The world economy has never faced a more perilous situation. While many have just started to debate whether a recession will start in 2019 or 2020, very few perceive the ’black hole’ the global economy is about to get sucked into.

The hole has two main “gravitational forces”: the wide-spread mispricing of risk and stagnating productivity growth. Central bank meddling with their bond buying programs (QE) have seriously distorted prices in the capital markets, which means that risk has also been mispriced in vast magnitude. The implications and repercussions of the six-year period of stagnating global productivity growth has also not been understood. These intertwined developments will lead the world economy into a serious economic downfall, a Global Depression.

See no risk, hear no risk

We devoted most of the March issue of our Q-review to explain how the asset purchase (QE) programs of the central banks have created an environment which encourages risk-taking, leverage and yield-hunting. At the heart of it is the suppression of yields on assets considered safe, most crucially government bonds, which have been the primary target of their QE-programs. QE created a stupendous, multi-year pulse of artificial central bank liquidity forced into the financial system. As the major central banks kept on pumping it eventually ended up increasing the price of almost every single asset class in the world with the possible exception of precious metals.

While leverage can be usually measured with some suitable metric (like debt-to-income or -equity), evaluating financial risk requires a reference point that is considered riskless. This creates a perplexing problem, because the QE -programs of the central banks have created a situation where we do not have any un-manipulated reference points telling us what the “riskless” rate of return actually is.

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