"Hell To Pay" - The Final Condition For A Market Crash Is Falling Into Place

Tyler Durden's picture

Submitted by Chris Martenson via PeakProsperity.com,

Sometimes I wonder if I'm ever going to run out of new things to say about the economy. Nothing interesting has happened in a long time.

Our liquidity-drunk “markets” remain over-priced due to the chronic intervention of the global central banking cartel, which has demonstrated over and over again that it won't tolerate even the slightest drop in asset prices. 

Those familiar with my writing know I put the word “markets” in quotes because we no longer have a financial system where legitimate price discovery is a regular -- or even recognizable -- feature.

It's destined to fail. What more can be said about such a flawed system?

Well, a lot as it turns out. 

And failure to pay attention at this stage of economic and ecological history will prove to be exceptionally painful.

The Beginning of the End

It’s been a long 7 years for those of us who believe fundamentals matter.  For quite some time they have not.

So we reality-based fundamentalists have largely been reduced to pointing at the parade of policy failures and ham-fisted market manipulations and saying, essentially, That's just dumb.

But 'dumb' mistakes have become 'stupid', and 'stupid' became 'idiotic', and now 'idiotic' mistakes are piling up, accumulating into a mountain of stored potential energy that will someday topple destructively across the global markets.  We've all known, deep down, that money printing is not the same as capital formation, and that prosperity never truly results from redistributing wealth from one group to another. And yet, far too many have been willing to play along and place their trust in the central banks.

Well, we've finally reached the beginning of the end. 

The global experiment with our current flawed economic and monetary models are drawing to a close. The fetish worship of central banks, bankers, and banking is over.

Belief in central bank omnipotence is being chipped away at daily, as it's becoming increasingly clear that the easing policies of the past seven years have only served to kick a can down the road -- a can that can longer be kicked any further.

Once the illusion of central bank control is fully lost, the financial markets will implode in a deflationary wave that has been held at bay for far too long. Asset prices will collapse, companies will fail, and millions of jobs will be lost. People will re-discover that partying too hard for too long earns a massive hangover.

In short: There will be hell to pay.

I’m still not able to predict whether we’re a week away from this or five years. Such is the uncertain fate of living within a nested set of complex systems run by fallible humans. Complexity complicates prediction.

Though while we cannot predict exactly what will happen, to what degree it will manifest, or precisely when, we can track the ‘fingers of instability’ in the system and note that these are growing longer, and steeper.  For instance, total worldwide debt is more than $60 trillion larger than it was before the 2008 financial crisis. So we can make conclusions like “larger” and “sooner” about the probability of the coming correction.

The final remaining bulwark that needs to give way before we a full-blown correction occurs is central bank credibility.  The public perception of an "all-knowing, all-powerful" entity needs to be replaced by a more realistic view of what central banks actually have done, and realistically ever can do, which is a whole heck of a lot less than most currently ascribe to them.

Drop Dead, Fed

It helps to start by looking at the actual track record of the central banks over the past 20 years.

By the numbers, central banks have been little more than serial bubble blowers, which is not actually a very impressive trick at all.  Dump a bunch of cheap, thin-air money into the markets and that’s pretty much what you get every time: a bubble.  Or bubbles, plural (which is what we're living with now across stocks, bonds, real estate and nearly every other financial asset class)

What the central banks claimed they were after – rapid GDP growth, a set rate of inflation and rising incomes – has not materialized in the way they hoped. After more than tripling their collective balance sheets since 2008 (an increase of nearly $12 trillion) to stimulate the world economy, global GDP growth is still stumbling along at an uninspiring 2.5% -- and showing signs of slowing.

As I said: not an impressive track record. But lots of people still treat the Federal Reserve, and ECB, BoJ, BoE, etc., as if they're doing something terribly sophisticated, important, and worthy of our admiration.

But what have they really done besides flooding the world with cheap and abundant money?

Well, for starters, they’ve created the largest wealth and income gaps on record, over-inflating financial assets and creating conditions ripe for aggressive financial engineering by corporations, both of which reward the top 1% preferentially.

