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Looking For The Next Big One: Part 1, Orderly Or Not?
Submitted by Jeffrey Snider via Alhambra Investment Partners,
I generally remain noncommittal about giving specific predictions about the future because there is simply no way toward predilection. We can think about probabilities as a guide for analysis, particularly in setting investment guidelines, but to offer targets for factors like GDP or some stock index is pointless. Even now, with all that is taking place of economic unraveling, there is still a non-trivial chance that GDP improves and stocks take off; I wouldn’t call that the baseline scenario but it’s enough to not ignore.
That being said, recent indications have darkened the probability spectrum to the point that it may actually be worth examining a worst case scenario. My gut sense is that there is indeed a recession forming, and one that looks worse by the month, so there are numerous relevant factors that demand attention the greater the potential for it. That starts with leverage and any transmission from finance to the economy.
If this is to be the third bubble episode in succession, the prior two do offer at least a useful guide as to potential even if their ultimate resolutions were quite different (to say the least). The dot-com bust that began in April 2000 took nearly three years to resolve itself, but remained suspiciously orderly in how that occurred. For a market event that took almost 60% off the S&P 500 high to low, it was both torturous and downright regular. The economy took its cues from that as well, despite fears of 1929 and asset-driven “deflation” there was no banking element in the reversal, and the recession itself, dated officially from March 2001 until November that year, was about as mild as a recession might go.
Alan Greenspan took the credit for all that, even though he was belated in his response and his monetary monster was responsible for it (denials somehow still persist). If there was a monetary factor in limiting the collateral damage to the economy and larger financial system, it had nothing to do with his expedition with the federal funds rate into “ultra-low” territory, instead the action was all over the eurodollar system. In short, the ascendancy of the eurodollar standard provided a massive cushion against even the largest asset bubble ever seen (to that point) – demonstrating the sheer absurdity of the bubble that took its place.
Convention views the housing bubble as arising sometime around 2003, but it is clear the world was fully engulfed long before then. The eurodollar effects (Greenspan’s idiotic idea of “global savings glut”) showed up as early as 1995 in so many places only a blind ideologue could have missed them. Thus, the dot-com bust was but a sideshow to wholesale finance that gave only partial and temporary pause then.
In fact, the housing bubble was hit harder (relatively) in its infancy by the Asian flu than the dot-com bust, more than suggesting that offshore “dollar” influence. Greenspan did nothing but sit back and let the eurodollar insanity carve out his GDP mandate year after year, through debt upon debt, all the while the Fed thought its 19th century view of finance was the monetary equivalent of magic and genius.
And that is why the 2008 bubble burst event was so much more dramatic. In these terms, it wasn’t necessarily the asset bubbles that were changing, it was the eurodollar standard that built them. Whereas there was solid financial flow in the 2000-03 period to keep that first bubble’s reversal orderly and far less problematic, starting in August 2007 liquidity underwent two successive reversals that ultimately amounted to total failure by 2008.
In this context it is easy to see why 2008 was so devastating where 2001 was not. In response to getting everything wrong in 2008, the Fed (almost understandably) by the end of 2008 and into 2009 set about trying to recreate the economy and financial system as it existed at that 2007 peak. It finally evolved into the 21st century by shedding its role as “lender of last resort”, with anachronistic tools like the Discount Window, and belatedly entered the realm of derivative and shadow finance becoming “dealer of last resort” and even “market of last resort.” QE’s fell under that regime, both as a means to force spending in the economy and as intended (though ultimately meaningless) assurance to financial agents (the real “printing press”) for the debt-basis that is all that is allowed under activist central banking.
The results of all of this have been far from fruitful, evidenced greatly at the start by the fact that there is still debate eight years later about whether or not a recovery has ever taken place. With that in mind, thinking about what might come next is already deficient just on the economic side (a recession with consumers already in the bunker before it ever began?). But there are also building dangers about financial feedbacks to consider, especially as it relates to the eurodollar standard in structural reverse. As shown above, through TIC flow, which is one meaningful method of presentation, the eurodollar standard has not been reconstituted despite all aimed efforts.
