<blockquote>'I would contend that globalization is not the true culprit, just as I argue that Capitalism is certainly not the root of all evil. The problem lies with unfettered finance and monetary mismanagement. Pricing mechanisms and resource allocation, the lifeblood of free-market Capitalism, will not function well within a backdrop of unlimited cheap finance. Similarly, so-called “globalization” is destined for failure in a backdrop of limitless financial claims.
I remain a proponent of “free trade.” Yet in the long-term it’s imperative that trading relationships involve exchanging things for things, rather than IOUs for things. I would go so far as to argue that this simple concept would go a long way toward nurturing healthy trading relationships, sound economic underpinnings and a more stable global financial backdrop.
For decades now, the U.S. and UK became accustomed to exchanging IOUs for goods and services. It has worked miraculously, or seemingly so. Consequences have included deep economic maladjustment and a world inundated with debt/financial claims. Look no further for the root cause of endemic financial instability and serial boom and bust dynamics that now afflict the entire world.
I wish to be clear: I am not arguing for barter between individual nations. Trade deficits and surpluses can exist between individual countries. But overall, countries should avoid running persistently large overall Current Account Deficits. Deficits with some countries should be offset by surpluses with others. Persistent trade deficits should be countered with tighter monetary policy.
- Doug Noland,
Greenspan on Bubbles, July 2, 2016</blockquote>
<blockquote>'World markets are in the midst of something on a frighteningly grander scale than 2007-2008. Tens of Trillions of sovereign debt have become trapped in speculative melt-up dynamics, as central bankers, derivative traders, speculators and safe haven buyers all battle to procure precious bonds. And I don’t believe it’s coincidence that the world’s largest derivative players are seeing their stock prices suffer under intense selling pressure. Meanwhile, sinking bank shares heighten market fears, which only feeds the dislocation and reinforces the dynamic imperiling the big derivative operators.
..
The Fed’s 2007 reflationary policies spurred strong flows into the risk markets - in the face of a horrible risk vs reward calculus. Washington had seemingly transformed the entire mortgage finance complex into a low-risk proposition: “The Moneyness of Credit.” When confidence inevitably waned there was an uncomfortably sudden appreciation that safety and liquidity had become major issues. The halting of redemptions in Bear Stearns’ mutual fund shares was a major inflection point. Confidence was shaken. It was the beginning of the end. It was, as well, the kickoff for a bout of destabilizing wild and crazy.
Throughout history real estate has provided a convenient bastion for financial innovation and speculation. Why not let retail investors in on the strong returns available in booming London and UK real estate markets, especially with decent yields unavailable elsewhere. Why not transform inflating illiquid assets into perceived safe and liquid shares for the masses - especially with central banks destroying yields for tens of Trillions of debt securities?
The “Moneyness of Risk Assets” has been a centerpiece of my global government finance Bubble analysis. It was an epic misconception to print “money” by the Trillions, incentivize massive flows (and speculative leverage) into risk markets in order to reflate the U.S. and the world – and then respond to inevitable instability with “whatever it takes” activism and further market manipulation. The Fed and global central bankers have nurtured the illusion that risk markets are safe and liquid (money-like). They have spurred “contemporary finance” and the transformation of increasingly risky assets into perceived safe and liquid securities. Ironically, as the liquidity myth is illuminated in UK real estate funds, a sovereign debt market dislocation ensures “money” floods into potential liquidity traps in risk markets around the world.'
- Doug Noland,
Sovereign Market Dislocation and Derivatives Turmoil, July 9, 2016</blockquote>
<blockquote>'Japan has been fighting deflationary headwinds since the bursting of their Bubble more than 25 years ago. It was a major Bubble exacerbated by a loosening of monetary conditions in the U.S. back in the late-eighties coupled with intense pressure from the U.S. to stimulate Japan’s economy to help rectify ballooning U.S. trade deficits. And it’s somewhat ironic that in 2016 Japan’s biggest adversary in its post-Bubble deflation fight is engaged in its own Bubble Battle across the East China Sea.
One could argue that Japan lost all control of its Bubble with the onset of post-1987 crash aggressive monetary accommodation. Chinese control was lost with the massive post-2008 stimulus, and it’s been awhile since I’ve read reference to Chinese officials having learned from the Japanese experience. Indeed, seeds for today’s runaway global finance Bubble were planted in Japan and came to full bloom with China’s historic Credit expansion. And for 25 years, global central bankers have chanted “deflation” as enemy number one. But it’s been Bubbles all along. They remain the dominant risk today, as they’ve been all the way back to the late-eighties.'
- Doug Noland,
Bubble Battles, July 30, 2016</blockquote>
<blockquote>'..Standard & Poor’s and fellow rating agencies share keen interest because Turkey and Turkish corporations and financial institutions have over recent years been assertive borrowers in international markets. For the past decade, President Erdogan has championed Turkish economic renaissance, a powerful boom that has been fundamental to his popularity and ascending political power. Unfortunately, it morphed into a Credit-fueled Bubble, with all the associated financial, economic and social consequences. Turkish consumer debt has skyrocketed, fueled by aggressive bank lending. Meanwhile, Turkey’s financial institutions have borrowed aggressively in global inter-bank markets, with much of this debt short-term and denominated in foreign currencies.'
- Doug Noland,
Don't Mess with Turkey, July 23, 2016</blockquote>
<blockquote>'As global markets celebrate Japan’s reckless move to further ramp up fiscal and monetary stimulus, it’s important to place things into a little perspective. Japan has been sporadically ramping up stimulus for more than 25 years. Federal government debt to GDP was about 65% back when the Japanese Bubble burst in 1990. Massive fiscal stimulus saw debt to GDP surge to 140% by the end of the nineties. By 2009, ongoing aggressive deficit spending pushed the ratio through 200%. It's now almost reached 250%. Meanwhile, expanding $1.0 TN annually, the Bank of Japan’s (BOJ) balance sheet is rapidly approaching 100% of GDP. BOJ assets hovered between 30% and 40% of GDP in the ten-year period through 2012.
..
Turkey is also today emblematic of the wide chasm that has developed between inflating securities markets and deflating economic prospects. Turkish stocks have been among the top performing markets globally, ending the week with 15.5% y-t-d gains. Running large current account deficits (4.5% of GDP) and having accumulated significant international debt (much denominated in U.S. dollars), Turkey has been on my list of countries at high risk of financial and economic crisis. The country is now on the downside of what was a significant Credit boom, which surely helps explain at least of some of the increasingly problematic social tension and political instability.'
- Doug Noland,
Scary Time, Juy 16, 2016</blockquote>
Context<blockquote>
'..they would tear down both central banks brick-by-brick.''An oil price drop to below $20 per barrel would be a shock reminiscent of the dotcom collapse..'(Credit Cycle) - '..Denmark, France, Italy, the Netherlands, and Sweden all facing demands for referendums over Europe..'</blockquote>