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5-16–Credit Bubble Bulletin=There will be no one within the marketplace with the wherewithal to absorb such losses in a crisis environment

Posted by Richard640 @ 9:31 on May 16, 2020  
Let’s start with the markets. So, U.S. equities have diverged dramatically from underlying fundamentals. Most believe this is simply the marketplace peering over the valley to the reemergence of growth once the economy moves past the pandemic. More plausible analysis focuses on the securities price impact from unprecedented monetary inflation.

Federal Reserve Assets surged $213bn last week to a record $6.934 TN, pushing the 10-week gain to $2.693 TN. M2 “money supply” (with a week’s lag) expanded another $199bn, with a 10-week rise of $2.257 TN. Institutional Money Fund Assets (not included in M2) added $15bn, boosting its 10-week expansion to $961bn.

There is clearly ample monetary fuel to push equities higher in the short-term. Yet our analysis must also factor in the Market Structure that evolved over a most protracted Bubble period. In particular, powerful speculative Bubble Dynamics fundamentally altered market perceptions and mechanisms. Assorted trend-following strategies supplanted traditional investment analysis. Algorithmic trading changed market behavior. The massive ETF complex fostered trend-following and performance chasing strategies. Negative fundamentals notwithstanding, “FOMO” (Fear of Missing Out) plays a profound role in today’s highly speculative market backdrop. Sustaining a vigorous speculative market dynamic was one cost of the Fed’s hasty and massive market bailout. 


Derivatives are also playing a momentous role in market dynamics. During the boom, faith in central bank backstops promoted risk-taking. Why not revel in risk so long as derivative market “insurance” is so cheap and readily available? This whole notion of hedging market risk is a dangerous case of “fallacy of composition.” Individual market participants can hedge market risk, offloading exposure to a counter-party in the event of a significant market decline. However, it is not possible for much of the market to offload risk. =.  
 
http://creditbubblebulletin.blogspot.com/2020/05/weekly-commentary-global-bubbles-are.html

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Post by the Golden Rule. Oasis not responsible for content/accuracy of posts. DYODD.