WorldoutofWhack

Martin Armstrong writes on the issue of Global hard landing

The hard landing is economic and will have its greatest impact outside the USA. While central banks have sold US Treasuries in an attempt to keep the dollar down, the private sector has been pouring assets into the USA and particularly the Dow. Our capital flows have tracked a significant shift in global capital flows into the USA especially from Europe. That should come as no surprise given the chaos in BREXIT as well as the May elections.

We still do not see a major correction in the Dow. We have been undergoing a shift from public to private assets on a global scale. Therefore, the hard landing will be more economically based and central banks will try to do something, as in lowering rates, but they have run out of bullets. The Fed has tried to back off on rates after buying into the problem of a hard landing outside the USA. The ECB has been on its hands and knees, pleading with the Fed not to raise rates when they will have to continue their QE programs or face sovereign debt defaults.

My two cents

I am a big believer in capital flows and if you read Peter Zeihan book ” The Accidental Superpower” you will realise that whatever conflicts US is picking up around the world today is by design. US does not want to carry the burden of world with it especially after becoming independent in the most precious resource in the world ” OIL”. This as Martin explains ,will lead to capital flowing back to US in the coming recession which will also create a double whammy for Emerging Markets in the form of rising dollar.

Recession Outlook Summary

• Our Recession Probability Model rose across all horizons in the first quarter of 2019. While near-term recession probability is limited, the probability of a recession occurring over the next 24 months has more than doubled.
• The deterioration in leading indicators, inversion of the yield curve, and tightening of monetary policy all contribute to rising recession risks. As we expect these trends to continue in 2019, we should see recession risk rise throughout the year.
• We maintain our view that the recession could begin as early as the first half of 2020, but will be watching for signs that the dovish pivot by the Federal Reserve (Fed) could extend the cycle.
• The next recession will not be as severe as the last one, but it could be more prolonged than usual because policymakers at home and abroad have limited tools to fight the downturn.
• Credit markets are likely to be hit harder than usual in the recession. This stems from the record high ratio of corporate debt to GDP and the likelihood of a massive fallen angel wave.
• When recessions hit, the magnitude of the associated bear market in stocks is driven by how high valuations were in the preceding bull market. Given that valuations reached elevated levels in this cycle, we expect a severe bear market of 40–50 percent in the next recession.

Investment Implications

Prepare for a Steep Decline in Risk Assets

On the surface, this scenario may not seem particularly dire for investors. But we would caution that market behavior is only loosely correlated with economic conditions, and a moderate recession does not mean moderate market movements. On the contrary, years of low interest rates have served to amplify the financial cycle over the past few decades, and this amplification has been further heightened in the current cycle by asset purchases by global central banks.

https://www.guggenheiminvestments.com/cmspages/getfile.aspx?guid=e0c1a866-ed48-458b-9f33-737ec1a0ed2d

HSBC Global research writes

In a non-consensus call, our analysis of two decades of Indian equity cycles shows that investors should be prepared for the start of the next bull market
Sectors such as banks and some laggards – consumer discretionary, metals, energy and real estate – look well positioned
We also highlight 16 key stocks, based on our strategy sector preferences and company classification framework

My two cents

In my humble opinion all bull run in India coincide with higher inflation feeding into higher nominal GDP. Higher inflation reduces the value of debt and increases the value of fixed asset correcting the balance sheet recession through inflating away the debt. So either inflation rise sharply leading to pricing power with producers or currency falls sharply leading to cheaper and much competitive local assets for global investors. Take your pick

full report below

Rising govt deficits at the time when household savings are coming down is the only reason that bond yields refuse to come down because supply of govt bonds is going up at the time when demand in the form of savings is coming down

Eram Tafsir writes…..
The Indian economy would run the risk of a wider current account deficit along with its associated consequences in case the gross household financial savings net of financial liabilities continue to grow slower than the net borrowings of central and state governments plus extra budgetary resources (EBR) and the gap is funded by external sources, as per India Ratings and Research (Ind-Ra). Further, the rating agency believes that despite policy rate cut by the RBI, a slower growth of gross household financial savings net of financial liabilities compared to net borrowing of central and state governments and EBR will keep the 10-year government securities (G-Sec) yields at relatively elevated levels. For ratio of gross household financial savings net of financial liabilities compared with net borrowings of central and state governments and EBR to improve either the former has to increase or the latter has to decline.

