Among the many evils of the Fed’s Bubble Finance regime is what might be called the Truman Show Effect. Like the Jim Carrey character who was unknowingly living a fake life on a movie set in the 1998 film, Wall Street players—-including the financial press—have been prospering inside the Bubble so long that they do indeed think it is reality.
Or more to the point, they have forgotten (or never learned ) the laws of honest markets and sound money. They therefore have no clue that the foundation of the system is rotten to the core and that the current debt and speculation ridden financial markets are an accident waiting to happen.
We had a close encounter with the Truman Show effect yesterday during an appearance on CNBC. The thirty-something anchors were shocked to hear that Washington’s upcoming $1.8 trillion double whammy (FY 2019 Treasury borrowing of $1.2 trillion plus Fed QT bond-dumping of $600 billion) in the bond pits might generate a resounding “yield shock”, thereby upending the current huge stock market bubble where 4%+ bond yields are most definitely not priced in.
The younger of the anchors (age 32) thought the $1.8 trillion was not a problem because the soaring debt and the Fed’s balance sheet shrinkage plan have been well telegraphed and will shock no one. Yes, and as we were tempted to reply, parking on a rail crossing and knowing that a freight train is barreling down the tracks is not likely to forestall the carnage.
Likewise, the senior anchor further averred that we’ve been there before and that “awhile back” $1 trillion dollar deficits were absorbed with ease. No carnage!
To little avail, of course, we pointed out that “awhile back” came at the bottom the Great Recession when private investment had collapsed and the Fed and other central banks had been running their printing presses red hot. During the nine years of so-called recovery thereafter, which saw huge but slowly shrinking fiscal deficits, the Fed had purchased $3.5 trillion of government and GSE securities and central banks globally had absorbed a total of $15 trillion just since 2008.
But that was at the bottom of the business cycle when the central bankers were buyers of bonds. By contrast, now we are at the top of the cycle heading into year #10 of recovery and the central bankers are becoming sellers.