'We started with the markets and will end with the markets. At this point, I don’t see great contradictions between the markets: Safe haven bonds and the risk markets are not actually telling wildly different stories. Seeing low market yields, loose financial conditions, seemingly great underlying U.S. economic fundamentals and Quadruple Puts, highly speculative (trend-following and performance-chasing) markets have been behaving about as one would expect near the end of a historic cycle: an intense, overarching short-term focus on speculative market gains. The safe havens, much less concerned with timing, see speculative Bubbles primed for bursting. Treasuries, bunds, JGBs, Swiss bonds, etc. see an acutely fragile global market structure.
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And for the crowd that these days harbors delusions of U.S. markets and economic activity largely immune to global issues, I pose the question: How do U.S. markets perform in the event of illiquidity and a “seizing up” of global markets? As I’ve posited before, the U.S. economy is extremely vulnerable to a dramatic market-induced tightening of financial conditions. What would markets look like if the marketplace turns against negative cash-flow enterprises? How would the U.S. economy function in the event of debt market illiquidity?
The Powell U-turn granted markets four months of fun and games – and only greater systemic vulnerability. Now comes the downside, with a Fed that just might prove somewhat slower to come to the markets’ rescue than everyone presumes. This week marked the True Start to the U.S. vs. China Trade War. The degree of cluelessness is shocking.'
- Doug Noland,
True Start to U.S. vs. China Trade War, May 18, 2019
Context'The freer a country is, the richer it is. There are no unfree countries that are rich.' - Mao Yushi