The End Of Stimulus? (And The Start Of The Crash?)

Authored by Chris Martenson via PeakProsperity.com,

Back in January of 2016 we saw what appeared to be, and in my opinion should have been, the end of the Everything Bubble blown by the word's central banking cartel.

The carnage started in the emerging markets. Highly-leveraged positions and carry trades began to unwind. That's a fancy way of saying that all the big, sophisticated investors -- who were busy borrowing heavily in countries with cheap money (the US, Japan, and Europe) and using that debt to speculate in markets offering higher yields (junk debt, emerging markets, stocks, etc.) -- began to reverse their trades.

It quickly devolved into a “Sell everything!” scramble. We saw the dollar spike and stocks fall -- with emerging markets taking the full brunt of the carnage as their stock markets rapidly fell into bear territory, their currencies fell, and their bonds were destroyed.

Until...

Very early one morning in February of 2016 everything U-turned and rocketed higher. Suddenly and magically, the panic was over. This wasn’t the invisible hand of the market at work; it was the very-visible hand of central bank intervention. 

With the benefit of hindsight, we now have a clear picture of what happened. The central banks huddled together, a bold (desperate?) plan was hatched, and key printing presses around the world were sent into overdrive.  In the months to follow, the European Central Bank (ECB) and the Bank of Japan (BoJ) went on a record-breaking money printing spree:

(Source)

The red arrows in the charts above mark this moment when the “markets” were saved.

Or, more specifically, when the portfolios the ultra-wealthy were "saved", as the assets within were boosted higher (yet again) by the central banks printing money from thin air:

(Source)

Addicted To Money Printing

So what caused the weakness in early 2016 that spooked the system so much? The central banks themselves.

After many years of force-feeding stimulus into the global economy to create a "recovery", the central banks have become increasingly concerned that asset prices have become too dependent on said stimulus. So in late 2015, the banks took their feet off of their monetary gas pedals for a bit to see what might happen.

They were hoping that the markets could be gradually weaned off of their stimulus dependence with few ill effects. They wanted to engineer a "soft landing", where if priced declined, they'd come down gradually and not too much.

That didn't happen.

Instead, the cheap-money-addicted markets instantly started expressing massive withdrawal complications.

To re-acquaint you with how quickly things were devolving back then, these are news headlines pulled from an article I wrote back in the middle of January 2016:

Sound familiar at all?  It should. These sound exactly like the headlines in the news today, here in May of 2018.

We are still paying the price from 2008, when the central banks committed a massive error by not allowing the markets and their bad debts to actually clear. Yes, it would have been acutely painful; but we would have been through the worst within a year or two and in the process restored the system to a much healthier and sustainable state.

Instead, the bad actors were protected (and rewarded!) and the root fundamental problems were literally 'papered over', left to continue to fester unobserved ever since. Similarly in early 2016, the central banks once again committed the same sin by rescuing everything with another wall of fresh, thin-air money.

To drive home how much, below is a chart showing the yearly change in world central bank balance sheets. The relative ‘area under the curve’ of each major period of money printing gives us a sense of the scale.  To help you eyeball it, I’ve placed similar-sized orange rectangles in each area.  Key to note is that central money printing has been increasing -- not decreasing -- the further out we've gotten from the Great Financial Crisis:

(Source)

If we've been in "recovery" for years now, as the central banks have been touting, then why has 2016-2108 seen the most stimulus ever injected into the system?

History has taught us that we should trust or leaders' actions far more than their words. And their actions at this time indicate panic.

What is it that has them so worried?  We should all ponder that question long and hard.  I’m convinced that they know as well as we do that, once the over-inflated ““markets”” created by the central banks can no longer be sustained at their current nose-bleed heights, the damage will be extraordinary and unstoppable.    

The End Of Stimulus? (And The Start Of The Crash?)

The pain of the 2008 crash will seem like a mere flesh wound compared to the devastation the next deflationary wave will wreak. 

Of course, the central banks have no interest in seeing that happen and will, once more, do all they can to "rescue" the markets.  

