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Albert Edwards: "It Is Already Too Late To Avert Another Crisis"

Tyler Durden's picture




 

After reading Albert Edwards' latest note which uses the most recent BIS report as an anchor, we disagree with his view that the Fed "finally concurs with the BIS' namely that rates need to rise,
not to rein in the economy, but to restrain financial market excess." If that was the case then Janet Yellen would have made it very clear that the rate hike which everyone had expected would be preannounced by the no longer patient Fed, would indeed take place instead of once again be terrified of the market's reaction and as a result caveat on several occasions just what the thesaurus definition of "not patient" is.

We do, however, agree with his take on why it no longer matters what the Fed will, or rather won't do:

The BIS is highlighting that QE and negative bond yields will ultimately have significant adverse repercussions on the financial system and beyond. Yet some highly respected market commentators, most recently Ray Dalio from Bridgewater, have raised the possibility that Fed rate hikes risk a 1937-like slump. It is indeed a dilemma but likely already too late to avert another crisis.... In that respect it is probably too late already. We believe that the die is now cast, the cake is baked and coming out of the oven, and the financially fattened goose is well and truly cooked!

And while we will shortly provide our take on the latest BIS quarterly note, for now we will focus on what Albert Edwards' latest pet peeve is: a household saving rate, which remains so high the only source of credit impulse in the economy comes courtesy of corporations whose entire issuance is merely used to fund stock buybacks.

To wit:

One of my ‘must reads’ for the past year has been The Downunder Daily written by one of the best commentators on the street, Gerard Minack. Formally on the sell-side he has gone independent and continues to write from his home in Sydney. (Actually ‘Daily’ is a bit of a misnomer - a bit like the Weekly in my title!). Minack makes the point that “monetary policy has been fairly ineffectual as a real economy stimulant in this cycle, but it’s been very effective reigniting the ‘financial economy’. I don’t think that real economy factors – such as inflation or growth – justify a tightening. But rates are too low for the financial economy: they are encouraging financial smarty-pants to do the same sort of things that got economies into a jam in the first place.” And indeed his chart below makes the point perfectly. While asset prices have rocketed upwards consumers are unusually reluctant to borrow and spend.

 

The linkage between household savings and accumulated household wealth, if only for the 1%, is to Edwards the reason why the QE4 "trickle down" has fatally failed so far, since it is the "poor" who spend, and it is the poor whose wealth continues to crash.

One of the reasons why QE has been ineffective, despite inflating household net wealth to a record $83tr in Q4 last year, is that the rich tend to own the assets but have a low marginal propensity to consume, while the poor with a much higher propensity to consume tend to own the debt –see this Zero Hedge article here for a good rant. Even the central banks agree that QE has made inequality worse – hence the BIS warnings of increasing social unrest if these policies continue in extremis. But although the household saving ratio has not declined much despite record household wealth, the overall private sector net saving ratio (or technically the financial surplus) has declined much more sharply (see chart below). Unfortunately this is not borrowing for economic activities – this is borrowing to finance M&A and share buybacks.

 

 

Now you may have noticed from the chart above that large swings upwards in the red line (increases in net savings) are accompanied by recessions. Most economists see recessions causing increased saving by both households and companies, but I believe the causality has been reversed in the aftermath of Alan Greenspan’s bubble-blowing era - loose monetary policy drives asset prices, fostering increased private sector borrowing and spending. That was the disastrous policy that led to the unprecedented 2000 private (household + corporate) sector financial deficit of 4% of GDP (all corporate), and the same ruinous policy that drove the deficit up again to peak in 2007 (all households). The problem with using asset bubbles to drive an economy is that when the bubble bursts, private sector borrowers realise they have been taken for a mug and correct their savings behaviour aggressively, causing a recession. That same barbarically naive policy remains in place today.

The paradox is that central bankers, who pride themselves in macro-managing human behavior using the price of money and human greed as the proverbial carrot (or rather stick) have lost their puppet-master abilities precisely because they took their craft to edge, and beyond, one bubble too far. At this point everyone knows what the outcome from this, too, bubble will be.

