"The Approaching Tsunami"
by Charles Hugh Smith
"Hey, is the water in the bay receding? Never mind, free drinks are on the Federal Reserve, so party on, life's a beach, asset bubbles will never pop, we're safe. Of course you are. The Fed is all-powerful and would never let a rogue wave turn all its precious phantom wealth into broken detritus.
The water is fast receding and a wave is visible if you care to look, but nobody cares to look. Why bother? The Fed is invincible. That's all you need to know to mint another fortune. Just to keep life interesting, let's look anyway. Gordon Long and I discuss four monster waves that are about to crash onto the Fed's beach party and sweep away the unwary revelers:
1. Declining liquidity: While everyone is focused on the Fed's ceaselessly repeated reassurance that the liquidity spigot will never be closed, never, ever, ever, so party on, and asset bubbles will never pop, never, ever, ever, other central banks have already started reducing global liquidity while domestically, the Treasury General Account (TGA) is soaking up liquidity to fund the federal government's monumental deficit spending.
2. Declining global growth: Long before the pandemic swept ashore in 2020, global growth was faltering. The business cycle had not been abolished, despite Fed assurances that growth and asset bubbles will continue expanding until they reach Alpha Centauri and beyond (Dow 1 trillion, yowza, baby!). Growth by any conventional measure (PMI, ISM, industrial production, global trade flows, etc.) had stagnated or rolled over. Profits had also topped out and the expansion of leveraged debt had started to wobble, hence the Fed's frantic unleashing of a repo flood in late 2019 to cover up the putrid stench of rapidly decaying debt.
3. Global supply shock: As we all know, global supply chains that everyone assumed were unbreakably robust turned out to be extremely fragile, tightly bound systems of endless dependency chains that fell to pieces once any one link snapped.
4. China credit impulse shock: While everyone in America focuses on the Fed's We walk on water claims of unlimited power to inflate asset bubbles forever, the rest of the world lives or dies on China's credit impulse, which has long been a reliable leading indicator of global expansion or contraction. For a variety of reasons, China's gargantuan credit bubble is no longer expanding, and so China is not going to save the world from recession and asset bubbles popping.
It would be easier to put one's faith in the unlimited power of the Fed to inflate asset bubbles if the humans behind the screen weren't hopelessly compromised by self-serving corruption. But alas, they are corrupt and self-serving, and their claims of unlimited power to inflate asset bubbles forever are about to be tested. Not looking won't stop the waves from washing the beach party away.
Below, I show you how risk was never low, just hidden. Plus, eight consequential triggers of a cascading market crash. Read on.
"Risk Was Never Low, It Was Only Hidden"
by Charles Hugh Smith
"But judging by euphoric gambler - oops, I mean "investor" - sentiment and measures of volatility, risk of a market drop has been near-zero for the past 18 months. But risk was never actually low, it was only hidden. When it emerges, it's a surprise only to those who mistakenly thought risk had vanished.
As Benoit Mandelbrot explains in his book "The (Mis)behavior of Markets," crashes are an intrinsic feature of systems like stock markets. These risks are not generated by specific human actions or sentiment but by the system itself. Just as humans make subconscious decisions and then conjure up quasi-rational justifications for their choice after the fact, market participants always conjure up some event or decision as the cause of the crash. Favorites include central bank policy error, black swan events ("bolts from the blue"), earnings surprises, technical levels were breached and so on.
Mandelbrot's insights reveal why markets crash without any policy error or other fabricated-after-the-fact justification: As those who witnessed the collapse of Japan's massive credit-asset bubble in 1989–1990 observed, markets just stopped going up and started falling.
Risk is a reflection of many dynamics, but the key dynamic few participants seem to understand is the inherent instability of complex systems: Surface tranquility is not an accurate reflection of the actual state of stability or risk, no matter how long the period of tranquility stretches.
The human mind rebels at the dominance of quasi-random crashes, as our hubris and need to be in charge generate an illusion of control: Rather than accept that markets can crash more or less "out of the blue" without any black swan or other trigger, we place our faith - yes, faith - in central bank policies, readings of sentiment, technical indicators and the like.
This illusion of control blindsides us to the reality that no policy tweak can stave off the quasi-random meteor strikes that are intrinsic features of complex systems. Wallowing in our hubris-soaked illusion of control, we believe that if there were no policy errors or black swans, markets could move smoothly higher forever. That is a fundamental misunderstanding of the systemic foundations of markets.
The ideal setup for a crash is a consensus that a crash is impossible - in other words, just like the present: Sure, there are carefully measured murmurings about a "correction" but nobody with anything to lose in the way of public credibility is calling for an honest-to-goodness crash, a real crash, not a wimpy, limp-wristed dip that will immediately be bought.
