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Why The Markets Are Overdue For A Gigantic Bust

It's just not possible to print our way to prosperity
Friday, June 9, 2017, 7:38 PM

Let me begin with a caveat: confirmation bias is an ever-present risk for an analyst such as myself.

If you're not familiar with the term, 'confirmation bias' suggests that once we've invested time and emotional energy into developing a worldview, we'll then seek information to confirm that view.   

After writing about the economy for so many years, I'm now so convinced that we can't print our way to prosperity that I find myself seeing signs confirming this view everywhere, every single day. So that’s the danger to be aware of when listening to me.  I'm going to keep repeating this mantra and Im going to keep finding data that supports this view.

Based on lots of historical inputs, I have concluded that Printing money out of thin air can engineer lots of things, including asset price bubbles and the redistribution of wealth from the masses to the elites.  But it cannot print up real prosperity.

As much as I try, I simply cannot jump on the bandwagon that says that printing up money out of thin air has any long-term utility for an economy. It's just too clear to me that doing so presents plenty of dangers, due to what we might call 'economic gravity': What goes up, must also come down.

Which brings us to this chart:

The 200 bubble blown by Greenspan was bad, the next one by Bernanke was horrible, but this one by Yellen may well prove fatal.  At least to entire financial markets, large institutions, and a few sovereigns.

It's essential to note that more than two-thirds of the net worth tracked in the above chart is now comprised of ‘financial assets.’  That is, paper claims on real things. 

As the central banks have printed with abandon over the past decade, they’ve created the most extreme gap between real things (GDP) and the claims on those same things (Net Worth) in all of history.

Following the Great Recession, the ‘plan’ of the central banks, such as it was, seems to have been to jam up people’s paper wealth, under the theory that people who feel wealthier are more likely to spend more and hopefully borrow more, too. 

That plan has worked rather well, at least from the standpoint of creating vastly larger amounts of new borrowing (debt and credit).  But  how much GDP growth has resulted? Not that much.

The gap between the two only grows and grows at this point. And the central banks are now stuck at this point. They literally have no idea how to undo this problem they've managed to create.

At some point that gap is going to have to close. Either GDP growth recovers to its highest rate in all of history and then stays there for many years (a complete fantasy if we're being honest), or the global debt pile starts getting defaulted on (which will have very ugly repercussions).

This is why we’ve focused so heavily lately on central banks. It's why we recently produced the End Of Money webinar with an excellent panel of experts (including G. Edward Griffin, David Stockman and Axel Merk) to increase our understanding of what actions the increasingly desperate central banks are likeliest to try next.

As the above chart chillingly shows, the damage down by the bursting of each previous market bubble blown by the Fed has been worse than the ones that preceded it. This time will not be the exception. This third bubble, the largest and most ill-considered of them all -- which we've written extensively one as The Mother Of All Financial Bubbles -- will be enormously destructive. 

It will be so bad, that here at Peak Prosperity.com, we not only focus on helping people navigate the tricky world of building and preserving their financial capital at a dangerous time like this, but we also advise building true resilience across the other important forms of capital such as Social, Material, Living, Emotional, Knowledge, Time and Cultural capital. So much will likely be lost in this next reset that true wealth in its aftermath will be dependent on more than just money.

Actions, Not Words

Most people take their cues from the price level of the stock market.  Once upon a time, equities were a useful barometer. But that was before the central banks began intervening heavily in them, starting under Alan Greenspan. He was responsible for the first big bubble on the earlier chart above.

If you listen to the words in the public statement of the central banks, you'll hear a lot about ‘improving conditions’ and ‘nearly full employment’ and ‘strengthening growth prospects’. However, if you then look at their actions, you'll see they're in complete opposition to these statements.

As always, you should put far more weight on what someone does rather than on what they say.  Actions speak louder than words, and so here’s all you need to know about the central banks, their influence on markets, and what they really think about things at the moment:

First, we have the red line trundling up at about a 30-degree angle from left to right for several years.  But then, in early 2016, the trajectory changed.

Do you remember what was happening then?  Emerging markets were in disarray, many had entered bear market declines, and the dollar was shooting higher ruining the economies of many developing nations. The western stock markets started rolling over and appeared ready to suffer a serious decline.

"Not on our watch!" declared the central banks. See what happened at the same time, as indicated by the orange line rising at a much steeper 45-degree slope?

That’s right: the central banks began dumping far more money in the equity and bond markets, in an attempt to save everything from the inevitable downturn that threatened to result from the prior central bank printing spree.