Edwards' conclusion:

Should we be less worried now that the US private sector surplus is 3% of GDP – ie an historically high level and less liable to spontaneous retrenchment? No. The decline from a 9% surplus at the end of 2009 to 3% of GDP now is precipitous and almost entirely driven by another corporate sector borrowing binge to finance activities in the financial markets. Another spontaneous recessionary retrenchment awaits.

The only question is when do the mathematics of reality, denied for so long by trillions in printed money and loose liquidity, finally get the upper hand.

 

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Thu, 03/19/2015 - 16:00 | 5907332 KnuckleDragger-X
KnuckleDragger-X's picture

They can't stop it, can't fix it and can't even slow it down, things will not end well....

Thu, 03/19/2015 - 18:46 | 5907609 weburke
weburke's picture

.

Thu, 03/19/2015 - 20:15 | 5908182 max2205
max2205's picture

Well I have been waiting for 3 years but like the 90's there is no end in sight

 

Clinton and Barry bull markets will go down in history as the most manufactured in all mankind.

Fuckers 

Thu, 03/19/2015 - 16:19 | 5907400 Bananamerican
Bananamerican's picture

Driving back I saw Chicago rising in its gases and I
       knew again that never will the
Man be made to stand against this pitiless, unparalleled  
       monstrocity. It
Snuffles on the beach of its Great Lake like a 
       blind, red, rhinoceros.
It's already running us down.

You can't fix it. You can't make it go away.
       I don't know what you're going to do about it, 
But I know what I'm going to do about it. I'm just 
       going to walk away from it. Maybe
A small part of it will die if I'm not around 
feeding it anymore

-Lew Welch

Thu, 03/19/2015 - 16:51 | 5907501 Paveway IV
Paveway IV's picture

"It Is Already Too Late To Avert Another Crisis"

That's why I rely so much on heroin, ketamine and lighter fluid to get through the day. It makes the pain of reality go away before it arrives, and pain has been knocking on our door for some time now. I'm pretty damn sure it want's IN and it isn't going to go away. It knows we're inside.

Thu, 03/19/2015 - 18:52 | 5907858 eatthebanksters
eatthebanksters's picture

Glue...cheaper and better!

Thu, 03/19/2015 - 17:08 | 5907557 Ruffmuff
Ruffmuff's picture

Never too late fora planned crisis.  Just another big ass shovel of steaming shit to fling. JUst know when to duck.

Fri, 03/20/2015 - 02:37 | 5908947 StychoKiller
StychoKiller's picture

Chorus 1
The wheel is turning and you can't slow down
You can't let go and you can't hold on
You can't go back and you can't stand still
If the thunder don't get you then the lightning will

Chorus 2
Won't you try just a little bit harder
Couldn't you try just a little bit more
Won't you try just a little bit harder
Couldn't you try just a little bit more

Round, round, Robin run around
Gotta get back where you belong
Little bit harder, just a little bit more
Little bit further than you gone before

[chorus 1]

Small wheel turning by the fire and rod
Big wheel turning by the grace of God
Every time that wheel turn round
Bound to cover just a little more ground

[chorus 1]

[chorus 2] -- Grateful Dead, "The Wheel"

Thu, 03/19/2015 - 16:02 | 5907337 semperfi
semperfi's picture

Hey Albert, I have news for you - the cake was baked in 1913 and the icing finally applied in 1971.  Wake up!

Thu, 03/19/2015 - 20:33 | 5908237 CapnJackDaniel
CapnJackDaniel's picture

Well now I just want cake, thanks a bunch

Thu, 03/19/2015 - 16:06 | 5907350 JonNadler
JonNadler's picture

now he comes out and says its too late? Hasn't it been too late for too long?

Thu, 03/19/2015 - 18:57 | 5907882 eatthebanksters
eatthebanksters's picture

If it blows I hope it happens on Obama's watch...that narcissistic loser is so concerned about his legacy that I hope it shits just so he knows he will go down in history as the biggest loser.

