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The End Of The Central Bank Super-Bubble

Michael Roat profile picture
Michael Roat


  • Central bank policy has lost effectiveness.
  • China is in decline regardless of official data.
  • The deflationary forces in the global economy and financial stability risks are too great.
  • Oil remains oversupplied with a risk of increased production either from OPEC or US shale. Price upside and also inflation remain capped.
  • Risk assets including gold are overvalued. Treasuries will not provide an adequate hedge. Long USD is the safest place to be.

Eventually, market expectations become so far removed from reality that people are forced to recognize a misconception is involved. A twilight period ensues during which doubt grows but the prevailing trend is sustained by inertia... A point is reached where the trend is reversed and becomes self-reinforcing in the opposite direction.

- George Soros

The prevailing trend is central bank firewalls will always protect markets. The misconception is central banks have the ability to fix deeply ingrained deflationary forces/financial stability issues and that monetary policy ineffectiveness is a non-issue. The exponential rise in central bank balance sheets and subsequent tantrums on withdrawal since 2008 is a sign of this.

It’s become clear financial markets are being held up by central bank support, not global business and economic fundamentals. Markets may cheer this but undoubtedly massive central bank intervention is a symptom of an underlying problem. Therefore, not a reason to be optimistic. Simply put, if a patient is on life support, is that a good thing? The answer is a clear no.

The failure of the Bank of Japan is a perfect example of this. As is the ECB in being unable to generate 2% core inflation in the Euro-area despite massive expansion of the monetary base, large central bank balance sheet assets to GDP ratios, negative rates and unprecedented QE programs. Interestingly the Fed is actually the least accommodative comparatively yet USD bears love to latch onto the story that Federal Reserve QE printing and bond buying is debasing the USD. Yet the USD is still way up on a trade-weighted basis which I will touch on a bit more later.

central bank assets - balance sheet

Source: Robin Brooks, IIF

global inflationtrade weight USDFirst off I will quickly start out by saying, if you look at total credit to US private sector in 2020, it has risen which

This article was written by

Michael Roat profile picture
I have approximately 8 years of experience trading and 10 years of researching, specifically relating to central banking and credit cycles. I have developed a keen ability to synthesize and understand complex macroeconomic information very effectively and quickly. I have an in-depth understanding of international capital flows, foreign exchange rates, and global bond, equity and commodity markets. I have extensive experience tracking economic data and developing macro-economic investment theses. I specialize in and often express views relating to currencies, monetary policy, real (inflation-expectation-adjusted) interest rates and bond yield differentials. I avidly read and process daily economic news, analysis and market data. I can contribute to relevant economic thinking and discussion as well as generating and assessing investment ideas using the knowledge I’ve developed through first-hand experience trading in competitive financial markets.Disclaimer: I am not a registered financial advisor. I am a newsletter provider and nothing published under the name Michael Roat or Tri-Macro Research should be considered financial or investment advice.

Analyst’s Disclosure: I am/we are long DHT, FRO, STNG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.


Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (143)

Good data and commentary.
@Michael Roat

". . . meaning I expect global inflation and growth expectations to fall while US government yields still rise as bonds sell off due to an oversupply of issuance and a switch to the USD. This is exactly what happened in March 2020."

Do you expect it to happen as quickly as it did in March 2020, or do you expect a slower and more gradual unfolding?
Michael Roat profile picture
Not sure. I'm inclined to say the pace of the deflation theme will happen in between the pace of March and the glacial pace it's been the last several years. Closer toward March speed though maybe unfolding over a course of Months to a year. Short interest in the USD is high so that could accelerate things.
Michael Roat profile picture
My takeaway from the OPEC+ meeting is, the group is clearly on an untenable path and I think a dissolution is very possible.

Russia's oil minister, Novak, publicly supported the deal, but behind closed doors he asked for it not to go through - Bloomberg

Saudi Arabia is subsidizing the whole plan and in the process hurting their own economy and producers by volunteering to cut 1mbpd while everyone else holds steady or increases production. The entire thing was chaotically put together which is a trend with OPEC+ these days.

If this degree of complication is needed to "agree" on output, it is not a good sign. Also, the voluntary Saudi cuts will take effect in February. OPEC+ has already agreed in December to *increase* output by 500k bpd in January which could be the critical timeframe.

