Weekly Article 09-14-2017
I have seen an increasing amount of articles that are calling the central banks reckless. Personally, I have stronger feelings than that but an ultimate “insider” really let everyone know what is happening.
It was on CNBC yesterday and they were interviewing Jamie Dimon of JP Morgan. There was a discussion about the lack of volatility in the markets and how it might affect the trading desks at the major banks. His main point was that the central banks have purchased assets and hold them on their books to the tune of $12 Trillion dollars. Basically he said if the central banks buy $12 Trilion in assets you’re not going to have volatility.
This is the obvious way that much of Europe gets away with negative interest rates, how bond yields are ridiculously low globally and stocks respond to little other than the next dose of central bank and sovereign wealth fund buying. Of course these assets are bought with “money” that was conjured up out of thin air and appears to be nothing more than more debt for us and a real asset for them. Lucky them!
Many may say “So what- they’ll just keep on doing it.
Two problems. This “money” creates NOTHING but more debt. It has now become a drag on the economy and as the economy slows down the debt becomes harder to carry. As more income goes to service debt other purchases get postponed or shelved all together. Some services may have to be curtailed to make debt payments and pension contributions.
Those who cannot “print up” money out of nowhere are already showing major signs of stress. These would include states, municipalities and any countries that are bound by their currencies. If it were not for the ECB (European Central Bank) is there ANYONE that believes Spain, Portugal or Italy should have lower yields than the USA? Of course, if the central bank steps in it creates a false impression that these debts have little to no risk- even though if you look at the balance sheets many Southern European countries are worse-off than flat broke and are being kept alive with central bank infusions. The same could be said for many of the world’s largest banks. If their assets were “marked to market”- what they could actually sell the assets that they hold for- many would likely be insolvent immediately.
I think it is important to also understand that the $12 Trillion is just what the central banks have purchased. The actual amount of new debt since the great recession has grown by over $100 Trillion.
The derivatives that caused the last crisis are estimated to also be much larger at this time- between 1.5 and 2 Quadrillion dollars*- that is an unimaginable amount. I can’t picture a trillion in my mind- 1,000,000,000,000 (1000 billions) let alone a quadrillion (1,000,000,000,000,000) 1000 trillion.
When the general population deals with numbers between 1 and a million it is virtually impossible to grasp the gravity of the type of debt that we are on the hook for.
Many say that it will be defaulted on, forgiven or inflated away. That may be true but any one of those actions may have a major effect on our economy. If the debts are defaulted on those that counted on income or growth from those assets will see those assets and possibly their income from that asset disappear forever. If the debt is forgiven it would have the same basic effect. If the “leaders” decide to keep “printing” then everyone will likely get paid but the value of your payment is likely to be just a small fraction of what it was intended to be when you decided to purchase that asset.
In my opinion the stage is set for some interesting times. The central banks are talking about reducing their involvement in the markets and reducing their balance sheets. I don’t believe they can do that without creating a massive revaluation of assets.
Don’t forget that since central banks have been purchasing assets there is virtually no price discovery and most assets are likely grossly mispriced. The day the games stop- or are forced to stop because of a geopolitical or economic event almost all assets will be revalued in a likely violent manner that will take almost all of the population by surprise.
Anyone who reads this article often should not be at all surprised if at some future point stocks bonds and real estate have a major downward correction to reflect economic value instead of being “pumped up” with fake demand. Also, precious metals should see a major spike in value as the games end and real price discovery takes over.
I really believe that at the end of all of this people are going to want something real and tangible- not promises. If this were 50 years ago many of these shenanigans taking place would not have even been contemplated because our ancestors had morals. They had a conscience. They let the market determine winners and losers and not some beaurocrat. Promises were meant to be kept. Ask many pensioners and bondholders (Detroit, California cities, Teamsters, Puerto Rico, etc.) how they feel about the promises that were made to them. This already with stock, bond and real estate markets at or near all-time highs- you likely haven’t seen anything yet.
Just a quick note. September 14 would have been my grandmother’s 103rd. birthday. She passed away 10 years ago. For many years I called her every Sunday. There are still times that I want to call and realize that there is no one on the other end. Life is short- our economic situation is important but far more important are our interpersonal relationships and particularly our family. If things get tough you will find out who your friends really are. At that time there is no price high enough for those few good friends and your family. Keep in mind what is really important.
Mike Savage, Financial Advisor
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*AOL.com, King World News, Global Research