Why Markets Have Technical Targets Near Zero

Why Markets Have Technical Targets Near Zero

Posted by Karl Denninger

Yes, they really do have potential technical targets in that general area.

For instance, this chart:

Or this one.

Or this one.

All show potential “head and shoulders” patterns in process.  None are confirmed, but all will be if we head back toward March’s lows.  Note that these are patterns stretching back more than a decade and thus there is no immediate expectation that this is a “tomorrow” thing – rather, it is a longer-term problem.

All target, effectively, zero.

The Nikkei has a very similar pattern on it, as do most of the other major international indices.

What could cause such a preposterous outcome in the global stock markets?

This sort of crap:

Jan. 25 (Bloomberg) — Bank of Japan policy makers are prepared to consider expanding an emergency-loan program for banks and increasing purchases of government debt should the recovery falter, people with knowledge of the matter said.

Which “emergency” is that?

This one?

When it introduced a quantitative easing policy of pumping cash into the banking system in March 2001, it said the step would stay until prices stopped falling.


Will the global capital markets keep putting up with this?  So far the answer has been “yes.”  But there exists some point – somewhere – that such a policy will cause a full-on collapse of the bond market.

Realize that Bernanke has already effectively destroyed the market for Fannie and Freddie securities.  He is the market; there is nobody who will buy Fannie and Freddie paper at anything approaching the price he has paid.

In the Ivory Tower-filled halls of central bankers, there are those who believe they can twist the dials without consequence.  That their acts, however insane, are confined to their own nations and within their own borders.

This is a dangerous, even suicidal fantasy.

Not all nations will be forever tied at the hip to such magical thinking.  Many may not be even now, and as time progresses those who are bent over the table the most by such fantasies (cough-China-cough) will of necessity find ways to decouple from this self-destructive paradigm.

If the nations involved in this fantasy (Japan, the United States and perhaps Britain) do not stop of their own accord they will continue to see deteriorating public finances which, of course, will prompt them to buy even more of their own debt. 

But such an exercise is at best a circle-jerk and at worst it destroys private investment through crowding out.and destruction of the free market’s pricing mechanisms.

The “over center” point where one becomes too deeply in the gravity well of the black hole at the center is almost impossible to determine in advance.  Japan may have already crossed beyond it. 

Once that point is reached it becomes quite literally impossible to prevent a full-on collapse of the monetary system involved.  Other nations will be forced to jettison their ties lest they be sucked into the vortex like two ships tied together when the first sinks below the waves.  If those ties cannot be jettisoned in time a coordinated worldwide bond collapse is quite possible.

There is no attention being paid to these risks, yet with Japan’s public debt twice GDP it is rapidly sucking private savings into the vortex along with it. 

When, not if, that private savings is exhausted it will be too late.

The United States does not have the luxury Japan has had, as we do not have the reservoir of private savings the Japanese had at the outset of their folly.  Instead, it is a near-certainty that The United States will attempt to cajole and, if that does not work, coerce private citizens to buy Treasury debt as a means of staving off the collapse.  There is several trillion dollars in pensions, 401ks and IRAs that could be effectively forced into such a program, should the government decide to get out its jackboots.

But that has no different outcome than does Japan’s mess – as with Japan it simply sucks all the private capital into the vortex along with the government.

If there is one thing we should have learned from Japan’s debacle, now well into its second decade, it is that “Quantitative Easing” does not work.  It fails to halt deflationary pressures because the root of the problem is that there is too much debt in the economy relative to productive output. 

Quantitative Easing is an attempt to avoid the inevitable pain of debt deflation and default.  It is nothing other than a sop aimed at preventing those who made bad loans from being forced to eat them, recognizing their insolvency and going out of business.

Since “Quantitative Easing” does not reduce the level of debt in the system it is mathematically impossible for it to succeed in the goal of relieving the debt overhang.  Indeed, it is virtually assured to make such an overhang worse, since by definition such a program will prompt further and more aggressive debt issuance, especially by the government.  It did in Japan and now it has here in The United States as well.

You cannot fix a drinking problem with a case of whiskey, but you sure as hell can get alcohol poisoning and die.

Japan is well on the road, and we are not all that far behind them.