Europe’s Biggest Bank Dares To Ask: Is The Fed Preparing For A “Controlled Demolition”
Why did we focus so much attention yesterday on a post in which the IMF confirmed what we had said since last October, namely that the BOJ’s days of ravenous debt monetization are coming to a tapering end as soon as 2017 (as willing sellers simply run out of product)? Simple: because in the global fiat regime, asset prices are nothing more than an indication of central bank generosity. Or, as Deutsche Bank puts it: “Ultimately in a fiat money system asset prices reflect “outside” i.e. central bank money and the extent to which it multiplied through the banking system.”
The problem is that the BOJ and the ECB are the only two remaining central banks in a world in which Reverse QE aka “Quantitative Tightening” in China, and the Fed’s tightening in the form of an upcoming rate hike (unless the Fed loses all credibility and reverts its pro-rate hike bias), are now actively involved in reducing global liquidity. It is only a matter of time before the market starts pricing in that the Bank of Japan’s open-ended QE has begun its tapering (followed by a QE-ending) countdown, which will lead to devastating risk-asset consequences. The ECB, which is also greatly supply constrained as Ewald Nowotny admitted yesterday, will follow closely.
But while we expanded on the Japanese problem to come in detail yesterday, here are some key observations on what is going on in both the US and China as of this moment – the two places which all now admit are the culprit for the recent equity selloff, and which the market has finally realized are actively soaking up global liquidity.
Here the problem, as we initially discussed last November in “How The Petrodollar Quietly Died, And Nobody Noticed“, is that as a result of the soaring US dollar and collapse in oil prices, Petrodollar recycling has crashed, leading to an outright liquidation of FX reserves, read US Treasurys by emerging market nations.
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