wallstreetexaminer.com / by Doug Noland /
The week commenced with yet another “flash crash.” The August 2015 version was notable for its ferocity and impressive global scope. Then there was the Dow’s 1,200 point “buy the dip” (and rip the bears’ faces off) rally from Monday’s lows. At Wednesday’s low point, the Shanghai Composite had sunk 18.7% from last Friday’s close, before a 13.4% rally left the index down 7.9% for the week.CURRENCY MARKETS, especially EM, were chaotic. From my perspective, the systemic nature of market dislocations provided decisive confirmation of the Global Financial Fragility Thesis.
Before diving into the present, let’s set the tone by reminding readers of an important but commonly unappreciated aspect of the Fed’s previous failed reflationary episode: Cheered on by “Keynesian” inflationist doctrine, the Fed specifically targeted mortgage Credit as the primary mechanism for post-tech Bubble system reflationary measures. In what was too surreptitious, government-directed mortgage Credit was unleashed to overpower deflation risks.
An historic expansion of mortgage debt ensued – too much of the risk intermediated, leveraged and obfuscated through sophisticated financial instruments and structures. Markets were distorted, risks were concealed and deep structural impairment was completely neglected. With the perception that Washington was backstopping mortgage Credit and housing, there was a breakdown in the market mechanism for pricing and allocating mortgage Credit. Fatefully, the marketplace completely lost its capacity to self-adjust and self-regulate. And that’s why they’re called Bubbles.
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