'..One can use a variety of estimation methods to demonstrate that the trajectory of the real economy (output, employment) in recent years has been no different than one could have projected using wholly non-monetary variables.''The key point here is this. Extraordinary monetary policy has one function, and it is to amplify yield-seeking speculation when investors are inclined to speculate. This amplified speculation has extended to every corner of the financial markets, from equities, to low-grade debt, to private equity. That and that alone, is how quantitative easing has impacted the economy in recent years. One can use a variety of estimation methods to demonstrate that the trajectory of the real economy (output, employment) in recent years has been no different than one could have projected using wholly non-monetary variables.
Years of relentless yield-seeking speculation have created the potential for a financial collapse far more severe than the mortgage bubble, which was largely limited to a single class of securities. Unfortunately, the consequences may be far more difficult to stem than investors believe, because there is a vast difference between liquidity (marketable assets on the left side of the balance sheet) and solvency (capital on the right side of the balance sheet that stands as a buffer between financial distress and bankruptcy).'
- John P. Hussman, Ph.D.,
You Are Here, April 8, 2019
'If Dr. Richebacher were alive today (he passed in 2007 at almost 90), he would draw a direct link between rising populism and central bank inflationism. Born in 1918, he lived through the horror of hyperinflation and its consequences. While he was appalled by the direction of economic analysis and policymaking, [h]e would tell me that he didn’t expect the world to experience another Great Depression. He had believed that global leaders learned from the Weimar hyperinflation, the Great Depression and WWII. His view changed after he saw the extent that policymakers were willing to go to reflate the system after the “tech” Bubble collapse.''The resurgent global Bubble has me pondering Bubble Analysis. I often refer to the late-cycle “Terminal Phase” of excess, and how much damage that can be wrought by rapid growth of increasingly risky Credit. Dangerous asset Bubbles, resource misallocation, economic imbalanced, structural maladjustment, inequitable wealth redistribution, etc. In China and globally, we’re deep into uncharted territory.
I had the good fortune to subscribe to the German economist Dr. Kurt Richebacher’s newsletter for years - and the honor of assisting with “The Richebacher Letter” between 1996 and 2001. It was a tremendous learning opportunity.
My analytical framework has drawn heavily from Dr. Richebacher’s analysis. This week, I thought about a particular comment he made about the “middle class” suffering disproportionately from inflation and Bubbles: The wealthy find various means of safeguarding their wealth from inflationary effects. The poor really don’t have much protect. They don’t gain much from the boom, and later have little wealth to lose during the bust. It is the vast middle class, however, that is left greatly exposed. They – society’s bedrock - tend to accumulate relatively high debt levels during the boom, believing their wealth is rising and the future is bright. They perceive benefits from home and market inflation, with rising net worth encouraging overconsumption and overborrowing. Meanwhile, inflation works insidiously on real incomes.
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If Dr. Richebacher were alive today (he passed in 2007 at almost 90), he would draw a direct link between rising populism and central bank inflationism. Born in 1918, he lived through the horror of hyperinflation and its consequences. While he was appalled by the direction of economic analysis and policymaking, [h]e would tell me that he didn’t expect the world to experience another Great Depression. He had believed that global leaders learned from the Weimar hyperinflation, the Great Depression and WWII. His view changed after he saw the extent that policymakers were willing to go to reflate the system after the “tech” Bubble collapse.
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It was fundamental to Dr. Richebacher’s analysis that Bubbles destroy wealth. He spared no wrath when it came to central bankers believing wealth would be created through the aggressive expansion of “money” and Credit.
It should be frightening these days to see pension fund assets fall only further behind liabilities, despite a historic bull market and record stock values-to-GDP. When the Bubble bursts and Wealth Illusion dissipates, the true scope of economic wealth destruction will come into focus. Don’t expect the likes of Lyft, Uber, Pinterest – and scores of loss-making companies - to bail out our nation’s underfunded pension system. Positive earnings (and cash-flow) doesn’t matter much in today’s marketplace. It will matter tremendously in a post-Bubble landscape where real economic wealth will determine the benefits available to tens of millions of retirees.
At near record stock and bond prices, pensions appear much better funded than they are in reality. With stocks back near all-time highs, Total (equities and debt) Securities market value is approaching $100 TN, or 460% of GDP. This ratio was at 379% during cycle peak Q3 2007 and 359% for cycle peak Q1 2000.'
- Doug Noland,
The Perils of Stop and Go, April 13, 2019
Context'..things continue to follow the worst-case scenario .. It was another blunder for the global central bank community..'An Unprecedented Speculative Spree - by Dr. Kurt Richebächer, March 20, 2007
'..The risk is rising that the U.S. will not only return to zero short rates but, as they have in Japan..'Weimar malaise - '..Monetary policymakers are urging more extreme actions in their frantic pursuit of higher inflation. They should be careful what they wish for.'