Thu, 03/19/2015 - 16:07 | 5907356 NoDebt
NoDebt's picture

Could this please happen while Obama is still in office so I can say "Obama's fault" for the next 20 years?

That this is going to end in tears is beyond question.  Now all I care about is anyone who has any clue on the rough timing.  So far, no luck.

 

Thu, 03/19/2015 - 16:13 | 5907374 KnuckleDragger-X
KnuckleDragger-X's picture

Right now that's what I'm hoping for because he desrves a big Karmic enema. Timing? A week before the Democratic convention would be fun.

Thu, 03/19/2015 - 16:16 | 5907387 semperfi
semperfi's picture

6-6-6teen

Thu, 03/19/2015 - 16:31 | 5907430 Cast Iron Skillet
Cast Iron Skillet's picture

I think they will do everything possible to keep the ball in the air until after the next election and then drop it on the new President, regardless of the winning party.

Thu, 03/19/2015 - 16:16 | 5907390 highly debtful
highly debtful's picture

It took me a couple of years of my life to accept that timing is the only unknown variable remaining. Where I live, I am the certified village idiot by now. But - in fine - what's more important at this point: knowing what or knowing when? 

Thu, 03/19/2015 - 16:48 | 5907490 SmedleyButlersGhost
SmedleyButlersGhost's picture

I think we've all pretty much been through that village idiot phase. I think it's coming and while I don't wish it so - I figure I've done every thing I can to prepare and would rather it be on my watch than my kids'. I left that wonderful clusterfuk Chicago and am now a 15 minute drive to the closest traffiic light. Best move I ever made no matter what happens.

My only regret would be failing to convince more or any one that it's best to be prepared. The military guys will have a leg up - plus the rural people but god help the urbanites.

For the doubters - ask the Greeks if they thought it would be like this 5 years ago, the Czechs and Slovaks, the Argentinians etc etc.

Thu, 03/19/2015 - 18:27 | 5907745 Praetorian Guard
Praetorian Guard's picture

Just remember to stay mobile. People who hole up in a bunker or house are easy targets. Most guys I know in the mil, et al would not be able to survive on there own without having to pillage. Those who are self sufficient will have a better chance.

Come join us for free at www.gunsgrubandgold.com

Survival books, markets, links, forum community!

Fri, 03/20/2015 - 01:11 | 5908897 Wild tree
Wild tree's picture

Ghost,

I love the "War is a racket" written by your progenator.

 

I live two hours from Atlanta, yet no traffic light yet in our entire County. I have to drive fifteen minutes just to reach a red blinking stop light at a major intersection. 45 minutes to a red light.

 

Lots of people like that where I live. Lot of hunters. Lot of guns. I don't want war in my old age, but it wants us.

 

War is a racket

Thu, 03/19/2015 - 16:11 | 5907367 Mike Honcho
Mike Honcho's picture

He is holding his face like Joe Peschi and Daniel Stern are in the neighborhood.

Thu, 03/19/2015 - 16:31 | 5907428 barry2001
barry2001's picture

If you are into drones check out this site : http://pickyourdrone.com/

Thu, 03/19/2015 - 16:33 | 5907433 Chuck Knoblauch
Chuck Knoblauch's picture

A Republic if you can keep it.

Fateful words from a smart man.

Congress turned over the Republic in 1913.

There is no Republic anymore.

Plenty of smoke, but no representation.

Thu, 03/19/2015 - 16:33 | 5907438 Phat Stax
Phat Stax's picture

No pundit is ever wrong - just early.

Thu, 03/19/2015 - 16:34 | 5907443 MATA HAIRY
MATA HAIRY's picture

Bullardish

Thu, 03/19/2015 - 16:42 | 5907471 davidalan1
davidalan1's picture

Prediction: One day our economy wont work- period..

