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Trying To Prevent Recessions Leads To Even Worse Recessions
Trying To Prevent Recessions Leads To Even Worse Recessions
Deutsche Bank strategists Jim Reid and Craig Nicol wrote a report this week that echos what I and other Austrian School economists have been saying for many years: actions taken by governments and central banks to extend business cycles and prevent recessions lead to even more severe recessions in the end. MarketWatch reports –
The 10-year old economic expansion will set a record next month by becoming the longest ever. Great news, right? Maybe not, say strategists at Deutsche Bank.
Prolonged expansions have become the norm since the early 1970s, when the tight link between the dollar and gold was broken. The last four expansions are among the six longest in U.S. history .
Why so? Freed from the constraints of gold-backed currency, governments and central banks have grown far more aggressive in combating downturns. They’ve boosted spending, slashed interest rates or taken other unorthodox steps to stimulate the economy.
“However, there has been a cost,” contended Jim Reid and Craig Nicol at the global investment bank Deutsche Bank.
“This policy flexibility and longer business cycle era has led to higher structural budget deficits, higher private sector and government debt, lower and lower interest rates, negative real yields, inflated financial asset valuations, much lower defaults (ultra cheap funding), less creative destruction, and a financial system that is prone to crises,’ they wrote in a lengthy report.
“In fact we’ve created an environment where recessions are a global systemic risk. As such, the authorities have become even more encouraged to prevent them, which could lead to skewed preferences in policymaking,” they said. “So we think cycles continue to be extended at a cost of increasing debt, more money printing, and increasing financial market instability.”
…click on the above link to read the rest of the article…
Why Warning About A Bubble For A Decade Is Completely Rational
Why Warning About A Bubble For A Decade Is Completely Rational
In my experience as someone who warns about the development of dangerous economic bubbles (both the mid-2000s U.S. housing bubble and the post-2009 “Everything Bubble“), I have been criticized literally thousands of times as the stock market surges year after year and the economy continues to grow. The criticisms typically take the form of “you’ve been warning about bubbles for years – you’re a broken clock!,” “you’re a permabear!,” and “you’ve been missing out on tons of profits!” I’ve heard every criticism in the book and I’m completely unfazed by them because those criticisms are based on misunderstandings of my approach and because I know that my analyses are correct.
The number one mistake that my critics make is assuming that I am calling to sell the market and go short at the very same time that I warn about a bubble. This is completely untrue because my goal is to spot and warn about bubbles as early as possible as an activist for the purpose of warning society that it is going down the wrong path. As someone who graduated college straight into the 2008 financial crisis and struggled for a number of years after, I know from first-hand experience how destructive bubbles are to the economy and overall society. As a result, I feel that it is my moral duty to help spot and warn about bubbles in an effort to prevent another 2008-style crisis.
Though my goal is to warn about bubbles as early as possible as an activist, I do not approach trading and investing the same way. I am able to separate anti-economic bubble activism from tactical trading and investing.
…click on the above link to read the rest of the article…
How The Bubbles In Stocks And Corporate Bonds Will Burst
How The Bubbles In Stocks And Corporate Bonds Will Burst
As someone who has been warning heavily about dangerous bubbles in U.S. corporate bonds and stocks, people often ask me how and when I foresee these bubbles bursting. Here’s what I wrote a few months ago:
To put it simply, the U.S. corporate debt bubble will likely burst due to tightening monetary conditions, including rising interest rates. Loose monetary conditions are what created the corporate debt bubble in the first place, so the ending of those conditions will end the corporate debt bubble. Falling corporate bond prices and higher corporate bond yields will cause stock buybacks to come to a screeching halt, which will also pop the stock market bubble, creating a downward spiral. There are extreme consequences from central bank market-meddling and we are about to learn this lesson once again.
Interestingly, Zero Hedge tweeted a chart today of the LQD iShares Investment Grade Corporate Bond ETF saying that it was “about to break 7 year support: below it, the buybacks end.” That chart resonated with me, because it echos my warnings from a few months ago. I decided to recreate this chart with my own commentary on it. The 110 to 115 support zone is the key line in the sand to watch. If LQD closes below this zone in a convincing manner, it would likely foreshadow an even more powerful bond and stock market bust ahead.
Thanks to ultra-low corporate bond yields, U.S. corporations have engaged in a borrowing binge since the Global Financial Crisis. Total outstanding non-financial U.S. corporate debt is up by an incredible $2.5 trillion or 40 percent since its 2008 peak, which was already a precariously high level to begin with.
U.S. corporate debt is now at an all-time high of over 45% of GDP, which is even worse than the levels reached during the dot-com bubble and U.S. housing and credit bubble:
…click on the above link to read the rest of the article…
When The US’s Stock Market Bubble Bursts, Inevitable Disaster Will Follow
When The US’s Stock Market Bubble Bursts, Inevitable Disaster Will Follow
Complete and utter disaster will be inevitable and unavoidable when the United States’ stock market bubble bursts. Unfortunately, too many think the high stock market is evidence of a stable economy, but it’s actually an artificial bubble that will end in a disastrous crisis.
This unusual market strength is not evidence of a strong, organic economy, but of an extremely unhealthy, artificial bubble economy that will end in a crisis that will be even worse than we experienced in 2008, reported Forbes. The current market is highly unstable due to an artificially low interest rate.
Forbes writer Jesse Colombo explained it well. Ultra-low interest rates help to create bubbles in the following ways:
- Investors can borrow cheaply to speculate in assets (ex: cheap mortgages for property speculation and low margin costs for trading stocks)
- By making it cheaper to borrow to conduct share buybacks, dividend increases, and mergers & acquisitions
- By discouraging the holding of cash in the bank versus speculating in riskier asset markets
- By encouraging higher rates of inflation, which helps to support assets like stocks and real estate
- By encouraging more borrowing by consumers, businesses, and governments
Another Federal Reserve policy (aside from the ultra-low Fed Funds Rate) that has helped to inflate the U.S. stock market bubble since 2009 is quantitative easing or QE. Many have warned about the negative effects of QE only to be told by leftists that it was “necessary.” When executing QE policy, the Federal Reserve creates new money “out of thin air” in digital form and uses it to buy Treasury bonds or other assets. That action pumps liquidity into the financial system. QE helps to push bond prices higher and bond yields/interest rates lower throughout the economy. QE has another indirect effect as well. It causes stock prices to surge because low rates boost stocks, wrote Colombo.
…click on the above link to read the rest of the article…
