Temptation and Conscience - Wednesday, page-58

I too fear the gasket is about to blow. We've seen a few screws come flying off at 100mph. Sharp, nasty shocks. Europe and now China. China's run-up was ridiculous and so it's bust is not surprising. But China is no longer a minnow for global economies and financial markets.

Central Banks have created sickening distortions through their actions. Capitalism does not know 'too big too fail'. Capitalism is not consistent with 'heads I win, tails you bail me out'. This is textbook moral hazard. It encourages excessive risk taking.

The Fed looked God-like when they "rescued" markets from the GFC with their zero interest rates and money printing. But this is a one time save. You can't do it twice. Once you buy enough bonds to send rates to zero you can't do any more. Mildly negative rates, yes. But anymore and people will take their money out of the system. Who would pay money on their savings when you can take it out and pay no money on it. So, we've kicked the can down the road.

And make no mistake it was an impressive thump. Dow 4,000 points higher than its peak in 2007. But economics tells you there's no such thing as a free lunch. The Fed has created a zero interest rate economy! All assets are priced on zero interest rates, businesses function on zero interest rates. You can't take the punchbowl away without causing withdrawal. 7 years of zero-interest rates, that's a long time.

Zero interest rates by repressing prudent savers have herded investors into the same room. Every single bear has had a bullet put through its head by the Fed. But when everyone is in the same room, the potential for a violent selloff is higher than ever before. This is the real risk of China/Europe, contagion of fear. Fear which has been entirely absent due to faith in omniscent Central Banks. When the horses get spooked... the Fed has no ammo or credibility left. This will be it... imo. The GFC will look like a garden party due to the monster Central Banks have created.