The worries of Saudi Arabia are an ominous sign for demand especially when investors are ebulliently long commodities. And lastly, US shale has now been given a window to ramp along with increased production from Libya and potentially Iran.

In reality, there was no agreement.
@Michael Roat My assumption is that virtually no oil producer has a cost advantage, except for geographic location. In other words, if your supply is within a high geographic demand area, you are in the catbird seat. Obviously, there are other factors (quality of crude, depth of wells, etc...), but in general, if your supply is in a relatively low geographic demand area (i.e. OPEC), than you have two options: 1) be the swing provider(s) and accept higher prices and lower volumes until such time as global demand exceeds global supply (either through declining shale output, recovering/growing global demand, or some combination of both), or 2) sell your product at a deep discount to gain market share (ie price war). IMO, the second option would yield unfavorable long term results since the cost of transporting their product to demand areas would put them at a competitive disadvantage. I believe this is the reason that OPEC reacted the way they did (and will continue to) - North American energy independence has changed the dynamics dramatically, essentially weakening OPEC's position.
timddeb profile picture
I am on the third reading. Phew!
Eric Neuwirth profile picture
Thanks @Michael Roat Michael Roat for an excellent article.

One of the most interesting pieces of information is actually in your fine print, where you disclose long positions in crude tanker companies DHT, FRO, and STNG. Despite my opposing view on inflation, which I believe will be upon us in the much less distant future, long positions in DHT and FRO account for 29% and 16%, respectively, of my investing portfolio. The thesis is that the crude shippers will simultaneously enjoy several tailwinds in the next 18 months:

a) recovery in global oil demand (independent of oil price, which may remain low due to pent up supply coming back on line),

b) a generally inflationary environment in which companies with significant debt loads will benefit as these USD-denominated liabilities shrink in real terms, and

c) industry-wide scrapping of older VLCCs outpacing newbuild deliveries for reasons discussed in the companies’ earnings calls and in podcasts by SA authors such as @J Mintzmyer (for example, here: seekingalpha.com/...

Your article lays out a different scenario, at least with respect to (b) above — one in which inflation is not to be found — and yet you are bullish on the crude tanker companies. Is it possible that DHT, FRO, and STNG do well regardless of an inflationary or deflationary backdrop?
@Eric Neuwirth Tankers enjoyed big increases in day rates due to demand as oil storage platforms and have now collapsed. Most of the articles I have read predict tanker rates wont recover until 2022.
@Eric Neuwirth

