Populismo + Economia sempre più debole + Potere ipersfruttati delle Banche centrali + elezioni = Mercati rischiosi e economie rischiose

Populismo + Economia indebolente + Potere di allentamento + elezioni limitato della Banca centrale = Mercati rischiosi e economie rischiose

Recentemente,1) la Fed ha saggiamente ritirato i suoi piani per aumentare i tassi di interesse e ridurre il suo bilancio e2) I negoziatori cinesi hanno chiarito che sono disposti a fare un accordo commerciale. Queste sono cose positive a cui i mercati hanno reagito bene.

Allo stesso tempo, a) il divario ricchezza / opportunità si sta manifestando sempre più in b) aumento del populismo sia di sinistra che di destra, che sta conducendo a c) conflitto maggiore sia all'interno che tra paesi e d) decisioni più estreme e peggio, che sono particolarmente rischiose quando e) la crescita economica si sta indebolendo e f) le banche centrali hanno una capacità limitata di allentarsi, g) si stanno avvicinando importanti elezioni, e h) le grandi tensioni geopolitiche che emergono dalla Cina emergono come un potere che sta sfidando gli Stati Uniti mentre l'attuale potenza mondiale si sta intensificando. Nei prossimi 2-3 anni, questa confluenza di forze arriverà alla testa e avrà grandi influenze su mercati, economie, società e affari mondiali (come avvenne alla fine degli anni '30).

Maggiore polarità e prossime elezioni

Uno dei miei principi economici / politici è: "Se c'è una grande lacuna nelle condizioni economiche delle persone che condividono un bilancio e c'è una crisi economica, c'è un'alta probabilità di conflitto grave. Se non c'è un grande divario (ad esempio, la maggior parte delle persone è povera o la maggior parte delle persone è ricca), c'è molto meno rischio di un conflitto. La disparità nella ricchezza, specialmente se accompagnata da disparità di valori, porta ad un crescente conflitto e, nel governo, che si manifesta sotto forma di populismo di sinistra e populismo di destra. Di norma, i populisti di destra (che di solito sono capitalisti) non sanno come dividere bene la torta, mentre i populisti di sinistra (che di solito sono socialisti) non sanno come far crescere la torta. Mentre si spera che quando esiste una tale polarità i leader riformerebbero il sistema sia per dividere la torta e farla crescere meglio (che è fattibile e certamente il miglior percorso), sfortunatamente leader che sanno come riunire le persone dietro politiche che crescono e dividere bene la torta sono entrambi rari e non apprezzati. Quindi il problema del divario in termini di ricchezza e opportunità è improbabile che possa essere risolto bene e in modo pacifico ".

Nel mio studio sul populismo da marzo 2017 (che si trova su www.economicprinciples.org), mi è stato chiaro che populismo e leader populisti seguono tipicamente un percorso abbastanza standardizzato di conflitto in costante aumento sia all'interno che tra paesi; per questo motivo, il conflitto era la cosa che volevo monitorare più da vicino per aiutarci a vedere ciò che è probabile che accadesse. Ecco perché i miei fantastici assistenti di ricerca e io abbiamo creato "misuratori di conflitti", che condividerò con voi in un altro momento.

Con questa prospettiva in mente, è importante tenere a mente che le grandi domande di a) se i populisti di destra (cioè i capitalisti) o i populisti di sinistra (cioè i socialisti) finiscono sotto il controllo e b) se i loro conflitti influenzeranno negativamente le operazioni di governo, l'economia e le relazioni internazionali saranno in gran parte avere una risposta nei prossimi 2-3 anni perché durante questo periodo gli Stati Uniti, il Regno Unito, l'Italia, la Spagna, la Francia, la Germania e il Parlamento europeo avranno o probabilmente avranno elezioni che risponderanno a queste domande.

Negli Stati Uniti, l'elenco dei candidati democratici e le loro politiche stanno cominciando ad emergere. Ora possiamo cominciare a vedere che il problema del gap di ricchezza sarà probabilmente il più grande problema delle elezioni, e possiamo cominciare a vedere dove i candidati emergenti sono nello spettro del populismo di sinistra (socialismo) e del populismo di destra (capitalismo ). Ad esempio, abbiamo recentemente visto la proposta di un'aliquota marginale al 70% superiore sui redditi superiori a $ 10 milioni fatta galleggiare dalla nuova repubblicana di 29 anni Alexandria Ocasio-Cortez, che rappresenta parti del Bronx e del Queens a New York City e possiamo vedere che la maggioranza degli americani intervistati è a favore. Abbiamo anche visto di recente la proposta di una tassa sul patrimonio del 2% su attivi superiori a $ 50 milioni e il 3% su fortune superiori a $ 1 miliardo provenienti dalla Senatrice Elizabeth Warren, che rappresenta il Massachusetts; non abbiamo ancora risultati di sondaggio per questa proposta, ma la mia ipotesi è che riceverà una ricezione simile. Mentre non abbiamo ancora visto i mercati reagire a tali notizie, perché è troppo presto per ostacolare le probabilità di chi avrà il controllo e cosa faranno, sappiamo che questo diventerà sempre più evidente e quindi sarà determinato nel prossimo due anni, e sappiamo che queste cose avranno grandi implicazioni per i flussi di capitale, le valutazioni di mercato, le condizioni economiche e le relazioni interne e internazionali.

