'Bond manager Jeffrey Gundlach made headlines this week with his comment that “central banks are losing control.” I would suggest that central bankers actually lost control back in 2012. Mario Draghi’s “whatever it takes” pledge was the cornerstone of desperate measures to save the euro. Yet “whatever it takes” actually amounted to concerted central bank intervention to shield global markets and economies from the intensifying forces of the downside of a historic Credit Cycle. The global Credit boom persevered for a few more years, right along with epic market distortions and economic maladjustment. Downside risks have grown significantly.'<blockquote>'Credit booms are powerfully reinforcing. New Credit provides additional purchasing power that spurs spending, economic output, corporate earnings/cash-flow and income growth. Monetary expansions, as well, fuel inflating asset prices, most notably in securities and real estate. In both the Financial Sphere and the Real Economy Sphere, Credit expansion and its myriad inflationary effects beget more self-reinforcing Credit.
Importantly, the upside of a Credit Cycle feeds off the commanding forces of cooperation and integration. The economic pie is expanding, and it becomes easily-recognized that working together offers more than zero-sum outcomes. In prolonged booms, a “virtuous cycle” appears almost a certain, natural outcome.
Yet the inevitable Credit cycle downturn ensures a vicious sequel. The bursting of the Bubble sees so many rewarding boom-time endeavors turn infeasible, unprofitable or unworkable. Hopes are dashed and dreams are crushed. Confidence, flowing over-abundantly throughout the boom, is suddenly in such short supply; faith wanes in policymaking, the markets, finance and in institutions more generally. Meanwhile, the unfolding bust illuminates the inequities and nonsense from the Bubble-period. Powerful forces then shift to tearing at the fabric of cooperation, integration and good faith that were so crucial throughout the boom period. Yesterday’s partner is today’s competitor.
Nowhere did this historic global Credit Bubble have greater integrative influence than in Europe. The euphoria of the victory of democracy and free-market Capitalism, along with technological advancement, financial innovation and developments in contemporary monetary management, emboldened Europe’s leaders to take the fateful plunge toward unprecedented integration, including a common currency.
To appreciate the complexities of the current market, economic and geopolitical backdrop, it’s helpful to return back to that fateful summer of 2012. European integration was under existential threat, though the seriousness of the situation was appreciated by few. A potentially momentous crisis of confidence had gathered powerful momentum. Fear of a European periphery debt crisis was being transmitted to a more general questioning of the solvency of the European banking system. And with Europe’s banks major operators in derivatives and throughout EM, European travails had begun reverberating throughout global markets.
Markets were increasingly questioning the viability of the euro currency – and such concerns invariably raised doubts as to the stability of global finance and, accordingly, economic prospects around the globe. As I chronicled the seriousness of developments back in 2012 (in the face of the media and pundits that generally downplayed associated risks), my analysis appeared extremist and misguided. It was only later that inside accounts (notably from the Financial Times) confirmed the extent to which European policymakers had worked to avert acute financial and economic crisis.
Bond manager Jeffrey Gundlach made headlines this week with his comment that “central banks are losing control.” I would suggest that central bankers actually lost control back in 2012. Mario Draghi’s “whatever it takes” pledge was the cornerstone of desperate measures to save the euro. Yet “whatever it takes” actually amounted to concerted central bank intervention to shield global markets and economies from the intensifying forces of the downside of a historic Credit Cycle. The global Credit boom persevered for a few more years, right along with epic market distortions and economic maladjustment. Downside risks have grown significantly.'
- Doug Noland,
Reminiscing about 2012, June 18, 2016</blockquote>
'..When the world worries about Europe’s financial structure and economic prospects, fears can quickly spread globally..'<blockquote>'June 24 – UK Daily Express (Jonathan Owen): “Five European countries may seek to follow Britain’s lead in leaving the EU in a Brexit domino effect, Germany has warned… Tensions are rising across the EU, with Denmark, France, Italy, the Netherlands, and Sweden all facing demands for referendums over Europe. In a statement, German Chancellor Angela Merkel said: ‘There is no point beating about the bush: today is a watershed for Europe, it is a watershed for the European unification process.’”
European integration is again under existential threat. And while disintegration will likely unfold over the coming years, a crisis of confidence in the markets could erupt at any point. Confidence in Europe’s banks is faltering badly. I believe faith in the ECB’s capacity to hold the banks and securities markets together is waning. How much leverage has accumulated throughout European periphery bond markets? And it is a harsh reality of Europe’s financial structure that de-risking/de-leveraging dynamics tend to see rising yields/widening spreads intensify market fears of bank impairment. Then bank worries further negatively impact sentiment in the markets and business community in a problematic vicious spiral.
The ECB could boost QE, but it recently did that. It could buy corporate debt, but it has started doing this already as well. Negative rates only worsen the banks’ predicament. And bankers facing such extraordinary uncertainties will extend Credit cautiously - in Europe, throughout EM and in securities finance. When the world worries about Europe’s financial structure and economic prospects, fears can quickly spread globally. I find myself worrying more about China. U.S. markets have remained resilient. On the one hand, our markets win by default. On the other, best I can tell there is no market in the world that remains so oblivious to a bevy of unfolding financial, market, economic and geopolitical risks. Central banks are losing control and I fear “contemporary finance” is again in the crosshairs.'
- Doug Noland,
Majority Mad as Hell, June 25, 2016</blockquote>
Context<blockquote>
'..a Brexit .. Austria, Netherlands, Finland, Poland, Hungary and Sweden..''..I believe a monumental de-risking/de-leveraging cycle has commenced..''..deeply flawed policies that have so destabilized global finance..''..a 30-year bear market..''China has an historic Credit problem..''..since 2007 .. total Chinese bank assets have inflated from about $7.0 TN to over $30 TN..''It remains my view that the global Bubble has burst..'</blockquote>