read full post below

https://www.financialexpress.com/economy/low-savings-high-real-interest-rate-is-indias-economic-growth-sustainable/1541914/

April 5 – New York Times (Dealbook): “’It doesn’t take a genius’ to know capitalism needs fixing. Capitalism helped Ray Dalio build his investment empire. But in a lengthy LinkedIn post, the Bridgewater Associates founder says that it isn’t working anymore. Mr. Dalio writes that he has seen capitalism ‘evolve in a way that it is not working well for the majority of Americans because it’s producing self-reinforcing spirals up for the haves and down for the have-nots.’ ‘Disparity in wealth, especially when accompanied by disparity in values, leads to increasing conflict and, in the government, that manifests itself in the form of populism of the left and populism of the right and often in revolutions of one sort or another.’ ‘The problem is that capitalists typically don’t know how to divide the pie well and socialists typically don’t know how to grow it well.’ ‘We are now seeing conflicts between populists of the left and populists of the right increasing around the world in much the same way as they did in the 1930s when the income and wealth gaps were comparably large.’ ‘It doesn’t take a genius to know that when a system is producing outcomes that are so inconsistent with its goals, it needs to be reformed.’ Stay tuned: Mr. Dalio says that he’ll offer his solutions in another essay.”

I’m reminded of back in 2007 when Pimco’s Paul McCulley coined the term “shadow banking” – and the world finally began taking notice of the dangerous new financial structure that had over years come to dominate system Credit. Okay, but by then the damage was done. As someone that began posting the “Credit Bubble Bulletin” in 1999 and had chronicled the prevailing role of non-bank Credit in fueling the “mortgage finance Bubble” fiasco (on a weekly basis), I found it all frustrating.

Why wasn’t the discussion started in 2001/02 when mortgage Credit began expanding at double-digit rates, and there were clear signs of Bubble formation? Oh yea, that’s right. There was desperation to reflate the system and fight the “scourge of deflation” after the bursting of the “tech” Bubble. Excess was welcomed early on – and later, when things got really heated up, nobody dared risk bursting the Bubble.

Reading Mr. Dalio’s latest, I have to ask, “What ever happened to ‘beautiful deleveraging’?” And I’m not on the edge of my seat waiting for his “solutions.”

There was a window of opportunity early in the mortgage financial Bubble period for “statesmen” to rise up and call out the recklessness of the Fed spurring mortgage Credit excess and house price inflation in the name of system reflation. Statesmen and women should have excoriated governor Bernanke for suggesting the “government printing press” and “helicopter money” – the type of crazy talk that should disqualify one for a position of responsibility at the Federal Reserve. Fed chairman? You’ve got to be kidding.

There was a window of opportunity to rein the Fed in after QE1. The Federal Reserve should have been held to their 2011 monetary stimulus “exit strategy.” Instead they doubled down – literally – as the Fed’s balance sheet doubled in about three years to $4.5 TN. Mr. Dalio – along with virtually everyone – didn’t seem to have any issues. Indeed, an unprecedented expansion of non-productive debt (certainly including central bank Credit and Treasury borrowings) somehow equated with “beautiful deleveraging.” It was ridiculous analysis in the face of the greatest global Bubble in human history.

Central banks aren’t fully to blame, but it’s an awfully good place to start. Three decades of “activist” monetary management has left a horrible legacy. The Institute for International Finance reported this week that global debt ended 2018 at a record $243 TN. This debt mountain simply would not have been possible without “activist” central banking. Despite a lengthening list of risks, global stocks have powered higher in 2019 to near all-time highs. A relentless speculative Bubble has only been possible because of central bank policies.

I’m not all that interested in Dalio’s “solutions.” In my book, he missed what was an exceptional opportunity for statesmanship. Bridgewater’s investors were the priority and have been rewarded handsomely. Pro-central bank “activism” has been the right call for compounding wealth for the past decade (or three). But no amount of ingenuity will resolve the historic predicament the world finds itself in today. Markets are broken, global imbalances the most extreme ever, and structural impairment unprecedented – and worsening, all of them.

