'..by 2016 the Fed’s balance sheet would have inflated to almost $4.5 TN .. the BOJ and ECB would each be expanding their balance sheets by about $1.0 TN .. the ETF and hedge fund industries would both balloon to $3.0 TN .. negative interest-rates and $10.0 TN of negative-yielding global debt securities .. Bubble in China .. a $35 TN Chinese banking system and $8.0 TN of so-called “shadow banking” were inconceivable back in 2009..'<blockquote>'It’s now been more than seven years since I first warned of a new “global government finance Bubble.” I had no idea that by 2016 the Fed’s balance sheet would have inflated to almost $4.5 TN. The thought that the BOJ and ECB would each be expanding their balance sheets by about $1.0 TN annually never came to mind. I did not at the time contemplate that the ETF and hedge fund industries would both balloon to $3.0 TN. I would have argued against the possibility for negative interest-rates and $10.0 TN of negative-yielding global debt securities. I expected a Bubble in China, but a $35 TN Chinese banking system and $8.0 TN of so-called “shadow banking” were inconceivable back in 2009. And clearly I expected this “Granddaddy of all Bubbles” to have succumbed before now.
I didn’t argue for a likely hyperinflation scenario. What was clear in my mind was that once the inflation of Central bank and sovereign Credit commenced it was going to be extremely difficult to control. Monkey with Money at Your Own Peril. I’ve always believed that using central bank Credit to inflate securities markets was both a trap and a monumental mistake. After the disastrous consequences of employing mortgage Credit for system reflation purposes, there was little possibility that inflating the securities markets would end any better. Yet after a few months of relative global market calm, the backdrop again has the appearance of being sustainable. I’ll continue to chronicle why I believe it’s late in the game.
It’s become increasingly obvious that Japan’s QE and negative rate endeavor is floundering. A similar prognosis for ECB reflationary measures is at this point only somewhat less evident. Historic bond Bubbles proliferate. Meanwhile confidence in economic fundamentals, the course of policymaking and general banking system soundness wavers. There is little to indicate that either the BOJ or ECB will be capable of extricating themselves from flawed policies.
With the Federal Reserve having concluded QE (for now), many present the U.S. as evidence that exit strategies are achievable and easily managed. It’s definitely not that straightforward. I would contend that ending QE was only possible because of the massive “money” printing operations being orchestrated in Tokyo and Frankfurt. I believe enormous amounts of finance have made their way into U.S. securities markets and the real economy, either directly or indirectly related to BOJ and ECB policymaking. Combined with historic Chinese “Terminal Phase” Credit excess, there was more than ample Credit and liquidity to propel the “global government finance Bubble” finale.
Yet there are today serious issues with BOJ and ECB policy measures as well as the Chinese Credit boom. I would argue that BOJ and ECB reflationary policies maintained the appearance of success only so long as the yen and euro were being devalued. For one, currency devaluation worked somewhat to mitigate domestic deflationary pressures. And, importantly, aggressive BOJ and ECB (QE and interest-rate) policies created extraordinary speculative opportunities for shorting the yen and euro. “Carry trades” and myriad leveraged strategies proliferated in order to profit from unusually conspicuous policy-orchestrated devaluations, in the process boosting securities market liquidity throughout global markets.
I tend to view yen and euro devaluations as part of last gasps in both policy experimentation and leveraged speculation. For a couple years, devaluation provided extraordinary speculative opportunities, in the process helping to mask the general deteriorating backdrop for leveraged speculation. Now, the yen is near 18-month highs against the dollar and the euro not far from one-year highs. Currency markets generally have turned volatile and uncertain. Slam dunk trades are a thing of the past. The backdrop is no longer conducive to leverage.
Integral to my bursting global Bubble thesis, I believe a monumental de-risking/de-leveraging cycle has commenced. This fledgling “risk off” backdrop helps to explain why BOJ and ECB QE measures have of late had such muted impact on global risk markets. At the same time, ongoing liquidity operations continue to bolster market sentiment in the face of a disconcerting fundamental global backdrop. Clearly, relative stability in China in concert with BOJ and ECB policy measures has been key to containing “risk off” over recent months.
China, commodities and EM have been the global markets’ weak links. The view has been that dollar weakness helps to ameliorate these fragilities. At the same time, there is the issue of how much speculative finance flowed into the U.S. in pursuit of king dollar returns. One more Crowded Trade to unravel? And there’s another issue worth pondering: confidence in QE has waned considerably over recent months. There’s increasing talk of “helicopter money” and central bank forgiveness of government debt obligations. Both would create serious issues in terms of the true underlying value of central bank Credit. And who holds the vast majority of central bank Credit? The major global commercial banks have accumulated Trillions of central bank obligations, as assets backing deposit liabilities. Perhaps waning confidence in central banking helps explain why the big global bank stocks trade as if something very serious is unfolding. It would also explain the seemingly insatiable appetite for safe haven assets.
June 2 – Bloomberg (Tracy Alloway): “Which fixed-income asset class is growing fast, outperforms similar debt issues, and rarely defaults? Emerging market 'quasi-sovereign' bonds, of course! At some $600 billion, debt sold by state-supported companies in emerging markets ranging from China to Oman has surpassed the amount of emerging market government debt outstanding, according to… Bank of America Merrill Lynch. Such quasi-sovereign debt issuance has helped propel the stunning growth of the overall bond market, with EM issuance accounting for 47% of the growth in global debt between 2007-14, compared to 22% in the previous seven years, according to S&P Global Ratings. But the surge in 'quasi' bonds is making some feel, well, queasy. ‘Quasi-sovereigns are effectively a 'contingent liability' for a country,’ write the BofAML analysts, led by Kay Hope. They note that quasi-sovereign issuance now makes up half of the $1.6 - 1.8 trillion euro- and dollar-denominated corporate bond market for emerging markets…”
May 31 – Wall Street Journal (Timothy J. Martin): “What it means to be a successful investor in 2016 can be summed up in four words: bigger gambles, lower returns. Thanks to rock-bottom interest rates in the U.S., negative rates in other parts of the world, and lackluster growth, investors are becoming increasingly creative—and embracing increasing risk—to bolster their performances. To even come close these days to what is considered a reasonably strong return of 7.5%, pension funds and other large endowments are reaching ever further into riskier investments: adding big dollops of global stocks, real estate and private-equity investments to the once-standard investment of high-grade bonds. Two decades ago, it was possible to make that kind of return just by buying and holding investment-grade bonds, according to new research.”
Again, Monkey with Money at Your Own Peril.'
- Doug Noland,
Monkey with Money at Your Own Peril, June 4, 2016</blockquote>
Context ('The Age of Deleveraging (2012 - 2025)) - '..Few readers believe chronic deflation is in the wings..'<blockquote>
Mises - Money and Credit - '..the recession was a problem of under-saving, and over-consumption..''..saving, wise investment and production are what creates wealth, not spending and consumption..''..2016 and inflated global securities and derivatives markets are more dangerous than ever..''..central bankers create very destructive asset bubbles that eventually collapse..''..Credit, inflationism and resulting central bank-induced monetary disorder.''..a 30-year bear market..'</blockquote>