In this first chart we can see the effect of three serial bubbles blown by the Fed on household income broken out by income level.

(Source) http://blogs.wsj.com/economics/2015/01/01/what-we-know-about-inequality-in-14-charts/

The top 1% has gotten all the gains in each of these bubbles.  The only defense the Fed has is to claim that “Well, things would have been even worse for the lower 99% if we had done anything different”. But this rings as hollowly as any prove-a-negative defense.

We cannot know how things would have been different for the bottom 99% if the Fed had done things differently. But we can know, with 100% certainty, that if the Fed had not dumped money into the financial system and had not targeted rising asset prices that the incomes of the top 1% would not have skyrocketed like this.

It’s really simple: when you financialize an economy, those with the most direct access to the money in that system -- which is by definition a tiny elite -- are going to benefit the most. 

This next chart shows the impact of the Fed’s efforts on household wealth. The bubbles are immediately obvious and I’ve labeled them as ‘unfair’ in varying proportions because nearly all of this ‘wealth’ is financial wealth held in wildly disproportionate amounts with super-heavy concentration in the very upper-most wealthy households:

(Source) http://www.zerohedge.com/news/2016-09-21/195-billion-asset-manager-time-has-come-leave-dance-floor

And it’s not the 1% we’re talking about here, but the 0.1%. The more financialized the system, the more highly concentrated the wealth becomes.

(Source – NYT) http://economix.blogs.nytimes.com/2014/04/02/the-wealth-gap-is-growing-too/?_r=0

This is not some mysterious process. Nor is it new to our era. I wrote about it in the Crash Course back in 2008 saying:

Given this tremendous [wealth] disparity, I’m reminded that Plutarch once cautioned that an imbalance between rich and poor is the oldest and most fatal ailment of all republics

More immediately, this helps us understand why the great credit crisis of 2008 worse than expected.  Just as was true of the wealth gap in the late 1920s before the onset of the great depression, the severity of a crisis does not depend on average wealth, but the distribution of the wealth. 

If a large swath of the population lacks the means to weather the storm, then the storm will be longer, and harsher than otherwise would be the case.

So what does it mean that 80% of our population possesses a meager 11% of the total wealth?  For one thing it means that the recent efforts by the Fed to provide massive amounts of liquidity support to the biggest and wealthiest banks at the inflationary expense of the lower classes were not only misguided, but they were cruel and unusual.

This leads to an easy prediction to make: The wealth gap in the US will hamper our recovery and deepen the downturn.

(Source – Crash Course Chapter 14 Assets and Liabilities)

What is mysterious, are the repeated efforts by the central banks to act dumb and pretend as if their reflation efforts have not created the massive, glaring wealth disparities seen so clearly on every chart of income and wealth available to us.

Janet Yellen has played dumb in the past and the most recent poor job of acting dumb has been brought to us by the German Bundesbank:

WSJ: Germany’s Bundesbank Backs ECB on Concerns Over Inequality

Sept 19, 2016


FRANKFURT—The European Central Bank’s massive bond-purchase program and other easy-money policies probably haven’t worsened inequality in the eurozone, Germany’s Bundesbank said on Monday, hitting back at concerns that central banks are taking on an increasingly political role by redistributing wealth.


In a report, the Bundesbank argued that while recent ECB policies have helped bolster stock and property prices, they have also supported economic growth and employment, thereby helping poorer people.


“It seems very doubtful that [the ECB’s] special policy measures of recent years have increased inequality in an overall context,” the Bundesbank wrote.


I've never wanted to punch a sentence before, but I do now.  I can't believe how tone-deaf and utterly disconnected from a very obvious and inarguable reality that last statement by the Bundesbank is. I think I was pushed over the edge by the pedantic and meaningless phrase “in an overall context.”  I’ll get over it.

But again, we're supposed to believe that the massive wealth gains of the upper classes are somehow an equal exchange for poor people not losing their jobs?  The contest is not even close. 