But will they act in time?  More to the point, given all of their very public commitments to raising rates and reducing their balance sheets, will they allow a market correction to happen in the near term? (presumably, so they can ride to the rescue soon after as "saviors")

Politically, the prospect of showering even more wealth on the 0.001% is going to be a tough sell. This is especially true in Europe -- in Italy, Greece and Spain where the populace is suffering mightily already and is in no mood to further enrich the ultra-wealthy.

So it would seem that the central banks, at least publicly, have to stick to their stated plans to reduce their levels of money printing/balance sheet expansion. 

As of right now, they are on track to end worldwide simulus in early 2019, when their collective net change in assets will dip below $0 for the first time in many years:

(Source)

Given the importance of central bank purchases and market interventions, the above chart is probably the most important one in existence for divining where financial asset prices are headed.

If global monthly stimulus indeed drops to $0, then Watch out below!

Who know if the future will plays out anything like the projections given above? The central banks have proven weak-kneed at every tiny moment of market wobbliness.  To date, they've chosen to print and pent and then print some more at every opportunity where the "“markets”" might have corrected.  

But we all know that this charade cannot continue forever.  Sooner or later it has to stop.  Given the blow-ups we're now seeing in the emerging markets, there’s clearly serious trouble brewing somewhere in the system.

In Part 2: The Breaking Point Is Upon Us we provide plenty of data to support that claim.

The currencies and bonds of five countries are now in the danger zone, and many more teeter on the edge. My analysis is that the central banks will resort to their usual money printing to resolve the issue, but for reasons I explain in Part 2, these efforts will fail at some point in the next year -- and spectacularly so.

When today's Everything Bubble bursts, the effect will be nothing short of catastrophic as 50 years of excessive debt accumulation suddenly deflates.

Given the dangers involved, you should expect the central banks to 'go nuclear' in thier deflation-fighting efforts by sending “money to main street” -- likely in the form of a universal basic income, or a check from the Treasury refunding your last 3 years of tax payments, or maybe even an electronic deposit directly from the Federal Reserve into your bank account.

That's when the inevitable fiat currency crisis will begin in earnest. At that time you’ll need to run, not walk, to buy anything with intrinsic value that can't be inflated away -- before your currency becomes worthless.

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

Comments

rejected Sat, 05/26/2018 - 10:42 Permalink

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

No thanks,,, 

This is why I usually go to the end of the article first... 

Edit: Ahhh,,, So Mr. Martenson has allies here. (lol)

Apparently he and others don't mind raking in the currency they say is gonna soon become worthless. So we should pay in our soon to be worthless currency or get spamed to death to find out the gory details. 

Harry Lightning 1 Alabama Sat, 05/26/2018 - 12:22 Permalink

Interestingly, if the equity market started going down and fell every day at approximately the same rate, I think that the VIX (a measure of volatility) actually would stay steady and maybe even fall. Because if I am not mistaken, VIX is a measure of volatility, which measures the relative degree of change from one session of trading to the next. If the outcome of every day of trading were the exact same, then there would be no relative degree of change between one close to another. Yes, the value would be lower, but the change in value would be the same every day. which very well could mean the VIX would remain unchanged through the calamity of a equity market storm.

In reply to by 1 Alabama

gdpetti Harry Lightning Sat, 05/26/2018 - 13:17 Permalink

True enough, as the same thing happened when the markets were going up and up, every week, if not every day... the 'new normal'... but this time is different... the puppet masters of this 'establishment' of Western led imperial excess has been prepping their puppet show for its grand finale... 'pull the rug out' time.... this isn't factored into the 'normal' equations... as to do so implies the end of western led 'civilization'... and most people have no sense of history..  not just the  history of the market in the last century, but of civilizations themselves, which come and go.... as Spengler pointed out long ago.... the cycle begins and ends with Mother Nature's return... which is why older civilizations kept close watch of the sky utilizing star locations... which seem like lost knowledge these days.... just like our 'new normal'... .the markets are full of people with no experience or knowledge of the past.

