The central banks have no idea how to get out of the mess and distortions they have created. Which makes it real hard to predict what they will do next. So all I can do is point out the distortions and tell you that in the long run (10-12 years), the purchasing power of the stock market will be much, much lower than today.
Our central bank has its heels firmly dug in. Monetary policy will remain ultra-loose, while their communications strategy at this point is little more than rationalization and justification. I can only assume they are fearful of the consequences of puncturing Bubbles. It’s been only 13 months since a near financial meltdown.
Over the years, I’ve relied upon a “Core vs. Periphery” model of market instability as a key facet of my analytical framework. Instability and financial crises typically emerge at the “periphery” – at the fringe where the structurally weakest and most vulnerable to risk aversion and tightening financial conditions – reside.
Probably the most surprising part of credit-driven market tops is how long they take to play out. The early crash, the central bank pushes back, the highly-leveraged speculative melt-up, then the initial blow ups (Archegos) that force banks to pull back.
Minsky witnessed a lot, but he surely never imagined an environment of zero rates and endless Trillions of Fed monetization, and how such a backdrop – the perpetual “bonanza” – would extend the “deviation amplifying” Ponzi phase.
It does not have to reset to the historical average for another large round of losses to hit your retirement funds. This is why determining the difference between normal pullbacks and larger corrections and bear markets is critical.
After such a historic year of monetary inflation, efforts to pull back will expose myriad fragilities. Unparalleled debt and speculative leverage in a backdrop of rising inflation risk and more cautious central bankers create a high-risk backdrop. Toss in an epic speculative mania in equities, derivatives trading, cryptocurrencies and the like, and it’s difficult to envisage an environment fraught with greater risk. All eyes on the global leveraged speculating community.
Noland comment: I abhor historical revisionism. “Rates were very low. They were at zero for seven years… During that we didn’t see… excess buildup of debt. We didn’t see asset prices forming to bubbles… We didn’t see a housing bubble.”
194% in 1990
358% marked 2000 mkt top
387% marked 2007 mkt top
556% today
A mental exercise of where the market and our funds are today.