Lo stesso sarà vero in Europa, poiché i conflitti populisti interni ed esterni si stanno intensificando nello stesso momento in cui l'Europa è tenuta economicamente insieme dal sottile filo di una banca centrale e da una moneta unica, che sta affrontando un crescente stress da parte di alcuni apparentemente inconciliabili. differenze. Più nello specifico, mentre la ricchezza e le polarità ideologiche all'interno e tra i paesi si stanno intensificando a causa dell'unione monetaria che lascia alcuni paesi bloccati nella stagnazione mentre altri si arricchiscono, il programma di acquisto del debito della BCE a livello regionale che tiene insieme la valuta è diventando insostenibile perché il mix di debito che la BCE deve acquistare per fornire supporto all'euro sta diventando di qualità inferiore. Ciò rende l'acquisto del debito sempre più discutibile nei confronti dei paesi "dell'Europa settentrionale". Questo sta accadendo nello stesso momento in cui si avvicina il precipizio della Brexit e si terranno importanti elezioni e appuntamenti politici.

Il conflitto geopolitico USA-Cina


Mentre la guerra commerciale USA-Cina sembra essere negoziabile, una guerra geopolitica su IP e come dividere il mondo in sfere d'influenza concordate (o coesistere in aree sovrapposte) sta emergendo con maggiore forza. La controversia è più immediata su dove e in che modo competono le società di ogni paese, specialmente le più importanti società tecnologiche (specialmente quelle in 5G, chip di intelligenza artificiale, gestione di informazioni / dati e calcolo quantistico). Piuttosto che vedere la soluzione, queste dispute economiche e geopolitiche (ad es. Sulla riunificazione di Taiwan con la Cina continentale) saranno con noi per i decenni a venire. Tuttavia, si spera che si possa concordare abbastanza in modo da poter raggiungere un "accordo commerciale" e che i mercati possano festeggiare alla fine del periodo di negoziazione di 90 giorni. Il tempo è dalla parte della Cina perché stanno crescendo e migliorando a un ritmo sempre più veloce e perché quelli negli Stati Uniti e in Europa sono i loro peggiori nemici, quindi mi aspetterei che la Cina sia relativamente non conflittuale. 

Se avessi un desiderio per gli americani e gli europei, sarebbe loro di gestirsi bene.

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Fonte: qui

Ray Dalio

 Co-Chief Investment Officer & Co-Chairman of Bridgewater Associates, L.P.

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How The Bubbles In Stocks And Corporate Bonds Will Burst

As someone who has been warning heavily about dangerous bubbles in U.S. corporate bonds and stocks, people often ask me how and when I foresee these bubbles bursting. Here’s what I wrote a few months ago:

To put it simply, the U.S. corporate debt bubble will likely burst due to tightening monetary conditions, including rising interest rates. Loose monetary conditions are what created the corporate debt bubble in the first place, so the ending of those conditions will end the corporate debt bubble. Falling corporate bond prices and higher corporate bond yields will cause stock buybacks to come to a screeching halt, which will also pop the stock market bubble, creating a downward spiral. There are extreme consequences from central bank market-meddling and we are about to learn this lesson once again.

Interestingly, Zero Hedge tweeted a chart today of the LQD iShares Investment Grade Corporate Bond ETF saying that it was “about to break 7 year support: below it, the buybacks end.” That chart resonated with me, because it echos my warnings from a few months ago. I decided to recreate this chart with my own commentary on it. The 110 to 115 support zone is the key line in the sand to watch. If LQD closes below this zone in a convincing manner, it would likely foreshadow an even more powerful bond and stock market bust ahead.

Thanks to ultra-low corporate bond yields, U.S. corporations have engaged in a borrowing binge since the Global Financial Crisis. Total outstanding non-financial U.S. corporate debt is up by an incredible $2.5 trillion or 40 percent since its 2008 peak, which was already a precariously high level to begin with.

U.S. corporate debt is now at an all-time high of over 45% of GDP, which is even worse than the levels reached during the dot-com bubble and U.S. housing and credit bubble:

Please watch my presentations about the U.S. corporate debt bubble and stock market bubble to learn more:

Billionaire fund manager Jeff Gundlach shares similar concerns as me, saying “The corporate bond market is going to get much worse when the next recession comes. It’s not worth trying to wait for that last ounce of return, or extra yield from the corporate bond market.” Another billionaire investor, Paul Tudor Jones, put out a warning this week, saying “it is in the corporate bond market where the first signs of trouble will emerge.” GE’s terrifying recent credit meltdown may be the initial pinprick for the corporate debt bubble, but make no mistake – it is not an isolated incident. GE may be the equivalent to Bear Stearns in 2007 and 2008 – just one of the first of many casualties.

