Wall Street Is One Sick Puppy—Thanks To Even Sicker Central Banks

Last Wednesday the markets plunged on a vague recognition that the central bank promoted recovery story might not be on the level. But that tremor didn’t last long.

Right on cue the next day, one of the very dimmest Fed heads—James Dullard of St Louis—-mumbled incoherently about a possible QE extension, causing the robo-traders to erupt with buy orders. By the end of the day Friday, with the market off just 5% from its all-time highs, the buy-the-dips crowd was back, proclaiming that the “bottom is in”. This week the market has been energetically retracing what remains of the October correction.

And its no different anywhere else in the central bank besotted financial markets around the world. Everywhere state action, not business enterprise, is believed to be the source of wealth creation—at least the stock market’s paper wealth version and even if for just a few more hours or days.

Thus, several nights ago Japan’s stock market ripped 4% higher in the blink of an eye after the robo-traders scanned a headline suggesting that Japan’s already bankrupt government would start buying even more equities for its pension plan. And that comes on top of the massive ETF and equity purchases already being made by the BOJ.

Likewise, this morning the European bourses soared on a self-evident trial balloon enabled by Reuters that the ECB might start buying corporate bonds—in addition to asset-backed commercial paper, covered mortgage bonds and targeted loan advances to commercial banks. Moreover, all this prospective asset buying with freshly minted ECB credit was supposedly a prelude to outright QE—-that is, adding sovereign debt to the ECB’s already bloated balance sheet.

The thing is, however, the last injection is never enough in today’s stimulus addicted casinos. In the case of the ECB, the market’s pandering for more monetary stimulus is especially disingenuous. The pot-bangers claim, of course, that the ECB’s current balance sheet inflation plan is just retracing old ground,;  and that it simply needs to fill a $1.2 trillion “hole” to get its balance sheet back to where it was in mid-2012 when Draghi’s “whatever it takes” ukase was delivered to Europe’s roiled bond and equity markets.

Let’s see. In just the eight year period leading up the crisis of 2012, the ECB’s balance sheet had exploded by 4X. And the the truth of the matter is that the subsequent shrinkage shown below is a dangerous, pro forma illusion. The ECB’s bloated portfolio of discount loans to member banks which were collateralized by sovereign debt was not really liquated; it just slithered to an off-balance sheet parking lot for the interim.