Game Over

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Game over. Occam’s Razor: The simplest explanation is often the best one. Central banks will never extract themselves. Whether they ultimately end QE is besides the point. They won’t reduce their balance sheets. They can’t.

Powell’s “performance” yesterday was not an accident. He’s been running on the same theme of offering absolutely zero specifics. Why?

3 reasons:

1. There are none as there is no plan.

2. To maintain flexibility and not to be held accountable or anything

3. To not upset markets.

We saw this recently when he actually got challenged on MBS and QE. He couldn’t and wouldn’t offer a rationale as to what is actually economically accomplished by it:

https://twitter.com/_/status/1415361023901589514

Why? Because popping the largest asset bubble ever would result in a catastrophic reset, not only a recession, but a depression.

The reality is debt levels have so exploded in the past 13 years any pre GFC type interest rates (which were historically low back then) would collapse the entire system. They know it. I know it, you know it. The entire system is predicated on debt expansion and cheap money to sustain it. That’s it.


How do you unwind something like this without causing a giant equity and economic collapse? Occam’s Razor: You can’t. And hence no central bank is even pretending to speak about it. And no media organization is even bothering to ask them. Taper is a performance act to pretend to get back to some path of normal. News flash: There is no path to normal. The opportunity was there in 2017-2019 and they all failed to take advantage of it at the time and now the Fed has doubled its balance sheet again since last year. They couldn’t extract themselves from a $4.5 trillion balance sheet without blowing up markets. They sure as hell won’t be able to from an $8.2 trillion going on $9 trillion balance sheet. Game Over. Don’t play again.

What then does the future hold? Well, you heard it from Mohammed El-Erian: “the Fed will most likely continue to disconnect asset prices even more from fundamentals. Wealth inequality will worsen more. The Fed’s monthly purchases of $40B of MBS will continue to price people out of the housing market.”

How is this the Fed’s mandate? How will this accomplish anything other than fracture society even further to the core? How does propagating an ever larger asset bubble promote financial stability? Baffling. Investors won’t care about these questions at the moment as the gains keep coming. The questions will only get asked once the damage of the distortions will become self evident. By then it may be too late.