<blockquote>'A strong case can be made that Q1 2017 experienced the most egregious monetary stimulus yet. No financial or economic crisis – and none for years now. Consumer inflation trends have turned upward on a global basis. Stock prices worldwide have surged higher, with U.S. and other indices running to record highs. At the same time, global bond yields remained just off historic lows. Home prices in many key global markets have spiked upward. Meanwhile, central bank balance sheets expanded at a $3.6 TN annualized pace (from BofA) over the past four months.'
- Doug Noland,
Liquidity Supernova and the Big Ugly Flaw, April 22, 2017</blockquote>
'..It’s now been over eight years analyzing the global government finance Bubble – the “Granddaddy of All Bubbles.” '<blockquote>'..But we live in the age of derivatives, hedging and speculation. Markets – especially European – were buoyed, once again, this week by the reversal of hedges and short positions.
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I start with a simple definition: “A Bubble is a self-reinforcing but inevitably unsustainable inflation.” Bubble terminology is used in various contexts and means different things to different folks. To most analysts, talk of a “Bubble” connotes something that is about to burst. I take a different approach, working to identify initial factors and characteristics that are favorable for Bubble formation - and then monitoring and analyzing its development and ramifications. I covered the mortgage finance Bubble from every angle on a weekly basis for over six year, after initially warning of its development in early-2002. It’s now been over eight years analyzing the global government finance Bubble – the “Granddaddy of All Bubbles.”
There’s an interesting dynamic that I’ve lived through a few times now. These Bubbles inflate for years – much longer than would seem reasonably possible. And the longer they survive the more dismissive conventional analysts (and the business media) become to Bubble analysis. At the same time, over time as a Bubble gains momentum there becomes overwhelming evidence and analytical support for the Bubble view. My feelings these days recall 1999 and 2007 experiences: I have great conviction in the analysis, while conventional analysis turns increasingly bullish and dismissive of what have become increasingly conspicuous (and precarious) market distortions and excesses.
Unsound Finance gets to the heart of the issue. Looking back historically on early economic thought, the recurring issue that perplexed deep thinkers was how an economy that appeared robust could suddenly run so amuck. Economic busts would invariably focus analytical attention to “money,” debt and banking.
While discerned by few, Credit turns progressively less stable over the course of an economic upcycle. Especially during the late-cycle boom phase, there would be a huge divergence between general confidence and the underlying deterioration in the quality of rapidly expanding Credit. At some point the boom begins to falter, resulting in a tightening of bank lending. Latent fragilities were soon exposed, traditionally leading to fear, panic, bank runs and such.
My fundamental premise is that we’re in the late-stage of a historic global experiment in unfettered finance. From a historical and analytical perspective, Credit is inherently unstable. Today’s Credit is acutely unstable on a global basis as never before. The bullish counter argument holds that central bankers will ensure financial and economic stability. And with central banks willing to employ negative rates and limitless massive monetization, confidence in the bullish view is higher than ever. As such, today’s divergence between confidence and the underlying soundness of finance has never been as wide – ever. The bullish view holds that central banks are the solution. They’re undoubtedly the problem.
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The Dilemma of Unsound Finance prevails just about everywhere – most notably China, Japan, Europe, EM, Canada, the U.S, Australia, etc. There are numerous potential flashpoints – where Unsound Finance has turned acutely vulnerable. While central bankers talk employment and CPI, I believe fear of global financial instability has been the true impetus behind “whatever it takes.”
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I have argued for a while now that EM Finance is Unsound. Over the past year, Chinese reflation coupled with global QE spurred a major short squeeze followed by on onslaught of (performance-chasing) EM inflows. As always, EM economies show alluring potential – so long as international inflows boost asset prices, lending and investment. To have EM binging again on dollar-denominated debt should be a troubling development for anyone paying attention.
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..There’s as well all the entitlements and unfunded pension plans. When things turn sour globally, we’ll be spending a lot more on national defense. Unsound Finance always comes back to bite. The worrying part is that the world has never experienced anything comparable to the past 30 years.'
- Doug Noland,
Unsound Finance, April 29, 2017</blockquote>
'..What’s offensive is Wall Street’s endless reliance on verbal argument in place of evidence, and the eagerness of investors to buy into verbal fictions to the point where they second-guess actual data.'<blockquote>'I occasionally receive questions asking why our valuation measures are supposedly “not working.” Wait. Hold on and look carefully at the chart above. It should be rather obvious that valuations have continued to “work” even in recent complete market cycles, and throughout the recent series of bubbles and crashes, correctly identifying stocks as wickedly overvalued in 2000, today, and to a lesser extent, 2007, while identifying stocks as undervalued in 2009, and reasonably valued at the 2002 low. Even the “overshoot” of actual returns from expected returns in the past few years is something that regularly occurs at valuation extremes, particularly when the completion of an extreme cycle occurs a bit sooner or later than usual. Note, for example, the 1988 overshoot of actual market returns for the 12-year horizon that ended with the 2000 peak. The reverse tendency is often seen at major lows. Note, for example, the 1997 undershoot of actual market returns for the 12-year horizon that ended with the 2009 low.
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What investors imagine to be a “different” market is merely a market near the mature end of an as-yet uncorrected episode of reckless speculation, just as it was in 2000. If you’re an investor and you want to do yourself a favor, do this: distinguish my own inadvertent stumble in the recent half-cycle, which I’ve regularly, openly and exhaustively discussed, from
objective evidence on valuations. What you see at present is not valuations “failing to work.” We
already know valuations don’t govern short-run market outcomes - that’s why market action and related measures are useful over shorter segments of the market cycle. What you see is a speculative bubble that is doing its best to draw you in like Sirens singing to Ulysses, across a graveyard of ship hulls smashed against the rocks.
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It’s not unheard-of for a peaceful Zen teacher to give a student a little whack over the head with a bamboo stick in order to wake them up, as an act of compassion. So I’m going to be blunt. Stop arguing that the market has permanently changed over the last several decades when you’re really trying to argue that the market has permanently changed over the past 5 years. Don’t get me wrong. It’s essential to ask questions, obtain data, and test every possibility. What’s offensive is Wall Street’s endless reliance on verbal argument in place of evidence, and the eagerness of investors to buy into verbal fictions to the point where they second-guess actual data.
If you can’t demonstrate your arguments with evidence, you’re fooling yourself. You’re mistaking the delay of consequences with the absence of consequences. You see the advancing half of a mature speculative episode and you’re looking for any excuse at all to escape into a fantasy world where stock prices never go down. Worse, you may even be using a stumble I’ve already admitted and addressed in the first half of this cycle as an excuse to make your own in the second half.
Again, on the question of near-term outcomes, we’ll take our evidence as it arrives, particularly from market internals. In any event, however, I expect any near-term market returns to be quickly wiped out quite early into the completion of this cycle. Investors who ignore valuations are going to get hurt.
- John P. Hussman, Ph.D.,
Valuation Breakevens, April 24, 2017</blockquote>
Context<blockquote>
'..China's Credit growth is on track to surpass $3.5 Trillion in 2017.'</blockquote>