Now, here in early June of 2017, the Big 5 central banks have poured a whopping $1.5 trillion dollars(!) of newly created, thin-air money into the markets since the beginning of the year.

And because they have, we see things like this, where all the hot speculative money flows to the very hottest stocks, in this case the "FANGs"(Facebook, Amazon, Netflix, and Google):

(Source)

The above chart shows that while these hot, sexy stocks have been rising (remember, we were all genius investors in the 1990’s, too?), the non-FANG stocks have not.  Further, the chart reveals the extent to which such stock price action has been coincident with central bank money printing (balance sheet expansion).  The connection is completely obvious.

But back to our story. This $1.5 trillion is a record-breaking amount.  As in, never-been-tried-before-let’s-see-what-happens sort of amount.

So, while the words of the central bankers may be soothing, their actions are panicky.

What are they afraid of exactly?

Well, that their entire scheme will prove to be another gigantic bust.

The only thing that can bail them out at this point is a swift return to robust, sustained economic growth. So let’s take a look at growth again, shall we?

Growth Is The Answer (And The Problem)!

The global growth scene is a mixed bag.  Right now, China and Europe seem to be in better shape than the US or Japan.

However it’s important to remember where we are in the economic cycle. Nothing grows forever, and we are now very far into this so-called 'recovery'.

In the US, it ranks as the third-longest recovery since WWII:

(Source)

Apparently, not all ‘recoveries’ are built the same. If you look at the average yearly GDP growth rate over the past decade, it's the same as we experienced during the Great Depression era of the 1930’s:

(Source)

The above dismal rate of growth perfectly explains the growing gap between household net worth and GDP.  If you boost financial assets ever higher using central bank stimulus, but the economy remains stagnant, you get a gap.

Global economic growth is weak, has been weak, and will continue to be weak for many reasons. Not least of which is the massive overhanging piles of accumulated debt across the global economy, which are very growth unfriendly.

As Professor Steve Keen has shown, if your debt grows at 10%, and this enables your economy to grow at 5%, anything less than a more rapid rate of credit growth in the future will cause your economy to contract.

Said another way, as long as you can grow your debts at a faster pace than your income -- forever -- you'll never have to experience another economic downturn.

That statement right there, lays bare the entire ridiculousness of everything the central banks have, and are currently trying to engineer. 

Eventually, reality always catches up.  And there are plenty of signs indicating that reality is now arriving.

And it doesn't look happy. 

In Part 2: Get Ready For The Coming Massive Correction we explain why there's a better than 50% chance of a global recession occurring in the next year -- and nearly a 75% chance of one in the US.

We then detail out how the coming predicted massive market correction may well rip the financial markets apart in a way that could take generations to repair in any meaningful sense.

Click here to read the report (free executive summary, enrollment required for full access)

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12 Comments

DavidC's picture
DavidC
Status: Silver Member (Offline)
Joined: Sep 29 2008
Posts: 241
1.33 percent

Chris,

As ever, a super article. I have a query regarding the 1930 to 1939 and 2007 to 2016 growth figures. If one starts with a notional 100 and uses the annual growth rates, I get the following results, bearing in mind the compounding effect of the rates;

                     100                                   100    
1930    -8.5%      91.50             2007    1.8%       101.80
1931    -6.4%      85.64             2008    -0.3%      101.49
1932    -12.9%    74.59             2009     -2.8%      98.65
1933    -1.3%      73.62             2010    2.5%       101.11
1934    10.8%     81.57             2011    1.6%        102.73
1935    8.9%       88.83             2012    2.2%       104.99
1936    12.9%     100.29           2013    1.7%        106.78
1937    5.1%       105.41           2014    2.4%        109.34
1938    -3.3%      101.93           2015    2.6%        112.18
1939    8.0%       110.08           2016    1.6%        113.98

Surely this gives an annual average for the 1930s as 1.008% and an annual averages for the 2000s as 1.398%?

The desperation and absolute fear of the central banks is surely evident in their inability to countenance or permit even a 'normal' correction in the stock 'market'. To me, this is what will make the final implosion even greater. The central bankers may be highly educated but they remain fools.