Initially, there seemed great promise to the determination in that area, as late as April 2011 there appeared some likelihood of getting back to at least close to the pre-crisis mode of operation. But the euro crisis that summer, which was in no small way a parallel “dollar” crisis, ended any hopes for revisiting pre-2007 financialism. The Fed, as always, did not get that message and instead opted to simply make it worse by removing the one “pillar” that was holding even that limited rebound in place – tapering QE. Just the threat of doing so has strained and totally sapped global “dollar” liquidity to the point that minor disruptions become major global events (October 15, January 15).
In short, the rebound in the eurodollar standard was never a permanent solution because it was as artificial as the economy it was intended to foster. Dealer capacity was rebuilt solely on the promise of QE-forever and that effect on bond prices as without pre-crisis conditions for gain-on-sale profit through proprietary “hedging” of inventory and providing liquidity through inventory and warehousing, there isn’t any real profit opportunity anymore. Spreads have been squeezed and avenues shut down (this, on its own, would not necessarily be an unwelcome result as financialism is due for several steps back, the problem, however, is where the Fed, again, intends on recreating 2006; in other words, you need the dealers and their activities to get you there, so you either have to accept what they do or stop trying to go back).
As noted yesterday, liquidity is bad and getting worse which would seem to rule out the 2001 version of bubble reversions. With the eurodollar standard growing even more precarious, arguably as bad now as in 2008, there is no financial cushion should “risk” shift dramatically.
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More fucking bubbles than the Lawrence Welk Show
Not to worry. We have the DHS and the Freedom act to protect us.
Practically bubbles everywhere. And huge ones.
I'm a prepper. I don't care.
No debt only guns and ammo. Food and water. Gun safe is FULL. I mean REALLY FULL! Got it, get it, Good!
Can't wait to see what a RMJ Tomahawk can do. Wink, wink. Or a Springfield Armory M1A Scout Squad.
Ok, I've had to many beers. Sorry!
RMJ Tomahawk is overpriced. It's like driving a fucking Lexus tricked out for offroad.
Maybe, I've never had to use it. I got the Shrike. Doesn't look like it will break. If it does it comes with a lifetime replacement.
I've played with it a few times and I know for sure that it would leave more than a mark. LOL!
What I'm trying to say is that, if you're concerned about breakage, you can buy 10 tactical hawks for the same price. Gotta treat 'em like BIC razors. If you're concerned about 'lifetime replacement', consider how much that GUARANTEE will be worth in a SHTF scenario. Might as fucking well 'short' the stock market.
I live in CA. I bought it just in case of a earthquake. I will be able to go through a wall if I have to.
I spent over 6K on suspension and other parts on my truck to make it off road worthy. Works like a charm!
I forgot what my point was? I already spent the money.
The RMJ is the coolest beer opener... EVER (so u got that going 4 u until Apple comes up with a gadget to do the same thing)
Please get over the RMJ Tomahawk. Next your going say shit about my Ka-Bar Navy Knife that my dad gave me. Everyone has their own budget. See what happens when you are debt free! :)
I didn't bring it up in the first place... I simply offered my opinion...
I was under the impression that California, like New York, had been declared Second Amendment free, as in you plebs cannot have bang-bangs. Just the gangs.
10 round magazine or less. Nice thing about a M1A is if I move to a different state I can legally own any size mag....
I have to disagree, you can never have too many beers.
I just want to know how many more predictions before the SHTF.
when the SHTF there will no doubt be a record number of prophets saying "I told you so" and personally i will not be able to cope with this deluge.
I could guess, but that would also be a 'prediction'.
Voila!
"Stop whoring for Wall Street"
http://www.showrealhist.com/yTRIAL.html
http://patrick.net/?p=1223928
Does anyone remember "promise zones" ?
15 MPH right?
Here are some more signs of a coming recession.
http://michaelekelley.com/2015/05/29/mergers-and-acquisitions-set-record...
http://michaelekelley.com/2015/02/20/fed-warns-of-two-bubbles/
http://michaelekelley.com/2015/02/24/would-you-pay-39-more-than-asked/
Here is the starting point.
http://michaelekelley.com/2015/04/28/next-recession-will-start-with-this-country/
Here is how to prepare.
http://michaelekelley.com/2014/10/16/8-things-to-do-when-recession-happens/
Here is how to get your mind off this stuff.
http://michaelekelley.com/category/humor/
Good luck!
According to Voya Investment Management LLC:
https://investments.voya.com/idc/groups/public/documents/market_commenta...