I asked essentially the same and he replied.
Powell has given the green light for a market sell off?? I guess we watched two different powells where at the last news conference he essentially said he is not worried about stock prices being too high. The fed tried to engineer a market sell off in the fall of 2018 and instead of a soft landing, the bottom fell out. The fed was forced to reverse course lest a bear market cause a recession. Powell has now changed his tune and the Fed will now get into "yield curve management" where if the long end of the yield curve gets too high, the fed will buy more longer dated bonds to bring it down. The housing market is said to be in a bubble right now with mortgages at record lows yet the fed continues to buy mortgage backed securities. Why?? It has to. Otherwise again it risks the housing market taking the economy into a double dip recession. The genie has been let out of the bottle. The little dutch boy is sticking his fingers in all the leaks in the dike attempting to keep it from collapsing. The dollar will continue to weaken because that is all the fed can do. The U.S cant pay back its debt. It cant default. It cant renegotiate it. The only thing left is for the currency to devalue. Back in 2010-2011 the USD fell another 20 percent and I think that is exactly where the dollar is going.
JHHAlpha profile picture
@Robert 7809591 But the EU and China are even worse off on debt to economy ratios, so the US dollar remains the best horse in the glue factory.
@JHHAlpha I am not predicting the complete collapse of the dollar, but I believe its best days are behind it and it will only get worse from here. I think commodity prices will continue to rise. In April 2011 Yellen gave a speech in which she said commodity prices had come too far too fast and the fed was prepared to act (with higher interest rates) BUT she thought the inflation was only "transitory", not systemic. That signaled the end of the commodity bull run. I dont think Yellen will be making a similar speech any time soon.
JHHAlpha profile picture
@Robert 7809591 That's a big so what, because it's still the best major currency.
highlarche profile picture
Gold is undervalued. Gold does better in deflation than inflation. I’m expecting record highs in 2021
You're pissing off Portnoy and the Robinhood gang
Flashback9 profile picture
Good work, Michael.
Steelhead15 profile picture
@Michael Roat Great article that is real meaty. One enters a strange reality when trying to proficize an end game. I do agree that the $ will become very valuable compared to many investment assets. Stocks are certainly entering a bubble. We could really use a solid correction to bring down prices/share. If not, then cash becomes more and more valuable.
CBR900RR profile picture
Gold is overvalued based on what? Charts? No, fiat currencies are debt laden junk and bitcoin is completely worthless except for the fools who believe it will be used as money on a widespread basis. Gold stands alone, as it has for thousands of years, and the doubters will continue to be proven wrong.
Michael Roat profile picture
Agree about BTC. Read my comment on the bottom of the page if interested.
@CBR900RR You sound like someone who was saying bitcoin was worthless when it was ten cents. Its no different than anything else. Demand and supply. The supply is limited while demand keeps going up. When was the last time you used gold as a currency to buy anything?? Bitcoin is seen right now as a store of value just like gold. Its no different than me marveling that I give you this piece of paper that is essentially an IOU and you give me products and services. Its just now we have issued too many IOU's (the money supply) and the value of the dollar must come down accordingly. The U.S is issuing more and dollars as the world needs dollars less and less. I hold gold and silver. I would hold bitcoin but since I dont understand how the block chain works and think bitcoin is currently in another bubble, I dont buy. I think on a relative value basis, gold and silver are a much cheaper way to have a store of value (as of now).
CBR900RR profile picture
Bitcoin was originally developed as an alternative currency and somehow it morphed into a claimed store of value rivaling gold, but it has no value as money, central governments will always control money. Digital yuan will result in bitcoin dropping significantly
Thanks for the article, you make several good points about China
China has gained greatly in wealth and trade recent decades while many articles have been written about the problems. The problems are real but the strength of growth of the country has continued to be greater than some expect.

The part of the article that quotes zerohedge is a concern as myself and others consider it a bad source. Quoting Soros is also not so good. I remember some real money losing periods he had.
navyair profile picture
For anyone who is interested: news.yahoo.com/...
@navyair - What a great addition to Michael Roat's article! Thank you for that. This part of the article said it all:

"The central conceit of Chinese relations with the West has been that while political authority is monopolized by the CCP, China has a free-market economic system, and should be treated as a free-market trading partner. This was always a convenient fiction."

Having had experience with this kind of governance in Chile back in the early 70s, I have cautioned many that Communism and Capitalism are incompatbile over the long haul and eventually any investments made in Communist China would be lost or severely impaired.

Recent changes in dealing with Communist China by clear eyed visionaries should have been a clue to company managements that have staked their business future on manufacturing in that Country, e.g., Apple Computer. Time will tell if they have awoken to the inevitable reality and are willing to save themselves.
timddeb profile picture
@AlexTheCat3741 I think the Chinese "external threats" started in 1949 when they usurped the uigers. Then Tibet. There have been many armed incursins into Vietnam since the US lost their war there, and China is building unsinkable aircraft carriers on islands the UN has agreed are not China's. I fear their aquisitive policies will cause many wars in the region, which is why Japan and Taiwan are snuggling up the the US. Let's hope Biden has the backbone to support them.
navyair profile picture
@Michael Roat Good article. As you continue to do your analysis, you may wish to take a look at the geopolitical spectrum as well.

We have entered a very dangerous time in the past year. However, most people are so focused on the virus and how it affects their immediate surroundings and few are focused on events outside their own sphere.

China is graying, and will soon have labor issues based upon its one child policies of old. Additionally, although somewhat of an economic miracle has happened around the country, it is unequal and there remain large pockets of substandard conditions within China. Xi has cracked down severely on internal dissent. The Belt and Road initiative is getting push back, and added to the economic issues you mentioned.

When you add this into the equation, you can see the reasons behind China's beligerance against its neighbors, and its push for "patriotism" for its youth (recent programs)...you've seen similar moves by pre-WW II Germany, and Stalinist/Leninist Russia/USSR...Chairman Xi sees his window to dominate shrinking...he no longer has decades to accomplish his aims, but perhaps years or less. As internal dissent rises due to economic slowdowns, he will try to focus China on some "external threat". Most likely it will be an attempt to re-take Taiwan, but could be some other area like a fight with India over disputed territories. This window will start closing as Western (and other Eastern) economies start to recover from Covid disruptions.