DavidC

cmartenson's picture
cmartenson
Status: Diamond Member (Offline)
Joined: Jun 7 2007
Posts: 5143
Compounded vs Average

DavidC wrote:

Chris,

As ever, a super article. I have a query regarding the 1930 to 1939 and 2007 to 2016 growth figures. If one starts with a notional 100 and uses the annual growth rates, I get the following results, bearing in mind the compounding effect of the rates;

                     100                                   100    
1930    -8.5%      91.50             2007    1.8%       101.80
1931    -6.4%      85.64             2008    -0.3%      101.49
1932    -12.9%    74.59             2009     -2.8%      98.65
1933    -1.3%      73.62             2010    2.5%       101.11
1934    10.8%     81.57             2011    1.6%        102.73
1935    8.9%       88.83             2012    2.2%       104.99
1936    12.9%     100.29           2013    1.7%        106.78
1937    5.1%       105.41           2014    2.4%        109.34
1938    -3.3%      101.93           2015    2.6%        112.18
1939    8.0%       110.08           2016    1.6%        113.98

Surely this gives an annual average for the 1930s as 1.008% and an annual averages for the 2000s as 1.398%?

The desperation and absolute fear of the central banks is surely evident in their inability to countenance or permit even a 'normal' correction in the stock 'market'. To me, this is what will make the final implosion even greater. The central bankers may be highly educated but they remain fools.

DavidC

David,

I trust your compounded figures...the other work I quoted was just an average rate of growth.  Compounding is more accurate, of course.

But even there, the weakness of the recent decade stands out. 

We might also ask the Trump administration where their assumption is for 3% growth, essentially forever, the how's and the why's for that growth given the past decade?

JohnH123's picture
JohnH123
Status: Bronze Member (Offline)
Joined: Apr 14 2010
Posts: 28
Still don't understand your perspective

Chris,

I still don't understand why you are so certain that the markets are going to crash hard. With the central banks capable of printing an infinite amount of money, wouldn't it be more likely that they will continue to print more and more, driving the markets up, until there is so much excess money in the system that they need to reset the system? In a reset, central bank policy will always support the ultra wealthy, so if the ultra wealthy own financial assets, then they will come out ahead in a reset.  If so, then we would come out way ahead by having our money in the market too.  What am I missing from your perspective?

I also think that it's possible that a reset that results from excess inflation could make central banks and politicians look stupid. A reset that results from a deflationary collapse could more easily be blamed on Russia or another convenient scapegoat.

davefairtex's picture
davefairtex
Status: Diamond Member (Online)
Joined: Sep 3 2008
Posts: 4356
good points

So JohnH - I agree that if everything is left to just monetary affairs, the gang in charge can keep this going into eternity.  But here's the thing.

Life on earth isn't just about monetary effects.

There are implications of the monetary policy that end up pissing people off.  Pissed off people vote for change.  For instance, Italy will at some point leave the Euro, as a direct result of the inequity caused by the structure of the Eurozone itself.  Its just a matter of time.  No amount of money printing will fix this problem, because it will come along with a default.

Accounting-wise, central banks can print money as long as they don't take any large losses.  Once they take losses, that has implications.  In the Eurozone, the member nations must all pony up cash to fix up the ECB's losses.  Thats not printed money, that's real money.

Given the amount of money printing that's happened, the losses will be a huge amount of money for the member countries.  Their taxpayers will be really upset, because the ECB bailout money will crowd out other real programs.  Maybe more votes, more change.  There might even be a rush for the exits.  Bail out before your nation has to pay.

shaxov's picture
shaxov
Status: Member (Offline)
Joined: Jun 10 2017
Posts: 3
With all respect this

With all respect this statement:

"Most people take their cues from the price level of the stock market.  Once upon a time, equities were a useful barometer. But that was before the central banks began intervening heavily in them, starting under Alan Greenspan. He was responsible for the first big bubble on the earlier chart above." is not correct. Alan Greenspan was not first central banker who created stock and real estate bubbles. First one was Benjamin Strong, who was New York bank governor during roaring twenties. He actually did first QEs during those years. M. Rothbard in his "America's Great Depression" shows the whole anatomy of his actions.

shaxov's picture
shaxov
Status: Member (Offline)
Joined: Jun 10 2017
Posts: 3
With all respect this

With all respect this statement:

"Most people take their cues from the price level of the stock market.  Once upon a time, equities were a useful barometer. But that was before the central banks began intervening heavily in them, starting under Alan Greenspan. He was responsible for the first big bubble on the earlier chart above." is not correct. Alan Greenspan was not first central banker who created stock and real estate bubbles. First one was Benjamin Strong, who was New York bank governor during roaring twenties. He actually did first QEs during those years. M. Rothbard in his "America's Great Depression" shows the whole anatomy of his actions.

