GLOBAL ECONOMIC REALITY: Why we no longer need gut feel to sense the Bust

The Slog

by John Ward

The writing on the wall street construction is as big as it gets

I suspect that Wolf at Testosterone Pit was one of the first out of the blocks last week to start calling The Bust, and Nasdaq bloodletting merely the overture to it. I followed within 36 hours, chiefly because having reached such a decision many times previously, I didn’t want to be caught wolf-whistling too early yet again.

A big lesson we have all learned over the last five years is that there are two ways to change reality in the 21st century: hitech media use, and money. A lot of the time they are used with great effect together, and the effect is to remove any and all faith in what we used to call The Fundamentals of any market. And despite this learning curve having at least some positive effect, lessons lead to lesions: my own SIPP pension has been bruised to the tune of 40% by staying too bear for too long.

The technology was invented by the science end of business, and the money donated (unwillingly on the whole) by taxpayers. Governments and banks put nothing into their application, but they have taken by far the lion’s share of its benefits. I believe that future economic historians of any value will see the period 2004-16 as one during which the earnings of the inventive and the productive were ruthlessly hijacked by the cunningly useless: media barons, legislators, bankers, accountants, lawyers, national security officers, and above all all bureaucrats.

But the time for backlash is some way off yet. In the meantime, I think one task for commentators is to audit a spectrum of informed opinion, and continue to monitor the best clues as to what happens next in The Bust. For while clichéd parallels like Hindenburg and Titanic are easily thrown around, the big difference here is that we can all, if we choose to, get off.

I mentioned in a previous post at the start of the week about the margin debt declines now running in tandem with falling ‘South Sea’ stocks. This is about as big as the writing gets on any wall street construction about to crumble, but major corrections can still be stopped – even reversed – if enough opposing data and signs pop above the horizon to prop up the wall.

Unfortunately, the signs remain consistently negative. Janet Yellen has twice in the last six months said she saw “no signs of speculative excess”, but to paraphrase Paul Simon, “A Fed Chairman sees what she wants to see and disregards the rest”. Those who specialise in the study of market bubbles are, on the whole, in accord at the minute: Edward Chancellor is just such a pointy-head, and he warns investors of bubble symptoms “feeding off one another, gaining momentum, fusing, expanding into a dangerous critical mass that can trigger and ignite an S&P 500 explosion way before the 2016 elections”.

Chancellor is more hawkish than some, but not by that much. I have had three people write to me this week offering a similar view, and by Thursday I was opining to New Mexico Shrewdie Butch that I’d give the S&P “five weeks tops before it chokes”. I got to that very hawkish point because so much of the opinion that is telling rather than selling (and it’s not hard to spot the difference) but Butch still has his doubts. Can’t say I blame him, but let me try now if I can to give some sort of further support to the idea that maybe we should all get off at the next stop.

I get a sense this Friday morning that the determination of the Alphas (it’s this that reignites the confidence of the Betas) isn’t there. This has nothing to do with fatigue, and everything to do with a grudging acceptance that the cow has been milked dry, and it’s time to store the milk in the fridge. Almost entirely absent from serious comment today is the “new paradigm” bollocks that so often led to the loss of the last dime in the past: suggesting that the coming correction might be as little as 15% is about as optimistic as the sane get…if my contacts are in any way representative.

That absence is going to be crucially important if and when things wobble beyond the current long knives of the Nazdaq. But swiftly even then, the racing thoughts of woodentops will turn to the Fed, and they’ll move into Oliver Twist mode. From the moment she stepped into the badly-stained chair vacated by Bernanke, I have found Yellen almost impossible to read, but my suspicions are growing that the problem isn’t one of inscrutability so much as creative paucity. I think she knows she’s in a corner: indeed, she is. I also think she’s behind the music. And last but not least, I think it highly likely that interest rates will do for her.

I know the longterm inability to control interest rates is a Slog hobby-horse, but for me the belief in total control of them – in whatever form – is pure Icarus syndrome. Two equally powerful factors are in play here. First, we have seen how taking away the income on safer investments has helped fuel the bubble now about to burst. Once the squitty-bottom money starts to realise that Clouds, Spaces and fantasy platforms are a mirage, that money has to get an income stream from somewhere. The powers running the market on behalf of client money rather than just sovereign survival will – at last – decide. And once enough of them do it, each of the Fed, ECB and the BoE and the BoJ and Beijing will be just another player trying to get a result. They will have to accept that interest rates must rise as the least of several evils on display.

Second, events will unfold on any one of several fronts. Not ‘could’, but ‘will’. For the human species at least, this Universe is Time-driven: things do not just freeze in amber, they develop. The list of these developing disasters does – just this once – justify the most overused adjective of the century, awesome:

China. “Very big, China” as Noel Coward once remarked. So big, in fact, that it can make room for crises of enormous size on several levels. The most obvious, and pressing, of these is that, all its customers being broke and austere, the export economy is in relative slump. But others are there: the usual banking insanities, the normal regional corruption scandals, and the fact that only 12% of China’s vast population are actually getting any benefit out of the country’s stratospheric growth.

