Friday, September 2, 2016

Understanding Ex Nihilo Credit and the Coming S&P Crash

There are all these hints out there, but what to make of them?
Indeed, if one left it at that, the answer would not be exactly wrong, however there is one more factor which is rarely discussed, and which – according to Deutsche Bank – explains virtually the entire equity rally of the past four years: the collapse of the equity risk premium as a result of plunging bond yields, which as a reminder, is the direct pathway by which central banks operate, by monetizing government, and now corporate, debt.
How do you monetize debt?  I know what they say they do, but certainly it cannot actually happen.  Something else happens when they do that to which they refer.

Debt itself is already the result of a monetization event.  When I lend you $20, you have a debt of $20.  the books are balanced.  My currency is converted to debt.  If I ship you $500 in goods net 30, you owe me $500, a debt.  In both instances there is a monetization event, and the books are balanced.

Now to take that $20 you spent and you owe me, and then say the debt can be monetized, that is counted as money, well, folks, now the books don't balance.  You have an asset, a liability, and another equal liability.  One asset two liabilities.

If a loaf of bread is a dollar today, and tonight you print 100% more currency, soon enough a loaf of bread will be $2.00 to absorb the increase in currency.  This is the definition of inflation.

But things get tricky when we are talking debt, not currency.

If debt is priced at 6%, and you "print" (monetize) again as much debt, then do prices of debt drop, deflate?

Does the interest rate drop from 6% to 3%?

Do the assets which now have a double liability drop in value, or wait, the reverse?  Do they rise in value, denominated in currency?

What happens to credit, or underlying assets, when the above occur?

The article is in relation to the price of the S&P, and notes a logical drop in the market of 40%.  But none of this is rational, for ex nihilo credit has no rational basis.  And there is always regression to the mean when there is a bubble burst.  The drop would be more like 60%, and when the short sellers start unwinding their positions, in a month or so it would stabilize at a 40% drop.  Smart money is in cash waiting to pick up that 50% bounce from the crash bottom to stabilized bottom.  That for the insiders, politicians, Foundations, etc.  You just lose 40%  And anyone who does lose money in the market, when everyone is screaming crash, well, don't they deserve it?  Anyway....
As Deutsche Bank’s Dominic Konstam writes over the weekend, “various Fed officials have raised the issue of financial stability in the context of the reach for yield and riskier products to make up for low rates. This is part of financial repression. The logic might be that once the Fed has normalized, elements of that reach for yield and risk would be unwound and this could lead to disruptive financial market volatility.”
Since when does getting my $20 back create instability?  Since when does getting my invoice for $500 paid create instability?  Getting paid means the monetization event on the books is unwound.  Well, both sides desire this above all things.  Bt what is disrupted in the FED scam is when getting paid zeroes out our mutual deal, but there is still that second liability out there.  There is nothing to which to relate it.  Yes, before it was fraud, but there was some pig in a poke, the mark did not open the bag yet to find it empty, as it is with the pigeon drop scam. The point at which the mark realizes he's been scammed can be quite disruptive, for the mark.  The FED's job is to keep the scam going (at least past the election).  When the mark is hapless citizens, and they realized they have been scammed, then it is pitchfork, tar and feathers time.

Is it not amazing that every top criminal fraud scam becomes a government program?  Social Security is based on the Ponzi scheme, the Federal Reserve System counterfeits, Treasury runs the pigeon drop scam,  Romney/Obamacare is the pig-in-a-poke,  Section 8 housing is price fixing...    unh, one could go on ad nauseum.

Anyway, back to the scam at hand.  As everyone says, this is all new.  There has never been a negative interest rate phenomenon in history. So the dynamics are yet to be recognized.

I do not know if I have any of the above relating to negative interest rates and ex nihilo credit correct.  I don't think an economist can figure this out, since they do not have the forensic tools to do so.  I think an accountant could, assuming they have the ability to define terms correctly, and not just GAAP everything.

I'd be delighted to hear from an accountant who can critique my analysis.  In so doing, maybe we can figure out some of the dynamics, and then figure out the great "so what?"

If you know a working CPA who is game to critically assess all this, I'd be delighted to entertain their views on this blog.  Who knows, maybe we'll both become famous.

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