Most regrettably, the type of structural reform required will only arise from a severe crisis. The Fed and global central bankers have been reflating Bubbles for more than three decades. Highly speculative global markets at this point completely disregard risk. And with borrowing costs incredibly low, what government (ok, Germany) is going to impose some spending discipline and operate on a fiscally responsible trajectory? At this point, finance is hopelessly unsound – and, importantly, hopelessly destructive on an unprecedented global basis.

I had the great pleasure to spend part of my Friday with the University of Oregon Investment Group. I gave a talk, “Money, Credit, Inflation and the Markets.” Being with bright, intellectually curious and enthusiastic university students gives me hope – and a smile.

From my presentation: “And it just breaks my heart to see young people turn away from Capitalism. I anticipate spending the rest of my life trying to explain that the culprit is unsound finance and deeply flawed monetary management – and not the system of free-market Capitalism. History teaches us that credit is inherently unstable. I would argue that the experiment in New Age unfettered credit – with its serial booms and busts – evolved into a failed experiment in “activist” monetary management – another debacle in “inflationism.”

“The result has been a period of historic bubbles – in the markets and in economies – on a global scale. And protracted Bubbles become powerful mechanisms of wealth redistribution and destruction. Central banks readily creating new “money” and favoring the securities markets are fundamental to the problem. Such policies benefit the wealthy and worsen inequality. We’re witnessing the resulting rise of populism and a mounting crisis of confidence in our institutions. Even with 3.8% unemployment, near-record stock prices and one of the longest economic expansion on record, our country is deeply divided and resentful. I fear for the next downturn.”

A Friday Business Insider headline: “Hedge-fund billionaire Ray Dalio says the current state of capitalism poses ‘an existential threat for the US’”; Barron’s: “Hedge Fund Billionaire Ray Dalio Says Capitalism ‘Must Evolve or Die’”; and Vanity Fair: “Billionaire Hedge-Fund Manager Warns a ‘Revolution’ is Coming.” Observer: “Ray Dalio on Capitalism Gone Wrong: America May See Dire Consequences.” And CBS: “Billionaire investor Ray Dalio: Capitalism run amok is ‘economically stupid’”

I’m reminded of an analogy I’ve used in the past. One could make a reasonable argument that our eyeballs are flawed. How could something of such importance be so soft, delicate and vulnerable? Yet this vital organ is not flawed – imperfection is not a legitimate issue. It is the nature of its function that dictates its characteristics and vulnerabilities. It cannot sit within a protective ribcage like the heart, or within the hardened skull as the brain does.

To be able to see the world – looking at distant mountain ranges and then immediately shifting focus to the pages of a wonderful book – requires an exquisitely complex organ functioning right out there exposed to the elements and largely unprotected. Importantly, we recognize and accept our eyes’ sensitivities and vulnerabilities. We would not wander into a metal shop without wearing protective eye coverings. We don sunglasses on bright days – darkened snow goggles for spring skiing. We learn at a very young age not to stare into the sun.

I disagree with the increasingly popular view that Capitalism as flawed. At the same time, I have been long frustrated by those dogmatically preaching the virtues of Capitalism without accepting the reality of inherent delicacy, vulnerabilities and weaknesses. As we are with our eyes, we have to be on guard, take precautions, and definitely avoid doing anything stupid. Who is reckless with their eyes? There’s too much to lose. No one wants to contemplate being blind for the rest of their life.

How could we ever have allowed Capitalism to be so irreparably damaged? There are innate instabilities in Credit and finance that have been disregarded for way too long. Unsound “money” is a primary (and insidious) risk to capitalistic systems. I would further argue that persistent asset inflation and recurring speculative Bubbles pose a major risk to sound finance and, as such, to Capitalism more generally. Moreover, inflationism – “activist” central banking – with its asset market focus, manipulation and nurturing of speculative excess and inequality, is anathema to free-market Capitalism.

When the Fed slid down the slippery slope and implemented QE, the economics profession and investment community failed society. The case against QE shouldn’t have been primarily focused on inflation risk. The overarching danger was a corrosive impairment of markets and finance, with resulting dysfunction for Capitalism more generally. The risk was destabilizing inequality, insecurity and resulting societal stress. There was the peril of a fragmented society, divided nation, political dysfunction and waning trust in our institutions. Somehow, everyone was content to ignore the reality that unsound “money” reverberates throughout the markets, the economy, society, politics and geopolitics.

