Addicts

Containment indeed. The PBOC went into full intervention mode last night trying to minimize the market damage that had been building in futures for the week that Chinese markets were closed.
Rate cuts on overnight reserves, record liquidity injections, and of course the old time favorite: Ban short selling.

Financial market levels are the most important battlefield in the world and any downside must be prevented at all costs. Whatever it takes:

“Calm markets” is the ever ongoing operative word:

Have you noticed that in the central banking world there is no difference in action between supposed communist or supposed capitalism regimes? Constant bail outs, constant intervention, the only variable being the degree of intervention at any given time, for whatever reason.
How is the PBOC doing anything different than the US Fed? Cut rates, repo, liquidity injections, it’s all the same script. The BOJ buys ETFs, the SNB buys US FAAMNG stocks, all is centered and focused and organized to prevent any market damage.

In the past 11 years we’ve morphed from occasional intervention mode to permanent interventions. We’re in 2020 and there is no one anywhere on the planet that has a single clue as to when central banks will ever raise rates again and the notion of normalization has been safely tossed into the garbage bin of history

And it won’t stop. Uncertainty. Climate change. Slow down, virus, whatever the occasion, there’s a central bank ready to make all the trouble go away:

Yet, concerns are mounting that the moment of singularity is approaching, the point where this permanent intervention mode no longer retains control of equity markets, the concern that central bank effectiveness is no longer guaranteed, indeed a point where central banks will lose control and then the period of the great unwind begins and markets shift from buying the dips to selling the rips.

Mohamed El-Erian raised that very issue last night:

“The coronavirus outbreak amplifies two vulnerabilities: structurally weak global growth and less effective central banks. It is becoming harder for markets to treat such fragilities as being beyond the immediate horizon, especially with a host of other uncertainties not far behind, including the recurrence of trade tensions, growing realisation of the impact of climate change, technological shocks, political polarisation and changing demographics.

A weakening China is also a problem for Europe, where the European Central Bank is effectively out of productive ammunition and politicians are yet to implement a comprehensive pro-growth policy package. And with the virus affecting the movement of people and goods, there is an increased risk of a multi-year process of deglobalisation that neither the global economy nor markets are wired for.

The coronavirus also has the potential to constitute a structural break for markets: that is, a big enough shock that fundamentally shifts sentiment. Previously, markets had been underpinned by the belief that central banks were always willing and able to repress volatility and boost asset prices. That fuelled investors’ fear of missing out on a seemingly never-ending rally.

(Investors) should consider that this latest shock to fundamentals could prove severe enough to dislodge for a while the bullish market conditioning that has been so critical to this historic stock rally.”

Given that the negative economic effects of the virus are yet to be sufficiently absorbed by markets, this also calls for much greater immediate attention to potential vulnerabilities in portfolios, in the form of equity and liquidity risk.”

Wise words and symptomatic of the underlying risks still ignored by investors and masked by central banks. Today’s gap up suggests the virus is contained and the risks are gone. That is silly of course as none of this is true at the moment, but once again central bank intervention is used for containment.

And investors are once again eager to soak up the new central bank stimulus. And that makes them addicts. Permanent addicts to artificial liquidity. And you know what happens to addicts when the fix no longer provides a high. It doesn’t end pretty.

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