From Davos With Love?
Debt/Asset Valuation: It will become obvious in the next recession that many of these debts will never be serviced or repaid, and this will be uncomfortable for a lot of people who think they own assets that are worth something.
Eurobank Liquidity/Solvency: European banks have already admitted to $1 trillion of non-performing loans: they are heavily exposed to emerging markets and are almost certainly rolling over further bad debts that have never been disclosed. The European banking system may have to be recapitalized on a scale yet unimagined, and new "bail-in" rules mean that any deposit holder above the guarantee of €100,000 will have to help pay for it.
FED Monetary Policy: Money policies by the US Federal Reserve and its peers have had the effect of bringing spending forward from the future in what is known as "inter-temporal smoothing". It becomes a toxic addiction over time and ultimately loses traction. In the end, the future catches up with you. "By definition, this means you cannot spend the money tomorrow."
The Effects of Central Bank Intervention: In retrospect, central banks should have let the benign deflation of this (temporary) phase of globalisation run its course. By stoking debt bubbles, they have instead incubated what may prove to be a more malign variant, a classic 1930s-style "Fisherite" debt-deflation.
Ensuing Serial Bubbles: A reflex of "asymmetry" began when the Fed injected too much stimulus to prevent a purge after the 1987 crash. The authorities have since allowed each boom to run its course - thinking they could safely clean up later - while responding to each shock with alacrity. The BIS critique is that this has led to a perpetual easing bias, with interest rates falling ever further below their "Wicksellian natural rate" with each credit cycle.
Outsourcing to Labor at The Margin/China: The error was compounded in the 1990s when China and eastern Europe suddenly joined the global economy, flooding the world with cheap exports in a "positive supply shock". Falling prices of manufactured goods masked the rampant asset inflation that was building up. "Policy makers were seduced into inaction by a set of comforting beliefs, all of which we now see were false. They believed that if inflation was under control, all was well,"
How Bad Is It? "It is a debt trap. Things are so bad that there is no right answer. If they raise rates it'll be nasty. If they don't raise rates, it just makes matters worse," There is no easy way out of this tangle.
- William White OECD Review Committee Chairman and Former BIS Chief Economist from an interview with the UK Telegraph.
QE Taps Out?
The excerpts above echo and validate almost every single Nattering we have posted since the run-up to the 2008 crisis. There is something in this more than natural... you can see how QE has "worked" so far and why there can be no more forthcoming. Vis. its tapped out on the mat due to poor ROI, not enough money or debt in the world to generate the necessary traction; despite drowning in capital, turnover or velocity is in a constricted coma; and the amplified market distortions or asset bubbles it has created, making true price discovery impossible.
Economic Side Effects?
Lacking a meaningful recovery, we have an "unnatural" reanimated "Zombie" economy. Adam Smith's severed "free market" hand should have been allowed to run its course, i.e. no bail outs, let the natural order of things play out, failure, death and birth. The Fed, since Greenspan, by inserting itself as a governing influence in markets, has done what was once taboo, affect markets for policy reasons. Un-natural "additives" is where the resultant witches brew "there is something in this more than natural" and its strange side effects and conundrums come from.
Central Bank Transparency?
The Fed has in fact perverted and degraded the assumed magical signalling quality of those markets (equity and bond) it mistakenly deems to be reflective of the real economy. Unfortunately, those assumed economic mirrors, are smoke and mirrors. Consequently, the Fed has made decisions based upon what is now, due to their own interference or lack of transparency, a tainted or bad signal. Lassie, is that Timmy in the well again?
Mixed Economic Signalling?
All that flows from the fruit of the poisonous tree (bad sensor, corrupted telemetry signal) can yield nothing short of erroneous decision making and result in systemic misguidance. Is it a coincidence that to date, starting with Greenspan's paradigm shift, "conundrum" and market "put," that all resulting central bank intervention has resulted in multiple serial bubbles, crisis and perpetual failure to rectify the situation? Apply the GIGO rule, garbage in garbage out, and Leroy Jethro Gibbs Rule 39A, there are no coincidences.
Concomitant with erroneous monetary policy, the global debt driven expansion facilitated through the unregulated credit based ED (eurodollar) has resulted in serial asset bubbles. QE, ZIRP and IOER are contractionary in nature. With the resultant concomitant contraction in global economic conditions, credit, capital and equity markets, the media narrative seeks a black swan to hoist on its own petard.
Call off the search, as they need look no further. The inter-temporal smoothing or bringing spending forward from the future is about to catch up with us. By definition, anybody's current spending, is someone else's current income. As we have already spent multiples of our future income today, (and real median household incomes are declining) we cannot spend it tomorrow. Houston, we have a problem.
ED Rehypothecated Irony?
Said problem is ironic, with all the debt-driven bail in/bail out, the central banks and banks are "short" of the very physical thing USD, that is necessary. While through all the resultant debt-driven consumption and asset bubbles, everyone via the electronic version ED are "short on" that very thing. This has led to systemic liquidity issues due to "hoarding" of the dollar; a contraction of eurodollars; and a rehypothecated irony. i.e. more leveraged claims on the underlying assets than actually exist or can be physically delivered.
The Singularity of Swan Lake?
No swan needed in this lake, just look at the economic vortex that is forming. As the inevitable end of a self reinforcing cycle turns into a systemic temporal liquidity trap. China along with all that global dollar denominated debt is on the verge of potentially becoming a singularity. Houston, forget the Black Swan, it's a Black Hole, straight ahead?
This is the tenth in a series of thematically-related missives which will attempt to identify the macroeconomic forces with potential to adversely affect capital, commodity, equity, bond and asset markets.