shaxov's picture
shaxov
Status: Member (Offline)
Joined: Jun 10 2017
Posts: 3
With all respect this

With all respect this statement:

"Most people take their cues from the price level of the stock market.  Once upon a time, equities were a useful barometer. But that was before the central banks began intervening heavily in them, starting under Alan Greenspan. He was responsible for the first big bubble on the earlier chart above." is not correct. Alan Greenspan was not first central banker who created stock and real estate bubbles. First one was Benjamin Strong, who was New York bank governor during roaring twenties. He actually did first QEs during those years. M. Rothbard in his "America's Great Depression" shows the whole anatomy of his actions.

pat the rat's picture
pat the rat
Status: Bronze Member (Offline)
Joined: Nov 1 2011
Posts: 94
wheel barrel or thumb drive?

The question is do you need a wheel barrel to carry money or just a thumb  drive? If you don't watch what is going on you will miss it till it blinds side you.Money is mostly not the printed form of 1920's Germany, cash, debit or credit?

Red Alert's picture
Red Alert
Status: Member (Offline)
Joined: Jun 12 2017
Posts: 2
Sooner the better

May the Fed raise interest rates as it should have done many years ago and ignite the deflationary tsunami that the free markets are begging to receive. The rich Keynesian selfish fools would get a spiritual awakening and the poor would rise out of their poverty. It would be beautiful.

Red Alert's picture
Red Alert
Status: Member (Offline)
Joined: Jun 12 2017
Posts: 2
Sooner the better

May the Fed raise interest rates as it should have done many years ago and ignite the deflationary tsunami that the free markets are begging to receive. The rich Keynesian selfish fools would get a spiritual awakening and the poor would rise out of their poverty. It would be beautiful.

Ambrose Bierce's picture
Ambrose Bierce
Status: Member (Offline)
Joined: Jun 13 2017
Posts: 1
To your first premise Sir

Suppose the IMF rollout of SDRs has the effect of expanding the global monetary base two fold? SDR is new money, which rides on top of sovereign currencies, there will be bonds and other investment paper written in SDR. Isn't this what we are already seeing, the global monetary base expanding?

Suppose the US Federal Reserve achieves ROW Central Bank authority? (It's inevitable because nature abhors a vacuum) They can then purchase a "broader range of assets". The Fed can buy stocks, as the need arises, and they have demonstrated by their behavior that assets held on their balance sheet, are closely held. Should the Fed take stock out of the market, that reduces supply, puts more pressure on demand, and the price of the stock goes UP. The Feds balance sheet assets APPRECIATE. They could really get the squirrel cage going, its much better than going off balance sheet with government debt (as they did in the Iraq war) and going off balance sheet is the only thing they have left.

When Populist investors (including some billionaire investors) begin hoarding gold the Central Banks will issue worthless fiat money and use it to buy gold, in order to satisfy their customers. (You can buy gold using your CC and then go CH11. Then go buy an island somewhere) A CB is someone with something to sell, like Forty Five they just want to succeed, nothing else matters. Gold prices are routinely manipulated lower to facilitate buying of physical, a massive washout in Gold prices will be driven by the all in the stock market speculative boom. Should the market collapse, and what exactly does that mean, the two collapses this century have done little to discourage speculation, or effect returns, the BTD mentality is axiomatic,

Stock market collapses are buying opportunities, (ask Hussman) the problem is they also cause real populist anger, and should we have another massive market collapse the Fed and the Central Bank system would be taken over by "sound money" people, the legions of Mises, and this prevents any meaningful recovery. At the bottom you need money printing, at the tops you need sound money people to contain the excesses, should the process invert itself we could enter a new financial dark ages, the L shaped recovery.

Suppose you buy the dip and nothing happens? Suppose there is no collateral anywhere to buy the dip? It;s a huge chess game, with Warren Buffet and others saving money and making a shopping list of assets, and the Central Banks trying to destroy their collateral which seeks buying opportunities to put their money to work. That could be lose lose. Oddly enough you are probably better off buying this overvalued market here, than buying it after a 50% drop.

New_Life's picture
New_Life
Status: Silver Member (Online)
Joined: Apr 18 2011
Posts: 103
Renegade Inc Article

Good piece here;

https://renegadeinc.com/central-bankers-great-monetary-experiment-explode/

"We're in debt to our insanity...." #GoingBackwards

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