long break from ZH change your perspective about anything? This site is fantastic but it creates the constant sense that something is juuust about to break. Then it does not. Having taken that break, do you feel more strongly one way or the other that something may or may not happen soon?

americanspirit's picture

Hi Fonz - love your posts. And you're right, there is an underlying current on ZH that things are just about to break. But it's worth keeping in mind that 5-10 years on a historical line is only an instant, although day to day it seems like a long time. So, on a historical timeline, things are indeed just about to break.

Panafrican Funktron Robot's picture

$10 billion in POMO left to work through on a short week, including a $5 billion day on Friday.  2% on the 10 year seems to be a point of major defense.  Based on the action in REM since the start of May, and game theory-ing this out a bit, I think MBS is going to be the casualty (relatively speaking).  There just isn't a lot of inventory left for the Fed to buy, and the better conduit for flow is USTs anyways.  I think a June or Sept. tightening is actually pretty likely, but I see it as follows:

1.  Drop the MBS side either entirely, or very limited ($5-$10 bln, excuse "housing appears to be recovering strongly"); there is some major froth developing in residential RE and they may have an interest in capping this off a bit/getting some lower bid prices for their continued real asset grabs.

2.  Increase the UST side (excuse "there appears to be softness in the economy"/"continued concerns about the slow rate of GDP growth"/"significantly missing inflation targets", pick your poison really, but they actually HAVE to up the pace of UST buying to maintain general solvency).

viahj's picture

exactly, when backed fully into the corner, MBS won't mean shit. 

fonzannoon's picture

What contraction in credit creation? QE Tapering? It's bullshit until proven otherwise. It's a mindfuck to make you think that they could ever do it. That the possibility exists. It does not exist. Can they slowdown for a month or so? Maybe. The market seems to finally have caught on that they can't stop.

realtick's picture

you are confusing public credit creation with private

QE is an attempt to offset private credit contraction with public credit expansion

the problem is $2.5 trillion in QE is a drop in the bucket compared to the over $56 trillion in private debt out there

fonzannoon's picture

I thought you were talking about this QE taper bullshit. You mean public deleveraging....

I hear you. when does the rubber hit the road?

realtick's picture

i mean private, non-federal credit

the rubber hits the road when the orange line in the second chart hits the top of the wedge and reverses lower

Cursive's picture

While I think this is what is going to happen, I find it hard to imagine how people will adjust after this big Fed-induced bubble popping.

IridiumRebel's picture

Everything will go down once the central banks stop going down on the market. Ben needs some mouthwash and a cig.

Dr. Richard Head's picture

But this time is different and all it takes is fifteen minutes now.  *rolls over in bed and hits the snooze button*

the Absurd's picture

the Grand Narrative of the U.S. economy is a global empire that has substituted financialization for sustainable economic expansion

There's no such thing as "sustainable economic expansion" in a world that is not infinite.  Nothing grows forever.

Oligarch's picture

You could show the prices of JGB instead of the yields. The yields are just beginning to go up.

Major Major Major's picture

What If Stocks, Bonds and Housing All Go Down Together?

 

It would be good to have some cash.

Zen Bernanke's picture

Further to this point, why after so many failed attempts at price stability using monetary policy do people still place faith in the federal reserve bank.  it's obvious they do not know what they're doing, in fact, it could be easily argued what they've done has consistantly made things even worse, every single time. 

Philo Beddo's picture

it's obvious they do not know what they're doing

 

Zen...are you sure?  Depending on your perspective, one can make a case they know exactly what they are doing.

 

consistantly made things even worse, every single time.

 

Again, this depends on your perspective.   My thought is these bubbles are intentionally created with the inevitable intention of creating an insolvent Fed, ECB, BOJ, etc.  all of which will get the finger pointed directly at them for all of these bubbles, theft, drug cartels, war funding, etc....Then what could you possibly do with all of them now that they are insolvent and unethical???  Oh, I know...you create one global central bank since all those other "regional" banks don't know how to really handle themselves...

Create a problem, provide the solution.   On a large scale.

IamtheREALmario's picture

Uhu ... and we leap into the arms of the global banking empire that has promised to save us.

http://www.youtube.com/watch?v=V1FFVWEQnSM

daveO's picture

It's a centralization of economic power to New York City. Artificially low interest rates transfer ownership to the few 'connected' Bankers and Hedgies in NYC. Just think of it as 'Moscow on the Hudson', and it all makes sense. Pay off your debt and move your money into real assets, not FED notes or banks. That's your only defense. 

NipponMarketBlog's picture

 

 

So what you're arguing here is that some form of central bank accountability will eventually materialise?

I'll believe it when I see it....

 

http://nipponmarketblog.wordpress.com/

Tinky's picture

If they all go down at once, I will top off a fine Chinese meal with colLapsang souchong tea.

Panafrican Funktron Robot's picture

Love that stuff.  Feels like I'm drinking an excellent cigar.

Dr. Engali's picture

Bubbles only exsist in areas where everybody has their money on the same side of the boat, and that is in the "safety" (chuckle) of the bond market

Dr. Richard Head's picture

I agree.  The bond market is as safe as a conterfit Chinese-made condom.

On a related note, someone should have given Bernanke's dad a vasectomy years ago because it's seems like we have been paying banker child-support for years now.