<blockquote>'More signs that the economy is actually
not all that well. It may yet recover on its own (believe it or not, but from a historical perspective the data in their totality are not yet
decisive), but we think this is a very low probability scenario at this stage. There is likely already way too much malinvested capital in need of a significant purge.
Moreover, the economy’s pool of real funding has in our opinion been under strain (of varying intensity) since at least the year 2000. Although the pool of real savings cannot be measured, we can make educated guesses about its state by inference from other data points. If money supply expansion in the US does slow down further (as we suspect it will), an economic bust will become a near certainty.'
- Acting Man,
Corporate Loan Charge-Offs and Delinquencies Surge, December 8, 2015</blockquote>
<blockquote>'Price deflation is not damaging at all to banks or anyone else. Asset bubble deflation is.'
- Mish,
Energy Price Deflation: Crude Dips 6% to 7-Year Low; Gasoline Below $1.50; Central Banks to Blame for What's About to Happen, December 7, 2015 (
BIS, December 6, 2015)</blockquote>
'..In the depressed 1930s, productivity grew 2.39 percent annually, among the highest decades since 1900..'<blockquote>'Chronic deflation, the result of global supply exceeding global demand .. in the next decade or so. (p. 244)
..
..First, in deflation, conventional monetary policy is impotent; and second, deflation can spawn self-feeding deflationary expectations. (p. 245)
..
..Few readers believe chronic deflation is in the wings..' (p. 252)
..
..when the nation is not at war .. deflation is the norm as government spending in relation to gross domestic product (GDP) drops back. During those times, the productive capability of the nation, and now the world with globalization, is so great that supply chronically exceeds demand.. (p. 281)
..
Most forecasters vigorously disagree with my forecast of chronic deflation.. (p. 311)
..
..there's no evidence that productivity growth necessarily slows with a chronically weak economy. In the depressed 1930s, productivity grew 2.39 percent annually, among the highest decades since 1900. In that decade, much of the new technology of the 1920s .. was being implemented, despite the Great Depressions and its slow growth aftermath .. the new-tech burst of the past decade or so in computers, the Internet, biotech, telecom and semiconductors will no doubt promote rapid productivity growth in coming years.. (p. 323)'
- A. Gary Shilling, The Age of Deleveraging (2011)</blockquote>
'..Prolonged periods of below market capital costs induce business customers to drastically over-estimate investment returns. And therefore to eventually accumulate years and years worth of excess capacity.'<blockquote>'There has been so much over-investment in energy, mining, materials processing, manufacturing and warehousing that nothing new will be built for years to come. The boom of the last two decades essentially stole output from many years into the future.
So there will be a severe curtailment in the production of mining and construction equipment, oilfield drilling rigs, heavy trucks and rail cars, bulk carriers and containerships, materials handling machinery and warehouse rigging, machine tools and chemical processing equipment and much, much more.
The crucial point, however, is that sharp curtailment of the capital goods industries has far more destructive implications for the macro-economy than a reduction in consumer appliance sales or restaurant and bar tabs.
Service operations have virtually no working inventories and the supply chains for durable consumer goods such as dishwashers and cars typically have perhaps 50 to 100 days of stocks on hand. So when excessive inventory investments accumulate, the destocking and resulting supply chain curtailments are relatively short-lived.
But when it comes to capital goods the relevant inventory measure is capacity in place. That’s where the bubble finance policies of the Fed and other central banks have done so much damage.
Prolonged periods of below market capital costs induce business customers to drastically over-estimate investment returns. And therefore to eventually accumulate years and years worth of excess capacity.'
- David Stockman,
The End of the Bubble Finance Era, December 11, 2015</blockquote>
<blockquote>'The capital goods industries are the sector of the economy that is as a rule most sensitive to the suppression of interest rates in a major expansion of money and credit engendered by loose central bank policy. This is so because these goods are temporally the most distant from the consumption stage. The lower the time discount applied to calculating the net present value of long-lived, durable capital goods, the higher their prices will be. This incidentally explains also why the prices of
titles to capital (such as stocks) rise disproportionally relative to other prices in the economy during a major credit expansion/ boom period.
By comparing relative prices in the economy, one can easily see these distortion effects, which ultimately weaken the economy structurally, in spite of the “feel good” period of the boom. It stands to reason that certain segments of the financial markets will also reflect extreme monetary policy, as well as regulations that force funds to flow into certain assets (the fact that many government bonds in the euro area trade at negative yields to maturity is partly due to new bank capital regulations).'
- Acting Man,
Ever Greater Distortions Hint at Rising Crash Probabilities, December 8, 2015</blockquote>
Context (Big One: 2015 - 2017) - 'The Fall of a High-Yield Fund Echoes 2007 Crunch'<blockquote>
'..deflationary impacts..''..globalized de-risking and de-leveraging pressures.''..The resulting Credit stress only exacerbates disinflationary pricing pressures.''..since Irving Fisher first came up with the disastrous “price stabilization” idea..''..without taking any care to reduce the size of its balance sheet, the Federal Reserve instantly changed the monetary environment..''..The only way to stop the menace of boom-bust cycles is for the central bank to stop the tampering with financial markets..'</blockquote>