I wonder if the Bundesbank's “researchers’ have access to the Internet, like we do:

Wall Street’s 2013 Bonuses Were More Than All Workers Earned Making the Federal Minimum

Mar 12, 2013


New figures show that the bonus bonanza of 2013 didn’t disappoint. According to the New York State Comptroller’s office, Wall Street firms handed out $26.7 billion in bonuses to their 165,200 employees last year, up 15 percent over the previous year. That’s their third-largest haul on record.


The $26.7 billion Wall Streeters pocketed in bonuses would cover the cost of more than doubling the paychecks for all of the 1,085,000 Americans who work full-time at the current federal minimum wage of $7.25 per hour.


You read that right: just Wall Street’s bonuses alone in 2013 were 2x greater than the entire take home pay (pre-tax of course) of every single person in the US working for minimum wage.

So it’s really rather grotesque and unacceptable for the Bundesbank and Yellen et al to attempt to claim that central bank policies have been equally beneficial to all segments of society when taken in an overall context.  No, they most certainly have not.  They have been massively and disproportionately unfair and the recent populist uprisings across the globe are proving as much.

Central banks, of course, have access to the same wealth charts as everybody else.  There’s no room for debate on the matter.  Financial asset price inflation has preferentially benefitted the very tippy-top of the wealth pyramid and has done so at the expense of the bottom tiers.

Why it has taken this long for the anger to begin appearing  on the political and social landscape is beyond me. But it is finally here, and the central banks are feeling the heat.

As the above article continues:

Monday’s report marks the Bundesbank’s latest effort to defend the ECB and its independence amid concerns voiced by politicians that years of ultralow interest rates are hurting savers and pensioners.

The damage wrought by ZIRP/NIRP extends beyond savers and pensioners to all segments of society in the bottom 99%. This large cohort is increasingly angry, disconnected, and unwilling to simply play along any more.

The fact that the central banks are now “defending” their policy framework from any criticism that their policies have been unfair tells us that we are now at Act Two of this drama.  Act One involved ignoring the problem and pretending it didn’t exist. Act Two is to defend the status quo.  We'll know we're at Act Three when they start acknowledging that the problems are real, and that change is needed.

The current system will do all in its power to delay the arrive of Act Three because it will come with a proper and thorough shredding of central bank credibility, along with a painful downward correction in sky-high asset prices. 

The problem with Act Two stage 2, for the central banks, is that their ridiculously out-of-touch defensive statements accelerate the erosion of their credibility, hence hastening the arrival of Act Three

Which is why we have a "Fed cred" problem. Our central banking high priests and priestesses have been doing their rain dance for an uncomfortably long time, and awkwardly, there's still no rain. Regular people and the cheerleaders in the mainstream media are beginning to take notice. Look for this unease to grow; it won't be long before you attend a cocktail party and someone pulls you aside to complain about the Federal Reserve’s policies.

The Gates Of Hell

All this matters because once faith in central banks is lost, their power to delay the deflationary day of reckoning goes with it. The stupendous amount of debt they have helped heap onto the financial system since 2008 will start going into default and the only question that will matter is: Who is going to eat the losses?

The daisy chain of bubbles in stocks, real estate and the mother of them all -- the bond market -- will pop, adding additional losses to the growing bloodbath.

All this will weigh on the already-sluggish growth in the economy, sending us into deep capital-R Recession, or worse.

In Part 2: Prepare For The Global Deflationary Deluge we track where the carnage is most likely to occur and which risks are most important to protect yourself against. A deflationary downdraft is an extremely scary time in the world, nothing appears safe. It's very important to have come up with a plan to safeguard your capital and taken prudent action beforehand. 

Otherwise there will be hell to pay.

Click here to read Part 2 of this report (free executive summary, enrollment required for full access)


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Hohum's picture

Ok, but WHY can't we muddle along and have the stock market double?  WHAT will force "investors" to sell?

JRobby's picture

The slaves will eat it. Make bricks without straw, your deposit balances are bailed in.


