The Charge Of The Light Brigade: Central Bankers Have Misunderstood Their Orders

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by: Kevin Wilson
Summary

The famous Charge of the Light Brigade serves as a metaphor for the failure of central banks in recent years; they have charged the wrong positions due to a misunderstanding.

Central planners felt compelled by dire circumstances to undertake a huge gamble in 2008, i.e., the use of unconventional monetary policies; these have transformed into permanent interventions in the markets.

But standing in their way have been the perpetual explosion of deficit spending by governments, a secular decline in economic growth, and the tremendous growth of risky corporate debt.

Central bank policies favor an ever-increasing wealth inequality that is now driving a rising tide of populism; a major financial and political crisis is on the way if we don't alter course; central banks will lose their independence and we will lose "free market" capitalism.

The decade-long asset bubble is ending, and as it deflates, prudent investors would do well to hold things like GLD or IAU, OTCRX, WHOSX, and TLT.

"Into the valley of Death rode the six hundred…Forward, the Light Brigade!

Was there a man dismayed? Not though the soldier knew, someone had

blundered…Theirs not to reason why, theirs but to do and die."

- (Alfred, Lord Tennyson, 1854)

The Charge of the Light Brigade, Crimean War, 1854

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Introduction

The Crimean War was fought between a coalition of the British, French, Ottomans (Turks), and Sardinians on one side, and the Russians on the other side, during the period from 1853 to 1856 (Wikipedia, 2019a). The war was ultimately a successful attempt by Britain and France to prevent the Russian Empire from gaining territory at the expense of the weak and declining Ottoman Empire. However, there were setbacks on the road to victory, including a famous battle that ended in disaster for the British on October 25, 1854. The British army and their allies faced a counter-attack from the Russians on the Crimean Peninsula, which turned into the Battle of Balaclava. During the battle, the Earl of Cardigan's Light Brigade (cavalry) was assigned the task of recapturing an Ottoman (Turkish) naval artillery battery that had just been captured by the Russians and was thus disorganized and unprepared for an assault. However, a miscommunication by a junior officer directed them to frontally assault (by mistake) a very strong and well-prepared Russian army artillery battery in a different location. As the poem quoted above says, they rode into the Valley of Death, despite knowing that something was wrong with their orders.

Simultaneous attacks in support of the Light Brigade were launched by the British Heavy Brigade (cavalry) and French Chasseurs d'Afrique (cavalry). The British heavy cavalry unit advanced hardly at all before realizing something was terribly wrong and suspending their attack, leaving the Light Brigade alone in the center of the battlefield, facing the concentrated fire of some 50 Russian artillery pieces and thousands of rifles (Wikipedia, 2019b). The French unit carried a piece of high ground on the flank of the valley and accomplished their mission. In any case, out of 670 men in the Light Brigade who made the ill-fated attack, 118 were killed, 127 were wounded, and 60 were captured, making the total casualty rate about 45%. Only 195 of their horses survived the battle.

This disaster may serve as a metaphor of sorts for what I believe has been happening with central bank policies over the last decade or so. Actually the problems date back to the Greenspan era some three decades ago, but it all came to a head in 2008 when the central banks decided (in understandable desperation) to try out a grand experiment as a last resort in the midst of a global crisis. A great, mad gamble (i.e., unconventional monetary policy) was therefore undertaken by Ben Bernanke and other central bankers around the world during the Great Financial Crisis ("GFC") and its aftermath. These central planners felt compelled by dire circumstances to undertake this huge gamble (cf. Kevin Wilson, 2017a), and many would say they were fully justified in doing so (e.g., Ray Dalio, 2018; Principles for Navigating Big Debt Crises, Part 2, Greenleaf Book Group, Austin, Texas, 187p).

After all, they apparently helped us to avoid a depression when one seemed almost certain to descend upon us. It should be pointed out however that although it was excessive private sector debt, regulatory capture, and extreme risk-taking on Wall Street that really drove the crisis, various central bankers' own fingerprints were all over a number of the events that ultimately transpired to produce both the credit bubble and the final economic meltdown that came with its collapse (e.g., David Wessel, 2009; In Fed We Trust: Ben Bernanke's War on the Great Panic, Three Rivers Press, New York, 341p).