In reply to by Harry Lightning

Harry Lightning skbull44 Sat, 05/26/2018 - 11:43 Permalink

Eventually that will be the result, but you will see a massive deflation first that will cause what the author wrote above about direct cash payments from government to Main Street. Its when the government starts giving out free money to consumers instead of financial institution that you will see the same kind of hyperinflation in consumer products as we have seen in financial markets. 

That will be the beginning of the end.

Buy bitcoin. that'll probably save you ! Except when you go to sell it and no one has any money left to buy it from you. That will be the interesting phenomenon in a hyper-inflation, everything that cannot be eaten or lived in may actually go down in price as no one will have any money left to buy anything but food and shelter. Which will leave nothing for investment. The only present investment instruments that would have any value would be those that merchants would accept as payment for consumer goods. So may gold coins or jewelry, silver coins or tableware...something small enough to exchange and widely used enough to be accepted. Crypto currency could fit that bill if enough merchants start accepting it, but there may not be enough time for that to occur.

Its going to be a real mess...an entirely new system of money and debt will have to be created, hopefully this time one that will limit the arbitrary creation of both. 

I was told as a young man that everyone lives through one Economic Depression. I guess the world should have had one in 1980, but government finally crossed over to the dark side to avoid that malady and started accepting government budget deficits, which postponed what should have been a Depression. Surely 2008 would have caused a very bad Depression that would have gutted the world financial system had governments not bailed out the major banks. But now I think we have finally come to the point of no return, there are no more bullets in the mag, and maybe only one in the chamber. The governments are incredibly close to being out of options. The problem for the world will be that because the natural progression of ebb and flow that is inherent in economic cycles as well as life itself was aborted in 1980 and 2008, which means when the problems finally manifest they will have even more pent up pressures to explode than if they had been allowed to exert their will in those two preceding times. Too much time since the 1930s has elapsed, causing the natural pressures for a collapse to build to record levels. And that is reflected in the today's prices of equities and real estate. 

The sad part is there probably is little that can be done to hedge against the calamity. There are plenty of financial instruments that theoretically should rise in value as the financial assets collapse, but the problem is how do you collect from someone who has no money left to pay ? For example, say you sell short an S&P futures contract and it falls through the floor...on paper you have a really good profit. But what if the counterparty cannot make good on the amount they owe you ? Ostensibly the Exchange is supposed to backstop those losses, but the Exchange is only as good as the capital backing it. If the Exchange is out of capital and all its members are the same way, how would you get your profit ? My guess is you wouldn't. Which means that all the hedges in the world probably won't help when the armageddon of financial markets arises. 

When the financial assets collapse, then the governments will be forced to deal with a severe deflation and do what they have not wanted to do but will have no choice other than to do when this time occurs. They will have to send free money to consumers instead of financial institutions. And that's when the deflation becomes a hyper-inflation, which destroys the consumer side of the economy. 

In reply to by skbull44

Chupacabra-322 Harry Lightning Sat, 05/26/2018 - 12:31 Permalink

@ Harry,

”Its going to be a real mess...an entirely new system of money and debt..”

It’s a Criminal Fraudulent Economic System of Debt, Bondage & Enslavement.  The problem isn’t the money, it’s the usury. The Banksters which produce nothing of value & steal the real production & services from the people.

“For example, say you sell short an S&P futures contract”

Say the Criminal Banker get a real Career and produce a product or service of real value instead of Fraudulent financial instrument of destruction to the economy?

It is not interest per-se that is the problem, it is usury.  Usury used to be considered a mortal sin, but it was re-defined away, and is now a word that has no real meaning.

In Islam, there are injunctions against usury as well. 

In the original American Colonies, especially Massachusets and Pennsylvania, they didn't have "money" which was gold/silver.  They instead used bills of credit.  People would pledge something, usually land.  The land would then be the basis for hypothecation for new credit.  In today's world this is bad because it is done usuriously.  Back then they used a public bank, and the bills of credit channeled only toward new productivity.  It took three elements to become non-usurious: 

 

1) Public Bank - and the debt instrument could not be on-sold into a market.

2) Public Bank issues additional money debt free into money supply to then provide purchasing power needed for interest on the loans.  This debt free spend was channeled into the commons building bridges, ports and the like.

