'The 2008/09 financial crisis should have concluded an incredible era of dangerous risk misperceptions and flawed calculations. But the Federal Reserve and global central bankers Doubled-Down. Instead of the markets reverting back to more traditional (stable) views of risk, massive QE liquidity injections, zero rates and aggressive market liquidity backstops pushed risk analysis and perceptions only deeper into New Age Fallacy.'<blockquote>'August 9 – Wall Street Journal (Colin Barr): “Ten years ago this Wednesday, the first glimpses of the global financial crisis came into view. The French bank BNP Paribas froze three investment funds, saying a lack of trading in subprime securities made valuing them impossible. The bond market seized up, rattling investors and central bankers who previously soft-pedaled the notion that the U.S. housing bust would hit the economy. Aug. 9, 2007, marked the beginning of the most far-reaching economic disruption since World War II. The events that Thursday made clear that subprime-lending excesses wouldn’t be ‘contained,’ as Ben Bernanke, then Federal Reserve chairman, had predicted just months earlier. Yet few people appreciated the scope of the disaster that would unfold over the next 18 months.”
It’s simply difficult to believe 10 years have passed since the beginning of the so-called “worst financial crisis since the Great Depression.” It’s not beyond imagination to believe historians might look back to this week’s “fire and fury” as the start of the worst crisis in generations.
August 7 – Financial Times (John Authers and Alan Smith): “After the credit crisis began to unfold in the summer of 2007, many on Wall Street and in the City of London complained it was unprecedented and had been impossible to see coming. They were wrong. Speculative bubbles are rooted deep in human nature, and have been widely studied. History’s most famous bubble took root in the Netherlands almost four centuries ago — for tulips. The common elements to speculative bubbles are: An exciting and new ‘disruptive’ technology that is difficult to value in the short term, and whose long-term value is uncertain. Easy liquidity of markets so that shares or other securities can change hands quickly. The provision of cheap credit to pay for it. These classic elements were visible in, for example, canals and railroads, which both enjoyed speculative bubbles in the 19th century: In the 20th century, economic history was marked by a series of huge bubbles in critical markets. All followed almost identical patterns, and had a serious economic impact.”
The opening quote above – one of my old favorites – comes from Richard Bernstein’s classic “Against the Gods – The Remarkable Story of Risk.” The view that financial innovation and enlightened policymaking had tamed risk grew stronger throughout the nineties and mortgage finance Bubble periods. Each crisis surmounted only emboldened New Age thinking. Monetary stimulus coupled with derivatives and sophisticated financial engineering ensured that virtually any type of risk could supposedly be hedged away. And as the mortgage Bubble began inflating precariously, a powerful view took hold that “Washington would never allow a national housing bust.” GSEs, MBS, ABS, repo, CDOs and derivatives, Credit insurance – all things mortgage finance Bubble - enjoyed implicit government backing.
The 2008/09 financial crisis should have concluded an incredible era of dangerous risk misperceptions and flawed calculations. But the Federal Reserve and global central bankers Doubled-Down. Instead of the markets reverting back to more traditional (stable) views of risk, massive QE liquidity injections, zero rates and aggressive market liquidity backstops pushed risk analysis and perceptions only deeper into New Age Fallacy.
..
Let’s pray there’s a very low probability of a nuclear confrontation with North Korea. Hopefully, over time some diplomatic solution will be found where North Korea halts development of nuclear and ICBM technologies. But I would argue that even this best-case scenario is problematic for the markets.
Key market vulnerabilities are being exposed. There’s a major problem for highly inflated and speculative markets when it comes to hedging against risk – especially this type of undefinable risk. Indeed, this week provided a wake-up call for those that have been making a fortune writing variations of risk (“flood”) insurance during a period of over-liquefied financial markets (a risk “drought”). And the upshot of this mania in the “insurance” market has created a seemingly endless supply of cheap risk protection – readily available hedging vehicles that have kept players aggressively speculating in the markets.
..
For a number of years now, I’ve referred to the “Moneyness of Risk Assets” issue – the perception of central bank-ensured safety and liquidity - that has been instrumental in Trillions of flows into ETFs and other “passive” strategies. It is Here Where the Wildness Lies in Wait. I wouldn’t bet on a continuation of low market volatility.'
