It’s reasonable to ask, “Where does it all end?” – with an equally reasonable answer, “with market dislocation and a crash”. All those Coins in the Fuse Box in 1929 contributed directly to the house collapsing in flames.
With 2020 GDP estimates in the 2.0 to 3.0% range, the divergence between Chinese Credit and economic output is unprecedented. China’s “Terminal Phase” excess – including rapid acceleration of late-cycle loans of deteriorating quality – is unparalleled in terms of both degree and duration.
QE fundamentally changed finance. What commenced at the Federal Reserve with a post-mortgage finance Bubble, $1 TN Treasury buying operation morphed into open-ended purchases of Treasuries, MBS, corporate bonds and even corporate ETFs holding high-yield “junk” bonds. Markets assume it’s only a matter of time before the Federal Reserve adds equities to its buy list.
Why is it reasonable to believe that monetary policy specifically aiming to inflate securities markets will somehow simultaneously ensure a corresponding modest increase in consumer prices? It’s not.
“Consider the internet frenzy 20 years ago. Back then, large speculators, mostly hedge funds, were net short on S&P 500 futures in all but five weeks in 1998 and 1999. Those mostly losing bets were completely squeezed out in 2000. That’s when the crash came.”
Short-term Treasuries remain a safe investment. The TLT ETF mentioned by Doug has a long duration and its price moves 2% for each 0.1% move in interest rates. Interest rates popped a little this week sending bond prices down. And yes, inflation worries could be part of it.
It is a central tenet of Bubble Analysis that “things get crazy at the end of cycles.”
…the safe havens signal a major crisis is unavoidable. This is not your granddad’s Economic Structure. And to hear the Federal Reserve still focused on below target inflation is a farce.
I seriously doubt China’s banking system inflates from $8 TN to $43 TN during this cycle without Trillions of “Bubble Dollars” flooding the world and its resulting reserves horde. U.S. crisis and QE1 provided China a blank check for a massive $600 billion 2009 stimulus plan. And Chinese Credit – along with investment, manufacturing, apartment Bubble, economic boom, technological advancement, military buildup, global influence peddling, and ambitions for superpower status – never looked back.
It was obvious the Fed had really blown it. That this academic, and recently appointed Fed governor, referred to the “bubble poppers” from the late-twenties and their role in fomenting the Great Depression made it difficult not to be disdainful. I underestimated both the man and the world’s gullibility.