Anyone who thinks that the Fed can distort the credit markets for so long without terrible consequences is extremely naive and will be taught a lesson in the days to come.

Authored by Jesse Colombo via RealInvestmentAdvice.com

The Fed Will Continue To Tighten Until Everything Breaks

The Fed will continue on its current course no matter the cost, because there is a greater strategy in play. Here are the details…

by Brandon Smith via Alt-Market

Around three years ago, in September 2015, I wrote an article titled ‘The Real Reasons Why The Fed Will Hike Interest Rates‘ in which I predicted that the Federal Reserve, in the face of criticism, would soon pursue a program of interest rate hikes into economic weakness. I argued that this plan would be somewhat similar to what the Fed did in the early 1930’s; an action that prolonged the Great Depression for many more years. So far, my prediction has proven to be correct.

Despite the fact that the Fed keeps raising rates as it tightens the noose around the supposed economic “recovery”, there are still many people out there who refuse to accept that the central bank would deliberately implode the fiscal bubble that it has spent the last ten years inflating. Even today, I still see arguments proclaiming that the Fed will be forced to pull back if stocks fall beyond 15% to 20%. I also see claims that Fed officials like Jerome Powell had “better start looking for another job” because Donald Trump won’t be happy with Fed policies that could cause a crash. This is pure delusion from people who do not understand how the Fed operates.

First and foremost, let’s be clear, the Federal Reserve is an autonomous entity that does not answer to government oversight. It never has and it probably never will. This reality is supported by admissions by former Fed officials like Alan Greenspan, who publicly noted that the Fed answers to no one.

The central bank functions in quite the opposite capacity from what many people assume. As Carroll Quigley, prominent American historian and mentor to Bill Clinton, noted in his book Tragedy And Hope:

“The powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent private meetings and conferences. The apex of the system was to be the Bank for International Settlements in Basel, Switzerland, a private bank owned and controlled by the world’s central banks which were themselves private corporations. Each central bank … sought to dominate its government by its ability to control Treasury loans, to manipulate foreign exchanges, to influence the level of economic activity in the country, and to influence cooperative politicians by subsequent economic rewards in the business world.”

In other words, governments do not assert control over central banks; central banks assert control over governments. That said, there are some exceptions to this rule. For example, an act of Congress can be used to enforce a full audit of Fed activities, something which has never been done.

Fed propaganda asserts the lie that the bank is audited annually by the Government Accounting Office (GAO), but this is NOT an audit of Fed financial actions and policy initiatives. Rather, it is an audit of minor expenditures. Knowing how many pencils and desks the Fed purchases in a year does not help us to understand the bank’s influence over our economic security. All other audits of the Fed are done internally by the Fed’s own Board of Governors. This is hardly transparent or independent.

The only time the public has gained access to even a partial government audit of Fed activities was during the audit of TARP. This alone exposed trillions of dollars in bailouts and overnight loans to various banks and corporations, many of which were foreign.

The GAO did nothing in terms of regulatory action against the Fed after it was revealed that they were funneling trillions in capital into foreign corporations. All they did was make a ledger of the transactions, and remained silent on the rest.

I remind readers of this history and the conditions surrounding Fed actions because I want to drive the point home that, for now, the Fed and other central banks dictate the rules of the game. Some may say this has changed with the election of Donald Trump, but I disagree. If anything, as long as Trump is in office, the Fed will chase higher interest rates and steeper balance sheet cuts. They will not stop until markets break. And, the only solution (shutting down the Fed entirely) also comes with a set of extreme fiscal consequences.

There is a wall of cognitive dissonance when some in the public are confronted with this notion. They prefer to believe in a set of standard lies rather than accept that the Fed is a saboteur of our financial system. Here are those lies, listed in no particular order…

Lie #1: The Fed Is Unaware Of The Bubbles it Creates

Mainstream economists and Fed officials alike use this lie regularly. Not once has the Board of Governors of the Fed ever been audited or punished in light of an economic crisis they created. When central bank culpability is obvious, they simply claim they had no idea the fiscal bubble was as inflated as it became. The disaster “surprised them”.

The Fed’s creation of easy credit and zero oversight, not to mention its opposition to any regulation of derivatives, fed the bubble prior to 2008. Then they ignored all obvious warning signs that the bubble was about to burst. But what about the current “everything bubble” that the Fed has created through near zero interest rates and endless fiat money manufacturing? Well, Fed officials openly admit to their involvement.

As the former head of the Federal Reserve Dallas branch Richard Fisher admitted in an interview with CNBC, since 2009, the U.S. central bank has made its business the manipulation of the stock market to the upside:

“What the Fed did — and I was part of that group — is we front-loaded a tremendous market rally, starting in 2009.

It’s sort of what I call the “reverse Whimpy factor” — give me two hamburgers today for one tomorrow.

I’m not surprised that almost every index you can look at … was down significantly.” [After the first Fed rate hike]

The Fed knows when it is conjuring a bubble environment; they just won’t admit it as the bubble is deflating and economic pain is everywhere.

