End of Fed printing and Derivative Ponzi scheme.
Recently I have become increasingly concerned about the stability of the markets,
because US Federal reserve ended their temporary liquidity measures (the “soup”
of emergency lending facilities that emerged during the financial crisis of 2008) in
late January, while the Quantitative Easing policy (lately mostly Fed purchases of
tainted MBS securities from banks using money created out of thin air, or “digitally
printed”) ended in late March 2010.
I believe the derivative Ponzi scheme grew so large, it is now entirely dependent
on newly printed money to feed it, otherwise it will collapse under it’s own huge
weight like all Ponzi schemes do. I think this is exactly what happened 2 weeks
ago, when the DOW plunged more than 1000 points intraday. News sources claimed
it was “fat finger” effect, or someone made a few orders of magnitude mistake while
placing a sell order.
Rather, I think computers that now dominate the trading volume, engaged in
indiscriminate selling and there were no bids under the market simply because
the new Fed liquidity, or printing, evaporated as of mid-April, when the last contracts
settled. Thus, the derivative bubble, which has already popped in 2008, ran completely
out of oxygen.
If this hypothesis is right and while the SEC and others try to figure out the reason
behind Thursday stock market meltdown, we may see more crashes shortly unless
Quantitative easing (money printing) resumes. Sovereign issues in Southern
Europe were blamed for the mess, and the market bounced on Monday following
the a huge European bailout. However, the bailout is a loan, not a printing effort.
Moreover, the loan money will not be injected overnight. Therefore, the danger of
more market mini-crashes or a big one due to derivatives and computers
malfunctioning from the lack of oxygen was not removed.
Stay tuned for May options expiration week, we may see a market meltdown!
See this earlier post for an explanation.
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