It could be argued the only reason there has been any strength and investment in the emerging markets and the reason most of the developed world have not posted double digit negative GDP figures since 2008, has been the unprecedented market interventions by the Central banks worldwide. They have essentially acted as a backstop for the global economy with policies such as the ongoing Quantitative Easing (QE).
In the process, trillions have been added to sovereign, corporate and private debt worldwide and the expected growth from all of this intervention has not materialised. This was again recently highlighted by the massive ISM manufacturing index miss in the US.
As central banks and government intervene in the free markets, with unprecedented sovereign bond purchases and distressed asset purchases such as Retail Mortgage Backed Securities (RMBS).
They have created a Ponzi like scheme where only continued purchases of these assets in greater numbers, will continue to support the mark to market pricing of these assets on the balance sheet of the central banks and major financial institutions worldwide.
In the US especially, sovereign debt has accelerated since 2008 up to $17.3 trillion. It has now hit levels that require even greater issuance of treasury bonds annually, in order to roll over maturing debt, interest on the existing debt and to keep interest rates low to prevent default.
The fed has provided the artificial demand for these bonds and now owns 30-40% of the Treasury bond market.
However, the danger of this has now been exposed, with the recent move by the Federal Reserve to taper back on QE from $85 billion to $65 billion on monthly purchases.
Just a 23% reduction in monthly QE purchases has led to capital flight from emerging markets. On top of this it has led to capital rotation in domestic markets as the DOW, S&P 500, NASDAQ and Russell 2000 as well as global indices begin to accelerate losses, as investors begin to see the backstop for the economy and these markets as a whole taken away.
With major indices slipping under their 200 day MA’s, there is now concern of even bigger losses and the emergence of a bear market in equities.
All of this from a 23% taper is further showing how the Fed’s actions now in large determine the future outcome of the global economy and this is the biggest danger of the attempted taper.
If the Federal Reserve reverses the taper in the near future in an attempt to appease global market selloff’s and contagion, it will highlight more than ever that they simply cannot stop the monetisation of debt to support the global economy and the inevitability of the demise of the dollar and other fiat currencies in their current state, will be further exposed.
This could well and truly lead to the expected fiat currency collapses as people lose all faith in this global fiat Ponzi system and will potentially move us closer to the long expected capital rotation into finite asset’s such as precious metal’s crypto currencies and other commodities.