China is facing serious cultural, social, financial and economic problems. They’re not going to go away, and however Beijing deals with them, the impact on the rest of the World’s economic and sovereign debt problems cannot be anything less than critical.

Russian energy, EU hubris, and mutual paranoia. These three are having a heavy meeting at the moment in a place called Ukraine, a country obviously disintegrating under the weight of tribal hatred and external encouragement. Given that Russia’s energy leverage and Brussels ego has had such a profound effect thus far, imagine what a world slump in demand for energy plus further ClubMed debt crises are going to do.

Whatever smoke, mirrors and illegal scams Signor Draghi still has up his capacious sleeve, the bloke is gradually being found out by the markets. Even without rises in bond or interest rates, ClubMed debt is by and large unrepayable without a massive boom, and that isn’t anywhere on the horizon, or even over it. The Greek ‘recovery’ piffle is, like the Italian version, already revealed for what it is. Spain’s banking system is empty, and Portugal is down to raiding the petty cash. The eurozone is not in any shape to consume, and lacks the investment to export. It is, literally, neutered: the only unknown remaining there now is the exact sequence of inevitable bankruptcy.

When that happens, Russian leverage will be reduced. With a China slowing at the same time, it could eventually be broken. As I’ve said before, don’t underestimate the Russian surpluses: their problems are way different to ours. But they are equally insoluble….be they ghost banking investments or peripheral unrest.

On May 22nd, the EU electorate goes to the polls. It will be the biggest route of Establishment political Parties since Hitler’s Emergency Powers Decree of 1934. The change is balance of power involved afterwards is rarely understood on the American side of the Pond. Some may find it an anxiety-producing education.

The United Kingdom wouldn’t even be on the radar at all were it not for its astonishingly huge influence on world banking matters, and virtual control of some banking forms that is second only to the US. Let me make it clear one last time: with the likely exception of HSBC, the UK’s banking sector – from RBS through to Barclays via Lloyds – is in parlous shape. Barclays shed 19,000 jobs this week, RBS has had so many unexplained glitches in the last year that few believe anything it says any more, the Coop recently slid into the hands of hedge funds – and thanks to a deranged Chancellor’s electoral Help to Buy bribe, the property bubble is once more pumping up. Not for nothing is central banker Mark Carney hurrying through a serious bank stress-test.

What Britain is trying to do is divest itself of investment banking, and return to retail. The problem is, for a retail/local business bank to have any kind of point, it needs to lend money. UK banks are most emphatically not in a position to do that. The effect of this on its export income and local expansion will not be slight.

Of all the countries in the developed world, I categorically predict the one that will eventually emerge with the biggest gap between where it is and where the Coalition says it is will be Britain. Beyond banking and other professional services, the UK doesn’t have any economy worth the mention, and close to zero agriculture. Any concerted rise in interest rates would make the servicing of sovereign debt impossible. Having nothing to sell and nothing to eat is not an easily soluble problem in a tiny, overcrowded island split down the middle over Europe and immigration.

What can I say beyond “I’ve put my money where my mouth is”? I used to live in England, I am now resident in France. I didn’t choose to speak a second language most of the time for the fun of it.

Japan. I read yesterday that policymakers in the BoJ are “confident” that their Abenomics QE-fest is “starting to show results”. Well good for them: the consensus is that the result has been little more than tepid. Japan’s dead decade began one second after its export-led boom abruptly ended. For years the country’s been hooked on credit, and the damage has been well-nigh irreparable. A Sovereign borrowing bonanza as the cure simply doesn’t hold any water – especially not in an Asia which is, in 2014, totally mutually interdependent. Sino-Japanese tensions in the air right now are very probably nothing more than the aperitif.

And we didn’t even get to the emerging economies…still floundering in the wake of the slowly dwindling QE. Or what happens inside France when the full scale of the debt there starts blocking the autoroutes. Or Italy announces its withdrawal from the euro. Or the UK its withdrawal from the EU. Or the civil war gets under way in Greece.

As Paul Farrell wrote at the Wall Street Journal yesterday:

‘Prudent investors please listen, very, very closely: It doesn’t matter whether the markets crash or merely suffer a major correction, GMO is warning us the S&P 500 has a high probability of falling to “negative real returns over one-year, three-year, and seven-year periods.” And that sure sounds like another way of saying a major crash is dead ahead’.

This is the bottom line and then I’ll leave you alone on this subject…for we all need to unwind at the weekend: while nobody truly knows the exact order of the Chess pieces – or whether one of the animals in the house will simply knock over the board – the White Queen is about to topple.

Stocks bust, interest rate spikes, economic slump, fiat netting fantasies, sovereign collapse, banking insolvency, military conflict, social instability and damning austerity: they are the internal flaws of globalised monopolist greed masquerading as laissez-faire economics, and they will implode the system from end to end eventually.

But this is growth, not Gotterdammerung:

“For a seed to achieve its greatest expression, it must come completely undone. The shell cracks, its insides come out and everything changes. To someone who doesn’t understand growth, it would look like complete destruction.”
 Cynthia Occelli