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Why The Mania Is Getting Scary - Central Bankers Are Running A Doomsday Machine

Tyler Durden's picture




 

Submitted by David Stockman via Contra Corner blog,

If you need evidence that we are in the midst of a lunatic financial mania, just consider this summary from a Marketwatch commentator as to why markets are ripping higher this morning:

“The dovish comments from both Fed Chairwoman Janet Yellen and People’s Bank of China Governor Zhou Xiaochuan are giving markets a big lift, and in the absence of negative data or news, I imagine this will continue to buoy the markets throughout the session,” Erlam said in emailed comments.

 

Yellen said gradual hikes are likely this year, but that the central bank will move cautiously……. the PBOC governor said he saw “more room” for China to ease policy if the economy stays soft and inflation continues to weaken.

Its just that frightfully simple. If any of the major central banks anywhere on the planet ease or even hint they might, the robo machines and day traders unleash an avalanche of buy orders and the stock averages jerk higher.

Indeed, Zero Hedge captured the motion succinctly this AM. In keeping with Bernanke’s inaugural blog revelation that 98% of monetary policy consists of “open mouth” operations, the markets leapt upwards on cue. That is, if central banker jaws are flapping, then buy!

 

What this means is that this third immense financial bubble of the current century will keep inflating until central bankers stop banging the “stimulus” lever or the bubble finally crashes under its own weight. The latter will surely happen, eventually—- and the potential carnage can be readily approximated.

Last time, global equity market inflated to a peak of $60 trillion in aggregate value before they plunged to barely $25 trillion during the post-Lehman meltdown. Now they have been pumped back to the $80 trillion mark by the sheer recklessness of the world’s central bankers, but this time the underlying economic advance has been even more artificial and unsustainable; it amounts to little more than a temporary outgrowth of the explosion in public and private credit since late 2008. At the same time, the bubble has been spread to virtually the entirety of the world’s $200 trillion credit market owing to the nearly universal embrace of massive central bank bond-buying under QE.

Yet do the central bankers have even the foggiest clue that they are sitting on a potential $50-$100 trillion financial market implosion? That the mother of all meltdowns lurks around the corner?

Not these boneheads. They have ripped all the stabilization circuitry out of financial markets, thereby completely disabling honest price discovery. That means they have destroyed the shorts, extinguished fear, obsoleted fundamental analysis, drastically cheapened the cost of hedging and offered speculators unlimited opportunities to shoot fish in a barrel by front-running their announced bond buying and currency manipulation campaigns. In short, they have showered speculators with stupendous windfalls, displacing self-correcting two-way financial markets with rigged gambling casinos in the process.

The immense damage visited upon the machinery of financial markets is sitting there in plain sight. The endless six-year buy-the-dips run of the S&P 500 since March 2009, for example, would be impossible in an honest free market. So why do they ignore the dangers, and stubbornly plow forward clutching to ZIRP, N-ZIRP, QE, forward guidance and all the other tools of central bank stimulus?

 

The utterances of the duo who kicked off today’s rip make absolutely clear why the central bankers will never stop stimulating. They have embraced a spurious “inflation deficiency” doctrine, and have thereby, in effect, lashed themselves to the wheel of a doomsday machine.

To wit, massive central bank financial repression is the actual cause of deflation. In the boom phase of the expansion it leads to unsustainable public and private borrowing which finances artificial spending by households and governments and excess investment in private mining, processing, manufacturing, transportation and distribution capacity, as well as public infrastructure. Then eventually comes the crack-up phase when the borrowing ends or diminishes, causing cascading reductions in output, prices, profits and incomes throughout the economic chain.

Thus, Governor Zhou Xiaochuan’s threat to unleash more stimulus owing to the specter of “deflation” in China borders on the comical. The very deflation about which he frets was caused by the runaway money printing campaigns of the PBOC over the last several decades—-campaigns which produced monumental price and credit inflation in China, and which were then transmitted and amplified throughout the world economy, and especially China’s supply base in the EM

In the process, the latter caused massive overinvestment and malinvestment in private industry and public infrastructure alike. The “deflation” that Zhou professes to fear is thus the result of price cutting by companies battered by too much debt and too little business, and the inexorable cooling of artificial demand for the materials and services needed to build empty apartments, malls and cities and hideously redundant highways, airports, subways and bridges.

