The subtitle of this post is: Why everything you think is happening isn't and it might not matter any way.
First, the Bombs: Morrisey says "Shyness is nice, but it can keep you from doing all the things in life...If its not love then its the Bomb that will keep us together." As we've argued before, QE is the neutron bomb of monetary policy. CBs from all over the globe are now following Big Ben and losing their shyness. The ECB finds itself on the fringes of the New Wave. Under heavy neutron bombing, the assets are fine but the people are toast. The SP tagged a new high from the 2007 Credit Super Cycle Apex today. The unemployment rate averaged 4.5% then. The FF rate had risen 25bp systematically at 2:15et every 6 weeks for well over a year the last time "15" was the SP handle. Fast forward 49 months (your car is paid off!) and the "extraordinary emergency" 0-25bp FF gravitron, affectionately nicknamed The Zirp remains. The money market system that was has been replaced by a collateral system that pales in robust comparison.
This change has monetized the debt market. Most drive-by macro analysts have mistakenly equated large amounts of Government debt (and thus the Fed's balance sheet) as dangerously inflationary. The new financial order sucks up collateral where a name and a promise used to roam. GC futures and IOER will be asked to do some heavily lifting as the new system faces its first tests later this year (if we are right).
The Zirp has forced Boomers to maintain higher "risk asset" percentages in their savings vehicles than they had planned for in the Halcyon Days of 2007. (Even after several years of massive bond fund inflows) Ray Dalio is right, the key to de-leveraging is a nominal borrowing rate under the nominal growth rate. What he left out was the successful execution of the action is a deceit. A normalized term structure would allow Boomers to move back IN the risk spectrum and further support the collateral based system as it adjusts.
The elasticity between asset prices and economic activity could be even greater at extremes. Unless term structures are "free" enough to attempt to normalize with equity in the nose bleed seats, we will never know if the new financial system is flexible or robust enough to operate on its own. The Fed is now an annoying Helicopter Mom keeping everyone from skinning a knee and blowing out the grade curve by doing the science fair projects. Its time to cut the cord. Time will tell if Mom lets us go it alone.