LIQUIDITY DOES NOT CREATE SOLVENCY

The actions of central bankers around the globe which have been driving stock prices higher are not a sign of control. They are signs of desperation. They are losing control. Their academic theories have failed. Their bosses insist they turn it up to eleven. Something is going to blow. You can feel it. John Hussman knows what will happen. Do you?

That said, it’s worth noting that the inclinations of central banks toward quantitative easing and interest rate suppression are increasingly taking on a tone of desperation in the face of accelerating economic weakness in Japan, Europe and China. While the stated objective is to increase inflation, low inflation isn’t really the economic problem – low growth, intolerable debt burdens, and misallocated capital are at the core of global challenges here. Unfortunately, QE only misallocates capital toward more speculation and low-quality debt (primarily junk and leveraged loan issuance), without much impact on real growth. China’s move was prompted in part by a surge in bad loans to the highest level in nearly a decade. The largest European banks now have gross-leverage ratios as high as 30-to-1 (during the credit crisis, one could order the sequence of defaults accurately using this metric, with Bear Stearns, Lehman, and Fannie Mae right at the top). But liquidity does not create solvency, and with credit spreads widening, the growing desperation of monetary authorities is more a negative signal than a positive one.

This is much like what we saw in 2007-2008: when concerns about default are rising, default-free, low-interest rate money is not considered to be an inferior asset, and as a result, its increased availability does not provoke risk-seeking behavior. If we observe narrowing credit spreads and stronger uniformity in market internals, we will be able to infer a shift toward risk-seeking (and in turn, a greater likelihood that monetary easing will provoke further speculation). That won’t make stocks any cheaper, and downside risk will still need to be managed, but our immediate concerns would be less dire. At present, current market conditions and the lessons of history encourage us to be aware that very untidy market outcomes could unfold in very short order.

The upshot is this. Quantitative easing only “works” to the extent that default-free, low interest liquidity is viewed as an inferior holding. When investor psychology shifts toward increasing risk aversion – which we can reasonably measure through the uniformity or dispersion of market internals, the variation of credit spreads between risky and safe debt, and investor sponsorship as reflected in price-volume behavior – default-free, low-interest liquidity is no longer considered inferior. It’s actually desirable, so creating more of the stuff is not supportive to stock prices. We observed exactly that during the 2000-2002 and 2007-2009 plunges, which took the S&P 500 down by half in each episode, even as the Fed was easing persistently and aggressively. A shift toward increasing internal dispersion and widening credit spreads leaves risky, overvalued, overbought, overbullish markets extremely vulnerable to air-pockets, free-falls, and crashes.

Read all of John Hussman’s Weekly Commentary

3
Leave a Reply

avatar
  Subscribe  
Notify of
wip
wip

You will always be a slave and/or at the mercy of the 1%. PERIOD!!

Golden Oxen
Golden Oxen

You will always be a slave and/or at the mercy of the 1%. PERIOD!!

Most but not all Wip. There are ways to avoid their clutches.

Of course you need good guidance when you are a kid, and have to be taught how to stay clear of debt and such matters as savings and hard work. A few will listen and escape slavery.

Golden Oxen
Golden Oxen

BUBBLEOLOGY

Policymakers have been studying and implementing ‘Bubbleology’ – the science of bubble money. The impact of this earthly science on both economies and financial markets has been truly dismal. It is clear it is creating a divergence between economic and financial reality.

Far from eradicating the perils of debt deflation it is clear this program has merely initiated more fiscal and private sector balance sheet irresponsibility, as both continue to lever up. The capital (‘near money’) allocation of such leverage has resulted in rising asset classes, primarily housing stock, equity and bonds where the pursuit of yield has ignored all credit risk sensibilities. All this has occurred at the expense of daily living standards and the misdirection of capital.

We are witnessing the continuation and completion of the financialization of our economies and markets which began at the instigation of governments and central bankers in the years leading up to the 2008 crisis. There is no attempt to foster sustainable capital and income through innovation and production which ultimately drives healthy employment.

Rather financialization of asset classes driving elevated prices which creates an inequality of wealth, albeit illusionary wealth. Land, housing stock and excessive equity price growth in reality drains productivity away from entrepreneurship and the employment which enables sustainable taxable income for nations to run prudent fiscal surpluses.

We are in the butterfly vortex of a momentary illusion of ‘hyperinflated’ wealth – for the value of money is sinking rapidly – destroying the purchasing power of the global majority. Markets have a memory and from the first moment central banks expanded their balance sheets the flap of Lorenz’s wing has cast a shadow over financial and economic stability.

I offer a stark warning. This next week could well prove to be a historic turning point in the efficacy of money printing. The market herd has fully committed itself to the ‘Weimarization’ of equity. ‘Weimarization’ is the phrase I coined to refer to the rapid rise in equity markets as a consequence of monetary reflation. I first documented the potential of rapidly rising US and Japanese equity markets in our HindeSight Letter Nessun Dorma – None Shall Sleep in January 2011. And how markets have rallied but I firmly believe despite the inherent danger of fighting trending, debasing equity markets, now is the time to realize that the risk of a cascade lower in stock markets is very high. We are reaching a point of criticality.

When the herd is committed and the ‘money bubble’ potion has been fully drunk for now, it is time to be contrarian. This past few weeks Japan, China and the ECB have infused the markets with another dose of their elixir and the Pavlovian response of investors ensures the pack is likely fully invested.

This recent melt up in the US stock market is a SELL.

And conversely it is time to BUY precious metals.

Link to entire article by Ben Davies from King World

http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2014/11/24_The_Entire_World_Is_On_The_Road_To_A_Terrifying_Weimarization.html

Discover more from The Burning Platform

Subscribe now to keep reading and get access to the full archive.

Continue reading