But even so, the Fed and other central bankers didn't really start the metaphorical "war" that led to their misdirected "charge" in the "Battle of 2008" and its aftermath. The "war" was arguably really about the central bankers' fight against multiple "adversaries" (problems) they had little (or at most, indirect) responsibility for creating: 1) long-term deflationary or disinflationary expectations amidst a debilitating secular decline (Chart 1) in economic growth; 2) the mindless, heedless, perpetual explosion of deficit spending by governments everywhere, who have ended up using the "digital printing" of fiat currencies via "QE," and artificially (and almost eternally) low interest rates as the justifications for ever more government spending (Christopher Lingle, 2016; Richard M. Ebeling, 2018); 3) the intrinsic complexity and opacity of the shadow banking sector and its continued escape from both practical regulation and realistic econometric modeling (Michael D. Bordo et al., 2011); Kevin Wilson, 2019a; 4) the deregulation or critical lack of regulation by the "SEC" with respect to questionable practices on Wall Street like naked shorting, novation (selling on) of existing short-term credits, and historically-based ("VAR") risk analysis (Bryan Burrough, 2008; Matt Taibbi, 2010; Richard Levick, 2018; Laurence J. Kotlikoff, 2018); and 5) mark-to-market accounting of highly illiquid, risky assets (Brian S. Wesbury & Robert Stein, 2009).

Chart 1: Declining Nominal GDP and UST 10-Yr. Yields Since 1982

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One factor driving the secular decline in economic growth in each successive business cycle in recent decades has been our ever-increasing debt burden in both the private (Chart 2) and public (Chart 3) sectors (Kevin Wilson, 2017b; Kevin Wilson, 2018a). Public sector debt in the US has risen because of chronic deficit spending by Congress and various administrations since the US opted for a fiat money system in 1971. Central banks have been enlisted by the fiscal authorities to paper over the frightening explosion in government debt in numerous countries, in part by monetizing it in recent years via "QE," and this has had unexpected consequences (Nikolaos Bourtzis, 2017; Nomi Prins, 2018; Sven Henrich, 2019). In effect the Fed and other central banks allowed themselves to become the enablers of government fiscal profligacy, and in so doing have not only lost their credibility, but also many central banks are now effectively just another arm of government fiscal policy (for a detailed and well-documented discussion of this problem, cf. Herve Hannoun & Peter Dittus, 2017).

Chart 2: US Total Credit Market Debt/GDP Has Soared Since 1970

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Chart 3: US Federal Debt to 2017 Rivals That in WWII

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On the other hand, the sequential private sector debt bubbles, especially since 1987 (Chart 4), have been driven to a large degree by central bank monetary policy decisions that at times have caused extreme yield-seeking behavior (as rates stayed arbitrarily low during recoveries) and also promoted speculation (via the so-called "Greenspan-Bernanke-Yellen Put;" cf. Chart 5), with the result that they have actually facilitated the steady financialization of the economy (Chart 6). This serial bubble blowing has caused a massive increase in wealth inequality, and this inequality is part of what's been driving the new shift towards populism in a number of countries (Kevin Wilson, 2017c). In the US, the new populism is socially conservative and fiscally liberal (Nicholas Phillips, 2019), so there are unlikely to be any near-term constraints on debt-driven government spending.

Chart 4: Corporate Debt Bubbles Since 1962

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Chart 5: The "Bernanke-Yellen Put" Helped Drive Wall Street Speculation This Cycle

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Chart 6: Financialization of US Economy

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There has also been a simultaneous decline in productivity growth (Chart 7) as debt has increased (Kevin Wilson, 2016a). Indeed, the productivity (efficiency) of additional debt in generating GDP growth has declined (Chart 8) to an appalling extent since 1969. This makes it difficult to understand why nearly everyone in government (and especially at the Fed) has continued to believe that adding more unproductive debt via low interest rates and "QE" will somehow boost growth back to the way it used to be when everything still worked well (Dave Chapman, 2016; Chris Giles, 2017). Demographic decline (Chart 9) is of course another factor in the struggle against declining GDP growth (Kevin Wilson, 2019b). The Fed can do very little about many of these problems, nor can it have much effect on massive deficit spending by politicians of both parties. But by trying heroically to keep the game going in spite of a stacked deck (as it were), the Fed and other central banks have actually made things worse in the long run. In retrospect they have vainly charged the wrong "enemy" positions.

