Royal Bank of Scotland to investors: 'Sell everything'

I tried to have this conversation on here -- a year ago, two years ago, three years ago, when I was trying to explain to anyone who cared that the phoniness of ZIRP and the asset purchases created phony wealth -- asset price inflation. And it was reckless. The craziness didn't boost the real economy -- the bullshit cran was regurgitating rather than responding to what I actually posted about. In fact, it has been an anchor on our economy. The whole exercise in monetary expansion had zero to do with some superman technocrat saving the world from "economic collapse." That was simply an excuse to do more of the same -- and avoid acting like adults. ... people who have to deal with the consequences of poor past decisions that pushed future growth forward with their reckless manipulation. It was an excuse to try to push more future growth into the present on a wing anbd a prayer. ... rather than dealing with the reality of the mess they were facing from their prior recklessness that had sunk our economy.

In practice, it isn't even an efficient way to try to juice an economy in a phony way, because all it did was drive up the prices of risk assets via massive misallocations of capital -- real estate prices in Manhattan or San Francisco, and art prices and rare wine prices and old sports cars. ... and high-yield bonds, and equities. They were hoping for a "wealth effect," that would somehow magically bail them out of the mess they made in the first place. When I was suggesting that we were knee-deep a phony world on here, and a lot of people who think they are rich are going to end up finding out otherwise, cran didn't want to have the conversation.

For what it is worth, I believe that story you linked to hasn't even come close to playing itself out yet. We are just in the first inning of a mess that is bigger than most people on here realize -- one that hits everyone ultimately. What we got in terms of phony liquidity has been extreme beyond what people realize yet -- it created distortions that has priced regular people out of living in places like New York or San Francisco. On the way down, when it all ends, it has real consequences for the economy that employs those people (if they are actually employed beyond three part-time jobs). Monetary manipulation created a CDO in 2006 that eventually took down Lehman -- and it didn't just fuck a couple of rich guys. It fucked a lot of people trying to make their car payments who no longer had a job.

I would have loved to have this conversation with you two years ago, when I was trying to explain the cause of something that I saw playing out. ... and how I knew it inevitably has to end

This was a great exchange:

First they came for the Socialists, and I did not speak out....

Cutting to the part pertinent to that article you linked to . ...

Here was cranberry's response:

 

The fire truck comes roaring to the rescue. ... and the arsonist is driving it. And you cheer on the farce.

If you were really in favor of $4.5 trillion of debt asset purchases that are still sitting on our central bank's balance sheet (to keep it on point, rather than conflating multiple things the way you just did) -- like you understood the actual mechanism of it and what it did to obliterate the credit markets they hijacked, and the massive misallocations of risk that created across our economy -- then surely you were forward-thinking enough to know the plan for unwinding the mess (forgetting even the permanent malaise it has put our economy in). ... and you had the the future cost of it all worked out.

It's like the 3-year-old who is in favor of all-you-can eat ice cream. It's not like you have to be Kreskin to figure out where that goes.

At some point, it doesn't matter what cranberry is "in favor of." You are having a fantasy conversation. What is frustrating is that I try to discuss reality, you give me more fantasy.

Nobody can run up endless debt -- wasteful or otherwise. And in the case of a sovereign, they can't do it past a certain point without being able to monetize the debt (the treadmill the world got itself on). The ability to monetize the debt has run into a wall, as it had to. With each scheme to suppress rates (to stave off the day of having to deal with the reality of cascading defaults you created), you need an even bigger scheme to follow. ... in order to just STAY on the treadmill. We all suffer along the way as the treadmill speeds up and we are out of breath. ... while you tell us how great things are -- we just don't realize it.

And when you run out of those schemes (what it appears we are finally getting to -- predictions!!!)? You have to deal with the consequences of what you created with the dumb recklessness.

We have robbed a crazy amount of growth from the future to put off dealing with present problems you created in the first place. It would have been nice if we had even gotten a decent party for it this time around.

 

Your post is largely correct. But that part made me smile. There is this myth that gets repeated in news stories -- about how companies are sitting on huge cash reserves. It's just not true. Corporate debt levels are through the roof -- same as consumer debt levels, sovereign debt levels, etc. If you max out a credit card with cash advances (because let's say they offered you a teaser rate and didn't worry about your ability to ever pay back), it doesn't mean that you actually have a lot of cash. What you have is a lot of debt. Even if you don't run out and spend the borrowed money.

