Via Mark Grant, author of Out of the Box,
The greatest disconnect in the world today is the underlying economies of the world and the markets; all of the markets. This river is wide and getting wider given the money that the central banks are pushing downstream. The flood has reached all of the markets, Real Estate, the banks, many corporations, any and all borrowers with our incredibly low interest rates, but it has had little impact on the Main Streets of the planet. There is, in fact, a bubble of epic proportion.
It is not “irrational exuberance” but a quite rational placement of money that must go somewhere because it is not left in the sock drawer. The creation of money by the Fed, the ECB and Japan’s central bank keeps raising the tide but like all tides when it reverses course if will flow back out from the high water mark which has been created and with an equal force.
The reversal will come from an event or from the moment that the central banks reverse position or from the fall in the demand for goods and services as consumers/investors have less money to buy things. The one truism that can be counted on is that our current situation will not go on forever as many on Wall Street would have you believe. The one other long established truth that you can count on is that when this reversal comes that the “whoosh” of people trying to rush through the exit doors will be pronounced and startling.
Europe has been setting off the warning lights. Their economies are in trouble, real trouble. Total GDP for the EU-17 is -0.2% while Italy and Spain reported out matching drops of -0.5%. The entire Continent, with the barely escaping exception of Germany, is in recession. Europe, in fact, is now in its sixth straight quarter of recession and it is deepening and not lessening with each passing quarter. Japan teeters on deflation and has also charged into the money creation game and buoyed its equity market but I expect a result no different from Europe. Currency wars are now in play with the Euro and the Yen in a continuing drop against the Dollar.
America reports out a drop in our deficit and parades around the field in triumph but it is nothing more than our recent increase in taxes. Raise taxes; more Federal income and what did you think would happen in the short term? Hardly a surprise!
The world, in the eighteenth century, may have been a stand-alone place but it is not now. The only reason that all of this central bank money printing has been working is because there is no way to invest off-world. We are stuck with the options that we have and that is it. Conversely to the coordinated efforts of the central banks though is the moment in time when a reversal begins because it will affect everyone in the same manner. Even gold can no longer be counted on as an indicator because the physical demand for gold has prompted a mass sell off by Comex, JP Morgan and several central banks as physical gold must be delivered under contract and more cash is raised. We are living in an uncharted territory.