Posted on 06 September 2015 with no comments from readers
The Federal Reserve may already have pencilled in a 50 per cent crash in US stock markets as a neat way to remove a lot of the liquidity created by its QE money printing suggests Europe’s largest bank, Deutsche Bank in a new report.
As ZeroHedge.com explains today: ‘DB’s Dominic Konstam implicitly ask out loud whether what comes next for global capital markets (most equity, but probably rates as well), is nothing short of a controlled demolition. A premeditated controlled demolition, and facilitated by the Fed’s actions or rather lack thereof…’
The DB report itself says: ‘The more sinister undercurrent is that as the relationship between negative rates has tightened with weaker liquidity since the crisis, there is a sense that policy is being priced to ‘fail’ rather than succeed.
‘Real rates fall when central banks back away from stimulus presumably because they ‘think’ they have done enough and the (global) economy is on a healing trajectory. This could be viewed as a damning indictment of policy and is not unrelated to other structural factors that make policy less effective than it would be otherwise – including the self evident break in bank multipliers due to new regulations and capital requirements.’
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As to what happens next? Back to the ZeroHedge analysis again: ‘Well, DB casually tosses an S&P trading a ‘half its value’, but more importantly, also remarks that what we have also said from day one, namely that ‘helicopter money’ in whatever fiscal stimulus form it takes (even if it is in the purest literal one) is the only remaining outcome after a 50 per cent crash in the S&P.’
In order words, QE4 to keep the show on the road. In that case why not just keep the current show on the road and forget about having a crash? What if that is not now possible, and this is the least worst option?
Central banks live in a la-la land where mere mortals fear to tread. However, the consequences of all the money printing of the past few years have already ended in a stock market crash in China, so why not the US where stock market valuations are also very high on historic measures?
We’ve certainly heard it said that the People’s Bank of China has deliberately used a stock market crash to mop up its liquidity problems. Why not see the Fed do the same? It could well be the only route back to normal interest rates and investment dividends.
Would there be a hurried panic reaction in the opposite direction by the Fed with a QE4? We would put money on it and buy gold and silver to profit from that last great bubble before the great global reset of currencies that will be the end of this volatile period, and a transition away from the dominance of global financial markets.
Be careful you could be about to lose rather more than your shirt!