(STRATEGY): A BLOW-OFF TOP AHEAD?
Let us be perfectly clear. Central Banks are supposed to lean against the wind. Responsible Central Banking calls for periodic restraint, when monetary policies are overly expansive, in order to dampen excessive speculation. Unfortunately, their policies have proved powerless in helping an over-indebted economy reach escape velocity in economic growth, while inflation targets remain elusive, as prices are being determined by the global economy as a whole, not by individual Central Banks. There is no doubt, that ‘bad news is good news’ for the markets, if political pressures ‘to do something’ continue to mount and panic sets in. One can just imagine, what could happen, when Central Banks are forced to push hard on the accelerator at this point in time. If a racing car is already speeding, then such a decision would without any doubt SMASH the car at some point. But here we are: the rulers of the world seem to be faced with an absurd choice. ‘Steady, as she goes’ may be the preferred one, but the time to stick to such a strategy is rapidly running out. Courageous leaders, who pursue sensible policies against the odds, are very rare. Ex-FED chief Paul Volcker, who raised the Prime Rate to 21.5% in 1982 and managed to slay the dragon of runaway inflation in the early 1980’s, was one of them. No words can adequately describe his accomplishments, which paved the way for unthinkable global prosperity in the following decades.
Renewed aggressive monetary expansion may be great news for this terribly ‘mature’ Bull Market, giving it another lease of life, possibly of another few years. Financial engineering, like corporate stock buybacks and record mergers & acquisitions, was a perfect setup to lure the unwary public (less than 10% is still aware of this Bull Market) into buying a seriously overvalued stock market. A blow-off top in certain asset classes, like London property, High-Yield, Classic Cars and famous Art, may already have preceded, whatever could happen elsewhere. But this would be the most serious negative development for global markets and economies in the long run. An unbelievable CRASH would follow, which would put the 1929-event in the shade. Very hard times would come next. The current generation in the developed countries has no idea of the steep price, which had to be paid by previous generations as a result of similar insane actions of the powers that be, in the past.
The pressure on the European Central Bank (ECB) to embark on massive Quantitative Easing (QE), has now become relentless. Words like ‘whatever it takes’ may now have to be translated into action. The markets have been ‘frontrunning’ such action for years, by moving European bond and stock levels to ludicrous levels. Its many technically bankrupt banks and countries have not been any deterrent, because the ECB supposedly would have no choice but to buy everything in sight and ‘own’ the markets in their entirety. Germany’s opposition would crumble in the face of potential deflation and the Eurozone could then be ‘saved’. But this would not be very different from the destitute looting all the stores. A state of emergency, a bank holiday and capital controls would certainly not be far behind. It could be a desperate ‘last act’ of an improbable monetary union of mainly penniless countries, who would otherwise have to resort to constant devaluation or default, which was their tradition in the last 100 years.
The last man standing will then be the U.S., with its relative economic independency and self-sufficiency. The U.S. Dollar and the U.S. stock markets would shine as never before. That flight to safety would not last either. Because a global SMASHUP is in the works.
RICK SCHMULL
August 22nd, 2014
WESTCLIFF-On-SEA, Essex, U.K
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