'And we definitely cannot ponder the next recession without taking a global view. Since the last crisis, global Credit Bubbles have become highly synchronized, securities markets atypically synchronized, and economies uncommonly synchronized..''When it comes to Bubbles, the more conspicuous they are the less likely they are to be deeply systemic. The “tech” Bubble was obvious, yet the most egregious excess was contained within the technology sector. The mortgage finance Bubble was much more systemic, with excesses spread about and not as apparent. I believe today’s Super “Tech” Bubble is much more systemic than back in 2000. And while subprime is not the key issue it was for previous Bubble, I would argue that excess in many key housing markets is comparable. Commercial real estate on a national basis is likely more vulnerable today than in 2007, and the same could be said for some regional housing markets (i.e. greater “Silicon Valley”, Los Angeles, Seattle, Portland, Atlanta). Today’s Bubble in leveraged lending and M&A is greater than 2006/2007. The Bubble in corporate Credit dwarfs that from the mortgage finance Bubble period. Excesses throughout the securities markets phenomenally exceed those from the prior Bubble period. Moreover, I suspect the current level of derivatives-related speculative leverage could be multiples of 2007.
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During the last crisis, the collapse in rates and market yields significantly mitigated the Treasury debt service burden. This ensured an outsized percentage of huge deficit spending went to bolster the real economy, with relatively less to debt holders. Come the next recession, already huge deficits will expand much larger, likely with only meager benefits from lower borrowing costs. Worse yet, there’s a scenario where fiscal recklessness finally leads to some market backlash. At some point, out of control deficits could be compounded by rising market yields – central bank stimulus notwithstanding.
And we definitely cannot ponder the next recession without taking a global view. Since the last crisis, global Credit Bubbles have become highly synchronized, securities markets atypically synchronized, and economies uncommonly synchronized. Synchronization also applies within the markets – equities, investment-grade and “junk” corporate Credit, sovereign debt, M&A - “developed” and “developing.” Global asset prices – certainly including real estate – notably synchronized. When it comes to a synchronized global policy response, keep in mind that ECB and BOJ policy rates are basically at zero – with little evidence of benefits from negative rates. The ECB just ended QE, while the BOJ just keeps printing. With little effective ammo, policymakers exploit what they can to sustain the Bubble and hold fragilities at bay.
To be sure, today’s backdrop overshadows the world’s predicament heading into 2008/09. China and EM, in particular, were in the midst of powerful expansions in 2008 – burgeoning Bubbles readily resuscitated post-U.S. crisis. Fueled by China’s massive stimulus, the emerging markets became the “growth locomotive” pulling the entire global economy away from a downward spiral. Pondering the future, it is not at all clear how a vigorous downward spiral is repelled come the next crisis.
Policymakers continue to throw enormous stimulus at global markets and economies. Instead of stabilization, we’ve witnessed ongoing Bubble inflation and intensifying Monetary Disorder. And the more Bubbles inflate, the greater the underlying financial and economic fragilities – and the quicker the Fed was to conclude “normalization” and China was to, once again, aggressively spur lending.
What worries me most is that underlying instability and vulnerabilities have policymakers resolved to abrogate bear markets and recessions. Extraordinary measures continue to be taken to nullify business and market cycles, with apparently no appreciation for how vital adjustments and corrections are to sound financial and economic systems. Worst of all, structurally maladjusted and highly speculative global markets are emboldened as never before. Party like it’s twenty nineteen – with global financial, economic and geopolitical backdrops uncomfortably reminiscent of ninety years ago.'
- Doug Noland,
No Holds Barred February 16, 2019
Context'..Ill-advised central banking has ceded a historic global market Bubble additional rope..'