<blockquote>'Price deflation is not damaging at all to banks or anyone else. Asset bubble deflation is.'
- Mish (
'..a 30-year bear market..')</blockquote>
'..‘Deflation just doesn't appear out of nowhere and it doesn't happen because you are near the zero bound. Every serious deflation I've looked at is preceded by an asset bubble and then it bursts,’..'<blockquote>'In so many ways, years of loose finance have spurred over-investment and attendant downward pricing pressures. Shale finance is only one of the more visible examples. Importantly, excess cheap finance and investment have evolved into powerful global phenomena. One has only to point to the runaway Credit boom - and resulting manufacturing overcapacity in China (and Asia more generally) - to come to the rather obvious conclusion that activist monetary management/accommodation can foment downward pricing pressures.
..
It’s simply difficult to believe that these central bankers fail to recognize what have evolved into deeply systemic risks. They know they’re trapped, but in denial – right? Then again, complacent central bankers have a history of being blindsided. Clearly, they’re determined to cling to flawed doctrine. I’ve always believed conventional thinking has it wrong: The great risk is not deflation but runaway Credit Bubbles. And very serious problems unfold when the risk of a bursting Bubble ensures that policymakers rationalize, justify - and sit back and do nothing.
December 12 – CNBC (Tae Kim): “Stanley Druckenmiller believes the overly easy monetary policies by global central banks will have disastrous consequences. ‘The way you create deflation is you create an asset bubble. If I was 'Darth Vader' of the financial world and decided I'm going to do this nasty thing and create deflation, I would do exactly what the central banks are doing now,’ he told CNBC's Kelly Evans… ‘Misallocate resources [with low interest rates], create an asset bubble and then deal with the consequences down the road,’ he said. The investor noted how this boom-and-bust cycle has happened time and time again. ‘Deflation just doesn't appear out of nowhere and it doesn't happen because you are near the zero bound. Every serious deflation I've looked at is preceded by an asset bubble and then it bursts,’ he said. ‘Think about the '20s, a big asset bubble that burst, you have the Depression. Think about Japan. Asset bubble in the '80s. It burst. You have the consequences follow. Think about 2008, 2009.’” '
- Doug Noland,
Chronicling for Posterity, December 16, 2017</blockquote>
'..It’s been a huge year for Credit on a global basis.'<blockquote>'U.S. and global growth surprised on the upside in 2017, explained by monetary conditions that somehow became only more extraordinarily loose. The Fed, with its dovish approach to three baby-step hikes, failed to tighten conditions. Led by the Bank of Japan and the European Central Bank, it was another year of massive global QE. Meanwhile, Chinese “tightening” measures couldn’t restrain record Credit growth. At the “periphery,” EM were the recipients of huge financial flows, spurring domestic Credit systems and economies around the globe. It’s been a huge year for Credit on a global basis.
December 19 – Financial Times (Eric Platt and Robin Wigglesworth): “A borrowing binge by companies and governments has reached a new high this year, providing bumper fees for Wall Street but raising questions ahead of a year of expected tightening of cheap money by the world’s most important central banks in 2018. Blue-chip corporate borrowers such as AT&T and Microsoft have led the way, as companies accounted for more than 55% of the $6.8tn raised in 2017 through bond sales organised by banks, according to… Dealogic. Countries from Argentina to Saudi Arabia also took advantage of an almost decade of low interest rates in developed economies, which forced investors to chase returns in the bonds of emerging market governments and their companies. ‘In 2017, there was such an influx of capital coming into high-quality fixed income. It’s a demand-fuelled story,’ said Gene Tannuzzo, a portfolio manager with Columbia Threadneedle. ‘If you are a sovereign or corporate, with interest rates where they are, you are supposed to borrow now.’” '
- Doug Noland,
Epic Stimulus Overload, December 23, 2017</blockquote>
'So if there is something in the financial markets to be optimistic about, it’s the prospect of opportunities that will evolve over the completion of the current market cycle. Despite extreme valuations in this cycle, we’ve learned to limit negative market outlooks to periods featuring deteriorating and divergent market internals..'<blockquote>'The reason that delusions are so hard to fight with logic is that delusions themselves are established through the exercise of logic. Responsibility for delusions is more likely to be found in distorted perception or inadequate information. The problem isn’t disturbed reasoning, but distorted or inadequate inputs that the eyes, ears, and mind perceive as undeniably real.
..
The strongest expected market return/risk classifications we identify emerge when a material retreat in valuations is joined by an early improvement in market action. While we can’t identify when that opportunity will occur, I expect that the cumulative market return between now and that point will be negative, because even a gradual 2-year improvement in prospective 12-year S&P 500 returns to just 4% would require a market loss of more than 20% over that 2-year period. In my view, a defensive posture here is an optimistic stance, because it recognizes the likelihood that prospective returns will again be positive before too long. I actually expect a much more substantial improvement in prospective market returns, but as in 2000 and 2007, that would require much deeper market losses than investors seem to contemplate.
So if there is something in the financial markets to be optimistic about, it’s the prospect of opportunities that will evolve over the completion of the current market cycle. Despite extreme valuations in this cycle, we’ve learned to limit negative market outlooks to periods featuring deteriorating and divergent market internals. We observed that shift last month, but I’d still call it “early” deterioration; permissive of abrupt losses but not yet encouraging aggressive downside expectations. We’ll respond to market conditions as they change.'
- John P. Hussman, Ph.D.,
Three Delusions: Paper Wealth, a Booming Economy, and Bitcoin, December 18, 2017</blockquote>
Context<blockquote>
'Central banks’ seriously misguided attempts to defeat routine consumer price deflation is what fuels the destructive asset bubbles that eventually collapse.''..central bankers create very destructive asset bubbles that eventually collapse..''..while vulnerable, the Bubble is still expanding..'
'..China, once supported by strong household savings, is on a debt binge..''..the U.S. equity market .. exceeding even the levels observed in 1929 and 2000..''..Central banks have inflated the greatest Bubble in history..'</blockquote>