The West has a lot of interesting challenges ahead to avoid war, but yet maintain its own best interests.
The one child restriction is no more.

navyair profile picture
@drftr Hence the part: "policies of old. "

You don't recover from several generations of a policy like that quickly. My understanding is that like the West, a lot of people who've gained the Middle Class don't want more children and the expense they entale.
Agreed. Happens in almost all developing countries.

Maybe the West should have made 2 children mandatory 2 decades ago to keep the machine rolling... ;-)

terryongarland profile picture
Interesting views..but the overall premise of the article on the Dollar,debt etc..is debatable indeed. I am sure the author will get lots of pushback..but its good to hear debatable arguments
cgougeon profile picture
Truly contrarian! Thank you for this. I had my comment already planned before I finished reading your bullet points: "thanks for the fresh perspective, I disagree". I see that others have already responded in that vein already. However, after reading the content of your article, I have to re-think my opinions. I found the China commentary most surprising and will have to look into that further. The TLT/USD dynamic was fascinating to me as a newb. I will be sharing that and the oil outlook was very interesting, living as I do in Alberta. Hopefully I get the opportunity to share that too with my circle.
ds141414 profile picture
The dollar? Are you serious? We have devalued the currency at a rate unseen since the Weimar Republic. That is where we are to hide from the approaching storm? Precious metals and Bitcoin might end up being the measuring stick by which we stitch together a new system of finance once this house of cards finally finished collapsing. Why do you think Central Banks have been reclaiming their sovereign gold and buying more with both hands? And, as Americans, we have the most. That is reason enough politically to establish a backed system of world currency after the storm.
Not enough gold to do that and powers that be don't want; not to mention oncoming two generations can't even spell gold. Gold is historical; an artifact. Gotta change with the times or be left behind, regardless of the sense of it. I know the pain, being almost 59. It sucks. But tech and crypto and some sort of global CURRENCY (likely digital-only) will soon dominate in a cashless and less free society. Sucks? You bet. Fight it from the basement? Nope. Just show me what to do. This is the part that bugs can't grasp. I know, as I used to be one.
@ds141414 I have not witnessed or experienced this devalued dollar you write about. Can you provide specifics? Yes, there are pockets of inflation - medical, education, etc..., but virtually everything else has gotten cheaper in relative terms, primarily due to advancements in technology. The currency is really irrelevant - inflation will occur if there is more demand for goods and services than there is supply. The central banks are simply trying to reduce volatility in financial markets - without this stabilizing force, there would be global chaos. BTW, it is not the Fed that is irresponsible, it is the Federal government(s) that does not operate on a balanced budget, resulting in a need to issue more debt. And no, BTC is not a solution for anything, other than criminals wanting to conduct private transactions.
if prices should have gone down 50% due to technological efficiency, but due to currency debasement they are only down 25%, that is still 50% inflation
Gold is OVERVALUED ? Are you kidding ? US $ is trashed by all US governments since Clinton . China RMB has gained 10% in 9 months on the $ . China offers zero % Govt Bonds fully subscribed . Anything else than $ is worth its true value . $ is morphed into a shadow currency . All traders-bankers are shorting the $ . What do you hold yourself ? RGOLD ...
Dollar prettiest girl in an ugly girl dance...as has been explained to bugs SOooo many times, as they continue to be enraged and beffudled by "that dollar, that dollar." If money printing goes through the roof, U.S. stocks the way to go. If it hits the fan? The USD, the good ole dollar for the foreseeable future...as galling and undeserving as it is. It IS YOUR reserve currency, sir. If you fight it, like I did WITH GOLD years ago (before I bailed lucky to break even after six years [gold long, not trading], it will eat your lunch, in tandem with a gold hostile fed and G.)
Almost didn't read because I'm leery of any article that begins with a quote by soros . I really didn't see any suggestions just prophecy and more or less an inference to sell stocks/bonds and stuff your cash into the mattress or buy currency that is artificially propped up- hobson's choice.
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