Twice in the past week I've highlighted warning signs about the current state of the world economy. In his latest 'Things That Make Me Go Hmmm' newsletter, Grant Williams (whom we've met several times before in these pages) quotes an e-mail dialog he had with a subscriber. The whole newsletter's worth reading, but I'd like to highlight some of what he said, because it dovetails very neatly with my own observations.
My worry is this ...
Markets have become conditioned to Goldilocks outcomes manufactured by CBs & govts over a period of three years when EVERYTHING should have gone wrong but nothing has.
The Taper hasn't mattered (yet) because everybody believes that, if the wheels come off, the Fed will blink and crank it up again.
China's problems are starting to become too difficult to ignore. (GDP 7.7% & PMI sub-50 for a manufacturing economy? Righto. Don't even get me started on the shadow banking system, which is straining at every seam right now.)
Abenomics is just beginning to be shown up for the farce it really is — just in time for the consumption tax hike coming in a few weeks. Abe's fabled "three arrows" are not the ones everybody imagines but rather the kind of arrows with a sucker rather than a point on the end. Actually, in this case, on BOTH ends.
Putin is in a corner, and we KNOW he don't take to backin' down none.
Obama's approval is at all-time lows with midterms on the horizon, so he needs to look Presidential at home.
Draghi is trying to force the BuBa to BEG him for QE before turning the taps on, and it is crushing Europe, but he won't blink (I don't think).
The Fed meets next week and will taper another $10 bn.
That's the broad backdrop. Now, let me ask you this:
What if this next $10 bn taper is the "bang" moment when markets suddenly realize that the Fed ARE serious about continuing to wind it down?
What if the latent fear over all of the above issues, combined with that next $10 bn and the words of smart guys like Seth Klarman ringing in their ears, tells managers it's "safety time"?
At some point the market factors QE at $0 if the Taper continues — and that time ISN'T after they withdraw the last $10 bn.
Above all, what if (and the marginal signs have been nagging away at me the last ten days or so) everything goes back to trading how it SHOULD, based on everything we know about markets and economics, instead of lingering in the Magical Fairydust World created by central banks since 2009?
Markets have been reacting correctly and beginning to decorrelate over the past several sessions.
Where does everything trade if a stimulus level of zero suddenly gets discounted?
I don't know EXACTLY, but I'll hazard a guess at "a ****-load lower" to kick things off.
Gold is talking loudly, so is copper.
JGBs and equities are mumbling, so are bonds.
Something is happening, right now, in all the dark corners of the dance hall, and whatever that "something" is, it will NOT lead to an extension of the bull market.
Do we "crash"? I think that's the wrong question.
The right questions (I think) are these:
If a major correction begins, at what stage do they turn on the printing presses again? 10% lower? 15%? 20%?
When they DO (and it is WHEN, not IF), what happens now that the last vestige of their credibility has evaporated? A quick spike then a crash, or does the patient flatline on the bed no matter how much juice they pump into it?
I'm nervous as hell and feel a sharp disturbance in The Force. We've been here before and pulled back from the brink every time, but this time that outcome is expected again by most, and that is extremely dangerous.
Markets are most assuredly NOT ready for reality.
. . .
I've been saying for two years that nothing matters to anybody until it matters to everybody, and I have a nasty feeling that the test is this:
Suddenly, in one moment, EVERYTHING matters to everybody.
That's something even central banks won't be able to stop.
There's much more at the link. Disturbing, but recommended reading.
Peter
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