Wednesday, June 3, 2015

The Biggest Red Flag Yet........A REALLY PESKY FACT!

The Biggest Red Flag Yet

A few days ago the very worst thing that could possibly happen to stock market bulls actually happened. The following news flashes came across the Bloomberg wires:

*BERNANKE: NO LARGE MISPRICINGS IN U.S. SECURITIES, ASSET PRICES

*BERNANKE: HOW TO MANAGE ASSET PRICE DROP SCENARIO MORE CRUCIAL

Given the former Fed chief's well-known and often demonstrated utter cluelessness about asset mispricing, which he frequently displayed during the latter stages of the housing and mortgage credit bubble the Fed instigated between 2001 and 2007, the above information is undoubtedly a major red flag.

Once again, it is not an indicator that can be used for timing purposes, except perhaps in a very general manner (last time around, Bernanke's lead time was roughly between 3 to 6 months relative to the stock market peak, but it was much shorter relative to the median home price peak – in fact, several of his utterances with respect to the housing bubble were made after the peak had been quietly recorded in mid 2006).

Risk has increased enormously, and it will keep increasing the longer the bubble persists. Governments and their agencies such as central banks will find it extremely difficult to deal with the next crisis. They have become quite overstretched as a result of the last one. After having gone "all in" last time around, what are they supposed to do for an encore?

The only options that come to mind are repressive measures such as capital controls, confiscation of private wealth, and a host of other unpleasantries. Moreover, one must expect various radical political organizations to gain a lot of electoral support, as voters will rightly consider the establishment to have failed. This danger is especially pronounced in Europe, where the free market has very few supporters to begin with, and the political class and its media mouthpieces are highly likely to once again blame non-existent "lassez faire capitalism" for the failures of socialistic central planning institutions.

No comments:

Post a Comment