Lie #2: The Fed Is Unaware That It’s Tightening Policies Cause Extreme Economic Contraction

So, if the Fed is aware when it causes a bubble, is it aware when it is popping a bubble? Absolutely. As Ben Bernanke admitted in a speech in 2002:

“In short, according to Friedman and Schwartz, because of institutional changes and misguided doctrines, the banking panics of the Great Contraction were much more severe and widespread than would have normally occurred during a downturn.

Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.”

Bernanke was referencing Milton Friedman’s assertion that the Fed’s tightening policies in the early 1930’s, after they had made markets dependent on easy credit through the 1920’s, had caused negative feedback in the system at the perfect time, destabilizing any possible recovery for years to come.

The problem is twofold, of course. The Fed was allowed to fuel a fraudulent market bubble in the first place. Then, it was allowed to pop the bubble in the most destructive way through tightening policies (like higher interest rates), which crushed Main Street support. If this sounds familiar, it is, because the same tactic is being used by the Fed today.

In an October 2012 meeting of the Federal Reserve, minutes indicate that Jerome Powell was highly vocal about what would happen if the Fed pulled support from debt addicted markets by raising interest rates and cutting assets:

“My third concern — and others have touched on it as well — is the problems of exiting from a near $4 trillion balance sheet. We’ve got a set of principles from June 2011 and have done some work since then, but it just seems to me that we seem to be way too confident that exit can be managed smoothly. Markets can be much more dynamic than we appear to think.

When you turn and say to the market, “I’ve got $1.2 trillion of these things,” it’s not just $20 billion a month — it’s the sight of the whole thing coming. And I think there is a pretty good chance that you could have quite a dynamic response in the market.

I think we are actually at a point of encouraging risk-taking, and that should give us pause.

Investors really do understand now that we will be there to prevent serious losses. It is not that it is easy for them to make money but that they have every incentive to take more risk, and they are doing so. Meanwhile, we look like we are blowing a fixed-income duration bubble right across the credit spectrum that will result in big losses when rates come up down the road. You can almost say that that is our strategy.”

Jerome Powell is now the Fed Chairman, and yet, he is following through with the same tightening actions that he warned about in 2012. He is pretending that the tightening process will be painless even though fundamental economic conditions are just as weak now as they were six years ago. Again, Powell knows the Fed is going to cause a crash, but he is moving forward anyway and he is not warning the public about the danger.

Lie #3: The Fed Is The Center Of Establishment Power, Therefore They Need The U.S. Economy To Thrive

While it is true that the Fed is currently in charge of the dollar as the world reserve currency, the idea that the Fed is somehow indispensable to the global establishment has always bewildered me. Everything the Fed has done since its inception in 1913 has been designed to diminish the U.S. economy and erode the purchasing power of our currency. I ask, at what point has the Fed ever taken an action which did NOT result in a bubble or a bubble collapse? At what point has the U.S. economy ever improved at a fundamental level because of the Fed, rather than diminished in the wake of a fake recovery the Fed conned the public into believing in?

What else does the Fed do besides sabotage?

I believe the truth is that the Fed does not care about the U.S. economy, or even the survival of the dollar, as is obvious in their actions. The Fed is merely a puppet entity of larger institutions like the Bank for International Settlements or the International Monetary Fund. These institutions seek centralization at a global level, with a global currency system and global economic authority, as they have openly admitted to in their own publications. The U.S. economy as we know it today, and the Fed by extension, are expendable in this pursuit.

The Fed will continue on its current course no matter the cost, because there is a greater strategy in play. In fact, some elites may even welcome a shutdown of the Fed at this time because this opens the path for the death of the dollar as the world reserve currency and the introduction of a new world monetary system, while all the consequences surrounding the shift can be blamed on political chaos and coincidence.

To drive the point home, I leave readers with a revealing quote from Christine Lagarde, the head of the IMF, as she outlines why crisis in national economies is actually good for the IMF:

“When the world around the IMF goes downhill, we thrive. We become extremely active because we lend money, we earn interest and charges and all the rest of it, and the institution does well. When the world goes well and we’ve had years of growth, as was the case back in 2006 and 2007, the IMF doesn’t do so well both financially and otherwise.”

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The Era Of Gains Is Over

Ever since the central banks became serial bubble blowers twenty years ago, household wealth has mostly been driven by asset price inflation:

But this has been a quixotic pursuit. Created by pulling tomorrow's prosperity into today, these asset price bubbles are unsustainable, and invariably suffer violent corrections at their end.

So far, the central banks have responded to these corrections by simply doing more of the same, just at greater and greater intensity. To keep the current Everything Bubble going, the world's central banks have not only had to more than quintuple their collective balance sheets, but have recently had to resort to the extreme (desperate?) measure of injecting the greatest amount of liquidity ever in 2016 and 2017.

History has shown us that the height an asset bubble reaches is proportional to the damage it wreaks when it bursts. Applying this logic, the coming pop of the Everything Bubble will be devastating.

