Thursday, November 19, 2015

The "Grandaddy Of All Bubbles"......DO NOT MISS THIS!

The "Grandaddy Of All Bubbles"

The "Granddaddy of All Bubbles" thesis rests upon the view that the world is in the midst of the precarious grand finale of a multi-decade global Credit and financial Bubble. When a Bubble bursts, system reflation requires an even larger fresh new Bubble. This has repeatedly been the case going back at least to the "decade of greed" late-eighties Bubble in the U.S. These days the world confronts the terminal Bubble phase partially because of the unprecedented scope of the China and EM Bubbles. It's simply difficult to imagine another more far-reaching Bubble.

Also critical to the finale Bubble thesis is that the "global government finance Bubble" - encompassing unprecedented excesses in sovereign debt, central bank Credit and government market manipulation - has engulfed the very foundation of contemporary "money" and Credit. It's again quite a challenge to envisage a new financial Bubble inflation cycle following a crisis of confidence at the heart of global finance.

The global Bubble has been pierced. 

The collapse in commodities and EM currencies along with the faltering Chinese financial Bubble mark an historic inflection point. Global policymakers have gone to incredible measures to stabilize market, financial and economic backdrops. Yet reflationary measures will continue to only further destabilize.

When policy-induced "risk on" is overpowering global securities markets, fragilities remain well concealed. Fragilities, however, swiftly manifest with the reappearance of "risk off."  Rather quickly securities markets demonstrate their proclivity for illiquidity and so-called "flash crashes." So after another unsettled week in global markets, the critical issue is whether "risk on" is giving way to "risk off" dynamics.

There is no doubt that a powerful "risk off" has again gripped commodities markets.

With commodities succumbing to another leg in an increasingly brutal bear market, worries quickly returned to EM. The Brazilian eal declined 2.1% this week and the Colombian peso sank 6.4%. The Russian ruble fell 3.5% and the South African rand declined 1.6%. Mexican stocks were hit 3.6%.

The optimistic view of things turns flimsy in a hurry. When crude and commodities begin to tank, large quantities of debt (company, country and financial) look increasingly suspect. King dollar takes off, putting added pressure on faltering commodities and EM (currencies, debt and stocks) Bubbles. And with the Chinese currency pegged to king dollar, the markets' view of the China Credit situation can abruptly shift from "manageable" to "potentially very troubling."

Returning to the "Granddaddy Bubble Finale" thesis, the Chinese and EM Bubbles fundamentally changed the "producer" and "consumer" inflationary backdrops. Ultra-loose global finance has ensured massive overcapacity in too many things. It has created an unprecedented divergence between bubbling financial markets and weakening fundamental prospects. There's way too much debt almost everywhere, a debt burden that central bankers would like to inflate away to more manageable levels. The Chinese are desperate for inflation to grow out of historic amounts of debt. 

The bursting global Bubble is especially problematic for China. EM currencies have been devalued, while the U.S. and Chinese currencies have skyrocketed. The old reflationary measures no longer work. Loose "money" only exacerbates overcapacity, inequalities and financial Bubbles. The strong dollar further pressures global pricing, while adding to heightened Credit stress globally (certainly including EM dollar-denominated debt). Meanwhile, China's currency peg to the dollar ensures the already vulnerable Chinese manufacturing complex becomes further uncompetitive. It ensures major problems related to the country's enormous lending and investing boom in global resources. The resulting Credit stress only exacerbates disinflationary pricing pressures.

This is all consistent with heightened risk aversion and self-reinforcing pressure to de-leverage.

In the increasingly hostile world in which we live, it's consistent with a darkening of the social mood in Europe, as well as here in the U.S. and around the world more generally. It's also part of the troubling backdrop conducive to a problematic "risk off" when faith in global central bankers and Chinese officials wanes.

The real worry about liquidity is that it behaves like a bad friend -- it is there when you don't especially need it, but as soon as you do need it, it disappears.

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