Chart 7: Productivity Growth Has Declined to Low Levels

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Chart 8: Steeply Declining Productivity of Additional Debt

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Chart 9: Declining Growth of Working-Age Population

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The Central Banks Have Taken a Knife to a Gunfight

The Fed and other central bankers have for theoretical reasons tried to fight the modern economic "war" with antiquated ideas such as the Phillips Curve (cf. Kevin Wilson, 2018b), which was completely repudiated all the way back in the 1970s. Their econometric models are also effectively worthless. Yet despite strong empirical evidence indicating this (from their failure to predict something as huge as the "GFC," plus their perpetual failures to hit their inflation targets), they have continued to use them to guide monetary policy (Kevin Wilson, 2018c). On top of all this, they have chosen for the last 20 years (at least) to ignore a proven rules-based (Taylor Rule) approach to monetary rate decisions (Chart 10) and instead have used ad hoc (so-called "data-driven") seat-of-the-pants estimates (Kevin Wilson, 2017d).

A similar policy has been followed in Europe (Gavyn Davies, 2017). This has often kept rates too low as the Fed and the ECB have pandered to the markets ever more obsequiously, for many years (with the possible exception of Chairman Powell in 2018), and thus the central bankers have actively inflated a whole series of asset bubbles (Chart 11). Topping it all off, the Fed has ignored the effects of Quantitative Tightening ("QT," or balance sheet reduction) since 2015 as it simultaneously increased the Fed Funds Rate (Chart 12), with the result that it appears to have once again significantly over-tightened; this has probably helped trigger a recession that looks like it will arrive in the next few months (Kevin Wilson, 2019c; Kevin Wilson, 2019d).

Chart 10: The Federal Reserve Has Ignored the Taylor Rule For at Least Two Decades

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Chart 11: Serial Bubble Blowing By The Fed

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Chart 12: Additional Tightening From "QT" ("Shadow Rate") Boosted Effective Rates Much Higher Than Fed Admits

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As a result of using antiquated or inadequate tools, abandoning proven decision-making rules, and favoring completely unrealistic econometric models, the Federal Reserve has strayed far off the path of price stability (one of its two major mandates), first in the Great Inflation (1965-1982), and again in recent decades with its serial asset bubble blowing (Patrick Watson, 2017). Indeed, its estimates of future Fed Funds Rate increases (Chart 13) have been a joke for years, and its ability to achieve the targeted inflation rate (2.00%) has never been very good (Chart 14). In fact, its specific target of 2.00% inflation is itself nonsensical and counter-productive, because there is nothing wrong with a non-zero (say, 1.0%-1.5%) "PCE" that would require any intervention at all (Paul Volcker, 2018). The Fed's effectiveness with regard to its other major mandate, achieving maximum levels of employment, has been highly variable to say the least (Chart 15), although the current headline rate (4.0%) of unemployment appears on the face of it to be the best it's been in many years.

Chart 13: The Fed's FFR Guidance Has Been a Joke

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Chart 14: Inflation Missed the Targeted Level of 2.0% (Core PCE) From Late 2011 to Late 2017

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Chart 15: Unemployment Rates Have Twice Soared During Recessions

To Levels Far Above Optimal or Natural Rates

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This assumes however that the huge numbers of the long-term unemployed (1.3 million) and the partially employed (8.6 million) that are not counted in the headline rate simply don't mean anything (cf. David Rosenberg, 2019). Indeed, the U-6 or total unemployment rate (which does count them) is still 8.1% or double the headline rate (Chart 16), and this current U-6 rate is about the same as it was in early 2007 (only a few months before the recession began), and well above the 6.8% U-6 rate observed all the way back in late 2000 (again, right before the 2001 recession began). However, even this measure does not include those who left the labor force permanently in the 2008-2009 recession and its aftermath, a number that has improved but is still estimated at about 2% of the prime working-age population or some 2.5 million people (Chart 17). There are of course structural factors in GDP growth, inflation, and employment that the Fed can do nothing about.

