Tuomas Malinen+ Your Authors @mtmalinen PhD econ. Chief Economist of GnS Economics. Adj. Professor of Economics @ Uni Helsinki. Economic growth, economic crises, monetary unions and central banks. Jan. 17, 2020 3 min read + Your Authors

While the 'permabulls' have been correct on the #StockMarket , I find their arguments (no crash, strong support) rather hilarious.

Let's look at the facts, shall we, starting from early 2018. Thread.

As we all know, 2017 was the year of "Liquidity Tsunami". 1/

Yet, in October 2017, the #Fed started to experiment with balance sheet run-off with just $10 billion/month.

In the last week of January 2018, the Fed rolled off some $18 billion worth of assets from its balance sheet, while the US stock markets were breaking records. 2/

The response of the markets was swift.

In 2nd of February 2018 the Dow Jones industrial average fell by 666 points.

We warned our customer on the risk of an imminent crash, and published a blog. 👇 3/

On the 5 Feb, 2018, the Dow Industrial average experienced the worst daily point decline of its history by falling 1175 points.

But, the #Fed eased the speed of the balance sheet run-off for the month, and the rally continued.

A drastic change came in September 2018. 4/

In August, 2018, a global balance sheet runoff started.

While the balance sheet of the four major central banks fell by meagre €131 billion from July to October, the response of the markets was brutal.

Selling in the US stock markets commenced in October. 5/

While there few brief rallies in November and the DJIA rose a little bit by the end of the month, uneasy mood crep to the capital markets.

In December, selling accelerated to a rout. In Christmas eve, 2018, the DJIA recorded its biggest Christmas fall ever. 6/

By early January, credit markets were cascading into a full panic.

A salvation came in the form of panicked central bankers.

The PBoC started to inject liquidity into the banking system, and the #Fed made a drastic U-turn in its monetary policy on the 4 January 2019. 7/

The record liquidity injections of the PBOC and the U-turn of the Fed turned the mood fueling the asset markets to one of the fierce rises in the history of US stock markets. Credit markets also rallied, but only modestly.

Global CB balance sheet runoff continued. 8/

In 16 September, 2019, the US financial markets broke.

Rates in the #repo -market shoot up, and panic swept through the #Fed.

Their decade-long money conjuring had finally broken the US financial system. The #Fed enacted emergency repo-operations the first time since 2009. 9/

The emergency repo-operations continue today, and they keep distorting the US financial system even more. 👇

The #Fed is utterly trapped, as noted by @DiMartinoBooth , and the only question remains, how long can they keep the system afloat? 10/

I do vaguely remember the last years of the Soviet Union. Then, the "permabulls" of socialism argued that it could never fail.

If was too big, it had too much control on the economy and society, and it had "limitless resources".

But one day, people said: enough. 11/

Current market 'permabulls' remind me of those defenders of the Soviet Union (in more ways than one).

Still, the fact remains that while the #Fed is currently playing the music, all that is required for everything to come down, is that the investors stop dancing. 12/

This, for example, happened in October 1929. 👇

Yes, the market has gone up, but only because central banks have thrown the kitchen sink at it.

Yes, a victory for the permabulls, but an extremely hollow and dangerous one. 13/

Those who truly understand the market logic, know that when this ends, it ends spectacularly.

The unpleasant fact is that liquidity alone cannot sustain markets indefinitely. The #economy is not doing so well to justify the current valuation levels. /14


You can follow @mtmalinen.


Tip: mention @threader_app on a Twitter thread with the keyword “compile” to get a link to it.

Enjoy Threader? Sign up.

Since you’re here...

... we’re asking visitors like you to make a contribution to support this independent project. In these uncertain times, access to information is vital. Threader gets 1,000,000+ visits a month and our iOS Twitter client was featured as an App of the Day by Apple. Your financial support will help two developers to keep working on this app. Everyone’s contribution, big or small, is so valuable. Support Threader by becoming premium or by donating on PayPal. Thank you.

Follow Threader