Royal Bank of Scotland to investors: 'Sell everything'

I have these conversations everyday with people who actually have an understanding of the debt and currency markets fueling all of this, and the liquidity that has been sucked out of them. Central banks own 1/3 of the $54 trillion global debt markets. As long as they can get away with that UNTIL there is a credit crisis, yeah, they can create price distortions, and a debt mess that holds up as they keep ladling more and more debt on the world. And in the case of risk assets, they can maybe blow a bubble beyond anything we have ever seen before.

But jeez, even the people I know making gobs of money front-running central bank "policy" know that when the illusion they have created as a proxy for managing the economy ends, we are staring at a mountain of bad debt and something horribly painful. I wish you had a clue how illiquid the debt markets are because of what you think you understand. ANY instability. ... and it is going to be a runaway train on the downside -- not just for U.S. equities, which as I said, is a small symptom of it all. And I believe it is going to take a prolonged period for us to get our economy back on sound footing afterward. Global debt levels are up 276 percent in the last decade because of them. Debt is now 327 percent of global GDP. You don't understand what you're talking about, but if you did, you are saying that there is NOT going to be a credit crisis at the end of this road. You'd think that 2008 would have clued you in. The answer to a self-created debt mess was to try to put off the consequences by digging in deeper with more debt. How do you think that ends?

The rest of your post? Unemployment is certainly better than it was in 2008 -- how couldn't it be? They tanked our economy. But it is not low. Wages aren't growing, precisely because the BLS numbers are a farce. If we were really at full employment (which means no slack), wages would be going up. They are not, obviously. We have created a huge underclass of bartenders and part-time workers who are struggling and have only bad options (people who had higher paying jobs 15 years ago). And that doesn't include the people who have permanently given up, and to the extent they exist, do it on government aid which has exploded (which we can only get away with, as long as the Fed is monetizing more and more debt -- as a country, we're $20 trillion in the hole now).

Inflation is not low, either. Not even using the word incorrectly, the way i you've been conditioned to (in the CPI or PPI sense, which are an even bigger farce than the BLS employment numbers). They have increased the money supply to a batshit crazy degree -- which has consequences. We are surrounded by price distortions -- including the stock market run up this thread is about. You want to see inflation? Look at Tesla's stock price. Look at the junk bond market. Look at the market for German Bunds.

I have no idea what you are talking about with your reputable economists and how the recovery has played out. The Federal Reserve you are tying yourself, has spent the entire recovery forecasting much higher economic growth than we actually have gotten. It's like watching a Mr. Magoo cartoon. The whole reason we are in the 9th year of a recovery (and it is the longest recovery in history, even though it has been a shittier recovery than even the great depression) and they are still trying to pump more and more "stimulus" in, is that everything they forecast has been wrong! It's a great game. They sow the seeds of a financial crisis and take down our economy with their bungling. ... and then step in to mitigate the effects. Of course, rather than allowing the deleveraging they made necessary to happen, they put us into a depression. ... and on top of it, sow the seeds for more misery, because now we are facing a much bigger deleveraging due to their antidote. And you argue with me (but don't say much that is factual) as I point out reality.

Those inequality and wage growth problems? THAT IS THE FED'S DOING. Christ. It is a cartel that has the effect of making the rich richer -- on paper at least, because at some point a bunch of market millionaires who don't understand that they are playing with matches are going to be wiped out, the same way a bunch of house flippers found out in 2008. To listen to you, the people trying to explain this in 2004 or 2005 were just broken clocks who would eventually be right about something. Meanwhile, the great swath of people are not only not getting rich on paper have been living in a crappy economy that you are invested in telling me is doing fantastically.

If this is the new normal, we're fucked. But yeah, of course we're going to have another recession. The fact that you keep saying things like that shows that you're not having the same conversation. We are 9 years into a recovery. It's the longest recovery in history. Of course we are going to see a recession. The problems have nothing to do with the fact that there is a business cycle. It has to do with the bust the exaggerated the boom / bust cycles they have turned that business cycle into by trying to play god. The recovery hasn't been much of a recovery (BECAUSE of the anchor they have put on our economy). ... and there is a massive amount of debt that needs to see a very painful deleveraging. That new normal hasn't been a GOOD thing.

 

I really don't mean this in a dick way. Please believe me. But I really don't think you fully understand what you are trying to discuss.

Real interest rates are lower today than they were a year ago, 5 years ago, 10 years ago. Your understanding of the cost of borrowing seems to be that the what the Federal Reserve does to the overnight rate (and they brought it down to zero and 9 years later it is not much higher) is some magical number that sets a level of of REAL interest rates.