The Fed never could and never will be able to control employment, a silly Congressional mandate with which they should probably not be burdened (Jared Meyer, 2015). In any case, the Fed's dual mandates are the only authorized goals, yet it seems clear that the tools the Fed has been forced to use, or has chosen to use, are either theoretically inappropriate, inadequate to the task at hand or not fit for purpose, similar to someone taking a knife to a gunfight.

Chart 16: Total (U-6) Unemployment Rates Since 1996

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Chart 17: Civilian Employment Population Ratio (Aged 25-54 Yrs.)

Since 1950

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Confused Central Bankers in an Age of Excess

As I've already suggested, US central bankers actually have a virtually impossible mission based on the fact that the secular decline in the economy cannot be controlled by the tools the Fed has; nor can they perpetually paper over our dire levels of federal indebtedness via continued monetization of annual deficits (Jeff Deist, 2016). Indeed, it is clear that there are probably political limits to the future use of "QE" to offset federal spending, based on what some in Congress have said in debates about auditing the Fed (Congressional Record, 2016). It is the executive and legislative branches that must take the lead here and do something practical to bring down our debt levels. I have already made some suggestions about what could be done, including passing a federal balanced budget and setting up a sinking fund to retire the debt (Kevin Wilson, 2018d). Neither is ever likely to happen in a Congress bought and paid for by corporate, union, social justice, and other special interest groups. In fact, tax preference items for corporations and other special interests account for $1.4 trillion per year of subtractions from federal revenues, much of which can be attributed to outright corruption or corporate welfare, as the case may be (Kevin Wilson, 2017e).

With regard to our serial corporate debt bubbles (cf. Chart 4 above), Congress could theoretically do something to help here as well, perhaps by either: 1) requiring the Fed to use a rules-based system for setting rates (e.g., Norbert Michel, 2015; John B. Taylor, 2016); or 2) limiting the proportion of stock buybacks a company could undertake as a percentage of total cash flow (e.g., Hazel Bradford, 2018; cf. Chuck Schumer & Bernie Sanders, 2019). Of course, how these changes might be done is very important, and scoring political points in the rush to populism should not serve as a driving force for such legislation. There are strong policy reasons for wanting to do this. Certainly Congress could (if it wanted to) also write tighter legislation on the uses of corporate tax cuts; this seems to be necessary given yet another apparently failed attempt to use fiscal policy to boost long-term corporate investment (Charts 18 & 19).

Chart 18: Fiscal Stimulus (Tax Cuts) Have Had Little Effect on Corporate Investment

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Chart 19: Stock Buybacks at a Record Because Of the Corporate Tax Cuts

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It is sobering to note that in addition to the essentially impossible mission that the Fed faces, it has unfortunately also completely misunderstood its orders. Instead of furthering the cause then, it has charged off in the wrong direction (just like the Light Brigade in 1854) and run headlong into its (and our) worst nightmares. Actually, there are several somewhat related nightmares now: 1) unconventional policy has potentially turned into a trap that we can't escape (cf. Richard Koo, quoted by Matthew Boesler, 2013; Herve Hannoun & Peter Dittus, 2017; Op. cit.), in spite of its known limitations and failures; 2) the Fed's independence is essentially over (if it ever existed; cf. Ron Paul, 2018), since Congress and the Executive, under popular pressure, will ensure that it acts in future merely as an extension of fiscal policies; 3) the serial bubble economy will continue ad nauseam (cf. Chart 11 above); and 4) the Fed is widely perceived as lacking credibility, in the light of its series of policy failures and its craven fear of the markets (cf. Rich Miller & Liz McCormick, 2018). To some, Nightmare #1 (at least) may seem like a bold claim, so let me explain why I think this prognosis is justified.

