Today’s “Dip” Is A Warning—-Get Out Of The Casino!

Tuesday, January 27, 2015
By Paul Martin

by David Stockman
Davidstockmanscontracorner.com
January 27, 2015

Shortly after today’s open, the S&P 500 was down nearly 2% and off its recent all-time high by 3.5%. But soon the robo-machines and day traders were buying the “dip” having apparently once again gotten the “all-clear” signal.

Don’t believe it for a second! The global financial system is literally booby-trapped with accidents waiting to happen owing to six consecutive years of massive money printing by nearly every central bank in the world.

Over that span, the collective balance sheet of the major central banks has soared by nearly $11 trillion, meaning that honest price discovery has been virtually destroyed. This massive “bid” for existing financial assets based on credit confected from thin air drove long-term bond yields to rock bottom levels not seen in 600 years since the Black Plague; and pinned money market costs at zero—-for 73 months running.

What is the consequence of this drastic financial repression along the entire yield curve? The answer is bond prices which keep rising regardless of credit risk, inflation or taxes; and rampant carry trade speculation that can’t get out of its own way because central banks have made the financial gamblers’ cost of goods—the “funding” cost of their trades—-essentially zero.

Needless to say, this is all too good to be true because it has generated humungous funding mismatches. That is, on the warranted word of central bankers—-who are petrified of a Wall Street hissy fit in any event—-speculators have funded long-term debt and equity securities with overnight money which must be rolled every day. This “works”, of course, until the carry-traders are hammered by a sudden, powerful and unexpected shock owing to either a sharp drop in the price of their “long” asset or spike in the carry cost of their overnight funding.

Thus, the true evil of central bank “wealth effects” pegging of risk asset prices (i.e. the Greenspan/Bernanke/Yellen “put”) is not merely the undeserved windfalls which accrue to the financial asset owning households at the very top of the income ladder. An equally baleful effect is that it suppresses fear of risk and eventually drives it from the casino entirely.

The Rest…HERE

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