3) Uptake in taxes. Without some sort of tax the system would fall apart.  (Fiscal policy is taxation, another facet of money which monetarists will never admit to.)

So, the "American" credit system did have interest, and this interest would be taken up in the loan, or through taxes, and then cycle back out into the commons, thus improving general productivity.

The "American" credit system was also one of economic productivity, not finance capitalism "speculation" and usury.

Our ((friends)) and their English Shabbos Goys have always done their best to hose down the American System, because after all - usury is their method of control and sustenance.  

 

In reply to by Harry Lightning

Harry Lightning Chupacabra-322 Sat, 05/26/2018 - 13:25 Permalink

That's a very interesting history, thank you !

From what you wrote about the debt instrument not being able to be sold into a market, that would seem to indicate to me that the aggregate lending of public banks in the economy could not be more than the total value of the pledges made to back the bills of credit. Which in essence says that the total credit could not be greater than the asset value of the country. Now if that credit were apportioned to each individual in accordance to the assets the individual owned, then the total borrowing a person could engage under that system would be no greater than the value of the assets owned by that person. Wouldn't that system then tend to apportion more credit to the wealthy, making upward mobility through class structure nearly impossible ?

The other point I am wondering about is how did the Public Banks decide how much additional money to issue, and how would that additional money be accessed ? Would it be a loan or a grant, and if a loan, what would be pledged in order to access this money ? 

The term "Public Bank"...did the public own it or was it a private enterprise ? Did the bank receive some portion of the collected taxes to pay for its payrolls and operational costs ? Who regulated each bank's activities to ensure soundness of credit quality in the bank's loan portfolio ?

Did all the Public Banks issue the same currency, or did each bank issue its own vintage of currency ? If there were individual currencies issued by each bank, was there a way to exchange one currency for the other ?

In reply to by Chupacabra-322

Sonny Brakes Harry Lightning Sat, 05/26/2018 - 13:39 Permalink

When you're right, you're right. Prediction. Consider me the canary in the coal mine. I came of age during the 1980s recession and the town I'm from has never recovered. Once I managed to get into the workforce it was one sunset after another one industries after another. Unless you're connected education and experience are worthless. I managed to work enough and save enough to buy myself a tarpaper shack on the edge of town by 2006 knowing that trouble was around the corner. I was under the naive impression that a financial reset was baked into the cake, but somehow people started believing in fairy tales, Santa Claus, the tooth fairy in 2008, definitely not what command sense would have predicted. So now I'm approaching the end of a minor windfall, due to overdue infrastructure spending, that managed to put a few bucks in my jeans. By September, I'm either on welfare, working (which is still a possibility now that employers have deflated the salaries they're paying), or back in college pursuing even more education. Actually, the college option is only available because of student loans. The thing about being on welfare or in college in Canada is that you have access to supplemental health insurance whereas if you go work somewhere maybe you won't have it, but you knew that.

In reply to by Harry Lightning

runningman18 rejected Sat, 05/26/2018 - 10:53 Permalink

Agree with a lot of the points in this article, but the assumption that the central bankers "will do everything they can" to stop the next crash is dead wrong.  They're causing the next crash!  They know they're causing it.  They're even calling it a "reset" instead of what it will actually be, which is an epic disaster that only they'll benefit from.  The idea that the banksters are ignorant of what they're about to do requires some serious cognitive dissonance to believe.     

In reply to by rejected

runningman18 NidStyles Sat, 05/26/2018 - 13:44 Permalink

No, that's not stupidity, it's hubris, which is a form of ignorance but they aren't "stupid".  I'm talking about the fact that the banksters are aware of what they're doing in terms of bringing down the economy deliberately.  You're talking about something completely different; i.e. you think that they are unaware of the failure behind their own philosophy.  The problem isn't my sight on the issue, the problem is you didn't read or understand my post correctly.   

