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"We Are Down To The Final Myth That Animates The Blow-Off Phase Of Bubble Markets"

Tyler Durden's picture




 

Submitted by John Rubino via Dollar Collapse blog,

Of all the problems with fiat currency, the most basic is that it empowers the dark side of human nature. We’re potentially good but infinitely corruptible, and giving an unlimited monetary printing press to a government or group of banks is guaranteed to produce a dystopia of ever-greater debt and more centralized control, until the only remaining choice is between deflationary collapse or runaway inflation. The people in charge at that point are in a box with no painless exit.

Prudent Bear’s Doug Noland describes the shape of today’s box in his latest Credit Bubble Bulletin:

Right here we can identify a key systemic weak link: Market pricing and bullish perceptions have diverged profoundly both from underlying risk (i.e. Credit, liquidity, market pricing, policymaking, etc.) and diminishing Real Economy prospects. And now, with a full-fledged securities market mania inflating the Financial Sphere, it has become impossible for central banks to narrow the gap between the financial Bubbles and (disinflationary) real economies. More stimulus measures only feed the Bubble and prolong parabolic (“Terminal Phase”) increases in systemic risk. In short, central bankers these days are trapped in policies that primarily inflate risk. The old reflation game no longer works.

In other words, most real economies (jobs, production of physical goods, government budgets) around the world are back in (or have never left) recession, for which the traditional response is monetary and fiscal stimulus — that is, lower interest rates and bigger government deficits. Meanwhile, the financial markets are roaring, which normally calls for tighter money and reduced deficits to keep the bubbles from becoming destabilizing.

Both problems are emerging simultaneously and the traditional response to one will make the other much, much worse. Some more specifics from Noland:

Let’s begin with a brief update on the worsening travails at the Periphery. The Russian ruble sank another 6.5% this week, increasing y-t-d losses to 37.9%. Russian (ruble) 10-year yields jumped another 146 bps this week to 12.07%…

 

Increasingly, emerging market contagion is enveloping Latin America. The Mexican peso was hit for 1.6% Friday, boosting this EM darling’s loss for the week to a notable 3.0%. This week saw the Colombian peso hit for 4.3%, the Peruvian new sol 1.1%, the Brazilian real 0.9% and the Chilean peso 0.6%. Venezuela CDS (Credit default swaps) surged 425 bps to a record 2,717 bps. Brazilian stocks were slammed for 5% this week and Mexican equities fell 2.2%…

 

Declining 1.3%, the Goldman Sachs Commodities Index fell to the low since June 2010. Crude traded to a new five-year low. Sugar fell to a five-year low, with coffee, hogs and cattle prices all hit this week.

 

And a quick look at the bubbling Core: The Dow 18,000 party hats were ready, although they will have to wait until next week. The S&P500 traded Friday to another all-time record. Semiconductor (SOX) and Biotech (BTK) year-to-date gains increased to 31.4% and 48.1%, respectively. The week also saw $4.0 Trillion of year-to-date global corporate debt issuance, an all-time record. Italian (1.98%), Spanish (1.83%) and Portuguese (2.75%) yields traded to all-time record lows again this week.

 

What differentiates today’s reflation from those that “worked” in the past? The current reflation has overwhelmingly manifested within the Financial Sphere. And that’s the essence of why I believe the Bubble is now running on borrowed time. It’s a critical issue that goes completely unrecognized these days: In the end, Financial Sphere inflations are unsustainable…. The entire world believes central bankers will support stock, bond and asset prices. Everyone believes central bankers will ensure liquid markets. Most believe global policymakers will forestall financial and economic crisis for years to come. And it is these beliefs that account for record securities prices in the face of a disconcerting world.

We are, in short, down to the final myth that animates the blow-off phase of most bubbles: that of the omnipotent government/central bank which likes the status quo and has the power to maintain it. They don’t have that power, of course, or else financial bubbles would never burst and we’d still be living in the golden age of junk bonds, dot-coms and subprime mortgages.

What’s different about this iteration is that instead of being confined to a single asset class, the bubble is in financial assets generally, including fiat currencies, government debt, corporate bonds and equities, along with all their related derivatives. Where previous bubbles accounted for hundreds of billions or at most one or two trillion dollars, this one is denominated in hundreds of trillions spread from emerging market bonds to money center bank interest rate derivatives. The number of moving parts and the magnitude of the hidden risks guarantee that when it comes, the dissolution of today’s myth structure will be like nothing any of us have ever seen.