Indeed, the PBOC is threatening to chase its own tail. If China’s traditional high level of consumer inflation is abating, its because of the drastic cooling of the oil-energy complex and the iron ore-metals complex—–trends which, in turn, originate in the sharp and unavoidable slowing of China’s construction and investment mania.

Iron Ore Spot Price (Any Origin) Chart

Iron Ore Spot Price (Any Origin) data by YCharts

So there you have it. The People’s Printing Press of China has been running red hot for more than two decades, and has fueled the most fantastic credit bubble in human history. Total credit market debt outstanding in China at the turn of the century was $2 trillion; now its 14X higher at $28 trillion.

Even more fantastically, China’s nominal GDP has barely doubled—-from $5 trillion to $10 trillion since the 2007. Yet its credit market debt—-public and private combined—-has increased by $21 trillion, or by 4X the gain in money GDP.

This is downright monetary insanity, but in response to modest cooling of its construction frenzy, its chief central banker could think of only one thing: moar ease!  Apparently, a 7X increase in PBOC’s balance sheet since the turn of the century is not enough—–even when it only adds fuel to the deflationary fires.

Historical Data Chart

Needless to say, during the past year the signs that China’s house of cards is tottering have become omnipresent. So this is where the doomsday machine comes front and center. China’s credit addicted financial system has just channeled the central bank’s liquidity injections to the stock market in response to Beijing’s attempts to administratively rein-in shadow banking system excesses, and particularly, the so-called “trust loans” to developers and commodity speculators.

Accordingly, the Shanghai A Shares index is up 81 % in the last nine months fueled by margin loans and an explosion of retail stock market speculation. Never has there been a more pathetic march of the lemmings toward their doom.

^SSEA Chart

^SSEA data by YCharts

Janet Yellen’s pronouncements last Friday were no more sensible. Rhetorically waving her arms at the bogeyman of too little inflation, she proclaimed the following:

That said, we must be reasonably confident at the time of the first rate increase that inflation will move up over time to our 2 percent objective, and that such an action will not impede continued solid growth in employment and output.

That is sheer gibberish and rationalization. There is not an iota of evidence that 2% inflation will cause any more growth in output and employment than will 1.6% inflation—–the actual rate of PCE deflator less food and energy increases since 2007. Worse still, there is absolutely no chance that “open mouth” policy at the Eccles Building will have any impact on what amount to downright trivial short-term wiggles in the measured CPI.

Indeed, the very idea that the US economy is suffering from insufficient inflation is a Keynesian canard that defies empirical reality and common sense. As we demonstrated last week, the rate of real GDP growth has slowed to 1.7% since the turn of the century and 1.1% since the pre-crisis peak. That is, to less than one-third of its historic growth rate. And that’s despite a 9X increase in the Fed’s balance sheet—-from $500 billion to $4.5 trillion during the last 15 years—-and far more inflation than main street households could reasonably tolerate, given the tepid rate of wage growth during that period.

And it doesn’t matter how you measure it. Inflation has been high on a cumulative basis, and the median household income has been going in the wrong direction.

CPI and PCE Ex Food and Energy Since 1987- Click to enlarge

CPI and PCE Ex Food and Energy Since 1987- Click to enlarge

In short, the US economy has not suffered from an “inflation deficiency”. As shown above, the price level has actually doubled  since the era of monetary central planning incepted under Greenspan in 1987.

Likewise, there is no shortage of “aggregate demand” that can be remedied by continued “monetary accommodation”. The welcome, modest abatement of consumer price inflation in recent months reflects the epochal deflation now underway around the planet——the inexorable correction of the monetary boom that has been fueled by central banks since the 1990s.

By insisting that monetary accommodation can fill-up an imaginary bathtub called the US economy until it reaches the brim of full employment and precisely 2.000% change in the PCE deflator over some arbitrary time frame that remains forever undefined, the Fed is engaging in an act of monumental folly. And one which is now being replicated even more egregiously by the rest of the world’s convoy of money printing central banks.

That’s the equivalent of a doomsday machine. The central banks will ease and talk of easing until the third great bubble of this century reaches brobdingnagian extremes. Then the carnage will commence. Again.

 

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Tue, 03/31/2015 - 13:02 | 5945710 cossack55
cossack55's picture

Since I pulled out of this entity (sometimes referred to as a "market") years ago, my shorts were not destroyed (tho the washer occasionally claims a pair or two).

