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A “Market” Crash Is Baked In–Here’s Why

Charles Hugh Smith
December 27th, 2019
Of Two Minds Blog
Comments (6)

This article was originally published by Charles Hugh Smith at Of Two Minds Blog. 

Anyone looking at the hollowed-out, fragile shell of a Fed-managed “market” as a system realizes a crash that runs away from central planning control is already baked in.

The last thing punters and pundits expect is a stock “market” crash, yet a “market” crash is already baked in and here’s why: real markets have internal resilience (they’re anti-fragile, to use Nassim Taleb’s phrase), and central-planning manipulated “markets” don’t.

Few look at markets as obeying systems-level dynamics that have little to do with “news” or conventional metrics. The media makes money by reporting every tiny change in mood, metrics, rumors, etc. as if these drive markets. But we all know that the reality is much simpler: The Federal Reserve is the “market.”

In other words, the “market” is no longer a functioning (real) market; it is a central-planning signaling utility of the Fed and other central banks. This hollowing-out of the real market in favor of a central-planning, top-down controlled “market” destroys the system-level functions of markets.

If you want a refresher on the legitimate functions of a market, please read The White Man’s Burden: Why the West’s Efforts to Aid the Rest Have Done So Much Ill and So Little Good, which explains why all the hundreds of billions of dollars of top-down, central-planning “aid” to impoverished nations has failed, enriching kleptocrats and autocratic regimes while assuaging the guilt of the poverty-pimps in the IMF, UN, and all the philanthro-capitalist foundations.

The only programs that actually improve the lives of the impoverished are those that enable small-scale markets in which participants make their own decisions rather than suffer the consequences of decisions made by central-planners who not only know nothing of local conditions, they’re uninterested in local conditions because we know best.

This is the core of central-planning: a handful of those with power make decisions that cripple markets’ ability to respond to reality by allocating goods, services, capital, and credit as participants see fit.

Centrally planned markets enrich the few at the expense of the many. This is as true of “markets” in developed nations as it is in kleptocratic developing economies. The Fed is akin to Soviet-era central planners, and the net result is the same: capital is grossly misallocated, distortions are optimized to enrich the few at the top, and the market’s functionality is destroyed because it doesn’t align with the goals of the central planners.

Central planning hollows out systems and increases fragility and vulnerability. Once a market has been gutted and turned into a centrally planned “market,” it can no longer perform the key functions of markets: communicate information to all participants, discount flows of capital, goods, and services, allocate capital, etc. These functions are what enable markets to alleviate poverty by increasing the wealth created by the free flow of information, goods, services, credit, and capital.

Just as the collapse of the Soviet Union was baked in by the systemic fragilities of central planning, the Fed’s commandeering of the stock market bakes in a crash. In systems-speak, central planning manifests as non-linear effects, i.e. the consequences are not proportional to the triggering events.

Just as a light snow seems to have no effect on the snowpack piled on a mountain slope, central planning-manipulation seems to have no ill effects on “markets.” The signaling utility keeps signaling that all is well because “markets” keep rising until the snowpack gives way in an avalanche.

Central planning is all about creating the illusion of permanence and the illusion of beneficial control: central planners are careful to present themselves as all-powerful beings whose actions are beneficial to all. But like Soviet-era planners or top-down poverty pimps, their actions are not beneficial to all, and so they must labor mightily to create an illusion of permanence and absolute control, lest the systemic fragility they’ve unleashed become visible.

The Fed’s phony “market” only signals “all is well” when it’s rising, but this masks the reality that crashing markets are just as profitable as rising markets. The idea that rising markets are “good” and declining markets are “bad” is reserved for rubes and chumps, as traders and algos don’t care whether “markets” are going up or down, the only thing that matters is profiting from the trend.

Central planning optimizes a disconnect from reality that erodes trust in the market’s signals. Now that the Fed has commandeered the “market” as a signaling utility, it no longer reflects the real economy. Trust in its “signals” is as thin as liquidity: both are an inch deep and a mile wide, the ideal set-up for a crash that takes almost everyone by surprise.

Anyone looking at the hollowed-out, fragile shell of a Fed-managed “market” as a system realizes a crash that runs away from central planning control is already baked in. The timing is unknown, but the greater the confidence that the central planners are god-like, the closer we are to an “out of the blue” crash that takes the punditry and punters by surprise.

That this now seems completely and utterly “impossible” is an interesting signal in itself.

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Author: Charles Hugh Smith
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Date: December 27th, 2019
Website: https://www.oftwominds.com

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6 Comments...

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  1. Mr_Yesterday says:

    Welcome to the bubble bust economy. Shorting the markets by way of central planning has been wildly successful since the creation of the Fed, and well before that. These days big lenders borrow at a negative rate so they technically don’t even need customers, but continue to take them in for easy fleecing, to maintain the illusion of open and free markets.