In reply to by NidStyles

SDShack runningman18 Sat, 05/26/2018 - 18:12 Permalink

Yep. they've engineered the greatest Ponzi in history, so of course they know exactly what is happening and what is going to happen. Their World Wide Debt Ponzi will end like all ponzi's, with the Ponzi creators being the only ones that get rich while almost all of the "investors" are wiped out. All necessary to eliminate the world middle class and usher in a New Feudal World Order. The sheeple will be so panicked after they engineer the crash that they will be demanding ANY relief, but all they will get is the promise of relief as "guaranteed minimum income" in exchange for perpetual economic slavery. The great reset will be the mother of all govt takeovers. Social Security, Medicare, Medicaid, Welfare, Pensions, 401k, IRA's, etc will all be purposely imploded so they can be eliminated in favor of the Ultimate MyRA. Serfs forever.

In reply to by runningman18

shortonoil rejected Sat, 05/26/2018 - 12:00 Permalink

Central bank policies are not the cause of the problem, they are the effect resulting from it. Economists, for some reason, have a difficult time differentiating between the two? This malaise has a much deeper root cause. The bankers will keep trying to push on their magic string until it is tied into a knot that no one can unwind.

In reply to by rejected

house biscuit shortonoil Sat, 05/26/2018 - 12:32 Permalink

Central bank policies are not the cause of the problem, said the idiot

This malaise has a much deeper root cause, he continued- channeling his inner Jimmy Carter

The bankers will keep trying to push on their magic string, he complained, whilst slobbering over his own smaller string

I am not an animal! I am a human being!: he was heard to say, as the SWAT team kicked in the door...

In reply to by shortonoil

Giant Meteor Sat, 05/26/2018 - 10:56 Permalink

So, to recap, central bank globally have injected massive amounts of monetary stimulus to prop up asset prices for the asset holders, in the so called recovery that never took place for the vast majority of global citizens.

And one day soon there is going to be a big price paid for all this financial alchemy that never should have occurred in the first place.

DingleBarryObummer Giant Meteor Sat, 05/26/2018 - 11:50 Permalink

It has caused mis-allocation of capital across the entire spectrum of asset classes, the most significant being labor, because the USD is the WRC.  It's a  zombie economy propped by the U.S. military (extortion muscle).

In other words, many, many people who provide nothing to a real unmanaged economy are being paid a living wage to be useless (not to mention all the money printed for welfare).  This will have many severe consequences, obviously.

In reply to by Giant Meteor

Khan Bodin Sat, 05/26/2018 - 10:58 Permalink

Why is monetization called stimulus when ameros, japs and euros are doing it? We were all taught in "high places of learning" known as schools that monetization is bad, that it's a proof of economic failure. And why are banksters printing currency out of nothing and endlessly expanding money supply in order to loan moar and thus make themselves moar profit? That is monetization and it guarantees failure of economy as learned in schools. But oligarchy must thrive. It's western way. The rule of capitalism. The rule of oligarchy. 

east of eden Giant Meteor Sat, 05/26/2018 - 13:02 Permalink

Depends on whether it's front wheel drive or rear wheel drive. If front wheel, you are likely doomed as very, very few people know how to correct out of a slide. If rear wheel then if you have any experience at all driving, you can let the car auto correct itself by NOT braking, NOT steering and taking your foot off the gas. Had that happen to me once in a old 67 Chev Impala. Slick, thin later of ice on a banking curve and all of a sudden I was in an uncontrolled spin, so I just let go of the wheel, the car did a complete 360 right in the middle of the road and came out heading forward.

Lucky.

 

In reply to by Giant Meteor

kindape Sat, 05/26/2018 - 11:08 Permalink

Chris Martenson (and Graham Summers and James Howard Kunstlerr and...) have called 8 of the last zero market crashes (go back to 2009 on this site and look).  One day theyll be right, and famous.

Not looking forward to that...

Khan Bodin Sat, 05/26/2018 - 11:39 Permalink

Have you already noticed how everything meant for deceiving the mind has that elitist, technocratic, meant-to-not-understand-or-to-be-ambiguous sound like "quantitative easing" for example, which is nothing but monetization. Everything of worth has clear, distinct and obvious resonation and meaning. Everything meant to obscure and deceive does not. That's why that moronic educated elitist trash always use "technic jargon" when explaining themselves or their thoughts. It's all by design you see.