 

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Mon, 12/08/2014 - 10:09 | 5528243 Dr. Engali
Dr. Engali's picture

When this thing finally vaporizes it's going to be epic. It would be funny to see happen if it weren't for the fact that so many lives are going to be destroyed in the process. 

Mon, 12/08/2014 - 10:17 | 5528275 Haus-Targaryen
Haus-Targaryen's picture

I have a list of people on various forums I'm going to send a 

"trolololol I told you.  Maybe I can get your repo'ed Porsche on the cheap?" 

Mon, 12/08/2014 - 10:28 | 5528313 sleigher
sleigher's picture

Everyone in my family thinks I am nuts and laughs.  As much as it will suck, I will still have to share my preps with them.  Assholes...

Mon, 12/08/2014 - 10:42 | 5528383 Haus-Targaryen
Haus-Targaryen's picture

Yeah.  I am in the same boat.  

Everything thinks I am certifably batshit nuts.  

NVM me showing them chart after chart after chart.  My mom who is a librarian is always like

"Oh what is this Zerohedge its not credited."  

"Then, oh this is the NYT -- this is reputible.  It says otherwise."  :facepalm:

 

Needless to say I am going to have to AG/AU->RE swaps when this whole shitstorm explodes, and give my folks free places to live.  

Mon, 12/08/2014 - 11:05 | 5528506 Rubbish
Rubbish's picture

Stack in 2000, you were crazy. Stack today and you're crazy. Must be crazy.

Mon, 12/08/2014 - 12:08 | 5528787 Newsboy
Newsboy's picture

I'm long winter veggies right now.

Mon, 12/08/2014 - 23:29 | 5531188 BigJim
BigJim's picture

I dunno. After Nixon took the US off gold everyone thought  the dollar would evaporate. But year on year TPTB kept pulling rabbits out of hats and here we are.

It certainly looks like collapse is imminent, but I've been thinking that for the last 7 years. And been dead wrong - and poorer for it.

Maybe the West can tick over at 50% capacity, consuming very little oil and scraping along while 'our' central banks keep the bubbles from bursting. Shit, there could be years of continuing transfers of wealth to the 0.01% ahead of us. Think how much the average American could lose before he had the same standard of living as his grandfather, and that generation weren't rebelling. Hell, they were frothing at the mouth to go and get their limbs blown off fighting our oligarchs' wars for them.

So - just as a thought experiment - tell me why we couldn't have another 20 years of this bullshit, with the central banks just buying more and more assets, forgiving their sovereigns' debts, people just making ends meet with the help of gummint giving them back a small percentage of what they picked from their pockets in the first place... the USSR lasted DECADES, and started off with a lot less capital to fritter away.

Who wants to bet me a silver dollar we'll all still be here in ten years, gold bouncing around $1200, beer at $20 a bottle, Hilaryphones free with every EBT card.

The CRIMEX are days from default!

The gold bars the Chinese are receiving are dusty!

They have serial numbers dating back to Amenhotep!

etc, etc. Shit, Eric King's grandson will have taken over KWN and still be telling us what 'street smart' Rick Rule Jr has to say regarding mining stocks. 'I think we're close to a bottom, here, Eric Jr...'

Mon, 12/08/2014 - 11:13 | 5528543 outamyeffinway
outamyeffinway's picture

Many of us I think are in that boat.

Mon, 12/08/2014 - 12:04 | 5528777 Panem et Circus
Panem et Circus's picture

Agreed. Truth be told, that's the whole reason for most peoples preps. If you can see this shit coming, you're a survivor and you'll end up better than most no matter what. From most of the folks I have talked to, it's their loved ones that cant see past the next two minutes that drives their preps.

Mon, 12/08/2014 - 11:59 | 5528754 stewie
stewie's picture

This is a good thing, as otherwise we couldn't buy phyzz at thse low prices.  The shelves would just be empty...

Mon, 12/08/2014 - 12:53 | 5529005 City_Of_Champyinz
City_Of_Champyinz's picture

I have been trying to get my 80 year old Dad to sell at least some of his stocks to no avail.  this despite the fact that he has seen numerous corrections over his lifetime.  Why the hell is he chasing another 1% return at this point?? He doesn't fucking need it, arrrrgh it is frustrating as hell...