- Doug Noland,
Doubled-Down, August 12, 2017</blockquote>
'..typically bubbles go on a lot longer after some strategist writes these articles in a major newspaper, a lot longer.'<blockquote>'It makes me nervous when I see the chief global strategist at Morgan Stanley write an op-ed pondering when the tech bubble will crash.
Why? Simply because typically bubbles go on a lot longer after some strategist writes these articles in a major newspaper, a lot longer.
There are two big risks in the market right now:
<blockquote>1)
A major correction or even a meltdown unlike anything we have seen before as literally every risk asset is way overvalued.
2)
A 1999-2000 melt-up where stocks go parabolic led by tech giants and biotech, forcing fund managers to keep buying at higher mutltipes or risk severe underperformance.</blockquote>
Risk managers often focus on the first risk but neglect the second one which is much more painful because it can last a lot longer than fund managers can stay solvent.
No doubt, 2008 was very painful, I remember it like yesterday when the Dow was falling 400, 500 or 700 points a day. It was beyond scary and I don't want to minimize the psychological effects of a severe meltdown.
But what about the risks of stocks continuing to grind higher? I'm not going to lie to you, that risk is in the back of my head too at the time of writing this comment, and it's something I lived back in 1999-2000 when you'd wake up and see tech stocks up 10, 20 or 30 percent a day every single day!
It was relentless, like a giant steamroller eviscerating short sellers and leaving many value managers scratching their head asking whether there is a new paradigm in markets.
The problem with these melt-up rallies is they're led by huge liquidity. That's what happened back in 1999-2000 and it took several rate hikes before that tech bubble burst.
But now we have even more liquidity in the system as central banks around the world slashed rates to near zero and engaged in unprecedented quatitative easing.
In other words, it could take a lot of time for this liquidity party to dry up so don't be surprised if stocks continue making record gains, frustrating fund managers who don't want to indiscriminately buy at these high valuations.'
- Leo Kolivakis,
When Will the Tech Bubble Burst? August 8, 2017</blockquote>
'..to prepare for global deflation.'<blockquote>'Last week, I discussed why Alan Greenspan and others are wrong on bonds, alluding to six structural factors that lead me to believe we are headed for a prolonged period of debt deflation:
<blockquote>1)
The global jobs crisis: High structural unemployment, especially youth unemployment, and less and less good paying jobs with benefits.
2)
Demographic time bomb: A rapidly aging population means a lot more older people with little savings spending less.
3)
The global pension crisis: As more and more people retire in poverty, they will spend less to stimulate economic activity. Moreover, the shift out of defined-benefit plans to defined-contribution plans is exacerbating pension poverty and is deflationary. Read more about this in my comments on the
$400 trillion pension time bomb and the
pension storm cometh. Any way you slice it, the global pension crisis is deflationary and bond friendly.
4)
Excessive private and public debt: Rising government and consumer debt levels are constraining public finances and consumer spending.
5)
Rising inequality: Hedge fund gurus cannot appreciate this because they live in an alternate universe, but widespread and rising inequality is deflationary as it constrains aggregate demand. The pension crisis will exacerbate inequality and keep a lid on inflationary pressures for a very long time.
6)
Technological shifts: Think about Amazon, Uber, Priceline, AI, robotics, and other technological shifts that lower prices and destroy more jobs than they create.</blockquote>
These are the six structural factors I keep referring to when I warn investors to temper their growth forecasts and to prepare for global deflation.
- Leo Kolivakis,
The Mystery of Inflation Deflation? August 7, 2017</blockquote>
Context<blockquote>
'..while vulnerable, the Bubble is still expanding..'(Banking Reform - Monetary Reform) - '..The Theory of Money and Credit .. an invaluable guide for ending the business cycles of our own time.''Central banks’ seriously misguided attempts to defeat routine consumer price deflation is what fuels the destructive asset bubbles that eventually collapse.''..the phenomenon of wave after wave of economic ups and downs is ideological in character..'The Ethics of Money Production - '..the care of souls.' - 'The point is to return to a universal respect for property rights.''..credit policies to ease credit..' - '..1844 .. the issuance of banknotes .. They could thrive as deposit currency.'(Planned Chaos) - 'Do we really want a repeat of the upheavals of the 20th century .. because a bunch of interventionists and central planners living in the virtual reality of their 'models'..'((Hapto)praxeology) - '..Mises’s warning to the world .. not to suppress the market rate of interest in the name of creating prosperity.'(Praxeology) - '..the behaviorist and the experimentalists versus the praxeologists and the philosophers..'</blockquote>