So devastating that analysts like John Hussman forecast a 0% (or worse) total market return over the next twelve years:

Moreover, the primary driver and supporter of asset price appreciation over the past seven years, central bank easing, is now gone. For the first time since the GFC, the collective central bank liquidity injection rate (the solid black line in the below chart) is now net zero.

And plans to tighten much further from here have been clearly committed and communicated to the world:

As a consequence, we fully expect yesterday's capital gains to become tomorrow's capital losses.  What goes up on thin-air money comes down with its removal.

And while this is going on, interest rates are suddenly exploding higher around the world after spending a decade at all-time historic lows:

We've detailed in depth the math behind the depressive effect this must have on asset prices in our recent report The Weighted Average Cost Of Capital. And as we look to the long term future (i.e., next several decades), compared to the past secular 30-year decline of interest rates down to 0%, rates have only one direction to go from here: Up.

All this taken together means that the era of amassing financial wealth from swiftly-rising capital gains is over.

It was a "shooting fish in a barrel" bonanza for most investors because no critical thought was required to make money; with the central banks hell-bent on creating a universal wealth-effect, the price of nearly every asset was on a one-way elevator ride.  All one had to do was buy blindly -- "buy the dip" and "buy the all-time high" -- and watch one's "wealth" increase.

But after three destructive bubbles in just two decades, the Fed and its brethren will not be able to blow a fourth. The system won't be able to withstand it. 

Our slowing global economy will require decades of recovery to heal itself from the massive over-leveraging and malinvestment binge we've been on.

So the existential question facing investors is: What will drive wealth accumulation in the coming era?

Investors are going to soon realize that without dependable gains, income becomes paramount. Specifically, income that will retain its purchasing power as inflation and interest rates rise.

As we look to the future and see anemic gains, slowing economic growth/return to recession, and a rising cost of living, those who own passive income streams will find themselves much better positioned for a sustainable retirement. Or for simply remaining afloat financially.

What If The Central Banks Print Like Crazy?

Yes, the central banks may attempt to flood the world with liquidity during the next recession. But the amounts required to reverse the growing deflationary pressures will be truly gargantuan -- very likely several multiples of the easing we've seen since 2009.

At those levels, extreme/hyper-inflation becomes the concern. Prices of everything will shoot the moon. But especially those of assets with income streams that adjust with the inflation rate (rents, dividends, etc).

Income-producing investments, which are generally backed by real assets (real estate, oil & gas wells, factories, etc) should keep up their relative purchasing power better than today's high-flying and often profitless securities.

And if it all ends in hyperinflationary currency collapse, income investors usually have more senior ownership claims on those underlying real assets. Those assets will still have intrinsic value, which will be priced in whatever new currency succeeds the old.

Submitted by Adam Taggart of Peak Prosperity

Market Crash? Another 'Red Card' For The Economy

A few months ago I wrote this article at the World Economic Forum called “A Yellow Card For The Global Economy“. It tried to serve as a warning on the rising imbalances of the emerging and leading economies. Unfortunately, since then, those imbalances have continued to rise and market complacency reached new highs.

This week, financial markets have been dyed red and the stock market reaction adds to concerns about a possible impending recession.

The first thing we must understand is that we are not facing a panic created by a black swan, that is, an unexpected event, but by three factors that few could deny were evident:

1. Excessive valuations after $20 trillion of monetary expansion inflated most financial assets.
2. Bond yields rising as the US 10-year reaches 3.2%
3. The evidence of the Yuan devaluation, which is on its way to surpass 7 Yuan per US dollar.
4. Global growth estimates trimmed for the sixth time in as many months.

Therefore, the US rate hikes – announced repeatedly and incessantly for years – are not the cause, nor the alleged trade war. These are just symptoms, excuses to disguise a much more worrying illness.

What we are experiencing is the evidence of the saturation of excesses built around central banks’ loose policies and the famous “bubble of everything”. And therein lies the problem. After twenty trillion dollars of reckless monetary expansion, risk assets, from the safest to the most volatile, from the most liquid to the unquoted, have skyrocketed with disproportionate valuations.

(courtesy Incrementum AG)

Therefore, a dose of reality was needed. Monetary policy not only disguises the real risk of sovereign assets, but it also pushes the most cautious and prudent investor to take more risk for lower returns. It is no coincidence that this policy is called “financial repression“. Because that is what it does. It forces savers and investors to chase beta and some yield in the riskiest assets.

Three examples of the market lunacy: Iraq, a country that has been all but devastated and in constant turmoil, issues a 2028 bond at 5.8% yield, lower than some developed markets only six years ago.

Argentina issued a 100 year bond  with an 8.5% yield. A country that in the previous 100 years before issuing this bond defaulted more than eight times. The $2.5bn issue was oversubscribed 3.5 times, which shows how credit investors are more than hungry for any kind of yield, as global negative yield bonds currently surpass the $6.5 trillion figure. With Europe and Japan giving negative nominal and real yields, and central banks buying a combined $200 bn a month of assets, there was massive real demand for some yield.