Mon, 12/08/2014 - 20:14 | 5530579 honestann
honestann's picture

SCREW THEM.  DO NOT SHARE.  All you do is encourage further insanity and endanger yourself.  All you do is convince them they were right, that being completely blind and insane doesn't have negative consequences, because some alert, awake, honest, productive SUCKER will save their butts.

LET THEM DIE.  They BEGGED for it... for their entire lives.

SAVE YOURSELF.

On the flip side, anyone you encounter who has been sane and prudent, but got into a jam somehow... feel free to help them.  In other words, help save those who CAN be saved... to the extent you can do so without endangering yourself.

Mon, 12/08/2014 - 14:01 | 5529276 hangemhigh77
hangemhigh77's picture

Good point but I think things will be so bad that there will be no repos or foreclosures as EVERYONE will be underwater and not paying their mortgage and printing worthless money won't save the banks anyway. They'll just fly off to barbados to their fortified redoubt mansion.  Who's gonna repo what for who?  

Mon, 12/08/2014 - 15:10 | 5529538 Analog Kid
Analog Kid's picture

I'm practicing my 'neener, neener, neener', myself for when the time comes. If you don't mind, I'll work in your 'trololololololol' for added effect.

Mon, 12/08/2014 - 10:09 | 5528244 SWRichmond
SWRichmond's picture

We've been in a box with no painless exits since at least 1971.

Mon, 12/08/2014 - 10:12 | 5528257 Dr. Engali
Dr. Engali's picture

We've been in a box with no painless exits since at least 1913.

 

There fixed that for you.

Mon, 12/08/2014 - 11:57 | 5528753 LawsofPhysics
LawsofPhysics's picture

At least up until 1971, you could still turn the "dollar" in for physical silver.  At least that was a viable exit.

Mon, 12/08/2014 - 15:25 | 5529587 N2OJoe
N2OJoe's picture

not being alive at that time, I was under the impression that only Central Banks could actually convert dollars into phyz - not real people.

Mon, 12/08/2014 - 10:11 | 5528247 Voltaire
Voltaire's picture

Thanks, I'll take that as a buy signal. 

Mon, 12/08/2014 - 10:44 | 5528391 weburke
weburke's picture

a careful buy signal. some stuff will tank. alibaba comes to mind. THey hired thousands of people to just buy and sell every day to make things look ........

Mon, 12/08/2014 - 10:16 | 5528252 Mike in GA
Mike in GA's picture

"Dissolution" is a most polite term Rubino uses to describe that which will be anything but.  Wonder if the oil price collapse will turn out to be the catalyst for "dissolution"?

Mon, 12/08/2014 - 10:14 | 5528261 SheepDog-One
SheepDog-One's picture

What we've been witnessing is the building of the 1 world central control system, even the best and brightest really don't see it.

Mon, 12/08/2014 - 10:16 | 5528265 AdvancingTime
AdvancingTime's picture

Many of us the are far from optimistic. While the future is hard to predict, as in politics the people who watch and study the economy are becoming more polarized as to the direction of the economy. Many of us are slipping into one of the two distinct camps, one that sees this as an economy slowly on the mend with the worse behind us and the other who clearly takes the position that things are not working.

Not only have things gotten worse but the distorted economy and manipulated markets only mask the fact that a day of reckoning is fast approaching and we are facing a bigger and meaner economic set back then any the world has witnessed in modern times. More on this subject in the article below.

http://brucewilds.blogspot.com/2013/08/after-big-crash.html

Mon, 12/08/2014 - 10:16 | 5528269 Haus-Targaryen
Haus-Targaryen's picture

#dontcarehaveagandau

Mon, 12/08/2014 - 10:19 | 5528271 buzzsaw99
buzzsaw99's picture

that of the omnipotent government/central bank which likes the status quo and has the power to maintain it. They don’t have that power, of course, or else financial bubbles would never burst...

Incorrect. Booms and busts, choosing winners and losers, is exactly how they maintain the status quo. Does the author really believe that wealth and power isn't concentrated by the central bank pump and dumps with attendant bailouts for cronies? Heads they win, tails you lose bitchez.

