Wednesday, May 1, 2013

Thinking the Unimaginable

I just showed a Twitter post from Pimpco saying that there are two scenarios on the table - bad and worse...

I am, of course, referring to this one below - (side note: you have to love Nit-Twitter and all of the acrobatic symbology "@#!*" required just to get one idea across. A medium purely by and for the Idiocracy that can no longer read anything longer than a fucking haiku without losing attention), I digress...


That's why I had to laugh when ZH posted this hypothetical scenario of what interest rates would look like if the Fed were to taper and then end its monetizations. 

At least Pimpco gets it - that option is off the table. We live in the Hotel California now. There is a reason why the Fed didn't change policy today, it's because the economy is getting worse, not better.

There are only two scenarios on the table right now:

Bad
1) The U.S. is the new Japan and monetization continues far longer than anyone thinks it can because inexorable deflation forces the Fed to keep monetizing debt, implying the convergence of monetary and fiscal policy into the new Keynes(ian) policy alluded to by Pimpco (which is already well underway).

Worse
2) Or a massive unprecedented, leveraged asset crash

Fantasy Land
Contemplating this third bullshit scenario that the Fed is going to all of a sudden raise interest rates, assumes that the economy is still functioning normally, and that we are just in a slightly "modified" version of the usual business/economic cycle. We buried the real economy in the Pet Sematary and now it has come back in "modified" frankenform. Therefore, there is no way to unmodify it without a debt reset. Year over year growth is now trending back down to 0% even as I write, despite unprecedented amounts of fiscal and monetary policy still being applied. So any amount of monetary tightening would kill what is left of the slowly dying economy instantly. Thereby leading to an asset crash.

We are stuck in a classic Liquidity Trap and there is no way out - except via economic "reset". Tomorrow, the markets will be hanging on whether or not the ECB cuts its interest rate from .75% to lower than .75%, even though none of the countries borrow at that rate anyway. As always, you can't make this shit up. It's history's greatest buffoon-fest.

And as always, the reason to expect scenario (2) over scenario (1), is because Central Banks are attempting something that rightfully has never been previously attempted i.e. to inflate global risk assets by financing leveraged speculation, even as the solvency of those assets dwindles with each passing day...