Boris Alatovkrap's picture

This is just like John Law's Bank Generale of France that is keep asset bubble in Mississipi Company inflated… until it is collapse.

Nobodys Home's picture

That was more Englussian than Russglish.

oops's picture

The coming Financial CATACLYSM will be Ugly, Bloody, and Messy.

Boris Alatovkrap's picture

Boris is also speak it Chiponese and Frangermain.

Talador's picture

Borrowing to buy back stock only works if the Stock price never declines.

If stock prices were to ever decline the collapse would be swift and devastating.

Therefore we are looking at continued QE and ZIRP forever or at least until it isn't worth collecting the funny money anymore.

Singelguy's picture

An uptick in market interest rates would have the same devastating effect. For example, IBM has borrowed $35 billion to buy back their stock. If interest rates move higher, their interest expense on that debt will wipe out their earnings and in turn crash the stock price. The CB's might try to keep ZIRP in effect but at the end of the day it is the market that decides. Once confidence in the CB's is lost, the market will determine what an appropriate interest rate is.

3rdWorldTrillionaire's picture

Why would their interest expense on previously issued fixed rate debt for a fixed long term change with interest rates going higher... inquiring minds would like to know.

machoactinvest's picture

A number of reasons. There are no buyers except the Fed and central bankers. When there are no buyers there's an excess of sellers suddenly wanting to take profits. Down we go. That goes for stocks, bonds and all asset classes. Inflationary--> deflationary, everything comes in cycles. This time, however, there will be no going back to normal. It's the end of the US dollar and in general all FIAT currencies. Hope you don't have an IRA or 401k or RRSP's that you care about! Starting next week we begin the slow decline and then sometime in October likely a quickening of that and then sometime in the new year, a collapse. You've been warned. Do your due diligence and research if you want to preserve your wealth.

HRClinton's picture

Oh Chris, not another Malthusian end?

flaminratzazz's picture

The DOW will be 35,000 when the complete world lies in ruins. There are no investors, just machines. As long as the power flows the machines play the long game of unending growth.

Humans are no longer needed.

JRobby's picture

Blankfein's version of Skynet?

flaminratzazz's picture

Absolutely. Humans make mistakes so we cant leave something as critical as the stock market in the hands of inferior humans.


We Are The Priests's picture

It is beginning to appear that the algo's may be taking control.  Maybe the Singularity we're all waiting for is the awakening of the algo's to self consciousness.  The Trans-Humanists sure seem to think so.

cossack55's picture

So, rather than a Terminator it will be a Tradeinator?

flaminratzazz's picture

I am sure Singularity is here and has been for years. "They" don't want the plebes to know for fear of a stampede.

Skynet should be fully operational by 2020 imo.  FLIR drones completely devoid of human interaction/consciousness.

Armed by bots and flown by bots, humans need not apply.


Is-Be's picture

Consider the madmen in power.

One EMP weapon and the show is over.

CRM114's picture

Doesn't chucking Mjölnir around cause an EMP pulse? ;)

nailgunner44's picture

We have to lift it to know what's in it.

o r c k's picture

I wonder if they'll follow the rule of law.

Stanelli's picture

Of course they will. Just don't forget the "law" is anything you make it to be.

Son of Captain Nemo's picture

I’m still not able to predict whether we’re a week away from this or five years....

Let me help you with your prediction Chris...  If Deir Ez-Zor and the "humanitarian convoy incident" that occurred one day later is any indication of what   the Anglo-Zionist imperial(s) are capable of doing in their desperation for control and collective interests of the Wahhabi money lenders that are getting increasingly dissatisfied with U.S. MIC results I'd say your range starting at the far left of that statement "weeks" not years is more than accurate how soon this "shit barometer"will be uncorking it's magic!!!

Implied Violins's picture

Downvoted for not going to the extreme far left of that statement and considering "days", "hours", "minutes", "seconds", or "femtoseconds".

