The past two years have been especially brutal to so-called equity ‘bears’. Against all odds, and despite all the shocks, global capital markets—if not the real economy they are supposed to represent—have continued to climb to new heights. After the onset of the coronavirus catastrophe, the relentless rise of the asset markets, particularly in the U.S., has completely baffled many.
But it should not. We are in the midst of an asset market mania—perhaps the biggest of all time.
All the while we have been warning about the possibility of collapse of the world economy, beginning in March 2017, when we issued our first-ever warning of global crash. Then we wrote:
The crisis of 2007 – 2008 reversed the trend of financial globalization, which has undermined global growth. The pull-back in financial globalization has been masked by central bank-induced liquidity and continuous stimulus from governments which have created an artificial recovery and pushed different asset valuations to unsustainable levels. This implies that we live in a “central bankers’ bubble”.
We have noted in several times this year how central banks and especially the Federal Reserve (or the “Fed”) has been acting as the ‘de facto’ market-loss back-stopper, successfully pushing asset markets to new heights. However, it is obvious that the central bankers are only following the script they had written before. This is no ‘New Normal’.
So, let’s take a tour of the bailouts over the past 11 years.
Starting with a bang
In the depths of the Global Financial Crisis at the end of 2008, standard monetary policy tools became ineffective. After slashing the Fed funds rate below one percent in October 2008, the Federal Open Market Committee (FOMC) decided that more drastic action was needed.
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