    I hung on every word, great article. However, perspective is in the eye of the beholder. Ruskie fever is a side note. These systems of currency manipulation and self asking regulatory structure to create monopolies were recognized long before the creation of the Fed itself.

    I sincerely believe that banking establishments are more dangerous than standing armies, and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale.

    If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their Fathers conquered…. I believe that banking institutions are more dangerous to our liberties than standing armies…. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.

    Article 1. Section 10. No state shall enter into any treaty, alliance, or confederation; grant letters of marque and reprisal; coin money; emit bills of credit; make anything but gold and silver coin a tender in payment of debts; pass any bill of attainder, ex post facto law, or law impairing the obligation of contracts, or grant any title of nobility.

    Liberty too big to fail. Patriot Trading Group and The Liberty Report. I’m just positive this author and I enjoy similar content. Fear not, the invisible hand is ever present. I remember ABC. Always Buy Colorado. How’s ‘globalism’ working out for you personally? Vote with your wallet. It’s never too late for individuals to alter their personal spending and borrowing habits. Corporate brand recognition is for the birds.

  2. Anonymous says:

    A Splunk Y2k “crash” is also imminent at the end of the month

  3. Clown World says:

    My theory is that frn’s are collateralized, if not accepted, universally. The market would crash, when they no longer have natural or corporate resources, to sell-off, in order to pay for Boomers’ mostly-fake makework and their friends.

  4. Confederate Bill says:

    A market crash can be bad, even real bad, but it is not the worst that can happen. The market / financial systems, though heavily manipulated, eventually recovers.
    The absolute worst crisis that will play out is a default of public debt (fed., state, and local). It is at catastrophic levels, IT WILL BE EVENTUALLY DEFAULTED ON. Once it starts the effects be will be unstoppable, and not just in the US. Officialdom is acutely aware of all this, but they are not doing or saying much anything about it, they know it’s too late.
    These are the ways to stave of the effects of massive debt; 1) all levels of gov’t finally get their budgetary houses in order – this will not happen, limiting spending to that degree would bring on social chaos, 2) grow the economy to surpass the growth of debt – however, the growth of public debt for the last 40 years has far exceeded the growth of the economy, 3) inflate our way out – but the debt is so absolutely unimaginably huge that in the long run it would likely wreck the currency, 4) raising taxes to the point that gov’t would basically confiscate almost all income – it would impoverish the majority of the citizens and destroy the consumer economy, 5) keep borrowing and borrowing more which would worsen the consequences of default, 6) confiscate all forms of private tangible wealth – this one would be the most dangerous, or 7) default. Each of these “solutions” would only bring on more problems. Expect a war to accompany a severe financial crisis to distract the citizens.
    Our entire economic and financial system in the US is entirely debt based. Actually, the debt cannot be paid. Money (mostly digital and distributed by a key stroke) is created by the Fed. Res. out of thin air, and doled out to gov’t and and major banking/financial institutions – at a cost of course. This money has to be paid back with interest. There can never enough money to pay off all the debt, to do so would absorb every dollar ever created and more, more money would have to be created (from nothing), and paid back with more interest thereby only continuously expanding debt. By the way, you can thank a small handful of “elites” who did this. Don’t believe me, look on any denomination of paper money, every bill says FED. RES. NOTE, which is a really a private institution. Officialdom has surrendered its Constitutionally mandated responsibilities to a private (and secretive) institution.
    There also needs to be a joint public and private audits of the FED. RES. and of all gold reserves in the US, and released to the public – good luck with that.

    • Anonymous says:

      You are right about the monetary system being debt based. In fact, if all debts were to be paid off, there would be no money supply since all credit/money is created digitally as a loan with usury added. The loan is an asset on the bank’s ledger and a liability on the customer’s books. If you cancelled all debt, those holding the asset side of the ledger (pension funds, bondholders, 401ks, etc) would also be wiped out at the same time.

      The debt will continue to pile up…even into the quadrillions and higher…until such time as physical resources(hydrocarbons, water, food) to back up the economy run short. Then, billions will die.

  5. durangokidd says:

    Under normal circumstances the markets would have crashed initiating the end of the business cycle. The TRUMP Tax Cut has sustained the business cycle but even that was dwindling, thus QE 4.

    I expect the markets will get another boost from the Phase One Trade Agreement with China which will be signed after the first of the year.

    Major American companies are simultaneously increasing wages across the board to stymie the wave of socialism rising among the young.

    If Bloomberg or HRC can get the Democratic Party Presidential Nomination this summer, a black swan will take down the markets anticipating a Dem win and return to Globalism, attempting to thwart TRUMP’S re-election; which won’t happen. Otherwise its America First. 🙂

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