Sunday, September 21, 2014

Even the mainstream media are beginning to get it

It's no longer just an 'alarmist fringe' that's predicting economic disaster - even the mainstream media are beginning to see the light at the end of the tunnel, and recognize it as an oncoming train.  On Friday the Telegraph published an article titled '10 warning signs of global financial meltdown'.  Here's an excerpt.

1. China slowdown:  The Chinese economy is slowing and this increases risks for investors around the world. China contributes more than a quarter of world economic growth and is the largest buyer of commodities in the world to fuel its massive construction boom. The signs coming out of China are not good ... For the past five years the credit glut in China has been driving world economic growth, but now it looks like the Chinese dragon is running out of puff.

. . .

3. Oil price slump:  The oil price is the purest barometer of world growth as it is the fuel that drives nearly all industry and production around the globe ... Brent Crude, the global benchmark for oil, has been falling in price sharply during the past three months and hit a two-year low of $97.5 per barrel, below the important psychological barrier of $100.

4. Global Commodities:  The prices for nearly all commodities are now falling in a sign of weakening demand across the globe. The Bloomberg Global Commodity index which tracks the prices of 22 commodity prices around the world has fallen to a five-year low.

There's more at the link.  Important information and recommended reading.

The real problem, as I see it, is that markets are not being allowed to naturally find their own levels.  Rampant 'money printing' (a.k.a. quantitative easing [QE]) has completely imbalanced financial markets not just in the USA, but around the world. That, in turn, has led to imbalances in almost all markets around the globe as all the liquidity sloshing around chases something safe in which to invest.  That in turn creates bubbles that - inevitably - burst, leading to panicked flight from suddenly unsafe assets into something - anything! - that offers even the semblance of security (such as, for example, rampant speculation in commodities).  When that, in turn, proves fickle . . . get the idea?

In his latest 'Thoughts From The Frontline' newsletter (link is to an Adobe Acrobat document in .PDF format), John Mauldin ably sums up the core problem with current monetary policy around the world.

Monetary policy as it is currently constructed is only marginally helping private markets and producers. Monetary policy as it is currently practiced is an outright war on savers, which sees them as collateral damage in the Keynesian pursuit of increased consumer demand.

It is trickle-down monetary policy. It has inflated the prices of stocks and other income-producing securities and assets, enriching those who already have assets, but it has done practically nothing for Main Street. It has enabled politicians to avoid making the correct decisions to create sustainable growth and a prosperous future for our children, let alone an environment in which the Boomer generation can retire comfortably.

It is a pernicious doctrine that refuses to recognize its own multiple failures because it starts with the presupposition that its theory cannot fail. It starts with the presuppositions that final consumer demand is the end-all and be-all, that increased indebtedness and leverage enabled by lower rates are good things, and that a small room full of wise individuals can successfully direct the movement of an entire economy of 300 million-plus people.

The current economic thought leaders are not unlike the bishops of the Catholic Church of 16th-century Europe. Their world was constructed according to a theory that they held to be patently true. You did not rise to a position of authority unless you accepted the truth of that theory. Therefore Galileo was wrong. They refused to look at the clear evidence that contradicted their theory, because to do so would have undermined their power.

Current monetary and fiscal policy is leading the developed world down a dark alley where we are all going to get mugged. Imbalances are clearly building up in almost every corner of the market, encouraged by a low-interest-rate regime that is explicitly trying to increase the risk-taking in the system. Our Keynesian masters know their policies and theories are correct – we must only give them time to more perfectly practice them. That the results they’re getting are not what they want cannot be their fault, because the theory is correct. Therefore the problem has to lie with the real world, full of imperfect people like you and me.

What our leaders need is a little more humility and a little less theory.

Again, more at the link.

Much of the Fed's QE program is scheduled to end next month, October 2014.  It's been underpinning the housing and stock markets for years now;  and in its absence, there's a serious question whether those markets will remain stable, or collapse.  Once QE's stimulus is no longer available, I think all the other pressures on the economy are going to build to a head . . . probably very rapidly.  I can't help thinking about the events of late October 1929 and what they precipitated.

Keep your heads down, my friends, and your economic powder dry.



Angus McThag said...

Inflation is bad.

Deflation is bad.

Expensive energy is bad.

Cheap energy is bad.

When polar opposites are bad and the reasoning as to why sounds identical, one rapidly begins to believe that they don't know what they're talking about.

Grog said...

Well Seasoned Fool said...

At a micro level, since 2005 I've had a part time business taking pictures and making reports of homes for mortgage companies. Usually, these home owners have defaulted. 2009-2010 had me working nearly full time. Now I'm driving by new home construction adjacent to the properties I'm inspecting. Not to be mercenary, but those are future jobs for me. Makes me sad.