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"The Biggest Bubble Today Is Central Bank Credibility" Gerard Minack Warns "All Hell Could Break Loose"
As The Age reports, widely quoted and much-admired straight-talking strategist at Morgan Stanley, Gerard Minack had been "banging on" about the mounting risks in the global economy well before the GFC hit and laid waste to the world economy and investors' portfolios.
...
Minack left Morgan Stanley some 18 months ago with the unsullied reputation of being one of the most bearish – and keenest – observers of financial markets.
Below are some key excerpts from the first expansive interview Minack has provided since he went solo.
Fairfax: That doesn't sound like the soundest base for markets to build on from here.
GM: My look forward this year is that with the Fed tightening even modestly you bring the curtain down on P/E expansion. It's going to be a poor year for US equities because earnings growth is not that strong; but at least the US has earnings growth. Outside the US you don't, which is a very problematic outlook for this year unless you want to say the world suddenly accelerates, which it may do for a quarter or two because of low oil prices, but beyond that it doesn't look great.
Fairfax: So you think the Fed will raise rates this year, despite low inflation?
GM: I think so, although falling inflation expectations may delay it. The Fed officials continue to hint middle of this year, which is as good a guess as any. What would make them back off are signs of macro weakness, not signs of low inflation, particularly if it's "good" low inflation. When the price of something you're buying is going down, that's great. The killer disinflation is when the price of things you're selling is weakening. That's Australia.
When the US heads into the next recession it's very likely to enter that recession with the lowest short rates, the lowest long rates, the lowest nominal GDP growth, and the lowest CPI it's ever entered recession with. Then you've got a problem! But that's the next downturn.
Fairfax: What are the big global risks you see out there in the coming few years?
GM: The biggest bubble out there is central bank credibility. If Draghi was a stock he'd be on a P/E of 200! Yellen's on 100. When that bubble pops, all hell will break loose again, and there you really just want to be in cash.
Fairfax: So the biggest risks are in Europe?
GM: Yep. The problem is the next crisis will not be in the periphery and it will not be in the banks; it will be economic and it will be in the core.
The big problem is the internal competitive imbalances in Europe. The problem's not [that] the euro is too high against the dollar, it's not that the euro is too high against the yen. The problem is that the French franc is too high against the deutschemark, and Mr Draghi can't fix that. From the resulting economic stress you're getting political blowback. You're getting fringe parties flourishing everywhere.
There are whole landmines of elections coming up in the next 18 months, any one of which could throw up a result that could get the crisis back as front page news.
Fairfax: So you still don't believe the euro can survive?
GM: That's still the case. You can't restore your competitiveness in a fixed-exchange-rate regime.
The solution is simple, and it's what the periphery has done: it's called having a depression. It's 20 per cent unemployment and large nominal wage cuts. The trouble is that the small economies can be bossed around, but you can't see the French taking the same medicine.
But what's quite clear is they will not take the action pro-actively. Mr Draghi bought them time with "whatever it takes", but they sat back and twiddled their thumbs. They need the cattle prod of crisis to get them to react.
I actually think that the next crisis – which is inevitable over a two or three-year horizon – will be a great buying opportunity for euro equities because they will get very cheap.
Fairfax: Isn't there the chance that the actions taken by central banks to soften, if extend, the pain will eventually lead to a more delayed and gradual return to normality, without a crisis?
GM: In a way I think we are all turning Japanese. In the 1990s when they first tackled their bubble – and it was world's best-practice bubble, it was spectacular! – initially most analysts, myself included, applauded. It looked like they had let the air out gently without a recession: rates and growth came down and unemployment did not go up.
But the point was that it was the second downturn in '97 that nailed them; only after then did the Japanese "turn Japanese".
Now, we've shot a lot of bullets in the global financial crisis and the next downturn I think will reveal most other people are turning Japanese. Unfortunately the one policy that blindingly obviously works is fiscal policy, but it's very unlikely to be doable in the next downturn; in the US due to congressional gridlock, and it will be disabled in Europe because they won't have a centralised fiscal authority.
So you're left response-less when you enter the next downturn, with monetary policy that is ineffectual, unconventional monetary policy that's just embroidery, and very close to deflation.
...
The funny thing is there is a disconnect between what investors are saying and what they are doing. No one thinks all the problems the global financial crisis revealed have been healed. But when you have an equity rally like you've seen for the past four or five years, then everybody has had to participate to some extent.
What you've had are fully invested bears
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BTFD before Draghi unleashes his QE. BOJ redux.
What a buncha pessimists. You'd think they all own gold or something for long tail risks.
You want to be in cash IF the CB Bubble pops. Meaning, the return of fiscal sanity and the dissolution of the Federal Reserve.
But if society goes full retard, and there is reason to believe we will, you do not want to be in cash.
Lets get physical, baby.