I hate NOT Knowing when that day will be as I want to have toilet paper, booze, cigs and food stocked to the ceiling...I do have a plan. My ego thinks since I read ZH and watch all things economically (lol) i will see the black swan land and have at least a day or two to lay in the provisions. Until then, I watch, wait and observe.  Back to the show, gold rush.

Thu, 03/19/2015 - 18:09 | 5907712 City_Of_Champyinz
City_Of_Champyinz's picture

Keep stacking Pb, Ag, Au...

Keep adding to the pile of #10 freeze dried cans, that shit lasts forever...

You will be fine.  If you wait, you will have waited too long and will not be able to purchase anything at any cash price, it will be mass rioting by then.

Thu, 03/19/2015 - 16:57 | 5907515 Condition 1SQ
Condition 1SQ's picture

Every other ZH headline mentions "crash", "crisis", "rigged", etc.  Nothing but bad news, no matter what.  Yet, the zombie markets continue to chug ahead.  While I appreciate a good dose of doom porn like the rest of us, it doesn't help the reader gauge the likelihood/timeline of catastrophic events when every day is reported as a catastrophe.

Thu, 03/19/2015 - 18:22 | 5907747 TeethVillage88s
TeethVillage88s's picture

Well if we were real experts with real discreet data and free markets... we would have 10-20 charts we would look at and swear by.

I'm not an economist(don't trust them) and not a Financial Expert... so I can't find my 10 charts.

But Capitalism has changed as the Bankers pulled off a Coup on the Federal Government.

Bailouts are not Capitalism. Bailouts are for corporations that are poor capitalist.

---------------------------
Bail-Outs are Corruption -
---------------------------

All bailouts benefit the corporations that were bad Capitalists.

Kapitalismus Totet oder Toten.

Capitalism where Corporations and Banks are Protected is probably an old Europe thing that just came to the USA in 2009. But it is not Capitalism.

It is Fascism, Inverted Totalitarianism, or Corporate Socialism.

Bailouts are for the Elites. Start a business you are a target of the Banks and Wall Street. You don't get a Bailout.

---------------------------
Bail-Outs are Corruption -
---------------------------

Thu, 03/19/2015 - 18:32 | 5907776 pebblewriter
pebblewriter's picture

Agreed.  A year ago, I could have sworn the Fed would eventually be stuck between defending the "everything is better" narritive and raising interest rates to stave off inflation -- something they couldn't begin to afford with $18+ trillion in debt.  Then they crashed oil by 60% and ramped the dollar 25% in less than a year.  No inflation, no need to raise rates, yen carry trade intact...it's all good.

Yesterday's turmoil indicates that this particular strategy may have run out of room to work.  I'm not sure, for instance, how they'll continue devaluing the yen forever.  And, at what point will heavily exposed banks put a stop to oil's demise?  But, at this point, I'm pretty sure they'll do whatever it takes, even if it means decimating an industry, ruining another country's economy, etc.  One thing they can't afford is to unravel the hundreds of trillions in derivatives that are dependent on steadily climbing "markets."

http://pebblewriter.com/algos-gone-wild/  

Thu, 03/19/2015 - 17:06 | 5907541 Flatchestynerdette
Flatchestynerdette's picture

@Yellen
Mother do you think you'll try to break my balls?
Mother should I trust the government?

Hush now baby, baby, dont you cry.
Mother's gonna make all your nightmares come true.
Mother's gonna put all her fears into you.
Mother's gonna keep you right here under her wing.
She wont let you fly, but she might let you sing.
Mama will keep baby cozy and warm.
Ooooh baby ooooh baby oooooh baby,
Of course mama'll help to build the wall.

Thu, 03/19/2015 - 17:58 | 5907690 Ward cleaver
Ward cleaver's picture

How can people not up vote Floyd. I know this is off topic but everything is so gloomy and F'd up I'd rather discuss music. Dark Side, Wish you were here, and the Wall in succession. Then Waters leaves band and Floyd turns into our economy, a shadow of its former self, living off the past greatness and trying to squeeze every last $ out of the public.

"By the way, which one's Pink"?

