"Monetary Policy Is Bankrupt" Dr. Lacy Hunt Warns "Bonds, Not Stocks, Are A Good Economic Indicator"Submitted by Tyler Durden on 02/27/2015 19:35 -0400
"While the wealth effect is a theoretical possibility, it is not supported by economic fact. The stock market is not a good guide to the economy, but...the bond market is a very good economic indicator. When bond yields are very low and declining it’s an indication that the same is happening to inflation and that economic activity is weak. The bond yields are not here for any fluke of reason. They are here because business conditions in the US and abroad are quite poor."
This is the biggest problem facing the world today, namely that at least 9 countries have debt/GDP above 300%, and that a whopping 39% countries have debt-to-GDP of over 100%!
US stock markets reached record highs last week. Question: does that make them riskier, or less risky? We think the former.
Like spirits, debt and risk make for a great party but a terrible hangover...
Few people understand the global economy and its (mis)management better than David Stockman -- former director of the OMB under President Reagan - and he is now loudly warning that events have entered the crack-up phase, which he predicts will be defined by four key developments. As the crack-up phase gains momentum, he predicts an increasing number of "financial breaks" that will add to the unpredictability and instability of the environment for investors. Even 'dancing close to the door' sounds excessively risky at this point.
What's an equity investor to do these days?
Many people ask why we can’t just cancel all debt, and start over again. To do so would probably mean canceling all bank accounts as well. Most of our current jobs would probably disappear. We would probably be without grid electricity and without oil for cars. It would be very difficult to start over from such a situation. We would truly have to start over from scratch. Those holding paper wealth can’t count on getting very much.
Today the financial system is even more leveraged than in 2007… backstopped by even less high quality collateral. And this time around, most industrialized sovereign nations themselves are bankrupt, meaning that when the bond bubble pops, the selling panic and liquidations will be even more extreme.
Post-Crisis Scorecard: Debt Up $57 Trillion, 60% Of Jobs Created Are Low Level, Record Youth Living With ParentsSubmitted by Tyler Durden on 02/08/2015 15:15 -0400
Greece’s problem can only be truly solved if large scale debt restructuring is accepted and executed. But that would initiate a chain of events that would bring down the bloated zombie that is Wall Street. And it just so happens that this zombie rules the planet. We are all addicted to the zombie. It allows us to fool ourselves into thinking we are doing well – well, sort of -, but the longer term implications of that behavior will be devastating. We’re all going to be Greece, that’s inevitable. It’s not some maybe thing. The only thing that keeps us from realizing that is that the big media outlets have become part of the same industry that Wall Street, and the governments it controls, have full control over. And that in turn says something about the importance of what Yanis Varoufakis and Syriza are trying to accomplish. They’re taking the battle to the finance empire. And it should not be a lonely fight. Because if the international Wall Street banks succeed in Greece, some theater eerily uncomfortably near you will be next. That is cast in stone.
Needless to say, Greece is only the poster child. The McKinsey numbers above suggest that “peak debt” is becoming a universal condition, and that today’s Keynesian central bankers and policy apparatchiks are only pushing on a giant and dangerous global string. So now we get to ground zero of the global Ponzi. That is the monumental pile of construction and debt that is otherwise known on Wall Street as the miracle of “red capitalism”. In truth, however, China is not an economic miracle at all; its just a case of the above abandoned Athens stadium writ large.
"Central bank polices have ruptured the proper functioning of capital markets. Some investors myopically believe that 'money printing needs a home' and that it will end up in equities (the asset class with upside). However, such a belief needs to include a deep faith in the central bank’s abilities to navigate a soft landing. History is not on their side. Investors pouring into equities might be playing an epic game of chicken."
Seven years after the bursting of a global credit bubble resulted in the worst financial crisis since the Great Depression, debt continues to grow. In fact, as McKinsey explains in their latest report, rather than reducing indebtedness, or deleveraging, all major economies today have higher levels of borrowing relative to GDP than they did in 2007. They pinpoint three areas of emerging risk: the rise of government debt, which in some countries has reached such high levels that new ways will be needed to reduce it; the continued rise in household debt; and the quadrupling of China’s debt, fueled by real estate and shadow banking, in just seven years... that pose new risks to financial stability and may undermine global economic growth.
Forget rate hikes… an entire generation of investors and money managers (anyone under the age of 55) has been investing in an era in which risk has generally gotten cheaper and cheaper. What happens when the bond bubble bursts?