'..its the debt..'

Posted by ProjectC 
<blockquote>'..a liquidity-driven crash similar to 2008-2009 does not seem likely. Instead, my model suggests we face a long drawn-out decline over many years similar to events in Japan.'

- Mike “Mish” Shedlock, Stock Market “Crash” Unlikely: It’s the Debt, Stupid, September 22, 2017</blockquote>

<blockquote>'..I'm far more worried about deflation headed to the US, wreaking havoc on the global economy and public and private risk assets for years to come.'

- Leo Kolivakis, Prepare For The Worst Bear Market Ever? September 22, 2017</blockquote>

'Policy-induced asset inflation has profoundly impacted Household Net Worth – or what I would refer to as “perceived wealth.”..'

<blockquote>'Complacency may come easy to those viewing relatively modest annual percentage growth in household, corporate and federal debt. Indeed, most at this point completely dismiss the Credit Bubble hypothesis. Yet there is plenty of support for The Bubble Thesis buried throughout the Fed’s Z.1 report.


September 17 – Reuters (Saikat Chatterjee): “Global debt may be under-reported by around $13 trillion because traditional accounting practices exclude foreign exchange derivatives used to hedge international trade and foreign currency bonds, the BIS said… Bank for International Settlements researchers said it was hard to assess the risk this ‘missing’ debt poses, but that the main worry was a liquidity crunch like the one that seized FX swap and forwards markets during the financial crisis. The $13 trillion unaccounted-for exposure exceeds the on-balance-sheet debt of $10.7 trillion that data shows was owed by firms and governments outside the United States at end-March. The fact these FX derivatives do not appear on financial and non-financial institutions’ balance sheets under current accounting rules means little is known about where the debt lies. ‘The debt remains obscured from view,’ Claudio Borio, head of the BIS’s monetary and economic department…”

I hold the view that nontransparent derivative trading and associated leverage have been integral to the global government finance Bubble. QE and currency devaluation strategies created extraordinary opportunities for “carry trade” leveraged speculation. I believe enormous amounts of finance have been created in the process of shorting select currencies, most notably near-zero rate euro and yen securities. A large chunk of “money” flowed to “king dollar” U.S. securities markets, easily offsetting the (late-2014) termination of Federal Reserve QE. It is likely that huge flows are not being captured in Fed data – the Rest of World Z.1 data in particular. It was helpful to see the BIS put a $13 TN estimate on debt/leverage associated with unaccounted for foreign-exchange derivatives.


Policy-induced asset inflation has profoundly impacted Household Net Worth – or what I would refer to as “perceived wealth.” Indeed, the bloated Household balance sheet remains a primary Bubble manifestation. Household (& Nonprofits) assets ended Q2 at a record $111.4 TN, up $1.844 TN for the quarter and $8.660 TN (8.4%) over four quarters. Liabilities increased $146 billion during the quarter and $467 billion y-o-y – to $15.219 TN. Fundamental to the ongoing Bubble, Household Net Worth (assets less liabilities) jumped $1.698 TN during Q2 to a record $96.196 TN. Net Worth surged a staggering $8.193 TN over the past year (now 42% higher than the 2007 peak). For perspective, Net Worth jumped $4.894 TN during 1999 and dropped $10.240 TN during 2008. As a percentage of GDP, Household Net Worth reached 500% for the first time during Q2, up from cycle peaks of 473% in 2007 and 435% in 1999.'

- Doug Noland, Q2 2017 Z.1 Report, September 23, 2017</blockquote>


<blockquote>'..remember also that the global financial crisis was the result, not the origin, of the Fed's activism..'

'..the true “Phillips Curve” .. is actually a scarcity relationship between unemployment and real wages, not general prices.'

'..six structural factors .. to prepare for global deflation.'</blockquote>