'..over time, debt stops stimulating growth..' - '..The mother of all bubbles exists and it is in the debt markets..'

'..We’re now 20 years into training people (and businesses) that running up debt is fun and easy… and they’ve responded.

But over time, debt stops stimulating growth. Over this series, we will see that it takes more debt accumulation for every point of GDP growth, both in the US and elsewhere. Hence, the flat-to-mild “recovery” years. I’ve cited academic literature via my friend Lacy Hunt that debt eventually becomes a drag on growth.'

- John Mauldin, Credit-Driven Train Crash, Part 1, May 11, 2018



'Argentina .. The currency board held narrow money supply growth in check, yet it did the very opposite for Credit. The onslaught of international inflows spurred massive government and corporate debt growth - too much of it denominated in dollars. The Argentine miracle economy boomed and became the poster child for enlightened "Washington Consensus" policymaking. It was all a Bubble Mirage. Conventional wisdom could not have been more detached from reality.'

'A decade of ultra-easy monetary policies has ensured deep structural maladjustment. Importantly, "activist" policies have nurtured way too much "money" playing global risk assets. Indeed, global financial speculation has become one historic Crowded Trade. And too much money in the game alters market dynamics. The bastardized yield curve is one momentous manifestation. Serial market boom and bust dynamics is another.

The speed by which the EM boom has faltered offers a warning to all..

..

Argentina was not without its share of responsibility, yet unfettered global finance ran roughshod through the Argentine financial and economic structure. At U.S. and IMF insistence, Argentina in the nineties adopted a U.S. dollar-based currency board system. This was to ensure that money supply growth did not exceed dollar reserve holdings, thereby containing inflation and, supposedly, ensuring financial stability. Inflation did collapse, but the Washington-dictated policy regime was a powerful magnet for global "hot money" flows. The currency board held narrow money supply growth in check, yet it did the very opposite for Credit. The onslaught of international inflows spurred massive government and corporate debt growth - too much of it denominated in dollars. The Argentine miracle economy boomed and became the poster child for enlightened "Washington Consensus" policymaking. It was all a Bubble Mirage. Conventional wisdom could not have been more detached from reality.

The Bubble inevitably faltered, and "hot money," as it does, raced for the exits. There were no buyers, no liquidity and meager real wealth to make good on all the debt that had been extended. It was a horrendous collapse and tragedy for the Argentine people, for which they're still suffering some 17 years later. Like many Bubbles before and since, it's amazing how long markets remain oblivious to financial imbalances and mounting structural impairment.

..

Turkey, China and others may hold crisis at bay for now. Argentina, an EM Bubble weak link, has rather precipitously succumbed. Even as the central bank (with a reasonable quantity of international reserve holdings) hiked interest rates to 40% and the Macri government sent a delegation to Washington to negotiate with the IMF, the currency plunge ran unabated. Argentina less than 11 months ago sold $2.75 billion 100-year bonds at a 7.9% yield.

..

This speculative dynamic, however, is coming home to roost in the emerging markets. At the same time, "developed" market outperformance spurs a rush to play - and talk of Goldilocks and dreams of new eras of permanent prosperity. Serious issues are in play at the "Periphery." It's an inopportune time for complacency at the "Core," let alone exuberance. That Bubble at the Periphery - it's been absolutely historic.

May 11 - Wall Street Journal (Chelsey Dulaney, Jon Sindreu and Saumya Vaishampayan): "The dollar's rise is squeezing bond markets in developing countries like Argentina, Indonesia and Turkey, gutting what had been a popular trade for investors seeking stronger returns. Countries in the developing world have been borrowing heavily, supported by upbeat expectations for global growth and a long period of low to negative interest rates that drove investors into emerging markets to get any sort of yield. Emerging markets added on $7.7 trillion in new debt last year, including bonds and other types of loans, with about $800 billion of that denominated in foreign currencies, according to data from the Institute of International Finance." '

- Doug Noland, Disequilibrium, May 12, 2018



'Since the 2008 crisis, we have slowly begun a process of deleveraging (blue line declining). But not by very much. The bubble remains. We are currently late in a long-term debt cycle not too dissimilar to where the world was in the mid-1930s. And frankly we are seeing many of the same protectionist uprisings we saw then. It’s the economy. People are not happy. How and when we find resolve and solution to restructure the debt will determine the outcome for the markets and the economy. We just don’t know what that looks like yet.'

'..The mother of all bubbles exists and it is in the debt markets. It is global in scale and there is no easy way around the problem. Like bubbles past, this too will pop..

..

..the larger macroeconomic picture has its challenges. We face a number of headwinds, the biggest issue is DEBT.

The debt situation in the U.S. is bad. As of December 31, 2017, it stands at 329% debt-to-GDP. It’s worse in the Eurozone at 446% debt-to-GDP. For perspective, credible studies show countries get into trouble when debt-to-GDP exceeds 90%..

..

Just how bad is the global debt problem? Following is the most recent debt-to-GDP data from Ned David Research (NDR):

Japan 590%
France 480%
Germany 279%
Greece 360%
S. Korea 357%
Netherlands 725%
Denmark 585%
Canada 332%
Italy 360%
Portugal 488%
Ireland 828%
Spain 397%
Sweden 467%
Switzerland 382%
UK 476%

..

<center><a href="[bazaarmodel.net] src="[bazaarmodel.net]; height="650" /></a></center>

I really like how NDR plotted the impact on the U.S. economy in the above chart. Think of it as a high probablity way of measuring and assessing future outcomes. And if you look at the very poor growth since 2000, it’s hard to refute the facts. Debt’s a drag on growth after it reaches a certain threshold.

Since the 2008 crisis, we have slowly begun a process of deleveraging (blue line declining). But not by very much. The bubble remains. We are currently late in a long-term debt cycle not too dissimilar to where the world was in the mid-1930s. And frankly we are seeing many of the same protectionist uprisings we saw then. It’s the economy. People are not happy. How and when we find resolve and solution to restructure the debt will determine the outcome for the markets and the economy. We just don’t know what that looks like yet.

..

Game plan: seek growth and have a trader’s mentality to minimize downside loss. More defense than offense is prescribed. We sit in a similar place as we did in 1999 (the great tech bubble) and 2007 (the housing bubble). But today it is the great debt bubble. It is the mother of all bubbles. You can shape your risk and return outcome based on the mix of strategies, but have a stop-loss process on everything you own.

I know this sounds all depressing, but please don’t ingest it that way. I just don’t see it that way. Instead, see the opportunity in this message. Recall the return opportunities that presented in 2002 and 2009. The next dislocation will be specular if you sit in the privileged position to act. Let’s get to it in good shape.'

- Steve Blumenthal, ..The Debt Bubble and the Interest Rate Trigger, May 11, 2018



Context (Banking Reform - English/Dutch) '..a truly stable financial and monetary system for the twenty-first century..'

(Story) – ‘a little over 20 years’ – ‘..extreme valuations and divergent market internals..’

Behold The Sudden Stop. Risk of Emerging Markets Collapse, May 6, 2018

Latin America vs. the United States: A Tale of Two Independence Movements, March 14, 2018