What I'm calling for is a rip your face off, weeping bitter tears over the grave of the speculative wealth that you thought was forever crash. All those buying the dip because the Fed will never let the market go down will be crushed like scurrying cockroaches and all those trying to rotate into the next hot sector or asset class will also be crushed like scurrying cockroaches because when the Everything Bubble pops, well, everything pops. There is no shelter in a risk-off cascade.
The crash is coming as a result of multiple mutually reinforcing dynamics, the first being that no "serious person" believes a crash is possible, much less imminent. In no particular order, here are a raft of other causally consequential triggers of a cascading market crash:
1. As I noted in my call for the top, “Is Anyone Willing to Call the Top of the Everything Bubble?” (Sept. 6, 2021), there is no history to support the widespread confidence that the extremes of overvaluation, leverage, euphoria and speculation last forever, or even much longer than the lifespan of a cockroach. We're well past that benchmark into unprecedented insanity. So what happens next: squish. Just for the record, the Dow topped out on Aug. 16, the S&P 500 topped out on Sept. 3 and the Nasdaq topped out the day after my call, Sept. 7. (Close enough for gummit work...)
2. The credibility of the Federal Reserve is in the dumpster, which just caught fire. The Fed is corrupt on multiple levels - thoroughly, completely corrupt, and so are all its minions, proxies, apparatchiks, toadies, apologists and lackeys. This is finally leaking through the Fed corruption-containment vessel as even the lackeys in the billionaire-owned corporate media are now fearful of losing whatever tattered shreds of credibility they still possess by refusing to acknowledge Fed corruption, overreach and hubris.
And so at long last, the Fed no longer walks on water. The Fed's fraudulent travesty of a mockery of a sham scam has finally breached the three-foot-thick containment walls and the putrid stench of Fed corruption can no longer be bottled up.
Like any good kleptocratic politburo, the Fed cashiered the two most indefensible scapegoats to divert attention from the equally corrupt incumbents presiding over the collapse of Fed credibility. Don't be surprised if the scapegoats are airbrushed out of official photos, per officially approved propaganda.
3. The fuel of the inflation rocket has just ignited and the clueless, corrupt Fed is watching the boost phase in abject, humiliating confusion, as the Fed is now completely powerless, having blown the opportunity to get ahead of the curve by reducing their making billionaires richer "stimulus" a year ago. Inflation is not just embedded, it's global. Natural gas prices could triple in entire regions without even breathing hard, and the costs of other essentials could just as easily triple without breaking a sweat. Inflation crushes risk-on speculative markets like, well, scurrying cockroaches. Squish.
4. The Fed has lost control of yields. We all know that liars reveal their dishonesty via microsignals, and with this in mind, slow down the video of Fed politburo speakers, starting with Chairperson Powell. Wealth inequality soaring? It's not our doing! etc.
Oops, the cat is out of the bag: The Fed has lost control of yields. Trust in the Fed's godlike powers is wavering, as punters and players realize the Fed's shuck-and-jive has finally lost its power to wow the greedy and the credulous. Rising yields crush risk-on speculative markets like, well, scurrying cockroaches. Squish.
5. China is not "saving the world" this time. China has other fish to fry and it isn't bailing out global markets as it did in previous bubble pops. Squish.
6. The rising U.S. dollar is Kryptonite to speculative markets, emerging-market debt and risk-on euphoria. Sorry about that, but you know what happens next: squish.
7. The retail bagholders are now all-in. The retail punters have finally gone all-in on the "this bubble will never pop" Everything Bubble. The retail bagholders have poured more cash into the Everything Bubble than they did in the past decade or two. This is of course the most reliable signal that a bubble is about to pop. Sorry about that: squish.
8. The buy the dip crowd has been so well-trained that they will provide the necessary buying to keep the cascade from gathering too much momentum. A stairstep down that sucks in buy the dip buyers is ideal for those profiting from the decline. First up: a rally to close the quarter positively to make it appear that every money manager beat the index funds. And so on. But the net result is still: squish. Consequences can be put off for quite some time, but the rot beneath the machinations only amplifies the eventual collapse.
The vast majority of market participants are about as ready for a semi-random "volatility event" as the dinosaurs were for the meteor strike that doomed them to oblivion. Financial oblivion awaits those ensnared in the quasi-religious faith of Federal Reserve power and other hubris-soaked illusions of control. The banquet of consequences is being served, and risk-off crashes are, like revenge, best served cold."
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Related:
"'Catastrophic' Property Sales Mean
China's Worst Case Scenario Is Now In Play"
"No ponzi scheme can continue if the participants lose faith in a favorable outcome, and at $62 trillion, China's housing sector is the world's biggest ponzi scheme."
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