The Outlook for Monetary Policy and Long-Term Interest Rates
Though there are many reasons for low long-term interest rates, it is useful to classify them into two sets: domestic factors and international factors. The main domestic factors are low short-term interest rates, low inflation and low inflation expectations, contained volatility in financial markets, tepid rates of economic activity and the increased size of the Fed’s balance sheet. The main international factors are low overseas interest rates, low inflation and deflationary expectations abroad, quantitative easing in major advanced economies and slow growth in the rest of the world. Domestic factors are the primary drivers of low interest rates in the U.S., while international factors have provided additional impetus.
It is well established that long-term interest rates are strongly correlated with short-term interest rates (Figure 9), a relationship that has been understood since at least the middle of the 20th century. Short-term interest rates are principally driven by the central bank’s policy rates and other monetary tools. The Fed has kept the fed funds rate below 25 basis points since December 2008, resulting in extremely low short-term interest rates, as indicated by the low yields of three-month and six-month U.S. Treasury bills.
Long-term interest rates are likely to stay low as long as short-term rates remain low. The recent, moderate selling trend in two-year U.S. Treasury securities implies that investors expect the Fed to hike its target rate. However, rates on three- and six-month T-bills have not risen much, suggesting that while an imminent rise in long-term rates is not yet priced, investors are pricing in a modest rate hikes afterward. Observed inflation and inflationary expectations also are important drivers of government bond yields. Low core inflation suggests that long-term rates will stay low.
Volatility in financial markets also affects long-term rates. The VIX and MOVE indices — measures of volatility for the stock market and the government bond market, respectively — have stayed fairly low. Volatility in the government bond market has increased a bit recently but is still low by historical standards. The size of the Fed’s balance sheet and Fed monetary policy actions can have substantial effects on long-term rates. While the large-scale asset purchase program has ended, the Fed will remain a large holder of U.S. Treasury and agency residential mortgage-backed securities even after it begins to hike (Figure 10). This large stock of Fed holdings is likely to restrain upward pressures on long-term rates by limiting the market supply of these securities.
International factors also have restrained long-term rates. Global price pressures are feeble. Inflationary pressures in the major advanced countries are subdued. Long-term rates are low in advanced countries such as Japan, the U.K. and Canada. Interest rates on short-term and intermediate-term government debt instruments are often negative in the euro zone and Switzerland. Japan has experienced long-term rates of less than 2% since the late 1990s. Compared to long-term rates in the major advanced countries, U.S. Treasury yields are markedly higher! What’s more, the European Central Bank and the Bank of Japan are likely to remain in quantitative easing mode at least for the rest of the year, if not beyond. Foreign demand for U.S. Treasury securities is extremely strong — China and Japan, for example, continue to hold large portfolios of U.S. Treasury securities for mercantilist and other purposes — and there is no reason to think that this will change anytime soon.
Summary
The combination of domestic factors and international factors supports our view that low long-term rates will persist. The U.S. economy continues to improve, albeit at a slow place. Job growth has been decent for the last few years and the unemployment rate has declined steadily. Auto sales have picked up. Crude oil prices have fallen dramatically from the elevated levels of recent years, to the benefit of consumers. Rising equity and house prices have enabled households to repair their balance sheets. Businesses have started to invest in equipment and software and building.
Nevertheless, the pace of growth is still disappointing. Labor productivity growth has been weak. Recovery in housing construction has been slow. Wage growth is tepid, as job growth has occurred in low-productivity sectors and industries in which wages tend to be low. Real median income for U.S. households is still below peak. Income inequality continues to increase. Labor’s share of national income is at a low point. Post-crisis income gains have been confined to the very top of the income distribution. Global conditions for growth are still unfavorable, which matters to the U.S. not only for trade but also for capital flows and migration. Slower growth abroad will diminish the prospects for exports.
The Fed, meanwhile, is likely to be cautious and gradual in raising the policy rate, and its balance sheet will stay expanded. The Fed has communicated that monetary policy will stay accommodative for a long time even after an initial rate hike and a few subsequent moves. The combination of tepid economic growth and low inflation domestically, weak global economic growth, strong demand for safe assets and the accommodative stance of the Fed could lead to the persistence of low long-term interest rates in the U.S. for much of this year.
So what do we need to do NOW to prevent losing what little we have left following 2000 & 2008's collapses?