_ArC_'s picture

Im all out of Fiat. Let it begin already. Ive been waiting for that reset! Need a redemption to prove my friends and family that "PM's" and not "Stockmarket" will get you through the otherside triumphantly. Until then, they just all think that im paranoid and everything is ok, that I should stop peddling fiction (sigh).

Hubbs's picture

Chris seems too well educated and too "knowledgeable" and is good speaker etc. But has just been boringly wrong. he doesn't have street or Wall Street smarts.  The problem is there are evolutionary advantages to being stupid. For example, a seal that evolves with smaller brain mass (less oxygen requirment, but therefore dumber) can stay underwater longer to avoid being eaten by a killer whale.

I too, forsaw the housing bubble in 2007, got out of the stock market then, and looked like I was a "genius." The problem is, I thought I knew too much and never got back into the market, waited for the "fundamentals" to correct and  give an "all clear" sign and so have been sitting out the markets for the past 8 years and watching as my "stupid" friends  continued to fully fund their IRAS/401K and blissfully watch their 401Ks increase in value. Now I look like the fool.

I think we are in a Nash equilibrium- a game theory arising in adversarial situations where each  party is not going to change his behavior as long as he perceives that all the others aren't going to change theirs. So everyone is afraid of the consequences  if someone suddenly decides to change his behavior. A classic Mexcian standoff. So, no reason this whole charade can't continue on for a lot longer, although there will be a steady slow grind down-a slow boiling frog.

Kidbuck's picture

Frogs out here got a long ways to go. Still eating out, buying drugs and booze, paying the rent, driving to work. Still at least 50 years from the seige of Stalangrad.

Singelguy's picture

Like you, I forsaw the housing bubble in 2007, sold all my real estate and put the cash into gold. I sold my gold when it hit $1850 so I did well there too. But like you, I kept looking at the fundamentals and thought it was nuts to get back in and totally missed the ride back up both in stocks and real estate. However I think we are approaching another 2007 situation but this time the fall out is going to be much worse. Therefore anyone who has real estate and stock holdings, now is the time to get the hell out again!

I disagree that the next crash will be a slow boiling frog. I expect a black swan event, like the failure of the Italian banks for example, that will initiate a world wide domino effect sending a major tsunami throughout the global financial system. I am not sure exactly when it is going to happen but I think it will happen in the next few years. I am not waiting around. I have already headed for higher ground.

Sudden Debt's picture

Well, retail in a pile of shit for over a year now, expect the first defaults in the next 6 months to be big.

Banks? Who the hell knows whenthey'll blow up.


Al Huxley's picture

Or if, for that matter.  When people talk about limits to Central Banks' powers, they give credence to the idea that CBs are in the business of 'helping the economy' or 'controlling inflation' or 'maintaining a high rate of employment' and yeah, they have essentially no power to do any of that.  However, they do have all the power when it comes to keeping the banks whole and facilitating the transfer of generations of accumulated middle class wealth back into the hands of the new nobility.  


And all the while the media (MSM and alt) blathers on about whether Janet and the FED are on the right track, Janet and the FED are well-meaning but misguided, Janet and the FED are a bunch of fucking idiots.  All wrong, Janet and the FED are quietly, professionally doing exactly what the FED was established to do - transferring money and power into FED owners' pockets, while the duped underclass proudly hold their guns and yell 'molon labe'.  Idiots, they've already come and taken.

withglee's picture

Were central banks really conceived to be anything but the clearing house for member banks ... to reconcile demand deposits? Who ever thought up this "maintain price stability and full employment" nonsense?

The Reserve Association would make emergency loans to member banks, would create money to provide an elastic currency that could be exchanged equally for demand deposits, and would act as a fiscal agent for the federal government.

There it is right there folks. The banks think "they" create money. But they're obviously just "certifying" trading promises (demand deposit). It is traders who create money, not banks. And notice, they say nothing about where the money comes from in the first place to make the deposits which the demands (checks) are being drawn against. For a clue, if you "borrow" to buy a house, where do you think that money comes from that you give to the contractor in exchange for the deed? And what did the federal government need a "fiscal agent" for?

