'The scope of today’s global Bubble goes so far beyond 2007. The prevailing view holds that global central banks will indefinitely do “whatever it takes” to ensure abundant marketplace liquidity, while backstopping global markets in the event of tumult. And it is precisely this perception that has sustained a prolonged Credit and asset inflation and resulting epic financial Bubble.'<blockquote>''I think back to the summer of 1998. Markets were surging to record highs, led by monster advances in bank and financial stocks. The mantra was “the West will never allow Russia to collapse” – certainly not after the devastating Asian Tiger debacle. The simultaneous autumn implosions of Russia and LTCM not only punctured the financial Bubble, they almost brought down the global financial system.
Bolstered by “The Committee to Save the World” and all the Fed’s Y2K histrionics, powerful Bubble reflation saw Nasdaq almost double in 1999. Fear somehow just vanished as greed took full control. The U.S. was the indisputable leader of the free-world; there was an unassailable New Paradigm of technology-induced prosperity; America was the vanguard of technological revolution; and the dollar was unconditional king. With the clairvoyant Maestro leading U.S. and global central bankers, the New Millennium was destined to be the golden age of prosperity. Naysayers were tarred and feathered, yet that didn’t change the harsh reality that finance was fundamentally unsound.
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Examining the backdrop, I think mostly deeply of 2007. For the most part, things looked pretty good at the time – at least superficially. The U.S. and global economy were generally viewed as robust, certainly strong enough to withstand some issues at the fringe of mortgage finance (subprime). Very few at the time recognized the profound financial and economic fragilities that had developed over the mortgage finance Bubble period. In general, policymakers and market participants were oblivious to how distortions in the pricing and issuance of mortgage finance had become such a critical systemic issue. Virtually everyone missed the key analysis: Perceived solid economic fundamentals were no match for deeply unstable financial and market underpinnings. It was a major Bubble, and it would burst.
I believe fragilities today are much more systemic on a global basis than back in 2007. Where’s the Bubble? Virtually everywhere. Indeed, the world would be altogether different if not for the past year’s $2.0 TN or so of global central bank liquidity injections – and expectations for only somewhat less this year. It’s noteworthy that few market strategist even mention QE these days – as if it no longer matters. With the Fed having suspended QE in 2014, there’s a general perception in the U.S. that markets will transition easily away from QE. Yet global liquidity is “fungible.” How much U.S. bound liquidity has arrived – directly or indirectly – via ECB, BOJ and BOE QE operations? Surely flows have been enormous – hundreds of billions or, likely, more.
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The scope of today’s global Bubble goes so far beyond 2007. The prevailing view holds that global central banks will indefinitely do “whatever it takes” to ensure abundant marketplace liquidity, while backstopping global markets in the event of tumult. And it is precisely this perception that has sustained a prolonged Credit and asset inflation and resulting epic financial Bubble.
..
In a world of unsound finance, China remains a major weak link. And while the United States’ relationship with our southern neighbor received most of the attention during the first week of the Trump Administration, I’ll be surprised if China escapes Trump Tweets for long. Prospects for growth in GDP and U.S. corporate profits seem enticing to most these days. I would counter that global financial and economic stability cannot be taken for granted if the U.S. and China come to loggerheads. Latent fragilities will spring to life.
Even if calm prevails, markets have grown way too complacent regarding the global monetary backdrop. So many unknowns. So many things that could go wrong. Whenever it unfolds, the next de-risking/de-leveraging episode should be quite captivating.'
- Doug Noland,
A Dubious Monetary Backdrop, January 28, 2017</blockquote>
Context<blockquote>
'..benefits have been diverted, via money-supply inflation, from workers and savers to the holders of financial assets.'</blockquote>