None of the eurozone countries’ sovereign debt yields show a realistic combination of risk and return. With 19 countries yielding negative real returns, the evidence that there is no real demand for those bonds at these levels is that the ECB is considering an “operation twist” to avoid the inevitable reckoning of rising real yields as the quantitative easing unwinds.

In Europe, no investor would buy bonds of the eurozone states with these coupons in a normalized environment. This has led to higher risk assets in fixed income discounting a spread of only 290 basis points over a sovereign bond that is already massively inflated. That is the creation of a huge bubble instigated by central banks with its reckless policy of ignoring the risks that they encourage in the markets.

With more than 6.5 trillion dollars in bonds with a negative yield, the global bubble remains huge. Stock markets on fire, infrastructure multiples soaring, junk bonds at the lowest yields in thirty-five years… 

And it burst. 

China reminded us that the tale of synchronized growth was false and that what we have been seeing in recent years has been synchronized growth … of debt .

(courtesy IIF)

When China devalues the yuan and introduces the biggest tax cut in 38 years and a constant monetary stimulus to bail out its banks, what is it really telling us? That everything is fine? No, that things are not going well with the Asian giant  No economy launches a massive undercover bailout of the financial sector, cuts rates and implements huge tax cuts as well as devaluing if everything goes smoothly.

The realization of the fallacy of synchronized growth has also brought down expectations of global growth. And with it, corporate profit estimates.

Markets, suddenly, look as expensive as many have warned when the combination of China devaluation and soaring US yields shows the extent of the accumulation of risk of the past years.

The cracks in the building always appear first with currencies. Countries that have become accustomed to the idea that “this time is different” and that debt does not matter, started to multiply their indebtedness in foreign currency. Debt in dollars from emerging countries soared to 41% of their total debt.

In the first three months of 2018, global debt rose 11% to a record of 247 trillion dollars (according to the IIF), and that of emerging markets soared by 2.5 trillion to an all-time high of 58.5 trillion. .

When the lowest risk bond, the United States 10-year, went to 3.1%, the synchronized growth and complacent veil lifted, and t many assets showed how risky they truly are.

Markets woke up to a reality that we had decided to ignore. That rates do rise. And if the safest bond gives a return of 3.2% … Am I willing to buy bonds from much riskier countries with negligible spreads?

Add to that “sobriety” effect, another one. The inevitable devaluation of the yuan , which soared to almost 7 against the dollar. Am I willing to buy emerging markets and commodities when China exports its imbalances sending disinflationary pressure to the rest of the world?

One, the US 10-Year, shows us the risk in the assets that we perceive as “safe”. And the other, the yuan, reminds us that China exports global disinflation and warns of impossible growth expectations.

This reminds us that this time is not different. It is the same as all the previous ones. A bubble created from monetary policy gives way to a deep hangover .

The US technology sector, which soared thanks to very low rates and high liquidity began to show signs of weakness, and the US market reacted by losing support levels as a continuation of the five-year lows in China and emerging markets as well as ongoing weakness in Europe, showing that the United States was not immune to the problem of excesses in other markets and that “value” in Europe or emerging markets was inexistent. These markets fell with the US -and more in some cases-. The US market might be expensive, but others are optically cheap but very expensive in reality, and as such, they fall in tandem.

What is the problem?

If we look at the 180 most important economies in the world, only six have in their estimates of 2018, 2019 and 2020 an evident improvement of their fiscal and commercial imbalances. In other words, almost no government in the world plans to reduce the rate of debt increases. If we look at the corporate sector and families, the situation is much better, because private debt is somehow more contained -except in China- and especially in terms of solvency, compared to profits and assets.

Given that it is more than likely that central banks will continue to Japanize the economies through financial repression, these “red cards” are becoming more frequent and, in addition, there comes a point at which the saturation of monetary and debt measures stops working even as a placebo.

Governments and their central banks always start from a wrong diagnosis. They always believe that the problems of their economies are due to lack of demand and that turmoils are caused by external enemies, not by their policies. By appointing themselves as a solution to the problems they create, they only perpetuate the imbalances, and the solution is increasingly complex

Above all, the tools that central banks and governments have always used (lowering rates, increasing liquidity and increasing spending), generate very evident diminishing returns. In the past eight years, for every $1 of GDP, there were $3 of debt created. 

This week’s tantrum will probably recover because the incentive to continue inflating the risky assets is high. But we already have had several warning signs and we keep ignoring them . Even worse, episodes of volatility are being used to increase imbalances and generate further problems in the long-term.

When societies are based on incentivizing spending and debt and not saving and prudent investment, we are always going to throw ourselves into a bigger problem based on the conviction that nothing is happening. When it bursts, governments and central banks will blame anyone except themselves. And repeat.

Authored by Daniel Lacalle via DLacalle.com

Has “It” Finally Arrived?

With the recent plunge in the S&P 500 of over 5%, has the long-anticipated (and long-overdue) market correction finally begun?

It’s hard to say for certain. But the systemic cracks we've been closely monitoring definitely got an awful lot wider this week.