First, the great gamble involving experimentation with unconventional policies by the world's central bankers (starting in about 2005, and really taking off in 2008) ended up including an amazing array of tools: Zero Interest Rate Policy ("ZIRP"), Negative Interest Rate Policy ("NIRP"), Quantitative Easing ("QE"), Qualitative Easing ("QQE"), an Operation Twist ("OT"), and even huge equity market purchases in some countries (e.g., Japan, Switzerland). This supposedly temporary array of experimental policies has now become entrenched and virtually permanent via nearly continuous and open manipulation of the major asset markets for over a decade. Its attractiveness has also been enhanced by blatant debt monetization in some countries for years at a time (more on this shortly). Every significant correction (since 2007) in a major market anywhere (up to just recently) was met with indirect or direct intervention ("QE," "QQE," or equity purchases) by a major central bank in proportions that had truly global impacts on asset prices (Charts 20, 21, 22). In fact, central banks now jump at the command of increasingly spoiled markets; they tend to cave in quite reliably at the 15%-20% draw-down mark, almost every time.

Chart 20: Fed Interventions Followed Market Dips (2008-2014)

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Chart 21: Global "QE" or Balance Sheet Expansion (2001-2017)

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Chart 22: Global Stock Indexes (2009-2018)

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Second, every economic slowdown (from already tepid growth) that seemed to demand higher deficit spending (i.e., fiscal stimulus) was also met by enhanced "QE" or even outright debt monetization. In fact, the largest central banks now own about 32% of all government debt (in aggregate) in their respective economies (Chart 23). Portions of this actually represent a massive, de facto debt monetization, at least to the extent that annual deficits were directly offset by annual bond purchases under some form of "QE." For the US, deficits from 2009 to 2014 totaled some $6.258 trillion (Kimberly Amadeo, 2019), while "QE" (excluding mortgage bonds but including all Treasuries) totaled some $2.013 trillion (St. Louis Fed, 2019), so roughly a third of the federal deficit was effectively monetized over a six-year period.

Chart 23: Central Banks Own Nearly a Third of Government Debt

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Clearly the boundary between monetary and fiscal policy has become rather blurred (cf., Herve Hannoun & Peter Dittus, 2017; Op. cit.). The result of this fuzzy boundary is that G7 governments, since they have implicit faith in debt-driven growth, feel increasingly emboldened to promote deficit spending and cheap credit. As growth has continued to decline, it has dragged yields down with it, even as total debt has soared (Chart 24). Central bankers have long said they want to return to "normal," but their actions speak much louder than their words. And given their mandates, they instinctively want to boost their market interventions anyway, in the face of declining productivity, feeble growth, and muted inflation. Indeed, as economics pundit Sebastian Mallaby said in 2016 (Philip Turner, 2017): "…Central banks [today] face an excruciating dilemma. Low growth and low inflation call for stimulus; markets untethered from fundamental value make stimulus seem dangerous."

Chart 24: Rates Fall As Global Debt Soars

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Third, there is likely a natural limit to all of this "QE" stuff that isn't discussed by politicians very much. Low rates via "ZIRP," "NIRP," and "QE" have promoted the ever-greater issuance of all forms of debt, but the efficiency of that debt in boosting growth has plummeted as the total cumulative debt burden has increased (cf. Chart 8 above), making debt-driven growth less and less effective (as already mentioned). But the extreme irresponsibility of fiscal policy as promulgated by Congress and the Administration (in the US) means that federal deficits are likely to soar from $1.1 trillion this year to $2.3 trillion by 2028, and that is assuming that there are no recessions (Chart 25). I have no doubt that this will lead eventually to one of two related and equally terrible outcomes: 1) effectively permanent political dominance of the Fed by fiscal authorities in order to facilitate debt monetization via "QE," or even "helicopter money," on a grand scale; or 2) a bond market rebellion (by the infamous "bond vigilantes") that arises as that market chokes on the huge issuance of new government and/or corporate debt, which in turn causes rates to be jacked up high enough to trigger a crisis, which will likely also result in renewed "QE" or a first dose of "helicopter money."