I wish to dedicate this missive, to one of my mentor's Salmo Trutta, who is a prolific commenter on SA. Without Salmo's tutelage, and insistence in not masticating and spoon feeding the baby ducks, as in learning the hard way, by doing the leg work and earning it, this missive would not have been possible. To you "Proximo"... "win the crowd and win your freedom" - Spaniard
Since the market potential is broad in both scope and scale, our conclusion could not be more specific than the discussion already had. Again, more grief in the dollar "short" or squeeze and its associated liquidity issues, with the potential to adversely effect capital, commodity, equity, bond and asset markets. Will it happen? TBD, and forewarned is forearmed.
As for how all of the above ties into the potential and partial list of market plays below... the market as a whole could be influenced, and this would tie into any list of investments or assets. Those listed below happen to influence the indices more than most.
Would like to thank you folks fer kindly droppin in. You're all invited back again to this locality. To have a heapin helpin of Nattering hospitality. Naybob that is. Set a spell, take your shoes off. Y'all come back now, y'hear!
Investing is an inherently risky activity, and investors must always be prepared to potentially lose some or all of an investment's value. Past performance is, of course, no guarantee of future results.
Before investing, investors should consider carefully the investment objectives, risks, charges and expenses of an investment vehicle. This and other important information is contained in the prospectus and summary prospectus, which can be obtained from the principal or a financial advisor. Prospective investors should read the prospectus carefully before investing.
Below, recommended reading for those invested in mutual and bond funds, ETFs, REITs, HY, leveraged, EM, oil, energy, bonds and the broader markets. Why? There are many macroeconomic cross sector and market asset correlations involved that affect your investments. Economic conditions, the eurodollar, global dollar debt and monetary policy all influence the valuation of the above and market plays below, via King Dollar's value, credit spreads, swap spread pricing, market making, liquidity, monetary supply and velocity, just to name a few.
Market Warning: Reading not only those listed below, but also every installment of these multi-part missives could lead to a better understanding of the market forces in play and how to profit from them.
- Run On Yuan (NYSEARCA:RMB)?
- Bull Economy Part 2
- Bull Economy Part 1
- HIBOR, LIBOR And TED... Oh My
- Is The TED Spread Yellen?
- The Fed, Behind The Magic 8 Ball?
- The Fed's Devil In The Details
- Petrodollars And Sovereign Wealth Funds
- Swap Spreads For Dummies?
- A Dollar Melt Up?
- Swap Spread Spike Signal?
- Mission Impossible: Correlations In Action?
- Oil: Shale Disrupts The Cost Paradigm? Part 3
- Oil: Price Impact? China's Shanghai Oil Exchange And RMB-Denominated Contracts
- Oil: Shale Moving The Goal Posts? - Part 2
- Oil: $20 Strippers - A Dangerous Swing Group?
- A Fed Raise Conundrum, Pt 3 How Much Pain?
- Oil: Shale Production Breakeven And Marginal Costs, Moving The Goalposts?
- New Paradigm For ETF, Mutual Fund, Bond Fund And mREITs
- Contractions In Money Flows And Market Liquidity
- The Fed's Ultimate Balancing Act
- The Emperor's New Clothes Or Econometric Misperception
- The Temple Grandin of Shadow Banking, Part 1
- Connecting the Dots, Part 6
- More Dollar Hegemony, In The Land Of OZ, Part 6
- Peak What? Christmastime in Hell, Part 6
- Peak What? The Quadruple D, The End
- An Unkind Bond Unwind
- The Feds Quandry with Uncle ED (Eurodollar)
For a complete missive series listing, click here.
These global economic developments could affect numerous capital and asset markets, sectors, indexes, commodities, forex, bonds, mutual funds, ETFs and stocks.
A List of Potential Market Plays (Long or Short?):
- Google (GOOG) 676K
- Facebook (FB) 383K
- Apple Computer (AAPL) 346K
- Citigroup (C) 344K
- Tesla (TSLA) 267K
- Amazon (AMZN) 257K
- SP 500 Trust ETF (NYSEARCA:SPY) 250K
- Netflix (NFLX) 153K
- Walt Disney (DIS) 142K
- iShares S&P 500 Value ETF (NYSEARCA:IVE) 110K
- General Electric (GE) 108K
- Bank of America (BAC) 105K
- Microsoft (MSFT) 103K
- Berkshire Hathaway B (NYSE:BRK.B) 100K
- iShares Select Dividend ETF (NYSEARCA:DVY) 97K
- Kinder Morgan (NYSE:KMI) 81K
- Chesapeake Energy (NYSE:CHK) 78K
- Freeport-McMoRan (NYSE:FCX) 71K
- Linn Energy (NASDAQ:LINE) 57K
- Schlumberger (NYSE:SLB) 55K
- Johnson and Johnson (NYSE:JNJ) 51K
- SPDR Dow Jones Industrial Average ETF (NYSEARCA:DIA) 49K
- Chipotle (CMG) 49K
- The United States Oil ETF, LP (NYSEARCA:USO) 40K
- EOG Resources (NYSE:EOG) 40K
- Berkshire Hathaway A (NYSE:BRK.A) 39K
- Union Pacific Corporation (NYSE:UNP) 31K
- CSX Corp. (NYSE:CSX) 31K
- US Natural Gas ETF (NYSEARCA:UNG) 27K
- Vanguard Total Stock Market ETF (NYSEARCA:VTI) 25K
- iPath SP Crude Oil Total Return Index ETN (NYSEARCA:OIL) 25K
- Energy Select Sector SPDR ETF (NYSEARCA:XLE) 25K
- Baker Hughes (NYSE:BHI) 23K
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.