Emerging fresh from the G20 summit where Japan has been aptly hailed as hero for their stimulus weapon ! Just as it emerges that Reinhart & Rogoff were WRONG ! about the 90% healthy debt/GDP ratio due to a SPREADSHEET ERROR !!
If you suppose that Japan’s 214% going on 300% is alright, then you could be mistaken. Because the new study that disputes R&R’s thesis tended to the same conclusion except that they allege a slower pace of growth and not growth falling off the cliff.
“The deficit of one sector must be the surplus of another.” Dr John Hussman
It is no wonder that the Dow is at a new record. We have government deficits not quite out of control, but their balance sheets are certainly swelling. Monetising collateral, in the form of buying up all the government bonds, forces banks to sit on a pile of cash which they would tend to pile into risk free assets as they are unsure when the monetisation would stop. By reducing the risk free asset yields to non existent would then force banks to take on more risk in the form of corporate loans in order to improve shareholder returns. This has created a “too big to fail” scenario with banks lending only to safe borrowers and abandoning the rest, causing massive systemic stress.
The fault lines are starting to show and it is the retail segment that would be suffering as they are forced out of the investment grade bond marketplace due to the bank demand and ply their cash into the high yield, high risk segment.
It stands to reason that “corporate profits depend on federal deficits almost as much as they depend on private investments”. When the Only Driver is Federal Deficits, the profits will go away soon enough. Asia‘s driver has been private investments which will also go away when the hot money goes home.
The warning signals are right in front of us. HSBC, Goldman and party all cannot wait to exit China. This is even as the Shcomp is massively underperforming and should be expected to rally only from here, given the outperformance of US and Japan.
“The recent slowing in the US and EU date over last month and the latest data point in China are reflective of a slowdown in demand. And this has resulted in our trimming of Global growth forecasts from high 2.9% to 2.4% area. This week we downgraded our Korea and China Growth forecasts as well.” taken from JPMorgan flows & liquidity
According to the FT, ”
What are we hopeful about then ?
Look at the manufacturing PMI chart.
Whilst it does not justify the highs we are seeing in the stock market, we should console ourselves that it is due to the central bank balance sheet effect.
The orange line is the BoJ‘s balance sheet and the red line is the Fed’s. Both playing catch up with each other as the Dow (yellow), Nikkei (purple) and S&P 500 (green) point towards the sky.
“the violently erratic moves that we are seeing across asset markets are more due to investor uncertainty over whether the dominant asset market theme will be weak global growth or central bank balance sheet expansion.” taken from Citibank FxWire
All evidence shows that this rally is getting more and more uneven as the cyclicals get ignored with Pimco is now piling into utilities and hedge funds scaling back their exposures. Citibank wrote about a 2 Speed Global Economy No More ? Emerging Markets are converging with the Developed World.
“G10 and EM economic data disappointed in sync as shown by Citi Economic Surprise Indicators. In addition, all this is happening while inflation in both G10 and EM surprised on the downside“.
The dominoes will come crashing down.
Bill Gross : “The world looks for a new Keynes but with high deficits & 0% rates there is only a long tough slog ahead at best & the unimaginable at worst.”
It was easier to see when there was only Bernanke printing, then the ECB followed suit. However, when all 3 of them start with BoJ joining in ? The entire picture gets distorted starting with irrational exuberance in the Nikkei, creating a massive disequilibrium in Asia, which will only lead to disastrous results as some thinkers are starting to allude to, such as the 1998 crisis of confidence in Asia.
If market confidence continues to be shaken, stirred, pummeled and besieged at this rate, I say a pandemonium of sorts would break out before long. Then what will the central banks do ?
Print more money of course !
Just buy gold, IG bonds, government bonds and counter cyclicals.