It’s Full Market Meltdown Mania and the Fire Truck Is on Fire

The stock market is smart in a dumb way, but it is currently unbelievably dumb in the way that it is smart. To understand that, you have to realize that today’s stock market is not a place for investing in businesses. It used to be that, but the players have all turned it into a casino for casting bets on what the Fed is going to do and then using the Fed’s money to do it. The stocks themselves — the little pieces that companies are carved into — are just chips. They are where and how you place your bets like setting your chips on squares on the craps table or roulette table.

So, investors have made their smartest moves (as measured in money made) by simply casting bets based on their knowledge that the Fed was creating money. It was the old “Don’t fight the Fed; buy every dip.” That is smart when no one is buying business anymore, but just betting on what all the others players are going to bet. It’s just a game, and in that game, bad news was always good news because it meant the Fed would create more money to play with.

It’s a much better casino to play than any in Las Vegas because the house (the Fed) tells you in advance how it is going to roll … if you believe it. Once in a very great while the Fed throws in a head fake, like it did in 2017 when Janet Yellen told everyone in the casino the Fed would put the roulette wheel on autospin for a few years so that it would keep popping up red. That made it safe to bet the economy and stocks would be in the red for some time. Just bet red. This she did by telling everyone the Fed would put quantitative tightening on autopilot for two or three years. That became a head fake, however, when the market played chicken and went red with the Fed, and the Fed chickened and stopped the wheel by hand as if were surprised the market bet everything on going red when it had just told the market everything was going red. The ball stopped back in the black.

This convinced the market it could not always trust the Fed to keep taking money away when it promises that is how it will be betting for a few years because the Fed proved to be a chicken. So, now, when the Fed is in the money-removal process once again, the market is inclined from recency bias to believe the Fed will chicken out and not do what it says it is going to do. So, this time, the players bet against the Fed, believing Yellen’s replacement would pivot again. It was unfortunate for all players when he reinforced his message by saying, “No, we’re moving forward with doubling down on the rate at which we take money out of the game.”

So, stocks crashed again. The players, and that is all they really are, should have known better because it is quite a different thing to go back to creating money in a hot-inflation environment when money is the fuel inflation is made of.

Of course, the game always has an element of chance to keep the casino fun because some old timers in the casino still cast their bets on whether or not certain companies will be making money, and those bets are run at risk from the general economy; but, as the economy tends to keep making money so long as truckloads of new money are being created and delivered, that has still been a fairly stable bet. It becomes problematic, however, when the Fed starts trucking money out of the casino at a time when the economy is, itself, a disaster. And that is now.

There’s a new game in town

This week, new economic disasters showed up in the global economy to join the nine months of the not-recession that looks in every way just like a recession, except that the labor market keeps tricking people to believe it is not a recession. The players bet so much bad news was good because it will, as bad news has done in the past, convince the Fed that did not pivot during all the recessionary bad news this year to pivot after all. So, bets went bounding back up in what appears to be another bear-market rally on the heels of the last bear market rally that occurred because the market that is smart in its stupidity (of betting that bad news is good news because it means the Fed will create more morey) but stupid in its smartness (in believing bad news is still good news in times of high inflation when the Fed says it cannot and will not pivot) bet, again, the Fed would pivot. It will be short-lived.

You see, the reason the big rollers started betting against the direction the Fed has promised again is because the casino next door was playing a similar game and just did a little shuck-and-jive in which the Bank of England head-faked the world to believe it was also going to start sucking the money away just like the Fed but instantly pivoted to run in the opposite direction before it even got started tightening, unleashing some of its largest quantitative easing because it suddenly learned, well, England is broke.

Almost out of nowhere, as I discussed in my last article, England’s supposedly most conservative investment funds started screaming they were all going to go broke in the space of something like twenty-four hours. Undoubtedly, the massive danger had been building for much longer, but no one was paying attention until the players in that geriatric, retirement corner of the London casino started screaming in unison, and then everyone ran over with terror in their eyes to realize, OH, MY GOSH, these gamblers are nearly broke!

At the same time, their casino was on fire with worse inflation than in the US; so, what did the BOE do? It did what any self disrespecting central bank would do, and grabbed a hose and started spraying gasoline on the screaming gamblers. Turns out the conservative pensioners had been making highly leveraged bets for years because of all the free money the bank had been hosing in their direction along with all the low interest the bank had established. Their bets to everyone’s surprise (and my surprise that anyone was surprised by this) all went foul when the bank started raising interest rates and everyone knew it was about to start taking the fuel away as well. That’s why the bank turned back on the fuel hose…….More Here

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