Fuck Wall Street

Tue, 03/31/2015 - 13:09 | 5945731 preciousmetalsnomnom
preciousmetalsnomnom's picture

I am trying to read Ben Bernanke's blog these days to learn some things. Not much luck there.  Central Bank games will continue... Is all i can guess. Gotta keep throwing out my back with silver.

Tue, 03/31/2015 - 13:11 | 5945739 i_call_you_my_base
i_call_you_my_base's picture

"I am trying to read Ben Bernanke's blog these days to learn some things."

You could learn how to be wrong about everything.

Tue, 03/31/2015 - 13:14 | 5945749 Headbanger
Tue, 03/31/2015 - 13:16 | 5945753 Osmium
Osmium's picture

Gentelmen, I suggest you beam me aboard!

Tue, 03/31/2015 - 13:21 | 5945773 Save_America1st
Save_America1st's picture

We crack-up boomed some folks...

Tue, 03/31/2015 - 13:38 | 5945811 TruthInSunshine
TruthInSunshine's picture

ALMOST GREEN.

ANOTHER 'MARKET' BREAK SHOULD DO IT.

(And a Phoenix Capital article)

Tue, 03/31/2015 - 14:34 | 5946028 Perimetr
Perimetr's picture

Sorry, if you want to see a real "doomsday machine", look inside an ICBM silo.

Tue, 03/31/2015 - 13:07 | 5945723 stocktivity
stocktivity's picture

"Quick!  Pull my finger."

Tue, 03/31/2015 - 13:07 | 5945724 KnuckleDragger-X
KnuckleDragger-X's picture

Nothing is working so let's do more of it....Sheer genius.....

Tue, 03/31/2015 - 13:21 | 5945772 Herd Redirectio...
Herd Redirection Committee's picture

"Hey, lets try the same thing, and expect a different result!  DURR!"

The War on Drugs.

The War on Terror.

QEx.

These 'initiatives' are not failing, or coming up short, they are working as designed AND intended.

Tue, 03/31/2015 - 18:31 | 5946859 TeethVillage88s
TeethVillage88s's picture

Let see what war ideas we have

-

1947 - Official War on Communism, to support Greece & Turkey
1964 - War on Poverty (L.B. Johnson)
1964 - War on Vietnam (L.B. Johnson)
1965 - War on Crime (L.B. Johnson)
1968 - War on Civil Rights, Poverty (L.B. Johnson)
1970 - War on Crime (R.D. Nixon)
1970 - War on Pollution (R.D. Nixon)
1980 - War on Communism (R. Reagan)
1982 - War on Drugs (R. Reagan)
1984 - War on Crime, Sentencing Reform Act (R. Reagan)
1986 - War on Organized Crime (R. Reagan)
1989 - War on Panama (H.W. Bush)
1991 - War on Bank Bankruptcy, Born, Keating Five (H.W. Bush)
1995 - War on Poor Not Having Subprime Home Mortgages (W. Clinton)
1999 - War on Kosovo (W. Clinton)
1998 - War on Poor Banks Having Structured Finance, Derivatives (W. Clinton)
2001 - War on Afghanistan (G.W. Bush)
2003 - War on Iraq (G.W. Bush)
2005 - War on Bankruptcy, Bankruptcy Reform Act (G.W. Bush)
2009 - War on Bank Bankruptcy, TARP, FED Loans(B. Obama)
2009 - War on Email, Counter Intelligence War on US Citizens (B. Obama, H. Clinton)
2009 - War on Health Care Patients (B. Obama)
2011 - War on Libya, Syria (B. Obama)
2014 - War on Russian Federation (B. Obama)

Well women got rights, worker rights were passed, Welfare programs are now seen as permanent for 25% of US Population which means VICHY DC is no longer pretending to deal with Domestic Jobs issues in a trade with "Free (Slave) Trade. So there must have been a War on Jobs

1980 - Most favored Nation Status for China (J. Carter)
1984 - Caribbean Basin Initiative (Free Imports to USA)
1994 - WTO Formed, Marrakech Agreement (W. Clinton)
1994 - War on Jobs, NAFTA, Deregulation of Trade, 3 Nations (W. Clinton)
1994 - Most Favored Nation Status for China Reinstated after Tianamen Square (W. Clinton)
1996 - Most Favored Nation Status for China Reinstated after Tianamen Square (W. Clinton)
2000 - Pemanent Normal Trade Relations with China and WTO Membership for China (W. Clinton)
2005 - CAFTA-DR Ratified, 2006 El Salvador, Honduras, Nicaragua, Guatemala

On 16 November 2012 the U.S. House of Representatives passed a bill which would repeal the Jackson–Vanik amendment for Russia and Moldova.[4] The law repealing the Jackson–Vanik amendment was signed together with the Magnitsky bill by President Obama on December 14, 2012.[5][6][7][8]

Tue, 03/31/2015 - 13:14 | 5945726 Dr. Engali
Dr. Engali's picture

Yeah, yeah,blah, blah blah, bubbles.... blah, blah, blah.  Can we talk about thum thar dirty gays in Indiana?