Over the years, I’ve referred to the “first law of holes.” If you find yourself in a hole, the first requirement is to stop digging. Similarly, I’ve repeatedly noted the long-ago recognized issue with discretionary monetary management: One mistake invariably leads to only bigger mistakes. And I’m fond of reminding readers that “things turn crazy at the end of cycles.” Historic cycle, historic “crazy.” I’ll repeat what I’ve written many times before: From my analytical perspective, things continue to follow the worst-case scenario.

It was yet another mistake for the Fed to go full U-Turn dovish. It was another blunder for the global central bank community to signal they were willing to move quickly and aggressively to bolster international markets. The 2019 speculative run in the markets only exacerbates underlying fragilities – worsens inequality – and sets the stage for an only deeper crisis.

I’ll be curious to see if Ray Dalio’s “solutions” include having the Fed disavow aggressive monetary stimulus, while letting markets begin functioning on their own. The biggest problem with Capitalism these days is that the system is not self-adjusting and correcting. Structurally distorted markets and deeply maladjusted economies are incapable of correction. Global imbalances only worsen every year. Speculative Bubbles inflate on further.

Global central banks are understandably distressed about the potential for market dislocation and crisis. Yet recurring efforts to forestall upheaval increasingly risk financial collapse. There is no real solution until deeply flawed monetary management is recognized and changed. The current course will only exacerbate inequality and foment Dalio’s “revolution.” Any soul-searching and scrutinizing of Capitalism must begin with central banking and monetary mismanagement. Where were the likes of Dalio, Dimon and Buffett when it could have made a difference? Faux Statesmanship.

Read Full Article below

http://creditbubblebulletin.blogspot.com/2019/04/market-commentary-faux-statesmanship.html

There is nothing that a human mind can’t conceive. It can shoot for the stars or dive in the ocean which twinkles in the shadows of stars and ascend back with sparkling mind bearing uncanny ambition only to float contended.  

Today, we live in fear of losing wealth, we worry what economic consequences would do to our cash, we look through a microscope and scrutinize every word, every policy, every regulation or find something to put above ‘every’ and list out the glaring negatives with a slight trace of approval. If only one could notice the lens of the microscope, would then one could tell reel and real apart.

Such is the case of negative interest rates. It is dealt differently by different flock of loaded individuals, generally in ways which would not only prevent losses but essentially gain cash. This flock stands on one side of the transaction contemplating means to win regardless of the loss that still deliberating other doomed flock endures. Well, this is how the world works. It is a Bernoulli trial. But there exists a splash of humble wit folks floating beneath the starry sky delighted by the victory of each one and beaten down none.

Theory? Without thinking too much, negative rates indicate that the economy is unable to generate sufficient income to service its debt. Almost always, all roads leads us back to debt sustainability levels. In order for an economic system to reduce debt, it requires growth or inflation or currency devaluation. For an economic system to exercise one of the two (growth not included), capital transfer is to be facilitated. This capital movement in negative rates environment is from the savers to the borrowers. Your invested value, the money you gave to borrowers would have a value lower than the face value. Barbaric! Savers should be the winners not the borrowers!

So each flock as per their liking would act in a way that makes them the gaining side. In real world scenario, one flock could be investors who when yields falls even deeper into negative territory scoop a profit through capital gain. Flock of foreign investors may try to earn through currency appreciation. Another flock would focus on real rates even though they are negative as that would preserve their capital under deflationary conditions when nominal yields would decrease their capital. Who would want that!

Investopedia gave an example, “In 2014, the European Central Bank (ECB) instituted a negative interest rate that only applied to bank deposits intended to prevent the Eurozone from falling into a deflationary spiral.”

Let’s recall a real practical example. The case of Switzerland. Paul Meggyesi of JP Morgan said, “The defacto negative interest rate regime lasted until October 1973. The negative interest rate was re-introduced in November 1973 at 3% per quarter and then increased to 10% per quarter in February 1978. All though this period capital inflows were being sustained by the global monetary turmoil/inflation that characterized the first years of floating exchange rates, not to mention the SNB’s singular focus on   promoting monetary and price stability through money supply targeting. Ultimately the SNB abandoned these purely technical attempts to curb capital inflows and embraced a much more effective policy of currency debasement, namely it abandoned money supply targeting in favor of an explicit exchange rate target that required huge amounts of unsterilized intervention, money supply expansion and ultimately inflation. (Suffice to say this policy lasted only until 1982, when the Swiss realized that inflation was too high a price to pay for a weak currency).”

