The bull markets in bonds and stocks will not go quietly into that good night. From Sven Henrich at northmantrader.com:
One day this bull market will end and the age of the central banking enabled debt bubble will be exposed for the hubris that it is and all the sins of “potential side effects” that central bankers warn about but never do anything about will come back to haunt all of us. It’ll be the age of the great unwind. Nobody will tell us in the moment when it peaks and I suspect it will not start with a bang, rather a whimper, but only end with a bang.
And this great unwind will not last a month or a year, but many years as all the excesses will have to work themselves through the system and all the systematic buy programs will turn into systematic sell programs that will be just as relentless on the way down as they were on the way up.
They very notion of the permanent can kicking we are witnessing now will reveal itself to have been a fantasy. People forget that 2019 and into 2020 came about because of systemic failure of epic proportions. The single one time central bankers tried to tighten blew up in their faces. And the Fed’s forced re-expansion of their balance sheet has now bestowed this blow-off top that has pushed asset prices the farthest distance above the underlying size of the economy that we’ve ever seen. A perversion of the financial system that has created wealth for the few not seen since the 1920s.
By all the time-tested valuation measures and sentiment indicators, the stock market is ripe for a big fall. From Sven Henrich at northmantrader.com:
None of us can know where markets would be trading without the Fed’s constant massive liquidity injections, but now that the bubble recognition has gone mainstream (Bloomberg, FT) and acknowledged by at least one Fed president (Kaplan) I think it’s fair to say: Lower, much lower.
But while investors continue to dance on the liquidity driven momentum rally right into major resistance currently ignored data keeps suggesting that risk is much higher than anyone is willing to acknowledge. Indeed these data points suggest investors may be walking a precarious tight rope without even realizing it.
I do my best to keep pointing out these data points, but so far admittedly in vain:
Since the Fed is currently hosting the most expensive frat party of all time it’s no wonder that investors are currently ignoring everything else consequences be damned.
I’ll let the reader be the judge, but below are a few charts I think are worth documenting as they highlight what investors are entirely ignoring at this stage.
To borrow from Orwell: there are some ideas that are so stupid on central bankers can believe them. From Daniel Lacalle at mises.org:
Negative rates are the destruction of money, an economic aberration based on the mistakes of many central banks and some of their economists, who start with a wrong diagnosis: the idea that economic agents do not take more credit or invest more because they choose to save too much and that therefore saving must be penalized to stimulate the economy. Excuse the bluntness, but it is a ludicrous idea.
Inflation and growth are not low due to excess savings, but because of excess debt, perpetuating overcapacity with low rates and high liquidity, and zombifying the economy by subsidizing the low-productivity and highly indebted sectors and penalizing high productivity with rising and confiscatory taxation.
Historical evidence of negative rates shows that they do not help reduce debt, they incentivize it. They do not strengthen the credit capacity of families, because the prices of nonreplicable assets (real estate, etc.) skyrockets because of monetary excess, and the lower cost of debt does not compensate for the greater risk.
Centrally planned systems have never worked very well, and in this day and age they don’t work at all. From Charles Hugh Smith at oftwominds.com:
Anyone looking at the hollowed-out, fragile shell of a Fed-managed “market” as a system realizes a crash that runs away from central planning control is already baked in.
The last thing punters and pundits expect is a stock “market” crash, yet a “market” crash is already baked in and here’s why: real markets have internal resilience (they’re anti-fragile, to use Nassim Taleb’s phrase), and central-planning manipulated “markets” don’t.
Few look at markets as obeying systems-level dynamics that have little to do with “news” or conventional metrics. The media makes money by reporting every tiny change in mood, metrics, rumors, etc., as if these drive markets. But we all know that the reality is much simpler: The Federal Reserve is the “market.”
In other words, the “market” is no longer a functioning (real) market; it is a central-planning signaling utility of the Fed and other central banks. This hollowing-out of the real market in favor of a central-planning, top-down controlled “market” destroys the system-level functions of markets.
If you want a refresher on the legitimate functions of a market, please readThe White Man’s Burden: Why the West’s Efforts to Aid the Rest Have Done So Much Ill and So Little Good, which explains why all the hundreds of billions of dollars of top-down, central-planning “aid” to impoverished nations has failed, enriching kleptocrats and autocratic regimes while assuaging the guilt of the poverty-pimps in the IMF, UN, and all the philanthro-capitalist foundations.
Rising interest rates and rising credit downgrades pose twin threats to the corporate debt market. From Claudio Grass at lewrockwell.com:
While I have reportedly highlighted the many risks of the current monetary policy direction and the multiple distortions that it has created in the markets, in the economy, and even in society, one of the most pressing dangers of the unnaturally low rates and cheap money is the staggering accumulation of debt. Nowhere is this more obvious than in the ballooning corporate debt, especially in the US. It has been growing so rapidly and for so long, that many investors and analysts eventually got used to it, accepted it as a fact of life, and became desensitized to the immense risk it poses to the economy at large. Now, another crucial milestone has been reached and a red line has been crossed, that will hopefully force market participants to finally heed the many calls for caution and the clear warnings that have been falling on deaf ears for years.
Historians looking back on the decade now ending may well name it the decade of debt. From Michael Every at zerohedge.com:
Authored by Rabobank’s Michael Every
- We are now close to the end of the year and the second decade of the 21st century
- 2010-19 saw a marked difference between growth in developed and emerging markets – but both may be about to slow together
- World Total Factor Productivity growth was virtually zero – and China’s performance crucial
- 2010-19 was a decade of record high debt… following a global crisis created by too much debt
- Absolute poverty levels continued to decline – yet there was increased in perceived insecurity and hardship in many developed markets
- There was a major increase in global asset prices, especially of stocks and houses…
- … and in inequality of wealth and income, even as gaps between states narrowed
- Interest rates went up and then down again in developed markets, and bond yields fell to record lows; but emerging markets also saw rates and yields spike
- The USD gained against most major FX crosses, and most so against struggling emerging markets
- What do the 2020s hold for us if this was what the 2010s provided? China arguably holds the key on many fronts
A very mixed decade
We are now close to the end of the year and, given it is 2019, also of the second decade of the 21st century. That marks an opportune time to look backwards in order to then try to look forwards.
In many respects this has been a difficult decade – for example, what do we even refer to it as: “The twenty-tens” or “The twenty-teens”? Far more importantly, of course, the key developments seen over the last ten years present a very mixed picture. Some are certainly positive, and yet arguably more are deeply negative.
Posted in banking, Business, Currencies, Debt, Economy, Financial markets, Governments, History, Investing, Money, Politics
Tagged Chinese economy, global debt, Income inequality
Who says they don’t ring a bell at the top? From Tyler Durden at zerohedge.com:
Just a few months after a record number of survey respondents said that the US is late cycle, a recession is imminent, and generally were “the most bearish since the financial crisis”, the latest just released Fund Manager Survey from Bank of America has confirmed that nothing is ever quite as wrong as consensus. The reason: in the past two months optimism across Wall Street professionals has exploded, and FMS investors have now fully reversed the bearish bent, pricing out recession risks as global growth expectations jumped a record 66% – an unprecedented reversal from the -50% in June – and recession fears plummeted 33%, in what BofA said was “a dramatic turnaround from the Most Bearish FMS since the GFC in June 2019.”
And to think all it took was a $350BN expansion in the Fed’s balance sheet – with another $500 billion on deck – to force a dramatic U-turn in “professional” opinions about the future.