Tue, 03/31/2015 - 13:19 | 5945762 Arnold
Arnold's picture

http://www.npr.org/blogs/itsallpolitics/2015/03/24/395070728/calif-lawye...

 Doc, careful what you ask.........oh never mind.

Tue, 03/31/2015 - 13:10 | 5945733 Q-Q-Q
Q-Q-Q's picture

Can I just go on the record and say "I saw this coming" for when they claim nobody did!

Tue, 03/31/2015 - 13:10 | 5945736 Thirst Mutilator
Thirst Mutilator's picture

Luciferians!

Tue, 03/31/2015 - 13:21 | 5945764 BoPeople
BoPeople's picture

OK, I get that all evidence suggests that computer programs control price (absolutely).

However, once one accept the belief that computer programs control price (absolutely), then there are some pretty strong implications. One of those implications is that the news does not determine price. The news is an excuse for price... and price is policy... just as news is policy and not a random collection of acts reported by citizen journalists.

Everyone supporting policy is rewarded (as you, Dave, have been over the years) and all of those who do not support policy are not rewarded ... until those who support policy are betrayed by the enactment of a deeper level of policy. ("Pride goeth before the fall" ... and "Pride is NOT a virtue" ... hat tips to Lord British.)

Tue, 03/31/2015 - 13:20 | 5945765 centerline
centerline's picture

They don't have a choice really.  The system can only "grow" or die. 

Unfortunately, organic growth rolled over long ago.  Since then, synthetic growth (financialization) has papered over the hole.  Now, financialization is beginning to fail.  And TPTB are going keep on the same path right up and into absolute ruin.

Tue, 03/31/2015 - 13:20 | 5945766 williambanzai7
williambanzai7's picture

Tue, 03/31/2015 - 17:33 | 5946722 TeethVillage88s
TeethVillage88s's picture

Must be my Doppelganger...

Tue, 03/31/2015 - 18:12 | 5946811 windcatcher
windcatcher's picture

Cool! The Banksters vs the Market!

Tue, 03/31/2015 - 13:20 | 5945768 Longduckydong
Longduckydong's picture

hate to say it, but the only "boneheads" have been investors like me that have missed the last 15% rally in stocks by taking the "fed is wreckless" and the "collapse is coming" view 

Tue, 03/31/2015 - 13:30 | 5945794 BoPeople
BoPeople's picture

A. Giving money power over you is accepting your slavery on their terms. Regretting 15% is regretting your opportunity to be more enslaved by money. If you are enslaved by it, there is never enough, unless you are the one creating it... and maybe not even then.

B. Evidence suggests that there is a lot more to this world than what we are told to believe comprises everything. Loving this world and the temporal things it provides is the path to ongoing slavery. Seems to work for some people...

Tue, 03/31/2015 - 13:36 | 5945805 Armed Resistance
Armed Resistance's picture

Dong....(Claps Hands).  Dong...  Where is my automobile?

Wed, 04/01/2015 - 00:00 | 5947532 Clowns on Acid
Clowns on Acid's picture

Bend over Dong....

Tue, 03/31/2015 - 13:27 | 5945776 ebworthen
ebworthen's picture

"Doomsday Machine", yup, have to re-watch that Star Trek episode, good one.

David Stockman putting it in black & white, again.  "Wall Street eats America".

Tue, 03/31/2015 - 13:38 | 5945807 Rainman
Rainman's picture

Kudos, too, for David's use of the weird word  ' brobdingnagian '

       ~ Gulliver's Travels, Jonathan Swift, 1726

Tue, 03/31/2015 - 13:26 | 5945781 buzzsaw99
buzzsaw99's picture

the only time in the past fifty years that "the market" has gone down substantially is when the fed raised the fed fund rate. don't raise the rate, problem solved.

