S&P/TSX Composite index (OSPTX) Responds to Stimulus: Plunge to Resume Soon
S&P/TSX Composite index(INDEXTSI:OSPTX) and other major world markets responded as predictably as Pavlov’s Dogs to the utterance by European Central Bank chief Mario Draghi pledging to ‘deploy these instruments’ – meaning more capital fabrication and Zero Interest Rate Policy. Stocks are soaring, China’s delivering the best performance in a month, and oil has even displayed a glimmer of hope by notching slightly higher at US$31.60.
This is precisely the response anticipated at MidasLetter mere days ago, with the notable distinction that Ms. Yellin has yet to launch her own capitulation to the downward spiral we are yet engulfed in. But don’t worry. As Mario’s and China’s fresh volleys of ersatz value evaporate into fairy dust, and world markets resume the mass deflation that is a response to the global collapse in core aggregate demand, Janet will print.
As stated repeatedly since 2010, the only ameliorative effect of Quantitative Easing, which is essentially the replacement of real aggregate demand with synthetic demand driven by synthetic liquidity. In short, and I do believe a resumption of the chaos of the past weeks will prove the point, the ability of such Central Bank ‘tools’ to effect lasting market exuberance is now past.
Considering the absolutely abysmal world economic data, there is no reason, liquidity deluge notwithstanding, to put capital at risk in any way shape or form. And I think we’re going to see this latest round of QE improving the financial conditions of no one and nothing but the financial institutions at the top of the food chain lucky enough to be standing next to the Spigot of Largesse.
That’s the collective experience of the world after $4.5 trillion in freshly fabricated Tier 1 capital was fractionally reserve banked into an unfathomable quantity of dollars, none of which, it appears, has been directed toward the construction of anything that might generate jobs and GDP.
So as stated here last week, this is the expected response. In that the Midas Letter thesis of the last five years was and still is, that the fabrication of capital and credit through ZIRP and QE were only able to create the illusion of recovery through thus gamed index highs, and at the direct expense of the overall integrity of the world financial system, it is expected that the yet to be announced reversal of interest rate ‘lift-off’ and, in all likelihood, the launch of QE4 Ever in the United States will occur in due course.
And, as stated this week, that response will be met with initial euphoria and market fist-pumping, the duration of that effect will be much shorter lived than in the period from 2009 to 2014, and the hyper inflationary destruction such financial ‘tools’ actually build will also materialize in due course. At some point, the Presidents Working Group on Financial Markets will be the only bid, and then its just a question of how we wind down the debt load underpinning the dollar, pound, yuan, and yen, and transition to a new world order and (my bet) a new global currency.
I’m reminded of a joke my father told me, and whose punchline I use often, much to the confusion of those who are not in on the joke.
A guy is sent to hell for being a bastard, and Satan takes him for a tour and tells him he can have his choice of three places in which to spend eternity. In the first chamber, the bodies of its occupants are consumed in eternal flame, and they writhe in agony, the screaming curdling his blood on the spot. No thanks, he tells Satan.
In the second chamber, bodies are being torn apart by machines apparently designed for the purpose, and the screaming in agony is again duplicated. He doesn’t like the look of this.
In the third chamber, everybody is standing knee deep in feces drinking coffee and chatting amicably. The smell is awful, but he thinks its absolutely the best option of the three available. He thanks Satan and heads over to the coffee machine to pour himself a cup. But suddenly the three-headed beast who is evidently the boss shouts, “Alright ya sinning bastards. Coffee break’s over – get back on your heads!”
In financial markets, the coffee break is almost over, and we’re about to get back on our heads.
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