The Violent Collision of Market Fantasy And Viral Reality

The Violent Collision of Market Fantasy And Viral Reality

The comments below are an edited and abridged synopsis of an article by Charles Hugh Smith

The shock wave of coronavirus is about to hit the US economy and shatter everything that is fragile, starting with the stock market. It is still reverberating through the Chinese economy: auto sales, real estate sales, shadow banking loans, workers’ wages, businesses that won’t re-open, supply chains dependent on marginal enterprises, and the faith of the people in their leadership.

The fantasy in the US is that the shock wave doesn’t exist. Since it has been heading towards the US, America’s fantasy has spread throughout the stampede triggered by the Federal Reserve in early October.

Not only is America’s economy seemingly invulnerable, so is its stock market. This has fueled a blow-off-top bubble of such classic proportions that even the Fed recognizes it as a bubble. And it knows that blow-off-top bubbles always burst, and with rough symmetry: If the bubble rocketed higher in six weeks, it will crash in about six weeks.

Looking at the Fed’s balance sheet shows an attempt to engineer a soft landing; stocks will remain at a permanently high plateau. The Fed balance sheet has gone nowhere for six weeks, while the stampede in stocks gathered momentum.

Fed Chair Powell wants to avoid blowing a bubble that will inevitably burst with devastating consequences for all. But the Fed instigated the blow-off-top bubble by blowing up the Fed balance sheet by over $400 billion in a matter of weeks.

Blow-off-top bubbles tend to take around 100 calendar days to reach their euphoric peak. The current blow-off-top bubble is already long in tooth at 130 days.

Blow-off-top bubbles tend to give a last chance to leave the thundering herd. That was yesterday.

In a low-volume market dominated by trading programs/bots, the exit is narrow. When the stampede tumbles off the cliff, buyers vanish and markets go bidless: Each victim wants to sell everything and save themselves, but there are no buyers at any price.