"...Unfortunately the one policy that blindingly obviously works is fiscal policy, but it's very unlikely to be doable in the next downturn; ..."
'Fiscal policy' is printing money and having the gov spend money it doesn't have - got to call BS on that central planning theory.
What does work is bond market restructuring and sound money reform.
So let's see - deflation and recession, so the FED will raise interest rates.
LOL.
Don't think so.
The biggest bubble today is central planning.
Central Banks have no credibility cause they print unlimited helicopter dollars.
Therefore, according to this guy, you should be in dollars?
Cash in a bank account? (laugh track deafening)
Bail In !!!!
Serta Savings and Loan........
No kidding, so let me get this straight........when the money printers get in trouble I should be entirely in printed money that they have full access to?!
Advice like that found in this article is worth what you paid for it.
Cash in the bank?? When this goes BOOOOOMMMMM??
Tell ya something....there won't be any 'cash in the bank'.
the sad thing is that most 401k's don't even have a "cash" option.
Only some money market or whatever.
If one want's to be out of equities, that's as close as it gets.
Sucks.
i think when ciivilization crashes and in case of civil war, cash was the king not gold, especialy the older banknotes the better, cause those is hard to forefeight
Will my confederate. Bills be good again?
Never Never Go Full Retard https://www.youtube.com/watch?v=X6WHBO_Qc-Q
Gonna be one hell of a BTFD'er roast when CB's fall.
The crude bubble just popped to another 5.5 year low in the $45 area, and equities will bubble on down in unison:
http://www.investing.com/commodities/crude-oil-advanced-chart
The moment someone big tries to sell there will be no buyers.
I can't wait.
big sell orders aren't allowed and they certainly aren't run through the exchanges
The full article in The Age includes this in the introduction:
Minack began self-publishing the Downunder Daily. He says his intention was to keep doing what he had always been doing, but this time for a select group of clients – almost all of whom are based in London or the United States – and without the growing pressures of his ever-expanding responsibilities at the bank.
"I deliberately decided when I left to keep it balanced, not to start writing like Zero Hedge," he says.
Anybody that is skeptical of a ruling government, who just happens to have close ties to the 6 media owners that own 90% of the media we are fed, is labeled "unbalanced".
I have known many crazy people in my life. And let me tell ya, they were so crazy that they weren't even given the time or effort to think about, let alone write a comment about. So the trolls that show up here and those in the media claiming "anyone questioning .gov is unbalanced" need to know that the very comment itself is tangible proof that the propaganda machiine is alive and well and that they need to write a comment like that because the propaganda they are perpetuating is under suspicion.
Otherwise, if we are so crazy and unbalanced, ZH and other blogs would not have the following it does, nor the number of trolls that they do.
It's pretty self evident that the unbalanced are truly those that ingest the MSM agenda and form a single line.
as much as I enjoy coming to ZH daily, I have to agree ZH is not the most balanced blog out there.
some of the articles(and many commenters) here are just bible-thumping preachers, even though they may be preaching for an angle I might agree with, I still recognize they are bible-thumpers and not high on balance.
Balance is for shit. Truth is what matters. Good luck getting that elsewhere.
Wild Theories,
You are new here. What took you so long to get here? In the 5 plus years I have been reading ZH some of the commentators and writers have been phenomenally educative and clearly well informed/connected. Now the comments are mostly trash but I keep scrolling through for the gems I find now and then. Most of the good commentators are now silent or have left.
it takes 25 years for an invetion to dramaticaly change the civilization, and al gore invented it when? :)
Central Banking credibility is a bubble....so buy jewish confetti? Ha haha...that makes sense.
You want to be in cash?
Pfffftttt... FAIL.
In a limited way, yes. When the runs on the bank start, a few thousand in cash will be quite handy....
From profit (take-home pay minus expenses), I use half to pay down debt (car now, house next) and sprinkle the other half in several credit union savings accounts around town (I also have a stash of silver). I don't what else to do with it.
Up until the grocery store starts taking PMs for food, yep.
You want to be in gold!
He not gonna win any friends telling the truth....
https://www.youtube.com/watch?feature=player_detailpage&v=ZZvT2r828QY
"Hey Draghi...go get your shinebox!"
Investors now Unvestors?
Electric cash, real cash, or money?
Why the big secret there?
Maybe to some degree. But the truly biggest bubble is the credit bubble which is only now beginning to burst..
http://www.globaldeflationnews.com/anatomy-of-a-bubble-how-the-federal-r...
Fed credibility will take care of itself...
http://www.globaldeflationnews.com/the-creature-from-jekyll-island-the-e...
The reason all bubbles exist today is because of the CB credibility bubble, so even the bond bubble is less than the CB bubble.
I thought his quote was something he said in the 80s. Way to go out on the limb and state the obvious.