Mon, 12/08/2014 - 10:18 | 5528274 Caviar Emptor
Caviar Emptor's picture

I predicted this deflation/inflation paradox an dichotomy in 2010 here.

As the risk and potential of Both increases, the economy will reach asymptotically toward zero.

Mon, 12/08/2014 - 10:21 | 5528279 NoDebt
NoDebt's picture

"or else financial bubbles would never burst and we’d still be living in the golden age of junk bonds, dot-coms and subprime mortgages."

Did that age end?  Seems like we've done a damned fine job resurrecting it the last few years if we ever truly left it in the first place.

Mon, 12/08/2014 - 10:22 | 5528282 NoWayJose
NoWayJose's picture

Great point by the author of the difference in policy needed to fight a weak economy versus fighting an asset bubble. We are already in this now with the intended desire to hold rates down and ignore the asset bubbles. Given the amount of debt built up recently, rates are going to stay low - they cannot raise them - so the decision has been made to 'talk down' or 'ignore' the bubbles, let them grow, and hope they don't pop until the next Fed governor's term.

Mon, 12/08/2014 - 10:27 | 5528310 esum
esum's picture

taking all my money out of banks.... i lost more money by not being n the market in the last few years and precious metals ... if shtf are you really going to go to someone with gold and barter for food... more likely someone will approach you with a gun and take your gold.. look at ferguson... that is the american future.. shit for brains in the white hosue has enough time to start a racial war in the usasa and ww3... if the repubs dont impeach..

Mon, 12/08/2014 - 10:58 | 5528467 NoWayJose
NoWayJose's picture

There are two scenarios you must prepare for - one is a true SHTF scenario where you or your community may have to fight to survive and where food and weapons attain great value. If you do not have either, then you better have PMs or a 'hot body' to trade. Scenario 2 would either be post-SHTF recovery or a more peaceful dollar collapse where all assets decline in value -- and PMs become the base for a new currency with PMs helping you retain some degree of value. Think about the South at the end of the Civil War. Would you rather own 10 gold coins or a suitcase full of Confederate money?

Mon, 12/08/2014 - 11:02 | 5528492 Government need...
Government needs you to pay taxes's picture

This is spot on.  Junior-baller bankers sitting on 100 oz of gold in their 'luxury' high-rise apartment are going to find that the cannibals are most interested in their bodies.  The shiny stuff can be made into trinkets after the meal. . .

Mon, 12/08/2014 - 10:57 | 5528461 orangegeek
orangegeek's picture

RUT is green, RUT volatility is up 4% - FULL RETARD CONTINUES!!!!!!!!!!!!  FUCK YA!!!!!!!!!!!!!!!!!!!!

Mon, 12/08/2014 - 11:24 | 5528595 Son of Captain Nemo
Son of Captain Nemo's picture

WWIII - with a side order of mutually assured destruction!

When the pouting pieces of shit who have only themselves to blame for their reckless demise blame it on someone else when all is hopelessly lost... Then they take you to war!

Mon, 12/08/2014 - 11:42 | 5528691 Jackson B. Nimble
Jackson B. Nimble's picture

I keep hearing that WW-3 will lift us out of this economic chaos.  Are you people crazy?  The next war will be a nuclear war.  Do you have a good fallout shelter? Have you bought your Potassium Iodide?  Do you have any idea of how bad the next war will be for all of us?  Einstein got it right when he said that WW-4 would be fought with rocks. 

Mon, 12/08/2014 - 12:22 | 5528851 Son of Captain Nemo
Son of Captain Nemo's picture

Einstein got it right when he said that WW-4 would be fought with rocks.

As we've witnessed countless times now for more than 16 years leading up to and following 9/11. When the U.S. military drills it always leads to more kills...

Mon, 12/08/2014 - 11:25 | 5528599 numapepi
numapepi's picture

I suspect they will do their level best to hold it together until January 2017. After that all bets are off. But then again, the power of a central bank is still limited by economic laws...

Mon, 12/08/2014 - 11:38 | 5528675 shovelhead
shovelhead's picture

C'mon everyone.

Let's face it. If anyone of us had the printing control of money to hand out to ourselves and our buddies, we'd run that bitch til the wheels fell off.