Chart 25: US Annual Deficits Over $1 Trillion Forever

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Fourth, an extremely unnatural market now exists, driven by yield-seeking behavior near the Zero Bound, with no legitimate price signals for anything at all, due to their suppression by the Fed and other central banks (Kevin Wilson, 2019b; Op. cit.). Recently the various central banks, led by the Fed, have undertaken "normalization" of interest rates and bloated central bank balance sheets, but there are indications that they have waited too long (cf. banking sector analyst Dick Bove, quoted by Michelle Fox, 2018; Charles Hugh Smith, 2018). The credit cycle is now ending, years before the central bankers are ready, and yet there's a possibility that, because of simultaneous "QT" or "shadow rates" and gradual Fed rate increases, the Fed has actually over-tightened like it did in 1936, causing the disastrous second phase of the Great Depression (Kevin Wilson, 2016b).

Fifth, the unconventional policies used by central banks were pursued by cutting yields (first to low rates, then to zero and below) in the period from 1990 to 2008, and later on, by buying assets for their balance sheets in the period from 2007 to 2019. These actions were taken in part to force investors to seek higher yields by taking on additional risk. This was deemed desirable because it was expected to enhance the "wealth effect" of recent economic theory, which would result in a boost to consumption by the well-off who actually owned most assets (cf. Mark Zandi et al., 2018). It was presumed also that there would be trickle-down benefits for the general population due to renewed GDP growth. This trickle-down effect has clearly been rather minor, since US wealth inequality (for example) has soared since 1990 (Chart 26). Lower yields were also expected to promote lending and boost overall economic activity (Patrick W. Watson, 2018). Unfortunately, the "wealth effect" also runs in reverse, and it appears to be subtracting from growth now that asset prices are in trouble (Charts 27 & 28). Another goal of central bankers was to boost inflation levels to their favored target ranges in each respective economy; this was in part designed to offset the presumed risk that would have resulted from deflationary expectations becoming entrenched (Raghuram Rajan, 2018).

Chart 26: US Wealth Inequality Has Soared

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Chart 27: "Wealth Effect" and Stock Prices

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Chart 28: "Wealth Effect" and Housing Markets

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Sixth, the major central banks have felt compelled to extend their unconventional policies for the better part of a decade (Kevin Wilson, 2017f; Kevin Wilson, 2018c), instead of declaring an end to the crisis (years earlier) as they should have, and removing their extraordinary and supposedly temporary interventions. Central bankers were rightly afraid of over-tightening before full recovery took place, much as they had done in 1936, as already mentioned above. But the unexpected has seemingly occurred anyway, because: 1) the central bankers have held on so long that they've completely destroyed price discovery for almost all asset classes; 2) much of European and some other national debt outstanding is now at negative rates (Chart 29), so governments fear any return to "normalcy;" and 3) zombie corporations are on the hook for many billions of dollars in junk-rated debt, and they will be greatly harmed by a return to "normal" rates. Yet, in spite of much foot-dragging and delay, it rather amazingly appears that the Federal Reserve has over-tightened again anyway (Kevin Wilson, 2019c; Op. cit.), based on its belated and desperate attempt to return to "normal." This truly does feel like a trap.

Chart 29: Growing Pile of Negative Yielding Debt As Global Economy Slows

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Not only that, but the large increase in wealth inequality (Chart 26 above) as a result (in part) of central bank pandering to the markets for 25 years has likely also been part of the driving force behind the recent shift (cf. Chart 30) towards populism (The Heisenberg, 2018; Yann Algan et al., 2018). Perception is everything, and it does seem to many that the last thing on central bankers' minds is Main Street. They are of course not the only ones who have some responsibility here, but they have not done very well at maintaining the financial health of the Middle Class. Thus the great gamble has not only failed, but it has also probably contributed to a potentially dangerous situation today, as people are losing much of their faith in the system.