Though some of his points are valid, I'm not sure about viewing central bank 'credibility' as a bubble. A better analogy might be silly string . . .
Looks funny when used in the same sentence.
imo central banks have all the credibility in the world that they will do whatever it takes to make sure the stock market goes/stays up. it's the only thing they care about. any other alleged credibility is just a hoax.
CB's are a recent creation. They only exist and remain strong because people are ignorant or willfully complicit, like you.
Built on the sand of human ignorance or greed, therefore it's days are numbered.
CB's (with an unnecessary apostrophe) are a... and:
...it's (with another unnecessary apostrophe)
preach on about ignorance bitchez
LEt me get this straight. I will lose confidence in the heads of institutions that print money. But, at the same time I will want to be holding that money?
Perhaps I would rather be in some other asset, like the barbarian that I am.
"there you really just want to be in cash."
Except there is no such thing as cash if you are talking about large balances, there is only debt. He meant to say that you want to be in the short to mid term sovereign debt of the senior currency (where the debts are written), which is to say you want to be in US Treasuries; ideally in five year or under. But when this $hi+ storm hits it will march out the curve and float any duration.
Real money (yellow) cash. Yep, that may work.
And one of the bank indices BKX is still a leading indicator of how equity investors are losing sight of bank credibility:
http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=bkx&insttype=&freq=1&show=&time=7
Useless article.
That's what Goldman standard of P/E.
"I deliberately decided when I left to keep it balanced, not to start writing like Zero Hedge," he says, referring to an uber-bearish and popular financial blog with the cheery tag line: "On a long enough timeline the survival rate for everyone drops to zero".
The powers that pull the levers in the stock market just WON'T let this thing fall like it needs to! We all know it's being held up by duct tape, baling wire and bubble gum but it just won't crash!!
hello?
Gerard, all hell has broken loose.
We're just seeing it in slo mo
What I do is never spend a $5 note.....
you'd be amazed how many you end up with.....
everytime I get 50 of them I change them at a bank into $50 notes.....$250............but I don't leave them at the bank.
Try it.
Pretty soon you have thousands......
I kinda do the same but I trade my $5s for something not paper.
Really?! In a currency crisis, you want to be in cash?
You gotta realize this cat is a creature of habit. He isn't foreseeing the end of the global economy, just a massive dip which will need buyers.
The System is completely RIGGED !
it will do what they need it to do
Crisis happens when they need it
Man, some people are fucking dense ... Wake up
Cash is trash when the Federal Reserve loses credibility.
All fiats backed by nothing will be dumped. Only assets having some sort of perceived valued will be purchased.
CBs.... P/E? Seriously? They are practically the only kind of corporate person where P/E is utterly irrelevant
a joke flew over Ghordius' head
would not be the first one, here
“When that bubble pops, all hell will break loose again, and there you really just want to be in cash.”
My reply, yes, “all hell will break loose”. However, there is one thing overlooked here…
Counterparties… counterparties… counterparties.
And no one thinks to examine the most basic of all.
When I was in the Navy, I was the lead electronic technician (ET) for a task force of 8 ships; when ET’s on other ships couldn’t fix gear, they’d call me. Most of the problems were too simple for them to see. For example, who would think to check the AC plug? It’s the simplest thing that could go wrong, and yet, nothing happens without secure connections to power. It would usually take me about 15 minutes to find this problem (more than once); and I never told them what I did; didn’t want to embarrass them.
We have the same problem today: people fail to consider the most basic of factors needed to secure capital: namely, our currency unit.
The most basic factor relative to all economic activity is a currency unit. Without a stable or functioning currency unit, barter is the alternative – or will be the alternative when a baseless currency unit ultimately fails. When that happens, fully 95% of all economic activity will cease. It would lead to… well, let your imagination run wild.
Is the dollar a baseless currency unit?
We derive the answer by examining how dollars (and American bank reserves) come into economic existence. They do so IN EXCHANGE for US Treasuries (directly or indirectly).
And what gives US Treasuries value? Wishful thinking… nothing more. They have value only because people worldwide believe the US Treasury can collect confiscatory taxes from following generations of American tax payers. Government debt, thus, is a form of financial cannibalism. The problem here is that, such taxes can neither be practically nor constitutionally collected. For, you see, a man, or a generation of men, will not voluntarily cannibalize himself. Hence, if such taxes are to be collected, it must happen BEFORE power passes from the hands of the cannibalizing generation. And the time for this is long past; for, this type of cannibalism began some 150 years ago (with the National Banking Act of 1863).
Unfortunately, owing to the mandate of Congress (thru the FR Act and debt authorizations), bureaucrats of the FR and Treasury are pursuing policies that can only end with the total destruction of the dollar and, owing to its status of reserve currency for the world, a few dozen banking systems that use the dollar as a reserve currency (Yen, yuan, Euro, English pound, Canadian and Australian dollars, among others). (Bad News…; and Anat., part two)
Chances of survival are very slim for those 95% who fail to prepare for those storms now looming on the horizon.