If they don't keep pace with real rates (which have declined sharply over the time you are talking about, despite their measly 25 basis point hikes), monetary conditions get LOOSER. You don't seem to understand that they are spiking the punch bowl right now with more booze than they were a year ago or 3 years ago. This isn't over! Two 25 basis point hikes in the last year has had the effect of LOWERING real rates -- because they are so behind what the actual economy is doing. They are FOLLOWING the market, not LEADING it. And they are way behind it, so they are now more effectively "dovish" than they were even at the height of the financial crisis.

Reckless amounts of credit and dangerous distortions are STILL building. You are blithely unaware, but to sit there and watch global debt levels increase by 276 percent in a decade, while those debt levels are still increasing exponentially, and tell me, "Well that hasn't ended with a credit crisis yet, so you're a broken clock that will someday be right" is unbelievable to me. You know why I'll be right? Same reason there were people who were right in 2004 about something that didn't implode the next day. This is cause and effect. Not some mystical, "Who could have seen that coming?"

This isn't over until they can prove they can STOP and undo the damage they did and the debt that has built can sustain itself without them price fixing the cost of borrowing. Whether you believe that or not, the fact that that they are looser today in terms of monetary conditions than ever isn't a discussion. Look at the yield on 10 year treasury bonds. It is LOWER than it was before their little 25 basis point hike. Look at the yield curve -- which they have flattened (and that is bad for our economy). You try to discuss this like it is an ideology or an opinion, when reality is right in front of you. Talk to any bond or currency trader. The reality isn't an opinion.

Also, clearing balance sheets? Did you really say that? Central bank balance sheets are STILL expanding -- just this year alone so far, they have added between $15 and $20 trillion. What do you think is running up asset prices? We have become inured to how insane that is. They create money out of thin air (which *is* inflation) and they inject it into the credit markets to create more leverage. And bubbles blow as a result. And while they are blowing, you are trying to convince me of what a wonderful job they have done (even as the real economy people have been left with stagnates -- precisely because it can't recover with them putting it under an overleveraged cloud).

The Federal Reserve HAS stopped expanding its balance sheet . ... but it hasn't cleared it! Where are you living? They reinvest the principal on the expiring bonds they bought, because they are propping up those debt markets to keep rates suppressed. It's the canary in the coal mine and there is no way out for them -- as much as they hope. Quantitative easing hasn't truly ended until they can get rid of what they bought. Do you understand that they are sitting with staggering $4.5 trillion of U.S. treasury and agency debt (having become the only buyer in the mortgage-backed securities market, which is now illiquid) and they keep reinvesting it, which has the effect of keeping monetary conditions loose?

 

Dunno. People investing equities to try to save for their retirement isn't a new thing. And the actual evidence is that money is fickle. Much more so than managed pensions were prior to the popularity of 401(K)s. The minute there is a crash or a downturn, it turns to really be hot money -- people tend to pile in when there is a mania and then sell low when they panic.

But let's say that 401(K)s create a floor under U.S. equity prices. Demographically that would be a really bad thing if you are forward looking, because a huge cohort in the Baby Boomers is starting to retire. That would mean they conceivably will be pulling their money OUT of equities over the next decades.

If you really want to know what is fueling the stock market. ... I'll submit this. Margin debt levels are at record levels right now (and volatility is at record low levels). It is cheap to borrow because of what I am talking about, and people have now been conditioned to think that risk assets can only appreciate in value. And worse, every time the wall of worry accompanying itstarts to erode that confidence, you have gotten something like this week, when Janet Yellen gave the high sign that she has your back (backing off of rhetoric for the last month from her and Mario Draghi, which had sent bond yields spiking a bit -- and that panicked her). People really think that the Federal Reserve will always be there to bail out markets, so you can't lose. And they are behaving accordingly.

That margin debt and the speculation it is fueling is only part of the story this time around, too. During the dot-com bubble, everyone saw their neighbor get rich on dogshitcompany.com stock, and A LOT of people got sucked in. This time around, many of those people can't even afford their rent 9 years after the financial crisis, and they aren't speculating on stocks. Which is why we are seeing wealth inequality increase. If you have money, it seems easy to make more money in this kind of rigged environment. So you have companies borrowing a ton of money (at seemingly no risk because of central banks), and rather than investing in factories or new business ideas or R&D or training workers they are buying back their own stick or raising their dividends. It's perverted. They have no reason to invest in their businesses, because the economy is stagnant and that investment won't pay itself back. But it's so artificially cheap to borrow, that they have loaded up on debt. ... and they turn around and make their stock options more valuable by buying back their own stock with the borrowed money. Now maybe that sort of thing is sustainable or can possibly have a good ending. All I see is artificiality, and when there is a catalyst (a trigger due to the bad debt) that unwinds it, not only will the stock valuations that have run up on that artificiality come barreling down. ... the debt they piled up to live a fantasy is still going to be there.