Central banks are damned if they raise interest rates and damned if they don’t, largely because their policies have resulted in both risk-taking (i.e. the creation of asset bubbles in stocks, bonds and real estate) and excess levels of debt.
Here’s a summary from the report which succinctly explains the potential debt crisis and how the world’s central banks have painted themselves into a “monetary policy corner”:
“Otherwise, over long horizons, failing to constrain financial booms but easing aggressively and persistently during busts could lead to successive episodes of serious financial stress, a progressive loss of policy ammunition and a debt trap. Along this path, for instance, interest rates would decline and debt continue to increase, eventually making it hard to raise interest rates without damaging the economy. From this perspective, there are some uncomfortable signs: monetary policy has been hitting its limits; fiscal positions in a number of economies look unsustainable, especially if one considers the burden of ageing populations; and global debt-to- GDP ratios have kept rising.”
The Federal Reserve and the world’s other most influential central banks have borrowed from the future. The long period of near-zero interest rates will prove, in the long run, to be extremely dangerous to the global economy, and could end up causing more economic pain than the Great Recession, largely because of the central bank fuelled “debt trap” that has been created since 2008.
September FOMC: The economy is so strong we'll reduce our balance sheet beginning in October.
How is all that going? pic.twitter.com/R00IMHQsCc
— Sven Henrich (@NorthmanTrader) November 11, 2017
Investors are famished for yield and willing to underwrite most any risk to get some income
Now, admittedly, a win is a win, and momentum has been the winning trade. Whether intrepid or fool-hardy, “risk on” has won the year 2017. But do trees ever grow to the skies? Did Minsky not elucidate how extended periods of low volatility have the effect of masking financial pathologies, allowing them to metastasize throughout the system? Indeed! While the central bankers dream of a never-never land where wise scholars can direct the flow of irrational humans, the real world that the rest of us inhabit is decidedly messier.
How so? Long periods of low volatility often mean that some traders and fund managers become less concerned with closely scrutinizing what they own. Credit analysis is hard, and in an environment where prices become inelastic to the “fundamentals,” some conclude that the work involved in analyzing bonds is a case of the juice not being worth the squeeze. Low volatility environments remove incentives to trade, thereby degrading the quality of price information. Meanwhile, the low rate / high asset price environment removes the impetus for corporate frame breaking changes, and so low productivity businesses are “allowed” to just muddle along, restraining the Shumpeterian forces necessary for growth. In short, fundamental problems are systemically ignored by the collective. So, if you happen to see an emperor strolling about, happy and stark naked, you just shrug and move on.
But the worm will turn. It always turns. The collective gets jolted out of its slumber and suddenly realizes that capital is surrounded on all sides by clear and present dangers. The torrent of capital that flooded in under the FOMO banner may well become the most formidable ebb tide!
ANALYST THINKS 1987 CRASH SCENARIO IS NEARING
Fractalist macro and TradingView moderator @ECantoni provides us with the most interesting chart of the 1987 fractal overlaid with today’s Dow Jones. Many of technicians have tried to time one in a life event that seems ever-increasing as the fundamental backdrop of the United States deteriorates. Our one question: is @ECantoni and if so what can G3 Central Banks do to stop this?
TROUBLE? Global stocks hit historic highs during week at $93.6tn, supported by solid earnings & synchronized global growth, before sharply selling off on Thurs. Indices suffered biggest plunge since Aug on profit-taking following Sept-Oct rally and lose $600bn in mkt cap from top pic.twitter.com/NcNcmhS7aN
— Holger Zschaepitz (@Schuldensuehner) November 11, 2017