The purpose of this article is to outline, with facts, large global structural issues that everyone, bulls and bears alike, should be fully aware of. This article will focus on much larger structural issues that have been building for years and decades. And no this article is not so much about central banks, debt issues, Greece, China, deficits, etc. While all these are important as part of the overall picture, they are mere current symptoms of a much larger issue that is at the core of all that is already in play and will only deepen in our societies in the decades to come.
And how you will be paying for her 'exit party' bill...
"in the 1990s, subprime borrowers typically were offered four-year car loans... Now, the standard is six years, partly because wages haven’t kept up with vehicle prices... I think that’s a good thing,... Unfortunately it seems to be painted as something bad, and I’m not sure why.”
The Fed may raise rates from 0.25% to 0.3% or possible even 0.5% sometime in the next 24 months… but these moves will be largely symbolic. Here's why...
So having acquired substantial quantities of gold for itself and having also ensured it is widely held by its public, the Chinese government is arguably in a more compelling position to encourage a gold revaluation as a means of stabilising her economy in a credit crisis than America was eighty years ago. It will be China's only option, and if the government doesn't go for it, China's middle classes certainly will. This simple fact could override all the geostrategic considerations upon which China-watchers have tended to focus. A gold revaluation would be presented to the world as bound up with China's domestic economic problems, instead of an act aimed at undermining the dollar's reserve status: a solution that is less confrontational than outright disagreement with Western central banks over gold's role in the international monetary order.
The last time these criteria were met... stocks plunged over 90% over the next 24 months.
When last we checked in with Rep. Jeb Hensarling, the Chairman of the House Committee on Financial Services, he was in the process of learning a frustrating lesson about central bankers in the post-crisis world. Namely, that whatever pretension of accountability the position of Fed chair retained in the lead up to the crisis disappeared entirely when Ben Bernanke 'saved the world' from financial armageddon in 2008.
Greece needs a bailout and China's stock market is in meltdown mode. But the global economy has another rising red flag: Latin America.
After failing to criminally prosecute any of the financial firms responsible for the market collapse in 2008, former Attorney General Eric Holder is returning to Covington & Burling, a corporate law firm known for serving Wall Street clients. The move completes one of the more troubling trips through the revolving door for a cabinet secretary. Holder worked at Covington from 2001 right up to being sworn in as attorney general in Feburary 2009. And Covington literally kept an office empty for him, awaiting his return. When the firm moved to a new building last year, it kept an 11th-story corner office reserved for Holder.
Nobody apparently learned much from the whole bubble-bust affair as banks and financial firms are at it again, this time in corporate debt. The artificial suppression of default, in no small part to perceptions of those bank reserves under QE (just like perceptions of balance sheet capacity pre-crisis), has turned junk debt into the vehicle of choice for yet another cycle of “reach for yield.” In the past two bubble cycles, we see how monetary policy creates the conditions for them but also in parallel for their disorderly closure. It isn’t money that the FOMC directs but rather unrealistic, to the extreme, expectations and extrapolations. Once those become encoded in financial equations, the illusion becomes real supply.
The US Federal Reserve has been universally lauded for the apparent success of its extreme monetary policy of recent years. With key world stock markets near record highs, traders universally love the Fed’s zero-interest-rate and quantitative-easing campaigns. But this celebration is terribly premature. The full impact of these wildly-unprecedented policies won’t become apparent until they are fully normalized. The most-extreme monetary experiment by far in US history is just at half-time now, the fat lady hasn’t even taken the stage. The full normalization of ZIRP and QE is likely to be as negative for stock and bond prices as its ramping up proved positive for them.
Spin revolving door, spin...
Whether, or not, a Greek exit from the Eurozone or a potential debt default is "the thing" that sparks the next major correction in the markets is unknown. Historically, such a widely "known" event is generally already factored into the markets and has much less of an impact when that event eventually comes to fruition. As Art Cashin suggested this morning: "I think China may be more important than Greece. Stick with the drill – stay wary, alert and very, very nimble."