Worst December Since Great Depression


 2018: Worst December Since Great Depression

     Reviewing the market movements over the past year and projecting out what can be expected in the new year we are left with the acknowledgement that the Federal Reserve remains mostly unaware of free market economics. The Fed has replaced true price discovery within the markets with  market manipulation and central planning. As has been discussed at length in previous posts the likely outcome of Quantitative Tightening was going to be a massive drop in the stock markets. I am not in the lest bit surprised or disappointed in the market reaction. 



     As the impact of Quantitative Tightening policy are taking hold markets are reacting exactly as expected. The Federal Reserve set themselves up for absolute failure the second they concluded that inflating a massive bubble in the debt and equity markets was a good idea. Not only did they think it was a good idea, but they further thought it was a good idea to let that bubble inflate over nearly 8 years, in what they referred to as "emergency measures". The Fed being the Fed doesn't understand or acknowledge market bubbles as a problem, instead they see bubbles as a tool to create what they call the "Wealth Effect". Unfortunately when you remove the punch bowl of free money the markets have no where to go but down, as the cost of debt climbs. The levels of debt within the markets is now so massive that raising rates will continue to bite hard as rates climb to even modest levels of sub 3%. The free lunch is over and Wall Street knows it. So I guess this could be termed as a "Poverty Effect".

 Of course the Fed suggests everything is under control. Even Janet Yellen said last year that there would not be another economic downturn in our lifetimes. The Fed further suggests everything will be measured as we go, as if they have a choice. Being data dependent is little more than a bad joke. The Fed has proven time and time again they can barely see through the financial weeds 6 months after the fact, at the best of times and are often caught completely off guard. Unfortunately time is not on their side moving forward.

It is either we unwind the QE program now and pay the price of a Fed induced collapse or we openly acknowledge that QE was little more than full on debt monetization. Debt monetization is that thing you see out of banana republics which the Fed insisted was not occurring under the QE program, when it was first announced. It was only temporary they insisted. Maybe they want us to believe it is temporary, kind of like the removal of the Gold Standard was also announced as being temporary back in 47 years ago. So if they have to now admit that the great Quantitative Easing program was in fact little more than a monetizing debt program, then that really changes a great deal of what US debt is really worth, as the markets can look forward to many more rounds of QE again and again as we move forward, as the Fed continues to react to collapsing market bubbles, they inflated with cheap free money. Round and round we'd go. The same market bubbles created by extremely easy monetary policy around the world are casting a sizable shadow over the global markets. One domino can easily set off the others. Monetizing debt is not the basis of a strong economy regardless what the Fed thinks or says. It is in fact an admission of failure and economic collapse.

The Federal Reserve is not magic and they have no magic rabbit to pull out of a hat. There are serious consequences for letting the markets inflate within a free money environment. They put off paying the price for 8 years, but I am afraid the jig is up.

The Fed has two choices. It can either let the bubble they created deflate as they continue QT and watch the markets collapse (both equity and debt), or the can fire up the printing presses again , while reminding us all it is only "temporary".

Bring on 2019!!!







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