Rethinking A Market Crash - How a New Development Changes The Game.
As you all know, I have been harping on the stock market crashing by September of next year. Considering how things were until just recently, that prediction was both logical and expected in a somewhat normal world.
However, a recent game-changer has me rethinking my position. It has nothing to do with the market going back up NOW whatsoever. It's not based on emotion, but rather based on some rather obvious and over looked new precedence that I just was able to put together - this is a game changer.
It has to do with the suspension of the USA Debt Ceiling. First, I want you to read this article here at ZeroHedge. The writer does not 'put it together' as I did immediately after reading the last 2 paragraphs of the article.
First, a quote from Narayana Kocherlakota, President of the Federal Reserve Bank of Minneapolis.
"I want to be clear at the outset that I am not saying that it is appropriate for fiscal policymakers to increase the long-run level of public debt.
I am simply pointing to one benefit associated with such an increase: It allows the central bank to be more effective in mitigating the impact of adverse shocks to aggregate demand."
"Such an increase (public debt) is only being advocated by Kocherlakota to be temporary (it won't be) to "mitigate the impacts of adverse shocks in demand."
This is an obvious reference to the upcoming Fed fund rate hike. By suspending (eliminating the debt ceiling until March 2017), congress can issue any amount of public debt it wants without any accounting for it whatsoever.
The Zerohedge writer goes to close the article by stating;
"So when the Fed talks about considering "options" in light of a lower long-term neutral rate, will one of those "options" be to encourage the Treasury to issue more debt? If so, we know a new regional Fed President that's in good with the folks at Treasury."
The answer would be a logical, "yes." Without a debt ceiling, the treasury can issue any amount of debt it desires without the public knowing about it (Japan does this, Greece did this) and for any purpose, including that to offset the effects of a fund rate hike. This would basically be inverse helicopter money. The treasury can even buy stocks, (as Japan does) and we won't know about it.
Here is an article that explains the suspension of the debt ceiling.
This "new tool" (which is robbery of the people) can also be used to QUIETLY bail out an institution that fails, even a foreign one like a Deutsche Bank, for instance. Say $DB went insolvent; Stock Market would see a strong dip, but then as Kocherlakota suggests, new issuance of public debt (note, he is directly referring to USA treasury = PUBLIC debt) can be used to mitigate the impact of adverse shocks to aggregate demand" [of stocks that would be selling off hard].
This is why for the most part, we see larger up moves on lower volume, and smaller down moves on much heavier volume. Before, QE buying did the 'low volume rally' trick. Now, the Treasury has no limit as to the amount it can borrow and spend to help keep their big money friends floating. Instead of the Fed ballooning its balance sheet, (private liability) the U,S Treasury takes the mantle - public debt/liability -- all of it again, unaccounted for without a shred of oversight.
My very first gut instinct on why the debt ceiling was basically done away with to at least March 2017 was correct; The Treasury will now be as The Fed - without audit, accountability, or responsibility to the people. The Treasury can issue an unlimited and unaccounted for amount of new public debt, and instead of The Fed (dealers) buying this debt ( they will in part indirectly) as they did before and taking on the balance sheet risk of it via QE, the risk. it's shifted to the public,(Greece, Japan) again without any audit or accountability. This is the sole reason for basically doing away with the debt ceiling, and it's akin to a "Super Public Debt QE" that never ends.
The Fed does not need to immediately implement negative interest rates or do another "official QE" as long as the debt ceiling is "suspended." However, they will most certainly at some point do so a long with every other major global central bank.
Basically, we are following the same path as Japan here.
What can and will destroy this eventually is either a loss of the petrodollar, and/or a real and serious world war, a natural disaster, or the American populace rebelling against the government (little chance of that). Otherwise, based on what I have discovered and correctly put together, the stock market CANNOT SEVERELY CRASH (a large crash like 2008) anytime soon. Even with deflation, and when paper assets turn toxic, the Treasury will issue more public debt (unaccounted for) to directly buy the bad paper, and put the cost of this on United States Citizens, which can never be paid so it will be continually rolled over -- super monetization of the public debt, which is moot because money is debt in and of itself because it's fiat (nothing backs it).
In fact, the treasury now can also directly 'reward' wall street corporations by allowing them to basically receive FREE MONEY (on US Taxpayer backs). They can endlessly buy back shares, forward split, buy back shares - rinse, lather, repeat, with very little risk. Of course, I would expect "special favors" to increase in the form of stronger campaign donations to Presidential candidates and incumbents in Congress who "go along with this" (the large majority in both political parties).
A good deal of institutions can go insolvent, but it won't matter as their governments via the help of central banks, backed by the fed and The American Treasury will simply buy up their assets, toxic or not with newly issued and unaccounted for debt, and consolidate what is left of them with other banks, funds, etc, etc.
Remember again, without a debt ceiling, the treasury can do what it pleases, hell, they can buy millions of Italian sports cars and NONE OF US WILL KNOW!
Even when derivative exposure kicks in from a small rate hike, the effective rate still remains low, with both the fed and the U.S. Treasury ready to obviously "do whatever it takes," any such significant stock market dip/Correction SHOULD BE BOUGHT >> #BTFD.
Conclusion:
I know many will say, "how can Scott flip like this?" As I've stated over and over, if I see I'm going to be wrong based on OVERWHELMING EVIDENCE and not emotion, I must reverse course, admit I was wrong, and sail on the correct course.
I am 99999% sure that I have this dead right. Yes, when this game runs its course and it will, markets will crash to a virtual zero, but barring the events taking place I mention, the near-term chances are extremely remote -- we live in a brave new world of corrupt financial engineering.
However, this is blatant thievery of The typical American non asset holder, both corrupt and amoral. These people and their children will pay for this, and we should remember this fact come end of year when it's time to give charity! But, we aren't trading the market for morals (it has none), we are looking to capitalize, and my job is to help both you and me do so.
Reviewing key points:
1.Debt ceiling done away with, any amount can be borrowed for any purpose whatsoever without any of us knowing what was spent on what.
2. This is being done to backstop any negative effect of a rate hike which has been done to absorb the effect of Chinese Yuan devaluation in preparation for them to enter in the SDR reserve currency basket in September.
3. Fed will raise rates now that debt ceiling is gone as the treasury and fed will "do whatever it takes" to keep stock market propped up -ANYTHING IT TAKES. (American public in general are ignorant and does not care)
In time, "Audit the Fed" will be joined with "audit the treasury" sadly enough.
