How central banks have sown the seeds for the next financial crisis

Daily Telegraph ^ | 6/5/2015 | Jeremy Warner

[HomerBohn]

The notion that governments have somehow got on top of the forces of financial instability is for the birds.

Here’s a somewhat scary statistic for those meant to know about these things. After a six-year bull market, the typical stock in America’s S&P 500 shares index is valued on a multiple of more than 18 times estimated forward earnings. This is not just expensive by historic standards, but super-expensive. In fact, according to analysis by Goldman Sachs, it ranks as in the top 98th percentile of historic valuations since 1976, or in other words one of the highest in nearly 40 years. It scarcely needs saying that these peaks tend to signal the top of the cycle, with some kind of bear market or crash just around the corner.

But hold on a moment, you might say; we’ve barely recovered from the last downturn. It surely cannot already be time for another? Regrettably it can. Most business cycles last little more than seven years, and if anything they tend to be getting even shorter. The US economy contracted in the first quarter and has shown few signs of significant recovery since.

As for the Eurozone, spring has brought a rare burst of growth, but few believe it will last, let alone be strong enough to undo the damage caused by the crisis.

[HomerBohn]

If the US mean reverts to long term averages on profit margins/GDP and valuation, CAPE says you will get -3% p.a., even with 5.5% Nominal GDP growth. That is -5% in real terms, if the Fed hits its target. Market Cap/GDP says you'll get about 0.9% real return.

[docbnj]

Here is how I see this. I am not an university-trained economist, so you can make your own judgment. Just think about it!
1. We have been running a “stimulus” policy for years, through the Fed and through deficit spending almost all through the government. Even states with balanced-budget provisions in their constitutions have been evading the rules by piling up huge retirement-benefit provisions which do not figure in their official budgets. NJ has done this, and is rated in some studies as 49th or 50th in financial stability of all the US states.
2. The policy is inflationary, and intentionally holds interest rates effectively near zero. Almost all countries have been doing this.
3. With investment rates near zero, where does one put savings? A citizen can simply stop saving, which is what many people do. As a result, many retirees have barely enough saved to make it through one year!
4. Investments in a zero-interest environment become extremely speculative, which means that many of them will be bad. That means misallocated investment, and the investment essentially lost. The high PE rations mean that people are going for the long shots, hoping that the future will be better. But only a few lucky investments merit such high ratios.
5. There are some interests which profit by this inflationary environment: politicians, real-estate people. Both are misguided, and indulging in short-range thinking, but that is the way the masses think. One can hardly lose by playing on the gullibility, ignorance, and self-absorption of most people in the country. We are in a age where the motto should be: do whatever you want. A corollary is: it is always someone else’s fault.
6. There is really nothing physically wrong with the economy! The world populations are richer than ever in history (almost everywhere except Cuba and North Korean). It should be easy to save for capitalization. Yet even the rich countries cannot find a way to save and invest efficiently; and if a few individuals do succeed, they are instant targets for the taxation authorities.
7. Countries which cannot even balance their budgets will eventually short-change on their defense spending. Meanwhile, countries like Russia, which have always had trouble producing efficiently and creatively, will adopt a conquistador policy: if you can’t make it, invade and take it.
8. War is the ultimate outcome.

[wastoute]

The only reason the last 6 years have been a “bull” market is the Fed pumping funny money. Bullcrap market.

[SkyPilot]

If economic prospects look so precarious, why are stocks, bonds and other asset prices so high? Part of the answer lies in central bank money printing, or so-called “quantitative easing”.

Even the term "Quantitative Easing" (like many terms those in financial industry have adopted) is a sham and a lie. It never "eased" anything - it only made things much, much worse. Those involved in banking, investing, and finance have long favored terms that sound like they are related to engineering or the hard sciences.

Some examples: Coase theorem, Securitisation, Creative destruction, Exogenous, Pigou effect, etc.

It is all a sham. Solid economics is not physics. Its foundation is really simple, and rests on the production of real goods and services, productivity, innovation, hard work, and sane fiscal policies. We have none of those today.

There is another tangible reference point that almost every financial analyst and economist does not even consider - God. It is the Almighty who blesses, and who curses, nations.

We are almost at the end of a Shemita year, which historically can portend either blessing or cursing of a nation. The economic downturns in modern times always fell on Shemita years. Jonathan Cahn has written an in-depth book on the subject.

People have become idolaters. They worship false money, and their IRAs and 401Ks. I believe all of that is going to be wiped out.

[HomerBohn]

You’ve earned your PhD.

[all the best]

“8. War is the ultimate outcome”

War is the heath of the state. The more war, the more government growth.

[pfony1]

Bring back Glass-Steagall!

Force all those too-big-to-fail casino gamblers to CHOOSE between being “banks” or being “investment houses”.

“Banks” will offer deposits guaranteed by the FDIC, will have emergency access to FED loans and will not be permitted to lend money on speculative terms. Yes, NO derivatives!

In contrast “Investment Houses” will have no government guarantees, but will be allowed to “invest” in ANY legal contract — no matter how risky or foolish — because it’s THEIR money! However, “investment houses” that raise money from the public will be required to publish financial reports in which the touting of phantom income would become a serious crime.

Hey, Congress! How about it?

[bert]

I was under the impression that the PE ratio over time was 15. That being so, if the figure of 18 is correct, it is not out of line

War is as you say, always the answer

BTW, peace is the interval between wars

[SkyPilot]

Did you catch this part of the article?

Rather, the main threat comes from conventional asset managers. Their portfolios have been swollen to bursting since the onset of the crisis by central bank money printing. Recent analysis by the International Monetary Fund, found that globally these funds today intermediate assets worth some $76 trillion, a sum equivalent to 100 per cent of world GDP. Via burgeoning bond markets, they have come to replace the banks as primary sources of finance for governments, corporations and even households. The upshot is that great chunks of credit intermediation have shifted from the banking to the non bank sector. Assets under management of some of the bigger players in advanced economies are as large as those of the largest banks, and show similar levels of concentration.

This is clear evidence that when the next crash happens (perhaps as early as this autumn), the only recourse for the governments will be seize all portfolios, IRAs, 401Ks, TSP accounts, and the like.

The governments are centralizing our private data right now, to include financial and medical.

When the food riots begin, or the "poor" cannot be sustained via checks or EBT, they won't care about "your" retirement. They will take the money that there is there, and tie everything to your "cooperation."

If you don't "cooperate" - prison, arrest, persecution, and denial of health care will be the result.

This is the Anti-Christ system, and it is almost completely in place.

[SkyPilot]

Billionaire Jeremy Grantham is standing on the rooftops, telling everyone who will listen that this coming collapse (he is calling it the "Yellen Collapse") will be worse than anything the world has seen in human history.

[crusher2013]

Stealing from savers.

In fact the stimulus, the bailout and government overspending are all aimed at savers.

Now they are talking about negative interest rates and doing away with cash to keep people from pulling money out of the banking system.

People are crazy to save money in this environment.

[wastoute]

Thanks to Ayn Rand we knew to “go Galt” when they immaculated the usurper. Unfortunately, The Fed was one step ahead of us. They knew how to put our money into the economy without our even spending it.

[SkyPilot]

People are crazy to save money in this environment.

The same might be said for "investing."

I think they are going to take it all.

[crusher2013]

I think that investing in yourself and your family’s education is probably the best investment. Especially in this environment.

Many people have started over from nothing, except for what they had between their ears.

“I think they are going to take it all”

I hope you are wrong. But I suspect that at least some powerful people would like that.