'..As confidence in both economic fundamentals and central banking wanes, I expect already problematic fund outflows to accelerate. A tightening of financial conditions portends Credit problems way beyond energy and mining..''Fisher, one of America’s most accomplished economists, was in 1929 operating with a deeply flawed analytical framework. And for years leading up to the crash the optimists had been repeatedly emboldened, as a booming stock market confirmed their view of the world. Fisher and the world were then completely blindsided. Their views of how the economy, the securities markets, policymaking and Credit interacted were completely erroneous. I expect some resolution to competing analytical frameworks will be a key Issue 2016.
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As they say, “bull markets create genius” (unless you’re an analyst of Credit and Bubbles). And there’s also a reason they’re called “virtuous cycles” – though there’s nothing virtuous about Bubbles. But they sure look good and feel good – and inspire over-confidence (along with dreams and inflated ambitions). Things just seem to go right during booms. And it wasn’t long ago that the conventional view held that Brazil, after all these years, finally got it right. Brazilian politicians, central bankers, businessmen – and the nation’s economy – were held in high regard. Talk today is of corruption, inflation, depression, impeachment and mayhem. The Bubble burst and genius was in short order transformed to gross Incompetence.
For years (decades), China was perceived to be doing all the right things. Their system of disciplined meritocracy ensured the best and brightest were in command of one of the greatest economic miracles (and enterprising and hard-working populations) the world has ever known. Today, history’s most spectacular Bubble is bursting. Genius has so rapidly morphed into Incompetence. When Bubbles burst – and confidence turns to angst – it’s as if suddenly nothing can go right. Dwarfing even the Japanese experience, it’s astounding how decades of accomplishment have been sabotaged by seven years of runaway Bubble excess.
This is not Mexico 1995, Thailand 1997, Russia 1998, nor even Europe 2012. Approaching $35 TN (from ~$8TN in 2008), the Chinese banking system over recent years has ballooned to almost double the size of that of the U.S. In terms of economic output, China rivals the U.S. As a global hub for manufacturing, they have few rivals. And if global financial and economic ramifications were not troubling enough, there is an alarming geopolitical component to the unfolding China bust. The Chinese boom has tremendously inflated perceived wealth right along with expectations. The Chinese people do not have a ballot box. Beijing will blame foreigners, especially the U.S. and Japan. China is a most critical Issue 2016 – and fight off the calls to downplay its maladies and significance.
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Over recent Bubble years, incredible quantities of “money” have flowed freely into U.S. Credit. Central bank policies have ensured epic mispricing throughout U.S. and global fixed income and derivatives markets. Buyers of U.S. securities and derivatives have been willing to tolerate skinny little returns on the view that the Fed ensured minimal risk. The Fed and global central bankers readily nurtured the perception of low risk throughout global securities and derivative markets – the “Moneyness of Risk Assets.”
There’s always a vulnerability associated with money – and “Moneyness”: crises of confidence are inherently highly destabilizing. There’s a shock when holders of perceived risk-free “money”/securities/derivatives come to realize their previous misperception. As confidence in both economic fundamentals and central banking wanes, I expect already problematic fund outflows to accelerate. A tightening of financial conditions portends Credit problems way beyond energy and mining. I hope I am much too dire. Acute systemic risk on a global basis is The Big Issue 2016.'
- Doug Noland,
Issues 2016, January 9, 2016
'..a long drawn out process like Japan.''Summers, Bernanke, Yellen and their ilk ought to explain former Dallas Fed Richard Fisher confession on Squawk Box "We Frontloaded a Tremendous Market Rally".
In his confession, Fisher admits
"We frontloaded a tremendous market rally to create a wealth effect ... The Federal Reserve is a giant weapon that has no ammunition left."The alleged
"wealth effect" is an illusion. It will vanish, with severe consequences, either in the next big downturn, or via a long drawn out process like Japan.'
- Mike "Mish" Shedlock,
Hoisington 4th Quarter Review: Failure of the Fed, How QE Acts to Contract the Economy, January 08, 2016
'..Fortunately, the future has always belonged to those who take discipline, analysis, and the lessons of history seriously..''The film also nicely depicted how entangled financial professionals were in facilitating, cheerleading, and denying the bubble. As I noted in Foxes Minding the Henhouse in April 2007:
“One of the disturbing features of the final advance to the 2000 bubble peak was that it involved much more than just uninformed speculation by individual investors. As those of you who've known me since then will remember, I was troubled by the fact that professional advisors and Wall Street analysts - people who I was convinced had both the duty and capacity to know better - had also abandoned their grip on the basic fundamentals of investing.”
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The other major failure was one that we see again today - a striking willingness of the financial community to ignore a simple question: what is the
historical relationship between the valuation measure you are using, and the
actual subsequent return on the investments you are encouraging other people to hold? Two bubbles, two crashes, and at the peak of the third bubble, the answer hasn’t changed at all. From my April 2007 comment:
“Of course, it's still on the issue of ‘operating earnings’ and the ‘Fed Model’ where the complicity and irresponsibility of Wall Street analysts is most apparent. What's happened over the past several years is that the whole definition of “earnings” has been changed from what it has been historically, while a simplistic ratio - ‘forward operating earnings yield compared with the 10-year Treasury yield’ has taken the place of all serious valuation effort... The valuation tools upon which Wall Street analysts increasingly base their analysis are, in fact, pure unadulterated garbage. Over time, investors will discover this along with a good deal of pain. Over the short-term, unfortunately, there is no assurance that investors or analysts will quickly recognize that this market is trading on the basis of false premises about earnings and valuation (though my impression is that those who wake up based on reasoned argument and evidence will be better off than those who wake up based on investment losses).”
Since two crashes weren't enough to teach the lesson, here we are again, at what's likely to be seen in hindsight as the last gasp of the extended top formation of the third speculative bubble in 15 years..
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There’s no question that at speculative extremes, recent history always temporarily belongs to the reckless herd that has ignored concerns about valuation and risk at every turn. Fortunately, the future has always belonged to those who take discipline, analysis, and the lessons of history seriously. Decide which investor you want to be.'
- John P. Hussman, Ph.D.,
The Next Big Short: The Third Crest of a Rolling Tsunami, January 4, 2016
Context(Big One: 2015 - 2017) - 'The Fall of a High-Yield Fund Echoes 2007 Crunch'A “Stealth” Bear Market Has Already Begun, January 7, 2016
'..credit booms tend to undermine productivity growth..'