'Capitalism is in clear and present danger. This sounds extreme – unless you’ve followed the trajectory of developments over the years. How are capitalistic systems to operate with central banks abrogating adjustments and corrections both for market and economic systems?''..Central Bank Capitulation seems to have unleased wild price instability throughout global markets. Things do get crazy during the late phase of Bubbles. We’re witnessing Bubbles and Craziness in historic proportions.'
Capitalism is in clear and present danger. This sounds extreme – unless you’ve followed the trajectory of developments over the years. How are capitalistic systems to operate with central banks abrogating adjustments and corrections both for market and economic systems? It takes a tremendous amount of wishful thinking to believe that today’s markets will effectively allocate real and financial resources. Sound analysis also points to only more precarious imbalances and maladjustment on a global basis. And with global fragilities increasingly conspicuous, it’s reached the perilous point where markets believe central banks will preemptively flood the global system with liquidity to forestall “risk off” in the markets and recession globally.
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With a flock of dovish central banks, collapsing yields and record stock prices, it’s easy to disregard China. Haven’t they, after all, repeatedly overcome bouts of heightened systemic stress. Beijing always gets things under control. The PBOC can effortlessly print “money” and bail out its troubled banking system. Not so fast… “Bond repos and interbank loans” up nearly 50% over the past year to $10.7 TN. Those are two data points that should alarm the world – and surely help explain panic buying of Trillions of negative-yielding global bonds.
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It all implies currency vulnerability. The good news for China is that currency values are relative – and the renminbi competes against a throng of structurally weak currencies. Little wonder gold has caught such a nice bid. Quite an equities run into “quadruple witch” option expiration. A decent short squeeze in EM securities markets and currencies. And wild volatility in crude and energy prices. Central Bank Capitulation seems to have unleased wild price instability throughout global markets. Things do get crazy during the late phase of Bubbles. We’re witnessing Bubbles and Craziness in historic proportions.'
- Doug Noland,
Rejoicing Central Banker Capitulation, June 22, 2019
'I would closely follow unfolding developments in Chinese Credit – funding issues for small and mid-sized banks; ructions in the money markets; trust issues with repo collateral, inter-banking lending, and counterparties; vulnerabilities in local government financing vehicles (LGFV); heightened concerns for speculative leverage; and the overarching issue of the implicit Beijing guarantee of essentially the entire Chinese financial system..''Record U.S. stock prices in October 2007 made it easy to dismiss the momentous ramifications associated with subprime borrowers (the “Periphery”) losing access to cheap Credit – to disregard the blow-up of two Bear Stearns structured Credit funds, widening Credit spreads, pockets of market illiquidity, and waning confidence in some sophisticated derivative structures. Acute monetary instability (i.e. equities and $140 crude) was mistaken for resilient bull markets.
I would closely follow unfolding developments in Chinese Credit – funding issues for small and mid-sized banks; ructions in the money markets; trust issues with repo collateral, inter-banking lending, and counterparties; vulnerabilities in local government financing vehicles (LGFV); heightened concerns for speculative leverage; and the overarching issue of the implicit Beijing guarantee of essentially the entire Chinese financial system. The overarching issue is one of prospective losses of monumental dimensions. These losses will have to be shared in the marketplace. As much as global markets bank on Beijing bankrolling China’s entire financial apparatus, the Chinese government will not welcome the prospect of bankrupting itself.
The solution, of course, is for China to simply inflate its way out of debt trouble – just like everyone else. What an incredibly dangerous myth the world fully bought into. Reflation – in the U.S., China, Europe, Japan and globally – has only inflated the size and scope of Bubbles. China could see $4 TN of new Credit this year – debt of increasingly suspect quality. Such reckless Credit excess is putting the Chinese currency at great risk. It took about 18 months from the initial U.S. subprime blowup to full-fledged financial crisis. While one could certainly argue for earlier (i.e. December), China’s crisis clock began ticking no later than with last month’s takeover of Baoshang Bank.'
- Doug Noland,
History Rhymes, June 29, 2019
'This relationship between unemployment and real wages is actually what the Phillips Curve was intended to describe..''In the short run, investors are celebrating the likelihood of Federal Reserve rate cuts – producing a knee-jerk, obligatory pop in the market. Historically however, initial rate cuts usually mean that something has gone wrong. The misplaced exuberance of investors is something my friend Danielle DiMartino Booth calls a “Recession Party.” We doubt this party will end well. Blind faith that rate cuts are always positive for the stock market is a mistake. This assumption is likely to be the hook that keeps investors holding on through a 60-65% market collapse over the completion of this market cycle.
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This relationship between unemployment and real wages is actually what the Phillips Curve was intended to describe..
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That said, asking whether it’s best to hedge inflation with stocks or gold assumes that one investment is always preferred, without considering valuations or market conditions at all. The correct answer is that stocks tend to be an ideal investment when initial valuations are depressed and inflation is falling (as we observed during most of the 1980’s). Conversely, stocks tend to be a dismal investment when initial valuations are elevated and inflation is rising (as we observed repeatedly during the 1970’s). The scatterplot below illustrates this regularity.
On the other hand, gold tends to be an ideal investment when initial valuations are depressed (for example, when the ratio of gold to the S&P 500 is relatively low) and inflation is rising. Gold tends to be a dismal investment when initial valuations are elevated and inflation is falling. The scatterplot below illustrates this regularity. Presently, the ratio of gold prices to stock prices is the lowest in about 15 years, and is in the lowest quartile of historical data. Given the hypervaluation we observe in the equity market, we would certainly expect gold to perform better than stocks in response to any inflation shock in the next few years.
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Likewise, the perception that investors will remain willing to accumulate an increasing stock of government liabilities and paper, without inflation pressure, is also an artifact the economic slack that followed the global financial crisis. Recently, we’ve observed much larger government deficits than are consistent with the position of the economy in its cycle, and historically, those “cyclically excessive deficits” have meaningfully provoked inflation pressures. The best indications to watch on this front are generally financial measures that are responsive to inflation, including gold, the U.S. dollar, yields on inflation-protected securities, commodity prices, and related instruments. We don’t see strong pressures quite yet – though gold has perked up considerably – but I do see it as a mistake to assume that inflation is merely a thing of the past.'
- John P. Hussman, Ph.D.,
Federal Reserve Easing Ahead, June 26, 2019
Context'Financial and economic Systems have evolved to become acutely unstable.'