Wednesday 18 March 2015

INVESTORS SHOULD HEAD FOR THE HILLS


INVESTORS SHOULD HEAD FOR THE HILLS


Nobody knows, what the markets are up to. The markets can do anything, because market participants act on emotion and on the basis of expectations, which are often irrational. Unfortunately, irrational actions are only confirmed in hindsight, because they seemed perfectly rational at the time. Therefore, prudent investors are nearly always pulling the plug too early and look pretty foolish for awhile, when doing so. The crowd usually succumbs to herd-like behaviour and loses big time, later.

What if massive monetary easing (QE) fails? Or if it has titanic (!) unintended consequences? Mind you, with interest rates essentially at zero, or worse, at negative levels, the typical monetary policy of a Central Bank ceases to work. Extreme monetary stimulus distorts normal price discovery and traditional valuation parameters. But these false signals could actually be responsible for the Crash, that would inevitably follow. At some point, no investor would want to hold on to expensive assets. The expected future return on those assets would just be too low. Also, by now it has become increasingly clear, that the ‘real’ economy cannot benefit much as long as excessive debt levels are impeding debt servicing, even with low interest rates. The process of deleveraging to more sustainable levels, always takes its course, no matter how onorthodox monetary policies may have become.

The nightmare of the end of the extended rally in ‘risky assets’ is looming ever closer. Every boom is followed by a bust. Trouble is, that it may take decades to recover from the next bust. Participating in this boom would turn out to be very unwise indeed, because it would all have been for nothing. Moreover, the excessive (‘cheap’) leverage applied by market participants to their ‘trades’, virtually guarantees the total wipeout of many. It doesn’t matter, what the eventual trigger could be for the end of the party. It usually is a combination of factors, which will fan the flames. The herd, however, may focus on the wrong possible triggers, while ignoring the real ones.

Most of the massive global debt is pretty low quality. That’s why the colossal explosion in liquidity has led to a shortage of high-quality debt instruments. Therefore, there only seems to be a bubble in low-quality, not high-quality debt, because if the situation becomes uncontrollably chaotic, only the latter will be tradeable or ‘liquid’ at all. But ‘risky assets’ like stocks and other overpriced assets could decline 70% or more, as they usually do, after such cycles of euphoria. Low-quality debt could become wallpaper.


Make no mistake. The frantic flight into high-quality debt, even at negative yields, is only partially due to Quantitative Easing (QE), which hoovers up high-grade debt. Secular stagnation, deflationary pressures, portfolio rebalancing and demographics, all play their part as well. But most important of all, and probably missed by most experts, is the fact, that the current action of the high-quality bond market is the omen for the deepest economic depression in history, ever. Society would simply cease to function if negative interest rates are allowed to persist. This now appears to be a secular, irreversible, not temporary, phenomenon. It foreshadows the final unwinding of the Grand Super Cycle in CREDIT of the last 60 years. Are you ready?

RICK SCHMULL

March 18th, 2015

WESTCLIFF-On-SEA, Essex, U.K.

P.S. COMMENTS ARE DISABLED WITH IMMEDIATE EFFECT

Tuesday 17 February 2015

THIS MONETARY UTOPIA WILL SELF-DESTRUCT



THIS MONETARY UTOPIA WILL SELF-DESTRUCT



http://blogs.wsj.com/economics/2015/02/17/did-shakespeare-make-the-wrong-decision-going-into-liberal-arts-and-not-finance/

Sometimes you have to listen to what you don’t want to hear. Because if you don’t, it could be the end of the road of your way of life. All is not well in the international monetary system. In fact, the end of this system, as we know it, is now in sight. Just take a look at what happened to global interest rates since 3000 BC! Already, trillions worth of international bonds carry negative yields today. The unthinkable is happening right in front of our eyes. The global monetary system is headed for an historic systemic failure.

Global interest rates are falling into the abyss. It’s harmful enough if savers lose their return on their capital and, with negative rates, are being penalized for having capital at all. But it’s disastrous if creditors can no longer obtain a profit from the spread between short and long rates. Short-term credit will have to become exorbitantly expensive in order to compensate for a potential negative cash flow problem. Most creditors, however, have little capital and are hugely leveraged. For the vast majority, bankruptcy is around the corner.


Lending can no longer be subsidized by ‘riding the yield curve’ as it flattens, when short and long rates converge. The ‘real’ cost of money will rise substantially. This will accelerate credit contraction, as borrowers, who are able to do so, pay down their debt or default, if they are overstretched. If the yield curve then inverts with short rates leaping up above long rates, the stage is set for a complete breakdown of the financial system. The velocity of money, which stands for the frequency with which a unit of money is spent, and which has been declining since 1997 and collapsing since 2007, will pick up speed on the downside, further adding to severe deflationary pressures.

Also, the main investors in longer term bonds, pension funds and insurance companies, will be faced with no return on, and with a relatively abrupt, exhaustion of their capital. They will go bankrupt. The size of the global bond market is at least $ 100 trillion, which is the essential collateral for the extension of credit and for maintaining the derivative market of at least $ 700 trillion. As debt is money, the whole current monetary system could implode and pass into oblivion.

The 2008 credit crisis, which only affected 10% of the total derivatives market, was just like a lightening bolt, flashing through the sky. The following thunder will be the first stage of the great unwinding of the generational Credit Super Cycle and will put an end to all the global asset bubbles, which temporarily resulted from the frantic monetary stimulus of the Central Banks. A global economic depression, much worse than the one during the 1930’s, will occur virtually overnight and looks now absolutely inevitable.

RICK SCHMULL

February 18th, 2015

WESTCLIFF-On-SEA, Essex, U.K.

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