Pre US market open today I want to jot down a few more thoughts on the WSB/Main Street revolution. Firstly I'll jump ahead to the main conclusion: the US economy and global confidence is fucked if they don't control this. In the simplest terms globally we've reached the limits of monetary stimulus: the effectiveness of reducing interest rates further is minimal and bond buying is already beyond the reasonable limits. The only real option left is fiscal stimulus. What do you think happens when a large part of your population starts throwing all their savings and stimulus cheques into these "get rich quick" schemes to inflate known asset bubbles? Where's the consumption and return of employment that's supposed to save the economy? If both fiscal stimulus and monetary stimulus lose their effectiveness, what's next?
I don't believe Main Street will win in these bubble inflation plays. The conditions are so stacked against them. Even if they succeed in one bubble they'll blow it sooner or later on another. In the short term the collapse of these bubbles destroys confidence, in the long term destruction of lower/middle class savings is a recipe for societal upheaval.
I'm not optimistic for a strong, quick political resolution either. Trying to parent a freedom loving American is just asking to be shot in the face. Especially in today's politically divided environment, it's asking to be torn apart from both sides. Time to look for scapegoats and diversions?
The main spark of hope is the many financial institutions now curbing the use of derivatives and margin lending. If these actions dampen and deflate these bubbles softly then perhaps the worst of the damage can be avoided (and hopefully before they start sending out those new stimulus cheques!). If not, then the record high stock markets/asset prices with record low global economic conditions is just a powder keg waiting for this match to ignite. What happens this week and month could be critical.
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