What are preparations most essential for survival?
There are at least two: and each requires a comprehensive network of sub-factors: one) establishment of an alternative and functioning currency and two) the collection of power (thru First-Amendment assemblies) needed to protect your person and company from those who failed to prepare. (What Price Gold…; and Failure of Power)
Physical gold, of course, is the only historically-proven stable currency.
The problem here is that, if you deal with fairly large “cash equivalents” or dollar-denominated investments (bank notes, bank reserves, debt instruments, Mortgage Backed Securities (MBS) serving as “cash equivalents” (see What Price Gold…), you’ve just about run out of time to convert to physical gold.
Twenty years ago, while I was operating my gold-based banking service, I learned that an order for $500,000 to $1 million (that is, $0.0005 to $0.001 trillion) worth of physical gold would seize up the physical gold market 4-6 weeks.
I need to stress the enormous disparity between “cash equivalents” and assets supposedly collateralizing (backing) them; as gold used to be backing (or collateral) for issued currency and bank reserves.
By “cash equivalents”, I mean, 1) all paper currency; 2) all bank reserves; 3) Mortgage Backed Securities (MBS) owned by central banks (now and future); 4) all $ instruments owned by foreign institutions; 5) all US Treasuries; 6) plus a large variety of flimsy paper (student loans, car-lot loans, SBA loans, credit-card loans et cetera (see Anat., part one)) owned by the Federal Reserve. By my estimate, there are something like $10 to $15 trillion such “cash equivalents” around the world that owners of such believe are instantly convertible into actual cash. With an order of $0.001 trillion capable of seizing up the physical gold market for 4-6 weeks, there’s not much hope for most or those $10 to $15 trillion.
(As you realize that the FR now collateralizes dollars and American bank reserves with such fuzzy paper as SBA and student loans, you will begin to wonder, ‘When did idiots and bandits seize control of the Federal Reserve?’)
All these “cash equivalents” are collateralized by a scrap of paper listed as “gold certificate” on the FR’s asset statement, which, in turn, is collateralized by a scrap of paper listed as “gold or gold swaps” on the Treasury’s asset statement. This last should tell you that there may not be any physical gold at Fort Knox.
Now, what is the price of gold necessary to make the following formula an equality?
“gold or gold swaps” = all those “cash equivalents” listed above.
Remember, we are dealing with a situation where 90% of the world’s banking systems (by volume) are built (at least partly) on top of the dollar.
What is the price… $7,000… $70,000… infinity?
What will the Piper demand when he finally presents his invoice to the town council?
What will people do when they can no longer cannibalize their children (see Bad News…)… on a world-wide scale?
Please, let your lawyers and accountants examine my work; and then act accordingly.
What is interesting is that the US was founded by people looking for financial freedom from an overtaxing government in the UK...without the concept of can-kicking that pushes the reality of today off til 2030 or beyond, there would have already been revolucion here..
the one policy that blindingly obviously works is fiscal policy
Come again?
When U have NO Leadership
- You don't want open Borders
- You don't want to allow Ebola or other nasty diseases into the country
- You don't want to Invade Foreign Countries over 600 miles away from CONUS
- You don't want to allow your Spy Agencies to do whatever they want, like domestic spying, spying through back-doors in computers & software that they designed or supported upfront, and you sure as hell don't want the NSA or CIA Writing their own Budget and keeping it "Black Budget" secret
- You don't want Private Banking running your economy & currency, and lending $12 Trillion or more to the Federal Government, and you don't want a Private Central Bank with Stock Holders
With No Real Public or Private Leadership in the USA:
- You sure as hell don't want to Suspend Individual & Civil Rights for a phony war on Terror that Cheney, G.W.B, and Don Rumsfeld concocted
So wait.. You still GWB was in charge? How quaint.
You also don't want to take a crap with your pants still on.
It doesn't matter anyways. What these people don't seem to understand is that our fed has made it impossible to increase rates, which means it has lost the ability to "control" inflation & deflation. Our economy should be booming after all of this easy money, but instead it's just crawling. They can't afford the added interest from higher rates and we will crash into oblivion. They are in an impossible corner and don't know what to do. Every option ends badly, including status quo...we're done. We are done!!! It's all about keeping up the illusion, period.
The propaganda amazes and angers me beyond belief, and I cannot believe the American people can't seem to wake up, almost as if we are all in denial. Soon we will see massive protesting, then rioting as anger expands. Martial law, executive orders banning guns to "protect" fellow Americans, etc...but I really hope I'm dead wrong, because if I'm right I'm probably going to die because I would fight before giving up my arms. I can only hope I'm not alone.