Submitted by David Stockman via Contra Corner blog,
Eric King: “David, the man who is counsel to big money around the world, Michael Belkin, just spoke with KWN and issued a dire warning for the financial markets. I just wondered how you see things at this point with the Dow recently tumbling and everything that is happening across the globe? What should we expect?”
Stockman: “Well, the watchword at this point is stay out of harm’s way. We are headed into a perfect storm of policy failures. This is not simply a failure by the Fed, which has inflated this massive bubble and painted itself into a corner with no clue how to get out, but we are also seeing an absolute failure of American world dominance….
Our foreign policy is collapsing everywhere and yet the Washington war party keeps wanting to do more of the same. This confrontation with Putin is utterly out of hand and unnecessary. Now we have a trade war going that is going to ricochet through an already fragile European economy.
We hear today that Obama is considering going back into Iraq. What is he thinking? If you layer that on top of an already fragile financial bubble that is waiting to burst, I think we are in a zone of extreme danger. It’s hard to predict whether this will be the big, destructive bear market that inevitably has to come, or simply just another dip that encourages the robots and the trained seals on Wall Street to buy for another move higher. But one of these times we are going to have a big failure and I don’t think it’s too far down the road.
If you look at the stock market it has gone nearly straight up for the last 64 months. If you look at the chart of the S&P 500 you can see that year after year the dips get shallower and more infrequent and that is not a healthy chart. That is a sign of a market that is not discounting the actual real world future, but simply trading the word clouds and the liquidity that is being injected by not only our central bank, but central banks around the world.
The difficulty is that I don’t believe this central bank ‘act’ can be kept up. We have had such tremendous expansions of balance sheets that even the central bankers are now beginning to second guess themselves, become divided among themselves, and begin to worry about how they get out of the corner they have painted themselves into.
So those are the factors that will ultimately cause a major collapse. It’s just a question of when the black swan comes flying in, or when the confidence in this whole central banking illusion finally breaks down in the markets.”
Eric King: “Michael Belkin also told KWN that the Fed doesn’t understand the leverage they have created. Their easy money policy and money printing funnels into all kinds of hedge funds in mid-town Manhattan and according to Belkin, ‘they leverage up the wazoo in al these weird, arcane derivatives.’ He warned a great deleveraging is coming that is going to feed on itself.”
Stockman: “Yes. I think the whole global financial system is booby trapped with both visible and hidden leverage. The problem with the Fed, and Yellen in particular, is that they are looking at a very narrow set of indicators. For instance, the nominal balance sheets of the big banks.
But the biggest source of leverage in the economy today is the whole area of structured finance and options trading of one type or another. These Wall Street mechanisms are inherently leveraged; and the market has been coiled up like a spring everywhere owing to the endless bid funded by that massive leverage. Well, on the way up this forces assets values to continue to inflate and rise. But on the way down, when these positions are liquidated, the adjustment can become very violent in the other direction.”
Eric King: “It sounds like we have a train wreck in front of us.”
Stockman: “Train wreck is a pretty good term to describe what is coming. But this train wreck isn’t simply going to hit a wall out of the blue. Actually, it has been forming and accumulating and expanding for many years now, and yet it has simply been ignored, particularly by the financial markets which have ridden this bubble to these extreme and historic heights.
But when you take the balance sheet of the Fed from $900 billion to $4.5 trillion in less than 70 months, and when that pattern is replicated around the world, that is a train wreck in slow motion. The only issue is, when does it hit the wall? The answer to that question is it’s not very far down the road, and I can promise you that is when all hell is going to break loose.”