Chart 30: The Rise of Populist Parties in Europe

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The Coming Storm

It now seems likely that we are trapped in a suffocating vortex of exploding debt, central bank interventions that enable the issuance of even more debt, artificially propped-up markets lacking any sort of price signals, inherent and increasingly dangerous financial instability, and rising (and unsustainable) wealth inequality. A financial crisis of overwhelming severity may very well be the result (Herve Hannoun & Peter Dittus, 2017; Op. cit.). There is significant risk of a truly explosive brand of populism taking power if such a crisis occurs, especially in those countries where populism is already in the ascendant. Indeed, there is even a risk that "free market" capitalism itself will potentially be on the chopping block when that happens. There is still plenty of time (I think) to turn the ship of state away from such a tragic outcome, but we will need better leadership than we have now (cf. Kevin Wilson, 2017g). Alternatively, we will at some point slide into the depths of perhaps the greatest financial crisis since 1932, and we will face a global depression. Currency devaluations will become inevitable, just as they did in the 1930s, and the Middle Class will pay a very heavy price in unemployment and loss of wealth.

I don't have any idea when this might happen, but I think there are many reasons to fear that this will be the final outcome of our love affair with debt. Central banks should be making it harder for governments to act so irresponsibly, but for a variety of reasons, they either can't or they won't. The Fed and other central bankers have charged off to fight mythical enemies in some cases, and the wrong foes in other cases, with the result that central planners are not only failing to stop the rush towards the abyss, but they are also cheerfully helping us go faster towards our financial doom. Ray Dalio has written about his fear of the rising level of wealth inequality and the resulting increased influence of populism (Ray Dalio, 2018; Op. cit.), but he seems somewhat less concerned about the failure of central banks to rein in the markets and limit government fiscal lunacy. I am in the camp of Herve Hannoun and Peter Dittus (2017; Op. cit.), both formerly with the "BIS," who stated that, "…Governments…are surreptitiously slipping into a different concept, that of a permanent intervention of central banks in government bond markets." This conveniently relieves governments of any requirement to control spending, and it is the epitome of political expediency. But it is an absolute certainty that it will end in tears, very likely yours and mine.

In the near-term, I think it's clear that we are at the end of the latest credit bubble, and its deflation is going to hit markets very hard. I believe that those who own long-term Treasuries and gold will make a lot of money in the next 12-36 months, and those holding stocks will writhe in pain at their enormous paper losses. Allowing for human nature, most people will sell closer to the bottom than the top. A bull market for the US Treasury bond is historically the norm under these circumstances (Eric Hickman, 2018), and a strong one is likely again (Van Hoisington & Lacy Hunt, 2018). Given the current long-term sell-off from the January market high, the renewed sell-off from the October market high, and the state of certain national economies (e.g., China, Europe, Japan), it makes sense to invest some money in a gold fund like SPDR Gold Shares (GLD), but only as a short-term hedging trade, not a buy-and-hold position. The iShares Gold Trust (IAU) is an alternative ETF that may be safer for those who want to hold it for a somewhat longer period of time. But the safest form of gold in the event of a true financial apocalypse is physical gold.

Also, for those discounting a possible near-term recession and bear market, some liquid alternatives like the Otter Creek Prof. Mngd. Long/Short Portfolio (OTCRX) could be held to protect assets in the event of a much sharper market draw-down associated with deteriorating economic data. Those in a more defensive frame of mind because of the expected eventual market slide should also hold some long Treasuries, in spite of bearish arguments to the contrary, as a stock market crash would be hugely supportive of bond prices: examples include the Wasatch-Hoisington Treasury Fund (WHOSX), and the iShares 20+ Yr. Treasury Bond ETF (TLT).

Disclaimer: This article is intended to provide information to interested parties. As I have no knowledge of individual investor circumstances, goals, and/or portfolio concentration or diversification, readers are expected to complete their own due diligence before purchasing any stocks or other securities mentioned or recommended. This post is illustrative and educational and is not a specific recommendation or an offer of products or services. Past performance is not an indicator of future performance.

Disclosure: I am/we are long GLD, OTCRX, WHOSX, TLT. 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.