He continued “Negative interest rates will only deter capital inflows if they are sufficiently large to offset the capital gain an investor expects to earn through capital appreciation. CHF rose by 8% in nominal and real terms in 1972-1973. Appreciation in 1973 – 1978 was 62% in nominal and 29% in real terms.”

In fact, during global financial crisis many central banks reduced their policy interest rates to zero. A decade later, today, still many countries are recovering and have kept interest rates low. Severe recessions in the past have required 3 – 6 percent point cuts in interest rates to revive the economy. If any crisis were to happen today, only a few countries could respond to the monetary policy. For countries with already prevailing low or negative interest rates, this would be a catastrophe.

Today, around $10 trillion of bonds are trading at negative yields mainly in Europe and Japan as per Bloomberg.

Poisons have antidotes, and sometimes one need to gulp down the poison to witness the mystique surrounding the life and glide with accidental possibilities, the possibilities which one wouldn’t seek if they remain wary of novel minted cure. 

Here enters a splash of humble wit folks! They want a win – win. So these folks came up with an idea, an idea with legal and operational complication but they have swamped themselves with research to find ways to not stumble in future and yes they do have a long way to go but we have a start. These folks are our very adored IMF Staff.!

They are exploring an option that would help central banks make ‘deeply negative interest rates’ feasible option.

Excerpt from their article ‘Cashing In: How to make Negative Interest Rates Work’:

“In a cashless world, there would be no lower bound on interest rates. A central bank could reduce the policy rate from, say, 2 percent to minus 4 percent to counter a severe recession. When cash is available, however, cutting rates significantly into negative territory becomes impossible.”

“…Cash has the same purchasing power as bank deposits, but at zero nominal interest. Moreover, it can be obtained in unlimited quantities in exchange for bank money. Therefore, instead of paying negative interest, one can simply hold cash at zero interest. Cash is a free option on zero interest, and acts as an interest rate floor.

Because of this floor, central banks have resorted to unconventional monetary policy measures. The euro area, Switzerland, Denmark, Sweden, and other economies have allowed interest rates to go slightly below zero, which has been possible because taking out cash in large quantities is inconvenient and costly (for example, storage and insurance fees). These policies have helped boost demand, but they cannot fully make up for lost policy space when interest rates are very low.”

“… in a recent IMF staff study and previous research, we examine a proposal for central banks to make cash as costly as bank deposits with negative interest rates, thereby making deeply negative interest rates feasible while preserving the role of cash.

The proposal is for a central bank to divide the monetary base into two separate local currencies—cash and electronic money (e-money).

E-money would be issued only electronically and would pay the policy rate of interest, and cash would have an exchange rate—the conversion rate—against e-money. This conversion rate is key to the proposal. When setting a negative interest rate on e-money, the central bank would let the conversion rate of cash in terms of e-money depreciate at the same rate as the negative interest rate on e-money. The value of cash would thereby fall in terms of e-money.

To illustrate, suppose your bank announced a negative 3 percent interest rate on your bank deposit of 100 dollars today. Suppose also that the central bank announced that cash-dollars would now become a separate currency that would depreciate against e-dollars by 3 percent per year. The conversion rate of cash-dollars into e-dollars would hence change from 1 to 0.97 over the year. After a year, there would be 97 e-dollars left in your bank account. If you instead took out 100 cash-dollars today and kept it safe at home for a year, exchanging it into e-money after that year would also yield 97 e-dollars.

At the same time, shops would start advertising prices in e-money and cash separately, just as shops in some small open economies already advertise prices both in domestic and in bordering foreign currencies. Cash would thereby be losing value both in terms of goods and in terms of e-money, and there would be no benefit to holding cash relative to bank deposits. This dual local currency system would allow the central bank to implement as negative an interest rate as necessary for countering a recession, without triggering any large-scale substitutions into cash.”

Negative rates are coming whether we like it or not. There is only so much growth we can get in steady state among rising debt levels. The only hurdle to implementing negative rates is currency in circulation and that’s why more and more countries are trying to outlaw cash. Interesting and profitable times ahead for those who understand the brave new world

( with inputs from Apra Sharma)