Royal Bank of Scotland to investors: 'Sell everything'

There is a credit cycle coming. And it is going to be ugly.

You can't time it. In fact, the fact that we have had multiple research notes in the last week like this one, suggests that it may not be imminent -- these things usually don't happen exactly when everyone is starting to warn. Or maybe the central banks will be able to coordinate somehow (although they are pretty much reduced to fighting each other in a beggar they neighbor currency war game at this point, as the world is surely in a recession. China is going to desperately be devaluaing its currency in the near term, which is going to create turmoil) and can hold off the tital wave a bit longer. But there is something catastrophic ahead. The debt levels that reckless policy has given rise to over the last few decades (and the last decade, in particular, when they inexplicably doubled down with more of what caused the last financial crisis, to try to put off reaping what they sowed). ... and all of the malinvestment and overleveraged speculation it has created since, are a huge danger. High yield bonds are already cracking in the U.S. -- shit companies have been able to borrow insane amounts of money because of zero interest rate policy (along with a lot of good companies that have loaded up their balance sheets with debt).

It is just going to intensify at some point -- I can't see how it goes on much longer, although I have been prepared for this for the last 3 years. It has been so easy to see coming, yet people remain intentionally blind. Ms. Ragu and I put our retirement accounts into 100 percent cash when the S&P first hovered around 2000. I figured it might blow through much higher than it even did but I know there is going to be a great buying opportunity up ahead. I was willing to let it turn into even more of an insane mania if it had gone much farther, because I know when things turn they go down much faster than they went up.

The debt and bad credit -- and this isn't just a U.S. thing -- permeates all aspects of the world's economies -- everything from European sovereigns that are drowning in debt. ... to a Chinese banking system that grew like a rocket shot and is likely swimming in nonperforming loans that may dwarf their foreign reserves. ... to a trillion dollars in subprime auto loans (2008 redux) in the U.S.. ... to a trillion dollars in subsidized student loans. ... to stock markets that were inflated on stock buybacks (fueled by the central banks that stupidly thought creating a wealth effect would somehow create real economic growth). ... to bond markets that were propped by intervention from central banks, which became the biggest buyers (the Federal Reserve created a $4 trillion balance sheet overpaying for bonds and the ECB is still out there buying European sovereign debt). It goes on and on. I saw a story yesterday about how 40 percent of millennials have to use payday loans because their credit cards are maxed out and they are drowning in student loan debt.

Coming into this year--especially with the Federal Reserve fumbling around the way it has been (it backed itself into a corner with its rhetoric and forced itself to raise the overnight rate 25 basis points at the exact worst time -- when all of the economic data has been weakening), my bet was that we wouldn't get through the summer without a severe, negative market event. But honestly, I don't see how people allowed themselves to have gotten sucked in by the phony "stimulus" in the first place over the last several years, and overleveraged themselves and created as much debt as they have. So maybe the party can somehow go on a bit longer. It's already gone on way beyond what I would have ever guessed should be possible. But that is the power of central banks running our lives. When it ends -- and it will, because you can not price fix markets indefinitely -- it is going to make 2008 look quaint.

 

Probably not that bad. The world will continue to spin on its axis. But countless people are being subjected to untold misery for political reasons -- when you price fix the debt markets to allow politicians to make promises and spend, and try to fool people into thinking the economy you sunk is better than it is by juicing their world with debt (for example, we created an auto loan crisis that is going to end badly by encouraging underemployed people with bad credit to buy $40,000 cars with zero percent financing), you create a phony world. It also never will end well.

They can only keep their thumb on the scale of finance for so long. The price of money (what debt markets do well when left free) is the most important price in a free economy. What they have been trying to do is akin to Soviet-style economics. Price-fixing any market -- let alone one as important as the debt markets -- creates huge misalocations of capital. In 2008, you saw a crack in housing due to what Alan Greenspan and Ben Bernanke had created, that in turn showed cracks in a banking system that had overleveraged itself on credit that a free market would have never made available -- without a central bank skewing the risk equation by suppressing rates to make it too easy to borrow.

The geniuses who caused that in the first place, then rushed in with the fix -- it was like the arsonist riding in on the fire truck to come to the rescue -- and they did more -- except on steroids this time. ZIRP (zero interest rate policy) in the U.S. for close to a decade. Negative rates in Europe (it's perverse). Round after round of asset buying (quantitative easing) to keep the Frankenstein debt markets they created in the first place from collapsing. The BOJ (Japan's central bank) has been the most reckless -- they are not the focus at the moment, but their debt to GDP ratio not only keeps their economy in a permanent malaise, their "policy" has run up their stock market worse than ours -- cheap money going right into their casino.

As long as we continue on this path, its an anchor on the worlds' economies. If they stop the manipulation there is going to be a horrific price to pay. They robbed our future economic growth in the name of short-sighted short-term drug fixes. There is a price to pay for that -- we should have let it happen in 2008. But we didn't, so they made the price even steeper.

If they don't stop the manipulation, there is going to be a horrific price to pay, anyhow -- and it will happen in a very disorderly manner when one of these debt-ridden places implodes and creates a chain effect. Plus, the longer they can manage to keep the floodgates from opening, the worse they make the day reckoning.