Sad, but true. It's easy to be a saint if you're never exposed to temptation.

You might even begin to think you're doing "God's work."

Everyone is a whore for a buck. Look at your job. It's only a matter of degree.

Mon, 12/08/2014 - 12:12 | 5528807 Clowns on Acid
Clowns on Acid's picture

Yeh I guess thaqt is why there is a Constitution. Was supposed to offset that type of behavior, long ago. I know ... only white goys signed the Constitution. 

Mon, 12/08/2014 - 11:48 | 5528711 lasvegaspersona
lasvegaspersona's picture

Rubino says there is a deflationary choice but show me a single example of that choice in a fiat currency regime...they ain't one...not a single one.

Why would a government allow a currency to become more valuable. It would print more and get more.

Mon, 12/08/2014 - 12:03 | 5528775 we built this city
we built this city's picture

The only ones pessimistic about the financial markets are Zero Hedge readers , Tim Knight , the crazy guy from Phoenix capital and a few more.(or less)

Every broker i talk to is quite sure he will have time to escape this madness on time. The trend is your freind ...

 

The markets have skyrocketed more than 200%- mostly indexes affected by insividual stocks

The average hedge fund manager is probably  0-1 % this year also due to the tanking oil 

offcourse there will be a meltdown.... but it will eliminate all bears(like me) first

iv been out of the market only since 1600 in S^P, and so far lost 8% on my total portfollio- a huge  dive  for me.

My personal problem (mistake)was too much leverage relatively since i was 80% short .

 Since i cant afford to lose more I decided to cover half of my shorts.

This has been a painful ride - only 2 months ago i was doing quite well.

The markets have won this time thanks to the crazy mf central bankers. 

 

Mon, 12/08/2014 - 12:10 | 5528797 Clowns on Acid
Clowns on Acid's picture

- 8% is a huge dive for you ? Mkts have won this time thanks to crazy central bankers? You have been riding central bankers for 6 years now... and you whine about the last 2 months and - 8% ?

You thought you could get out on time. If you ain't out, you ain't getting out on time.

Mon, 12/08/2014 - 12:53 | 5529001 we built this city
we built this city's picture

not for 6 years - i sold 90% of my stocks all the way up till 1400+. i started shorting at 1600 level till 2000

yes and 8% is alot for  me since i have never lost more than 2% on a year

Ive been trading the markets since 1992 and this has been the most frustrating year .

i remind you that not all stocks skyrocketed like the indexes. Although I bought into the 2008 crisis my stocks went up much less than the S&P(Intc- Msft- csco-mrk-teva-pfe-C-ba-Vlo-Pot-,etc.)

 

Dont forget i am still short and markets are still melting up.....

Mon, 12/08/2014 - 13:17 | 5529081 we built this city
we built this city's picture

My shorts :

short dax via futures(9300 level)

short biotech nasdaq (2700)

short S^P via futures(1820)

short indian market

long vix via VXX

short russel 200 via Twm

stocks shorts: Gpro-Tsla-Amzn-Nflx-Aapl-Twtr

 

Mon, 12/08/2014 - 12:08 | 5528785 Prober
Prober's picture

Crashes of financial markets are intrinsic to financial markets, can, have been and will continue to exacerbated by central banks, BUT they have always been exploited by the politicians as justifications to make the politicians and the apparatus of government (laws, IRS, FED, police, courts, surveillance, etc, etc) more intrusive and more powerful.

The financial markets definitely will crash again, and then the politicians will roll out a whole new wave of control programs, including entitlements to make the sheeple more dependent upon the politicians. This will go on unless and until the enlightened people overthrow the politicians by armed revolt - financial market crashes only strengthen politicians and governments, they do not overthrow them.

The corrupt immoral system will live on, bigger and stronger, unless & until people physically tear it down.

Mon, 12/08/2014 - 13:34 | 5529147 Dr Hide
Dr Hide's picture

Or opt out.

Mon, 12/08/2014 - 18:42 | 5530295 tudemonstro
tudemonstro's picture

Most ZH'ers probably know about FOFOA, but he's got the best analysis of inflation/deflation I've seen:

http://fofoa.blogspot.com/2010/09/just-another-hyperinflation-post-part-...

This is part 3.  I recommend the whole article.

Do NOT follow this link or you will be banned from the site!