Politicians and central bankers are desperately trying to convince
investors that the economy has returned to what they deem as a
"pre-crisis normality". But the truth is the global economy has
never been in a more fragile condition. In an example of just how precarious
the Fed-engineered asset bubbles have become, all of the 2014 U.S. equity
market gains were wiped out by just a few really bad trading days in October.
That's correct, the Dow Jones, S&P 500 and the NADAQ averages were all
negative after the first 10 months of last year. Investors were better off
sitting on the sidelines in cash, waiting for the better entry point that
appeared in mid-October. The so described strength of markets and the economy
is completely illusory.
Investors need to strategically allocate their portfolios for volatility
like we've never seen before, because government manipulations of
formerly-free markets have caused equities to repeatedly lose half their
value. That's what happened in 2000 and in 2008-'09. We are due for just such
another crash in the very near future. The investing rollercoaster ride that
results from the building and busting of asset bubbles is becoming more
extreme as central bank intervention grows ever more intrusive.
We have now reached the point where central banks can never stop buying
bonds because they cannot risk the normalization of interest rates. The best
example of this is Japan. Allowing interest rates to mean revert would now
cause nearly all of Japanese government revenue to be used for debt service.
Once a market becomes aware that all of a nation's revenue must be used to
pay interest on current outstanding debt, it becomes a mathematical certainty
that it must default on the principal. This condition has always led to a
currency, bond, equity and economic crises.
Throughout economic history this has only really occurred in isolation,
and/or in small banana republics. However, presently most major economies
face the same fate concurrently. Japan, China, Europe and the United States
cannot allow rates to rise...ever.
It seems logical to conclude that eventually the money printers will
become successful. After all, if buying banks' assets doesn't boost the money
supply central banks could simply resort to writing checks directly to the
public. By circumventing the private banking system it would guarantee to
create the inflation that money printers so desire. And then, once inflation
runs out of control and asset bubbles grow to unimaginable heights, interest
rates MUST become unglued because investors will then lose complete
confidence in all fiat currencies. Insolvency can be the only result of
interest rate normalization and that is why central banks will fight it until
the end.
Nevertheless, on the journey to central banks' ultimate solution to create
runaway inflation, it seems deflation has once again become the main issue.
This happens every time the Fed has tried to stop its QE programs. That
deflation is now pervading across the entire globe.
The perma-bull bobble heads in the financial media are extolling plunging
oil prices as the consumers' panacea. But the drop in oil also happens to
coincide with cascading base metal prices and global bond yields that are
crashing through the floor. Perhaps this is because nearly every economy on
the planet is either flirting with, or in a recession. Sure, deflation is
great for the consumer in the long run. But the collapse of asset bubbles,
although healthy and necessary, never feels great on the way down. Crumbling
equity markets and falling home prices, along with rising unemployment rates
and recessions aren't going to be offset by a few extra bucks in your pocket
at the pump. The WTI crude oil price at $33 per barrel didn't immediately
bail out the consumer in March of 2009, and it won't save them this go around
either.
In fact, the only vibrant growth that can be found anymore in the world is
in the Bank of Japan's balance sheet--and in government debt levels--not in
global GDP. The true message of falling oil prices is that global economic
growth is headed towards the zero bound range and deflation will be the
prevalent condition in the short term. Why else would the German 5-year note
offer investors a negative yield? The current state of record low and
negative bond yields are a sign of economic chaos, not a return to normality.
Investors would be very foolish to contend the U.S. can remain unscathed
from this global deflation and recession. The market selloff that began in
early 2015 is the result of slowing economic data, which is beginning to
unwind the massive yen carry trade.
But deflation has become public enemy number one in the eyes of all
central bankers. Therefore, it would be even more foolish to believe that the
Federal Reserve will raise interest rates into this incipient deflation and
recessionary environment. To the contrary, the printing presses for QE IV are
already warming up and the big shock of 2015 will be the rebound of investments
that profit from a weakening U.S. dollar.
The Fed believes interest rate normalization can occur within the context
of robust economic growth. However, a pivot away from the inflationary
monetary policy of the last 6 years will only start the rollercoaster down
the cliff towards a deflationary depression.
