'..The historic “Financial Sphere” Bubble has ensured that ungodly amounts of “money” and leverage have accumulated in The Grand Crowded Trade of Financial Speculation.''The mortgage finance Bubble period engendered major U.S. structural economic impairment. This became immediately apparent with the collapse of the Bubble. As was the case with previous burst Bubble episodes, the solution to systemic problems was only cheaper “money” in only great quantities. Moreover, it had become a global phenomenon that demanded a coordinated central bank response.
Where has all this led us? Global “Financial Sphere” inflation has been nothing short of spectacular. QE has added an astounding $14 TN to central bank balance sheets globally since the crisis. The Chinese banking system has inflated to an almost unbelievable $38 TN, surging from about $6.0 TN back in 2007. In the U.S., the value of total securities-to-GDP now easily exceeds previous Bubble peaks (1999 and 2007). And since 2008, U.S. non-financial debt has inflated from $35 TN to $49 TN. It has been referred to as a “beautiful deleveraging.” It may at this time appear an exquisite monetary inflation, but it’s no deleveraging. We’ll see how long this beauty endures.
The end result has been way too much “money” slushing around global securities and asset markets – “hot money” of epic proportions. This has led to unprecedented price distortions across asset classes – unparalleled global Bubbles in sovereign debt, corporate Credit, equities and real estate – deeply systemic Bubbles in both (so-called) “risk free” and risk markets. And so long as securities prices are heading higher, it’s all widely perceived as a virtually sublime market environment. Yet this could not be further detached from the reality of a dysfunctional “Financial Sphere” of acutely speculative markets fueling precarious Bubbles - all dependent upon unyielding aggressive monetary stimulus.
I have posited that aggressive tax cuts at this late stage of the cycle come replete with unappreciated risks. Global central bankers for far too long stuck with reckless stimulus measures. A powerful inflationary/speculative bias has enveloped asset markets globally. Meanwhile, various inflationary manifestations have taken hold in the global economy, largely masked by relatively contained consumer price aggregates. Meanwhile, global financial markets turned euphoric and speculative blow-off dynamics took hold. A confluence of developments has created extraordinary financial, market, economic, political and geopolitical uncertainties – held at bay by history’s greatest Bubble.
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..When push comes to shove, central bankers will foremost champion bond markets.
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..Going forward, I expect stupid cash to outperform scores of brilliant strategies. The historic “Financial Sphere” Bubble has ensured that ungodly amounts of “money” and leverage have accumulated in The Grand Crowded Trade of Financial Speculation.'
- Doug Noland,
The Grand Crowded Trade of Financial Speculation, February 3, 2018
'..inflation expectations will remain muted over the next year.''More worrisome, with credit card debt at a record high and personal savings as a share of disposable income falling rapidly, the US economy is already flashing a warning signal, one that tells you inflation expectations will remain muted over the next year.'
- Leo Kolivakis,
US Wage Inflation Spooking Markets? February 2, 2018
'..deflationary pressures that are more evident in longer maturities.''The yield curve -- the spread between short- and long-term Treasury rates -- may also behave differently this time. In the past, when the Fed jacked up rates to the point that yields on two-year Treasuries exceeded those on 10-year notes, the yield curve “inverted,” and a recession followed. Inversions typically occurred because two-year yields rose faster than 10-year yields. Recently, however, the spread has narrowed because two-year yields have risen but 10-year yields have been relatively stable. That’s unusual but probably reflects deflationary pressures that are more evident in longer maturities.
So if an inverted yield curve occurs, it may not, as in the past, guarantee a nearby recession, and it may take years before Fed tightening precipitates one.'
- A. Gary Shilling,
The Fed's Dilemma Isn't Going Away Under Powell, February 1, 2018
Context'..years of extreme central bank inflationary measures..''Things turned crazy in 2017 .. if the .. sessions of 2018 are any indication, markets are taking “crazy” up a notch.'"..they completely lost their minds.”