'..Lost in all of this is recognition that a decade of experimental monetary stimulus has failed. Global finance is much more fragile today than prior to the 2008 crisis – the global economy more imbalanced and vulnerable.
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..And when the current “risk on” gives way to reality, maladjusted Market Structure will ensure liquidity issues on a scale beyond December.''It has now been a full decade of near zero interest rates globally. Trillions (estimates of around $16 TN) of new central bank “money” were injected into global securities markets. What’s more, global central banks have repeatedly intervened to buttress global markets - from 2008/09 crisis measures; to 2012’s “whatever it takes”; to 2016’s “whatever it takes to support a faltering Chinese Bubble”; to last month’s Powell U-turn. The combination of a decade of artificially low rates, an unfathomable amount of new market liquidity and an unprecedented degree of central bank market support have fostered momentous market structural maladjustment. We’re living with the consequences.
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..I would further argue that this dysfunctional market dynamic recalls the destabilizing rally in Treasuries and agency securities in 2007 and well into 2008. This market anomaly stoked end-of-cycle speculative Bubble excess and exacerbated systemic fragilities.
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As we saw in December, sinking markets direct attention to an expanding list of troubling developments. Years of inflating securities prices seemed to demonstrate that so many of the old worries were unjustified – none really mattered. The problem is that many do matter – and some tremendously. The current extraordinary backdrop has all the makings for a decisive bearish turn in market sentiment that would create a problematic feedback loop within the real economy – domestically and globally.
I’ll highlight an issue that has come to be easily dismissed - yet matters tremendously. Zero rates and QE were a policy experiment. The consensus view holds that the great success of this monetary exercise ensures that QE is now a permanent fixture in the central banking “tool kit”. The original premise of this experiment rested on the supposition that a temporary boost of liquidity would stimulate higher risk market prices and risk-taking with resulting wealth effects that would loosen financial conditions while stimulating investment, spending and income growth throughout the real economy. The expectation was that a shot of stimulus would return the real economy back to its long-term trajectory.
History teaches us that monetary inflations are rarely temporary. Travel down that road and it’s nearly impossible to get off. Dr. Bernanke, the Federal Reserve and global central bankers never contemplated what a decade of unending monetary stimulus would do to Market and Financial Structure. Most – in policy circles and the marketplace - believe beyond a doubt that monetary stimulus was hugely successful in resuscitating economic growth dynamics.
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..Lost in all of this is recognition that a decade of experimental monetary stimulus has failed. Global finance is much more fragile today than prior to the 2008 crisis – the global economy more imbalanced and vulnerable.
..
..And when the current “risk on” gives way to reality, maladjusted Market Structure will ensure liquidity issues on a scale beyond December.
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..deflation is a fateful consequence of bursting Bubbles – Bubbles inflated in the process of central bankers fighting so-called “deflationary forces.” Now, after thirty years of unending global Credit growth, activist central banking and egregious financial speculation, Bubble risk has never been so great. “The amazing lurch toward recession” and financial dislocation specifically because of a failed experiment in QE and inflationist monetary management.
But I’ll conclude with Market Structure. Global markets have turned even more synchronized during this upside convulsion. This increases already highly elevated risk come the next downturn..'
- Doug Noland,
Delusional, February 9, 2019
'The world is in the throes of a precarious period. Ill-advised central banking has ceded a historic global market Bubble additional rope. Meanwhile, until something snaps it is reckless fiscal policies accommodated by ultra-low rates, along with the precarious market perception that central banks will have no alternative other than to reinstitute QE. Central bank-induced Monetary Disorder has completely distorted sovereign debt markets, granting Washington politicians the proverbial blank checkbook..''The delusion was believing zero rates and QE would over time support system stability. The “buyer of last resort” function during a time of crisis should never have morphed into the buyer of first resort for years of booming markets and economies. We’re now a full decade into aggressive stimulus, and global finance is more fragile than ever. Policy rates remain at zero and the ECB only recently ended its historic balance sheet expansion (to $4.7 TN). Yet economies throughout the Eurozone appear in - or headed toward - recession. Amazingly, despite a QE-induced collapse in market yields, Italy faces a recessionary backdrop with its fragile banks hanging in the balance.
Meanwhile, troubling data run unabated in China. The Caixin China Manufacturing PMI dropped 1.4 points during January to 48.3, the low since gloomy February 2016. It was also the first back-to-back months below 50 (contracting manufacturing activity) since May/June 2016. To see China’s economy weaken in the face of ongoing rapid Credit growth should be alarming to the entire world.
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The world is in the throes of a precarious period. Ill-advised central banking has ceded a historic global market Bubble additional rope. Meanwhile, until something snaps it is reckless fiscal policies accommodated by ultra-low rates, along with the precarious market perception that central banks will have no alternative other than to reinstitute QE. Central bank-induced Monetary Disorder has completely distorted sovereign debt markets, granting Washington politicians the proverbial blank checkbook. And it is worse than merely a marketplace devoid of “bond vigilantes.” Treasury yields are pressured downward by the fragility of global Bubbles and the expectation of aggressive monetary stimulus as far as the eye can see.'
- Doug Noland,
No Mystery, February 2, 2019
ContextMonetary Disorder 2019'They got on the wrong path about a hundred years ago by assuming that the economy was like a machine.''Global Financial Crisis is the Paramount Issue 2019. Last year saw the bursting of a historic global Bubble..'