It's fine as long as you can keep borrowing and the teaser rate stays in effect (i.e. -- someone can suppress rates to keep you on a growing debt treadmill) -- whether you spend the money or not. The idea behind all of the nonsense we are discussing was that those planning authorities tried to make it cheap for everyone to borrow, on a prayer that they money would grow the economy they had cratered by encouraging too much debt in the first place. ... instead of letting actual demand dictate the allocation of capital so the economy could finally dig its way out. As you pointed out, it has gotten to the point where the phoniness now has freaked everyone out, and entities that have actually been able to keep borrowing (because the typical person isn't sitting on any cash -- their debt was spent long ago and they are maxed out on credit) are now hoarding their borrowed money -- they see that the end of the phoniness is likely coming.

In the case of stock prices, a lot of companies (the ones you correctly noted have stagnant earnings) have been able to access the credit markets cheaply (risk has been priced of out lending decisions -- that always ends well!). ... and that money hasn't gone into investing in plant, equipment, growing their businesses (creating jobs, etc.), the way it does in a healthy, demand-driven economy. The money has largely gone into stock buybacks and phony dividend increases to juice stock prices. ... creating valuations that have no relation to actual earnings. It drove up stock prices to levels I think are ridiculous (whether you see what I am talking about or not). But not for the fundamental reasons that stock prices appreciate in a normal world (based on real economic growth and actual earnings).

There are two outcomes: 1) Magically, the recovery (which hasn't been much of a recovery) goes on indefinitely without a downturn. Corporate profits somehow shoot through the roof in a way they haven't in a decade. ... to justify current valuations (and keep prices appreciating). Or 2) The credit markets take back control. ... and the insane party comes to an end, because the phony credit fueling all of the buying goes away.

You seem to logically see the reality I see.

 

The world doesn't work that way. We are talking about debt levels that have taken a long time to build up and monetization of all of that debt that has been an increasingly experimental wing-and-a-prayer exercise. And it is still ongoing -- what the ECB did yesterday, for example. An elected person -- the president -- or some appointed central bank governor has little control over anything from day-to-day or week-to-week or month-to-month (the way they think they can steer an ocean liner in small increments). ... even if they can do things today that inevitably will have very serious long-term consequences.

Those consequences don't happen on a timetable. If it did, I'd be short a lot of places right now -- I wouldn't have to worry about getting squeezed, waiting for reality to set in.

You can look around the world and see trillions of dollars of public and private debt that is hanging over the global economy -- it is a much greater magnitude of the world's economy than it was even just a few years ago. And you can see the asset-buying programs and interest-rate suppression measures that enabled that debt to be built up. You can look at various places where those debt levels MIGHT be (and probably are pretty close) at a tipping point -- places where cracks are finally showing. But unless you know what the catalyst for a particular credit event is going to be (even if it is inevitably going to happen), there is no timetable.

Look at it this way. This is just an extension of what we saw in 2008. Except now with debt levels made much greater, and the misallocation of risk spread among a broader group of areas. But what happened in 2008 didn't happen on a timetable. I mean, there were people who saw a housing / debt problem in 2004, 2005, 2006, for example -- sounding the horn (and getting ridiculed for it by people who had no clue). ...Mike Burry got killed for a long time trying to short shitty mortgages for a long time, for example. And until he was right, he was wrong. There was no time table. ... until a catalyst finally snapped people back into reality and nobody wanted to be the last person holding the bag for some very ill-conceived debt that had created massive misallocations of risk.

Until there is a catalyst to snap things back to reality, insanity can reign longer than people who actually see the reality can believe.

Right now, I'd bet we don't have too much longer before the actual credit markets take back control and finally reject the manipulation -- similar to how it ALWAYS works out. Stocks stalled out when the last round of U.S. quantitative easing ended, for example, and we started seeing violent moves down in January when high-yield debt started showing cracks. At some point there are going to be a lot of defaults somewhere and it will spread. But I can't tell you if something like that happens next month or 3 months from now or a year from now. ... anymore than I could have told you at the end of 2007 that Bear Stearns wouldn't last another 3 months.