FINANCIAL REPRESSION IS NOW “IN-PLAY”!
A FALLING MARKET CANNOT BE ALLOWED – at any cost!
The Central Bankers have clearly painted themselves into a corner as a result of their self-inflicted, extended period of “cheap money”. Their policies have fostered malinvestment , excessive leverage and a speculative casino approach to investments. Investors forced to take on excess risk for yield and scalp speculative investment returns, must operate in an unstable financial environment ripe for a major correction. A correction because of the high degree of market correlation that likely would be instantaneously contagious across all global financial markets.
Any correction more than 10% must be stopped. As a result of the level of instability, even a 10% corrective consolidation could get quickly out of control, so any correction becomes a major risk. What the central bankers are acutely aware of is:
- If Collateral Values were to fall with the excess financial leverage currently in place, it would create a domino effect of margin calls, counter-party risk and immediate withdrawals and flight to areas of perceived safety.
- The already massively underfunded pension sector (which is now beginning to experience the onslaught of baby boomers retiring) would see their remaining assets impaired. This could lead to social and political pressures that would be simply unmanageable for our policy leaders.
- A falling stock market is the surest way of alarming consumers and signalling that things are not as “OK” as the media mantra has continuously brain washed them into believing. In a 70% consumption economy, a worried consumer almost guarantees a further economic slowdown and a potential recession.
As our western society continues to consume more than it consumes, productivity is not increasing at the rate that justifies the developed nations standard of living as well as the current levels of equity markets. A possible corrective draw-down to the degree shown in this chart is simply “out of the question”! The central bankers acutely aware of this.
MARKETS TEMPORARILY HELD UP
The markets are presently, temporarily held up due primarily to three factors:
- Historic levels of Corporate Stock Buybacks,
- The chasing of dividend paying stocks for investment yield in a NIRP environment,
- Unusual Foreign Central Bank buying (example: SNB)
Professionals, institutions, hedge funds etc have been steadily lightening up on equity markets (or simply leaving completely) leaving the public holding the back.
It is estimated that the $325B that will leave the US equity markets in 2017 will be replaced by an artificial $450B of corporations buying their stocks. With corporate cash flows now falling and debt burdens triggering potential credit rating downgrades, this game is quickly slowing. The central bankers are aware of this.