Thursday, January 14, 2016

Where Will It All End? .....THIS IS WHERE WE ARE HEADED!

Where Will It All End? 

If inflating asset prices via loose monetary policy were the route to economic prosperity, Argentina would be the richest country in the world by now. But it is not! 

The Feds pursuit of negligently loose monetary policies since 2009 is a misguided attempt to boost economic growth via asset price inflation and we will now reap the whirlwind (the ECB, Bank of Japan and the Bank of England are all just as bad). One of the main problems has been the overconfidence with which the Fed pursues their objective. Yet in the run-up to the 2008 Global Financial Crisis they demonstrated their lack of understanding of the disastrous impact of excessively low Fed Funds. Even in retrospect they remain in denial - as evidenced by Bernankes recent book. 

Why can't these incompetents understand that they are, once again, the midwife to yet another global unfolding economic crisis? But unlike 2007, this time around the US and Europe sit on the precipice of outright deflation.


Where will it all end? 

At previous bottoms, the Shiller PE touched 7X or below, a far cry from the 13.3X seen at the supposed "bottom" in March of 2009.

The Fed and its promiscuous fraternity of central banks have created the conditions for another debacle every bit as large as the 2008 Global Financial Crisis. The events we now see unfolding will drive us back into global recession.

Valuation booms are followed inevitably by busts. But the key point is that these valuation bear markets take the Shiller PE back down to 7x or below.

Since valuations peaked at the most obscene level ever in 2000, we have only seen two recessions and at the nadir of the last one, in March 2009, the Shiller PE bottomed at 13.3x, way above the typical sub-7x bottom. In valuation terms the bear market was not completed in 2009 and indeed after only two recessions there was no reason to expect it to have been completed.

We have just seen a cyclical bull market within a secular bear market, the next recession will spell real trouble for investors ill-prepared for equity valuations to fall to new lows. 

To bottom on a Shiller PE of 7x would see the S&P falling to around 550, a 75% decline from the recent 2100 peak.

Needless to say, a rout of that magnitude would wipe out virtually everyone from Wall Street to Main Street and the malaise would invariably be exacerbated by bouts of flash crashing madness in broken yet increasing correlated markets where "all weather", risk parity strategies are no longer reliable umbrellas when the storm hits.

With rock bottom rates and a still bloated balance sheet, the Fed would be working with exactly zero counter-cyclical slack, which means there would be no way for Yellen to avoid an all-out unwind of the much ballyhooed wealth effect that's served to restore the 401ks for any Americans still foolish enough to retain a seat at a casino run by crazed PhD economists, vacuum tubes, and modern day robber barons.

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