US Stock And Bond Markets Have Not Priced In A Panic Selloff
The Greek ‘No’ vote that came Sunday evening, and the markets fall was explained as a buy the dip opportunity for participants. Nothing to worry about from the Greek surprise it will be argued. And that may be right in the near term.
But the volatility is different in here, and savvy market participants are being cautious in here, they do not wish to be hammered as a pullback or major correction is overdue. They know that a selloff is not priced into this market.
The priced-in theme presumes that nothing has changed in the financial markets during the past 30 yrs. And capitalist price discovery is always in the works.
The presumption is that participants are always diligently engaged in sifting, sorting, dissecting and discounting the massive, continuous flows of incoming information that bears on future corporate profits and present value
The Age of Keynesian central banking has destroyed all the Key elements upon which vibrant, honest price discovery depends.
These include:
1. Short sellers that ensure disciplined two-way markets,
2. Carry costs that are high enough to discourage rampant leveraged speculation,
3. Money-market uncertainty that is palpable enough to inhibit massive yield curve arbitrage,
4. Option costs that are burdensome enough to deny fast money gamblers access to cheap downside portfolio insurance, and
5. Flexible, mobilized interest rates that enable imbalances of supply and demand for investable funds to be decisively cleared.
None of these conditions exists now. The shorts are dead, money-markets interest rates are pegged and frozen, downside puts are practically free and carry trade gambling is huge in extent and magnitude.
A vibrant market of atomized competition in the gathering and assessment of information relevant to the honest pricing of financial assets has been replaced by the games of the herd.
Until Sunday the herd of speculators was chasing the liquidity, word clouds and promises of free money and market “puts” with blind, unflinching confidence.
The only thing in this market that is priced-in is the unflinching confidence that any disturbance to the Northside move of asset prices would be quickly, decisively and reliably beaten back by the Fed’s money printing presses.
But now a different kind of disturbance erupted. It is one that does not emanate from short-term “price action” of the market or an unexpected macroeconomic hiccup or lend itself to another central bank liquidity producing move.
Instead, the Greek referendum amounted to a fracture in the state power machine on which the regime of financialization is based. Meaning, false financial prices, massive, monetization of the public debt and continuous bailouts of private speculator losses, mistakes and reckless gambling.
What has actually happened is that 1 of the 4 major central banks of the world, the ECB, is now on its heals.
We will see in the frame ahead that the European Central Bank (ECB) will be battered by desperate actions emanating from Athens, as it struggles with a violent meltdown of its banking and payments system.
It will be paralyzed by an outbreak of public confusion, contention and recrimination among the politicians and technocrats who run the machinery of the Eurozone and ECB.
The US Fed will reconfirm its hundreds of billions of dollar swap lines with the ECB, and the Bank of Japan and the Peoples Bank of China will redouble efforts to prop up their faltering stock markets and to contain the “contagion” flowing from the dying Eurozone.
But, many analysts now believe that there chance that even the concerted efforts of the Key central banks of the world will not be able to contain a coming financial panic.
And, that is because the blind confidence of the herd in the markets will be tested by the possibility that the ECB will be exposed as helpless in the face of a waterfall crisis in the Euro debt markets.
These are the things to watch, as follows:
1. If the Syriza government has any sense it will nationalize the Greek banking system now, and replace the head of the Greek central bank with an ally. it will refuse to heed any ECB call for collection of the questionable collateral that stands behind its $120-B in emergency liquidity assistance and other advances; and print 10-Euro notes until the plates on the Greek central bank’s printing presses are worn out.
2. If the Greeks seize their banking system and monetary machinery from the ECB out of desperate need to stop the asphyxiation of their economy those moves will trigger pandemonium in the bond markets of Portugal, Ireland, Italy, Greece and Spain, aka the PIIGS. From there it would be just a step to an existential crisis in Frankfurt and unprecedented, fractious conflict between Berlin, Paris, Rome and Madrid.
3. With that all of the Eurozone governments fall in line instantly in favor of a massive up-sizing of the ECB’s bond-buying campaign to stop the run on peripheral bond markets, or the Mario Draghi “whatever it takes” POV will be destroyed in a selling stampede that will expose the truth, no liquidity.
Meaning that the whole ‘ball of wax’ since mid-2012 was a front-runner’s con in which the ECB temporarily rented speculator balance sheets in order to prime the PIIGS bond-buying pump and to lure gullible money managers of bank, insurance and mutual fund portfolios into loading up on the drastically overvalued public debt of the Eurozone’s weak nations.
4. Next, there will be trial balloons from the desperate halls of Brussels, Berlin and Frankfurt designed to encourage the Greeks to leave their banking system hostage to “cooperation” with their paymasters, and to persuade traders that Mr. Draghi has been ‘Green Lighted’ to buy up the PIIGS debt, and to do so without regard to the pro rata capital Key under which the current program is bound.
That, of course. assumes that the Germans, Dutch and Finns agree to an open-ended bond-buying campaign that will make Japan’s current actions appear tame by comparison.
Should that happen it is just a matter of time before the Euro heads due South, if they do not do that, the falling Euro debt prices will infect the global bond market in a wave of contagion.
Stay tuned…
HeffX-LTN
Paul Ebeling
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