After nearly a decade of endless market boosting, manipulation and regulatory neglect, all of the trading professionals I personally know are watching with held breath at this stage. The central banks have distorted the processes of price discovery and market structure for so many years now, that it’s difficult to know yet whether their grip on the markets has indeed failed.

But what we know for certain is that bubbles always burst. Inevitably. Each is built upon a fallacy; and when that finally becomes apparent to enough people, the mania ends.

And today, there are currently massive bubbles in stocks, bonds and real estate. Every one courtesy of the central banks (as we have written about in great detail here at PeakProsperity.com over the years).

And with no Plan B in place to gracefully exit the corner they have painted themselves -- and thereby the global economy -- into, the only option available to them is to double-down on the pretense that we'd all be screwed without their stewardship. They have to do this I suppose. To admit the truth would throw the world into panic and themselves out of a job. 

Who knows what they think privately? But in public, they give us real gems like these:

Williams Says Fed Rate Hikes Helping Curb Financial Risk-Taking

U.S. interest-rate increases will help reduce risk-taking in financial markets, Federal Reserve Bank of New York President John Williams said.

"The primary driver of us raising interest rates is just the fact that the U.S. economy is doing so well in terms of our goals,” Williams said Wednesday in a reply to questions after a speech in Bali, where the annual meetings of the International Monetary Fund and World Bank are taking place. “But I would also add that the normalization of monetary policy in terms of interest rates does have an added benefit in terms of financial risks.”

"A very-low interest-rate environment for a long time does, at least in some dimension, probably add to financial risks, or risk-taking, reach for yield, things like that," he said.

"Normalization of the monetary policy, I think, has the added benefit of reducing somewhat, on the margin, some of the risk of imbalances in financial markets."

(Source)

And with that, our award for “Finally closing the barn door after the horse left 8 years ago,” goes to John Williams of the US Federal Reserve.

Come on, Mr. Williams. Your historic 'very-low interest-rate environment' didn't merely lead to a slight degree of higher risk at the margins here.

Instead, it has lead to an explosion of excessive risk everywhere today, including:

• Junk bonds trading near their most expensive prices ever
• Covenant lite loans out the wazoo
• The highest levels of corporate debt ever
• The most expensive stock markets ever, by several measures
• The highest margin debt on record
• Real estate bubbles across the globe
• Pensions highly exposed to the stock market

And the central banks' policy over the past decade hasn't merely been to create a “very low interest rate environment”. It has been nine long years of intense and deliberate financial repression.

The resultant risk-taking didn’t happen “in some dimension”. It happened right here on Planet Earth, in real time, and in public and private portfolios alike, across the globe.

Pensions have been monkey-hammered by this policy, forced to throw away 100 years of accumulated investment wisdom and flip from traditional allocations of 60/40 bonds-to-stocks to the opposite in a desperate chase for yield.

The mathematically-certain insolvency of much of the pension system lies on your shoulders Mr. Williams. And those of your other Fed colleagues. 

Moreover, the other malignant market responses to the Fed’s distorting policies didn’t “probably add to financial risks”. It absolutely guaranteed a future crisis -- one that will dwarf any prior.

In my assessment, the biggest crime of the Fed was the decision under Greenspan to try to eliminate the business cycle by replacing it with a credit cycle. Here’s what that looks like in chart form:

If you can't clearly spot the absurd Fed-blown asset bubbles in the above chart, you may as well stop reading here. With that kind of blindness, nothing can help you plan for what's coming next.

Now, why would central banks prefer credit cycles? Easy! They're a lot more fun. When they're expanding, everybody loves you. You get invited to Davos and people love celebrating you at parties.

Just as good, when the bubbles burst, as they always must, you get to ride to the rescue and play the role of savior. And when the dust settles, you get feted as a “hero” by the mainstream media (even though you were no better than an arsonist putting out his own fire).

Case in point:

Yes, I blame the central banks for the breakdown about to come. They are the villain to blame for their horse-whipping of stocks, bonds and real estate into dangerously over-valued asset price bubbles. Nobody else.

Former Fed chairs Greenspan, Yellen and Bernanke have to shoulder nearly all of the culpability. It remains to be seen what Powell does, but so far he seems less interested in bailing out stock market declines than his predecessors. If indeed so, he’s an enormous improvement.

Already, under Powell, for the first time in a decade, we are emerging out from underneath the miserable thumb of financial repression, the key cornerstone of which is having to accept negative real yields on saved money.  Today the rate of interest on a 3-Mo T-bill is higher than the (stated) rate of inflation. It’s also higher than the dividend yield on US equities. So savers finally have an option that doesn't unjustly punish them.

If we can thank Powell for that, then he’s already done more good than all three of his predecessors combined. And if he allows this last ill-conceived credit cycle to finally die of its own accord, he'll actually deserve that "hero" accolade. Especially because doing so will not only be the right thing to do, it will be deeply unpopular with the Powers That Be, and require an inordinate amount of courage to effect.

Heck, Trump was already gunning for Powell on Wednesday after just the first -3% decline:

“The Fed is making a mistake, they’re so tight. I think the Fed has gone crazy.”

