Seven Things Nobody Talks About that Will Eventually Matter–A Lot, by Charles Hugh Smith

When the only thing that matters is that the stock market is going up, it’s time to ask yourself what could go wrong. From Charles Hugh Smith at oftwominds.com:

Nobody seems to notice the ‘diminishing returns’ on Fed manipulation, oops, I mean ‘intervention’.

Perhaps it shouldn’t surprise us that everything that will eventually matter is ignored until it does matter–but by then it’s too late. Here’s a short list to start the discussion:

1. The Federal Reserve has transformed the American populace into a nation of dismayingly over-confident gamblers. I’ve been writing about moral hazard–the separation of risk from consequence–since 2011. Punters who are insulated from risk will have an insatiable appetite for risky bets, which is precisely what we see on a mass scale, as the confidence that the Fed will never let markets drop is 99.99% because the Fed has indeed reversed every decline, no matter how modest, month after month, year after year.

The Fed has perfected moral hazard: everyone from the money manager betting billions to the punters gambling their stimmy money is absolutely confident I can’t lose because the Fed will always push the market higher. Hence the advice to never sell and keep increasing the size of one’s bets because losing is transitory (heh).

2. The Fed’s perfection of moral hazard radically incentivizes increasing debt and leverage to maximize one’s bets because the bigger the bet, the bigger the payoff–the Fed guarantees it! Margin debt is at extremes, and many wildly successful stock and options punters have reaped fantastic gains by maxing out their Robinhood margin as their winnings increase.

Since the Fed guarantees that anyone holding until the Fed gooses markets higher will be a winner, maximizing leverage is completely rational: hedging is a foolish waste of money that could have been placed on a sure winner–any long bet.

Margin and shadow-banking leverage is through the roof, but nobody sees any risk from this extreme expansion of debt and leverage. Never mind that leverage unwinds faster than it builds…

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