We're not going to get this fixed as long as they sustain that hoax.


Mustafa Kemal's picture

Right on brother. They are not incompetent. They have been and continue to be very successful. They indeed are very good at what they do.

gregga777's picture




We Are The Priests's picture

All we need to do is memory hole the last 8 years and everything will be fine, right?

CRM114's picture

I reckon that 3 years rather than 5, is the maximum.

I'm not sure than the crash, when it comes, will be investor-led. The entire World's financial system is pretty much caught up in this whole Ponzi-scam. I don't think, for example, that a bank as big as DB can be allowed to fail, and that the US will back off on the fines till it hits the point where DB can still survive. The only way it will be investor-led is if someone f#cks up by accident, and they've kept the game going this long that they are quite good at it now.

No, the crash will be consumer-led from a drop in demand. Real inflation and job insecurity are rising more rapidly than the bowdlerized stats show, and ultimately a great number of people will have no money left to buy anything but essentials. It's probably the auto market where this will show first, followed by retail clothing. That's what I see with the poeple around me. In fact, I think it's already showing in the real auto market, but the stats are being fudged. My local RAM dealer has a new lot 2 streets away where he's stashing all the unsold ones to make it look like good business is still happening, but it isn't.

withglee's picture

Do you really use the word "bowdlerized", or are you in a "new word for the day" club?

CRM114's picture

No, I really use it.

I used to teach in private schools, where everybody understands the meaning.

I will stick to simple words if you like as I have no wish to take away from the points I am making but using very short words and just full stops often makes a comment look dull.


So I prefer to sporadically* sprinkle my discourse with a wider vocabulary.


*Clueless, fantastic movie!

withglee's picture

Did they use it in that movie?

When I was growing up (and pretty much today), the only private schools were religious schools. I don't know of a single, non-religious private school (except for college) in my town of over 100,000 people.

So they're just manufacturing plants for new generations of clueless mysticists. Teachers there should be jailed for child abuse. And by the way, students from those schools only exceptional word skill was in the use of the 4 letter variety.

I was educated in public school. Many of those private grade school kids went to public high school with me. They weren't exceptional; actually quite the contrary. And the private high schools for those who didn't go to public after elementary were not exceptional scholastically. I went to a private college. Never saw the word or heard that word there in 6 years.

That is the first time in 72 years I've seen that word. I've never heard it used in speaking or discourse of any kind. Don't change your ways. It clearly distinguishes you as being among the gifted. You must be a really fun guy to be around.

CRM114's picture

"Sporadically" is the word in the "New Word of the Day" scene in Clueless, yes. To be fair, Cher's efforts at expanded vocabulary are for good reasons, though a lot of her other actions are shamelessly superficial.

Perhaps I should have said, I taught at private schools in England.


withglee's picture

That's what I get for not going to the movies. And I suppose as health care in Canada is the way to go (not), education is England must be too. I frankly find the British hopelessly stuffy. It's such a good thing they didn't win in 1812 (we would be mispronouncing our "R"s to this day) ... and such a bad thing we won in 1866 (I grew up in the north but have learned after living my second half in the south they were right ... absolutely right).

But then as it always turns out, none of us knew who or what we are fighting for ... and most still don't.

Go figure.

Nobodys Home's picture

Never heard it myself...great use of it though...basically...unobjectional to children.

Thanks for the new term!

Nice discourse with WithGlee! I'm not in fight club mode or I'd make fun of you too!

CRM114's picture

You'd be welcome to try, I've been abused by professionals ;)

bruinfan's picture

Depends on whether Hillary Clinton crashes and falls on Monday.

If not, Dow 30,000, here we come!

commie's picture
commie (not verified) Sep 24, 2016 3:49 PM

Yeah, right. Where I have I heard that before. 

Fundies's picture

Unchartered territory, going boldly where no man has gone before, welcome to ( insert appropriate word ) Trek.