~ Donald Trump, 10/10/18

But if Trump was concerned on Wednesday, he must have been spitting nails on Thursday as the market carnage continued:

Is this really it?

Has the worm really turned?  Is it not possible that the authorities will once again rescue these “markets” driving them ever higher in their quest for printed-up prosperity?

Again, anything is possible, but our view is that until and unless the central banks decide to reverse their QE wind-down operations the faux gains that resulted from the money flood will evaporate as well.

Our view is that things progress from “the outside in” reflecting the fact that it is always the cash strapped zombie company that fails before the AAA rated company, and it is the weaker emerging market economy that suffers before the core OECD economy.

This table of various year to date stock market returns perfectly illustrates that the “outside in” dynamic has been in place for a while.

It’s not a perfect detection mechanism certainly (Germany is down 4x more than Portugal?) but the pattern is more than directionally adequate.  The money flood has reversed and we’re seeing that in the losses that have been mainly concentrated at the periphery --  but are fast rippling into the strongest "core" markets

Time For Safety

Admittedly, we’ve been mostly out of the markets for a long while, preferring cash, gold, some core real estate holdings; while slowly building a small short position.

Our main strategy for surviving bubbles is to not get caught up in them in the first place. We've long advocated the wisdom of amassing cash, to have 'dry powder' capital to deploy at much better valuations after the bubble's bursting. In our opinion, everyone should be working on ‘buy list’ for that day.

Sadly, the expansion of the Everything Bubble has gone on for far too long as the central banks have all but destroyed true price discovery and well-informed capital allocation. Heck, most Millennial adults weren't old enough to experience the 2000 and 2008 episodes -- to them, today's Frankenmarkets are 'normal'. Most seem to have exactly zero clue of the role of the central banks have played in fostering the lion’s share of the stock and bond market gains that have occurred during their short adult lives.

The investment chat sites I lurk through to gauge the mood are awash with folks telling each other to “buy the dip” and “stand firm.”  Many are parroting the Wall Street/CNBC mantra that "This time is different!", so it’s best to just keep putting money in, staying long and fully invested.

We disagree. And we think those blindly marching to Wall Street's tune will be the first and worst victims when the next major correction hits.

Which is why we encourage everyone reading this to crash-test their portfolio with their professional financial advisor. If indeed we're entering another 2008-style correction, how will your current holdings fare? How risk-managed are your positions? Are your potential losses hedged to the downside? And once the dust settles, what's your plan for re-entering the market?

These are critical questions to be asking right now. And the time to address them may indeed be very scarce (the Dow has dropped another 100 points as I've been writing this).

If you don't have a financial advisor, or are having difficulty finding one willing to address the risks discussed here, consider scheduling a portfolio crash-test consultation (it's completely free) with the advisor Peak Prosperity endorses.

Just please, whatever you do, make sure you've taken prudent steps to prepare for a major market downturn. Don't leave your hard-earned wealth exposed, unless that's an intentional decision on your part.

Conclusion

The recent market sell-off was not at all unexpected by us. We began observing the first tremors at the periphery many weeks ago.

Last week, on October 5^th, we sent out a market warning to our premium subscribers under the banner The Markets Are Suddenly Looking Very Sick.

Whether the central banks blink here and ride to the rescue is the big question.

While we'll have to wait and see to learn the answer, in all of our interviews with experts (e.g. Axel Merk) who know the Fed and its staffers personally, the consensus is that Powell is a different animal from his predecessors. He'll tolerate quite a lot of stock weakness before he's moved to act.  Is his line in the sand -20%?  -30%? 

Whatever it is, it’s likely a lot more than the -6% we’ve seen so far.

Further, the ECB is in a bind because it, too, are publicly committed to tapering its balance sheet expansions to zero by the end of 2018. And as the EU is also locked in a budget battle with Italy, and it would be very politically difficult for the ECB to both play dove and hawk at the same time by bailing out the markets with more QE while also not buying any more Italian government debt or helping Italian banks.

The Bank of Japan is pretty much done, too. It has recently even (gasp!) shrunk its balance sheet a few times in recent months.

China is busy fighting its own battles with slowing growth and history's largest ever-real estate bubble. It's also in very delicate trade negotiations with the US, complicated enormously recently with the revelation that the Chinese PLA had a role in inserting hardware hacks (chips) onto high tech products supplied to the US.  So the PBoC is probably not going to be in the business of doing anything dramatic in terms of balance sheet expansion right now.

Add it all up, and the “outside in” contagion we’ve been observing over the past few months seems to have finally reached the core.

12/10/2018

Fonte: qui

In Part 2: Preparing For The 'Big One' we examine what a true market "crash" would look like.  We’ll be looking at bonds, stocks, gold, the gold miners, currencies as well as discussing potential candidates to consider for your post-crash 'buy list'.

Ready or not, developments are escalating. Be as ready as you can for what's coming.

Click here to read Part 2 of this report (free executive summary, enrollment required for full access