'..remember that there’s really very little correlation between Federal Reserve policy changes and more general, cyclical economic fluctuations.. ''One may argue, perhaps defensibly, that aggressive monetary and fiscal policy can avoid Depression-type economic outcomes, but remember that there’s really very little correlation between Federal Reserve policy changes and more general, cyclical economic fluctuations. Indeed, the trajectory of every U.S. economic expansion – including this one – has followed a very simple mean-reverting path, where the output gap (real GDP vs. potential GDP) at the recession low has narrowed at a rate of roughly 8% per quarter. That trajectory has not been affected even by the most extraordinary monetary policies.
..
Presently, we observe market conditions that have been associated almost exclusively, and in most cases precisely, with the most extreme bull market peaks across history.'
- John P. Hussman, Ph.D.,
They’re Running Toward the Fire, July 14, 2019
'..The crazier things get the more unsustainable Bubble prices become.''Crisis-period QE changed the functioning of global markets. Permanently including QE in central banks’ standard toolkit has transformed global finance and Capitalism in ways not comprehensible at this juncture. The bond “vigilantes” are extinct. This has provided central banks unprecedented latitude to discard convention and follow their every whim. It has also conveniently removed a major risk (spike in yields) for equities. But is has also opened the fiscal floodgates, where monetary policies ensure the accommodation of huge deficit spending at extremely low borrowing costs. QE and the resulting death of the vigilantes have also empowered the strongman leader to subvert central bank independence.
..
Today’s “crazy” is incredibly dangerous. No check and balances. Markets have lost the capacity to self-adjust and correct. Sovereign debt, the foundation of global finance, has succumbed to unprecedented price distortions – and it only gets worse from there: The Speculative Blow-Off for Global Financial Assets. And I appreciate it all appears reasonable and unsustainable - so long as securities prices continue to inflate. But it will function poorly in reverse. The crazier things get the more unsustainable Bubble prices become.'
- Doug Noland,
Central Banker to the World, July 13, 2019
'..The weakness in the base flowed into world dollar liquidity (WDL), which contracted at an unprecedented 0.9% annual rate from 2015 to the present. This drop is far outside the range from 1960 to 2008 (or before quantitative easing) when WDL grew a much faster 8.2% per annum..''Third, the velocity of money (V) appears to have fallen sharply in the second quarter, the second consecutive quarterly decline. The steep drop in V in the spring quarter reflects the transitory fall in Treasury deposits but also the ongoing and far more significant decline in the marginal revenue product of debt, the main fundamental determinant of velocity.
With velocity down in both of the past two quarters, it is possible that the secular decline in V since 1998 has resumed. The ongoing fall in velocity will greatly reduce the Fed’s efforts to boost the economy.
Fourth, growth in the monetary base and total reserves of depository institutions has continued to contract due to a continuing balance sheet normalization and a drain of excess reserves needed to meet currency needs of the private nonbank sector as well as other operating factors. The weakness in the base flowed into world dollar liquidity (WDL), which contracted at an unprecedented 0.9% annual rate from 2015 to the present. This drop is far outside the range from 1960 to 2008 (or before quantitative easing) when WDL grew a much faster 8.2% per annum. Thus, Fed operations continue to drain liquidity from foreign markets at time when a synchronized economic downturn is evident in all major economies of the world.
Accordingly, monetary restraint is continuing to weigh on economic growth. Inflation, which fell below the Fed’s targets and most Wall Street forecasts, will remain on a downward path. These cyclical forces suggest that inflationary expectations should continue to fall this year and next as the economic growth rate weakens further. This means that a mild recession would push the real rate into negative territory. Thus, both determinants of the nominal long risk-free rate (i.e. the real rate and inflationary expectations) are directionally favorable for further interest rate declines, although the path will continue to remain volatile.'
- Hoisington,
Second Quarter 2019, page 5
'The global economy is in bad shape and the U.S. economy has ticked lower. No alarm bells just yet. I do believe the bond market is signaling there is a problem. I expect the Fed to aggressively cut the Fed Funds rate to zero by early 2020 and it is possible the U.S. economy will be in recession at that time. I believe the stock market is way ahead of itself (overvalued as shown above) and has not yet focused in on the global economic weakness. I expect the corporate sector will continue to reduce their earnings guidance. The global economy is weak. China has been the main driver of the global economy over the last decade. China is weak and can’t stimulate its way out like it did in the past. Trade wars are adding fuel to the fire. I see a short-term peace treaty as U.S. elections are next year but no real solution.'
- Steve Blumenthal,
Mauldin Strategic Investment Conference Wrap-Up, July 12, 2019
'..There is the potential for a far more abundant and pleasant future for everyone, if we can reconcile these economic conundrums.''What I don’t want to see is a repeat of what happened at the beginning of the Great Recession. When the powers that be finally realized the financial world was collapsing down around our ears, they had no plan. They were making it up as they went along. While they put out the fire, they also did a great deal of damage. This was not the best way to deal with the problem. But it was probably the best they could do at that moment, given the realities on the ground.
That’s why it is important to make this discussion become both public and national. I would hope that others will join us in thinking about how to restructure the US economy into a more self-sustaining and hopefully more equitable system. Having plans available for consideration in the next crisis will help create a willingness to compromise.
I think this may be the most important decision that our nation makes in my lifetime. If we continue down this path, at best we are consigning ourselves to more of the same meager growth. At worst, we will have a crisis that ends with what I call The Great Reset, where the world has to radically restructure its debt in ways that will not be pleasant. (That is an understatement along the lines of calling the Great Depression merely “unpleasant.”)
All this will be happening as technology improves our lives but also slowly eliminates higher-paying jobs, causing many people to earn less than they thought their education would justify. We will see more become “underemployed,” creating a great deal of political and social frustration. I hope we can avoid this type of Blade Runner outcome. There is the potential for a far more abundant and pleasant future for everyone, if we can reconcile these economic conundrums.'
- John Mauldin,
Ray Dalio – John Mauldin Conversation, Part 6, July 13, 2019
Context 'We doubt this party will end well.' - Hussman
Consumer credit hit another all-time high today of nearly $4.1 trillion, July 8, 2019
Zombie firms .. There are now 14 junk bonds in Europe with a negative yield, July 9, 2019
Housing Bubble Reblown: Last Chance for a Good Price Was 7 Years Ago, July 12, 2019
'..BIS chastises central banks .. More fundamentally, monetary policy cannot be the engine of growth.'