Thu, 03/19/2015 - 21:10 | 5908372 thestarl
thestarl's picture

Three classic's and I agree that without Roger Waters not really the same similar to the Rolling Stones without Mick Taylor.

Thu, 03/19/2015 - 17:09 | 5907560 ted41776
ted41776's picture

the mother of all distractions is in the works... hold on to your seats folks

Thu, 03/19/2015 - 17:34 | 5907626 yogibear
yogibear's picture

When all fails the banksters take us to World War.

Thu, 03/19/2015 - 17:47 | 5907662 Hohum
Hohum's picture

No one really has spelled out what will happen if the Fed goes for QE forever.  Some say "hyperinflation," but who knows?  It's a brave new world.

Thu, 03/19/2015 - 18:16 | 5907729 TeethVillage88s
TeethVillage88s's picture

So, .gov stats and financial analysts on Wall Street, Financial Newsletters, CNBC, and MSM are missing this structural Problem?

- 6 years of TARP, QE, ZIRP, and other programs at the FED
- 13 Years of Fiscal Stimulus by Federal Government
- Domestic Risk of Recession since like 1998, results in low Capital Equipment & Facilities Investment
- Off-Shoring Production with Decapitalization since 1996
- Open Borders providing Unskilled and Skilled Labor for at least 20 years
- Flat Wages since 1979 in 1984-86 Constant Dollars
- Record Inequality, Lost of Middle Class, Rape of retirement and Pension Funds for 20 years
- University Trust Funds Targeted by Wall Street for 10 years at least
- Money in Politics leading to Free-For-All for Federal Funds and Expansion of Federal Programs

"Should we be less worried now that the US private sector surplus is 3% of GDP – ie an historically high level and less liable to spontaneous retrenchment? No. The decline from a 9% surplus at the end of 2009 to 3% of GDP now is precipitous and almost entirely driven by another corporate sector borrowing binge to finance activities in the financial markets. Another spontaneous recessionary retrenchment awaits."

Mucho Structural Problems, but my people are here to help you now.

Fri, 03/20/2015 - 02:58 | 5908961 Magooo
Magooo's picture

Fuck off Albert you dumb fuck.  

 

There was NEVER any way to avoid a crisis.  

 

Unless you figure out how to get out of the fact that we are out of cheap to extract oil --- with no substitute

 

THE PERFECT STORM (see p. 59 onwards)

The economy is a surplus energy equation, not a monetary one, and growth in output (and in the global population) since the Industrial Revolution has resulted from the harnessing of ever-greater quantities of energy. But the critical relationship between energy production and the energy cost of extraction is now deteriorating so rapidly that the economy as we have known it for more than two centuries is beginning to unravel. http://ftalphaville.ft.com/files/2013/01/Perfect-Storm-LR.pdf

 

The marginal cost of the 50 largest oil and gas producers globally increased to US$92/bbl in 2011, an increase of 11% y-o-y and in-line with historical average CAGR growth.  http://ftalphaville.ft.com/2012/05/02/983171/marginal-oil-production-costs-are-heading-towards-100barrel/

 

 Sanford C. Bernstein, the Wall Street research company, calls the rapid increase in production costs “the dark side of the golden age of shale”. In a recent analysis, it estimates that non-Opec marginal cost of production rose last year to $104.5 a barrel, up more than 13 per cent from $92.3 a barrel in 2011.   http://www.ft.com/intl/cms/s/0/ec3bb622-c794-11e2-9c52-00144feab7de.html#axzz3T4sTXDB5

 

 Steven Kopits from Douglas-Westwood said the productivity of new capital spending has fallen by a factor of five since 2000. “The vast majority of public oil and gas companies require oil prices of over $100 to achieve positive free cash flow under current capex and dividend programmes. Nearly half of the industry needs more than $120,” he said

http://www.telegraph.co.uk/finance/newsbysector/energy/oilandgas/11024845/Oil-and-gas-company-debt-soars-to-danger-levels-to-cover-shortfall-in-cash.html

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