Tue, 03/31/2015 - 13:49 | 5945862 Icelandicsaga.....
Icelandicsaga...............................................'s picture

Will the market ever correct.. when hell freezes over maybe .. and the FED system is in flaming ruins .. JP Morgan doors are closed and Goldman employees are walking out the front door with boxes of their possesions .. will it ever implode. not while the Fed is involved or until the power brokers have decided to let it implode,,, explode into a 'new' system ... they already have a new system planned .. count on it. As we march to the tunes of the Hegelian dialectic into the new world order. OR . PROBLEM >> SOLUTION>>> RESOLUTION . the trick is to know when to get the pitchforks and torches to make sure the bastards are not in charge again ..

Tue, 03/31/2015 - 13:53 | 5945871 taketheredpill
taketheredpill's picture

 

 

3% Inflation since 1987 hardly seems Weimar-ish to me.

 

Tue, 03/31/2015 - 15:45 | 5946340 CHX
CHX's picture

What rock are you living under ? Go buy a house, some beef; some bonds, or the Dow, for that matter, and report back to us.

Tue, 03/31/2015 - 23:59 | 5947529 Clowns on Acid
Clowns on Acid's picture

Once you ans your family are dsead.. you will still wonder why. I ain't on that program are you ...still ?

Tue, 03/31/2015 - 13:55 | 5945879 Chupacabra-322
Chupacabra-322's picture

Ponzi

Tue, 03/31/2015 - 14:09 | 5945928 Herdee
Tue, 03/31/2015 - 15:50 | 5946363 MASTER OF UNIVERSE
MASTER OF UNIVERSE's picture

The Doomsday Machine is my favorite original series Star Trek episode of all time. Watch it and notice how the timing for the Doomsday Machine to reach the Enterprise keeps getting delayed during the episode. Much like Central Planners the Doomsday Machine does not seem to operate on empirical reality.

Tue, 03/31/2015 - 15:58 | 5946395 falak pema
falak pema's picture

How scary is "scary"?

ZH has been writing about scary for six years.

I know six years is not much on the geological scale. But on the scale of greenback God its getting to be a "long count"...

Dempsey! 

Tue, 03/31/2015 - 16:06 | 5946423 kchrisc
kchrisc's picture

I often hear my guillotine singing his favorite song, "Catch me, I'm Falling."
https://www.youtube.com/watch?v=hCE0UVmLeq4

The banksters need to repay us.

 

Guillotine the Fed. Audit the heads.

Tue, 03/31/2015 - 17:21 | 5946685 Clowns on Acid
Clowns on Acid's picture

Stockman must answer the question "Whats wrong with the Fed printing mopney to keep the economy going?"  Thats what all the feckin retahds always asj=k me when I curse the Fed.  

Where does one start? Depends on one's audience and level of corruption that they have acquiesced to in their own lives I guess. Can always start with "theft of production value is immoral" argument but that becomes a long conversation. Even when they might understand... they always ask "well what is the alternative... recession ?"

It is enough to encourage one to stack lead and pm... thats all I can say. 

Tue, 03/31/2015 - 17:43 | 5946753 dexter_morgan
dexter_morgan's picture

difficult to reason with ignorant people, and those that make themselves willingly ignorant.

Tue, 03/31/2015 - 18:46 | 5946891 kchrisc
kchrisc's picture

"Whats wrong with the Fed printing mopney to keep the economy going?"  Thats what all the feckin retahds always asj=k me when I curse the Fed."

Two word answer: It's theft.

The banksters need to repay us.

 

Guillotines are magic machines. Tyranny goes in, and Liberty comes out.

 

Tue, 03/31/2015 - 17:22 | 5946688 Niall Of The Ni...
Niall Of The Nine Hostages's picture

They have embraced a doctrine which dictates that everybody who isn't one of the 30,000 people who run the bedlam that is our planet is a threat to their rule if permitted to live much beyond hand-to-mouth even in the near term. We are to be robbed of our wealth and any way of accumulating any more, at any cost.

Long term, we are not to be allowed to draw breath any longer than it takes to build robots who will cheerfully work for free 24 hours a day, with no more thought of rebellion than a spirochete does of visiting the moon.

We are to be robbed of our wealth, and eventually our lives.

Tue, 03/31/2015 - 17:39 | 5946742 dexter_morgan
dexter_morgan's picture

Yet do the central bankers have even the foggiest clue that they are sitting on a potential $50-$100 trillion financial market implosion? That the mother of all meltdowns lurks around the corner?

Not these boneheads.

 

I disagree. I think they know exactly what they are doing, and doing it in a very coordinated way.

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