Greek debt trades at the highest yields since the dark days of 2012 as that story of false hope faces the reality of a likely default. Nothing was fixed there, really, just like nothing was done to truly rectify balance sheets anywhere else after the crash of 2008. Speculative activity is the only thing the deciders can elicit and without it growth would be more apparently challenged.
The entire “house of cards” of the stock market rests on the hope that 100 years of valuation data is of no meaning in the heavily manipulated construct of recent years even as earnings fall. Global GDP is near the weakest it has been since the last recession, yet we are supposed to trust that the sustained growth the Fed promised countless times will arrive at any second now, though their forecasting errors have been stunning in their consistency. By jawboning pleasantries when any worries surface either about low economic growth or higher rates, the Fed is doing its best to hold the 2,050 S&P 500 peg it seems to have established as the level which assures its acolytes will blindly assume all is right with the world. Eerily, equity investors have turned to celebrating the idea that rates are stuck at low levels for longer and selling on any stronger economic data.
It sure looks to us like QE in its practical application is deflationary at this point and a crushing blow to the real economy’s long-term prospects. This is the exact opposite of what the PhD’s tell us about monetary policy and the very notion is heresy among the ranks of the Keynesians who have the controls. However, free money, not surprisingly, has led many in business to decide that they simply must build something. Capital decisions are being based on the cost of money, not the underlying dynamics of business and industry. When hurdle rates are zero many think anything is possible. That adds to overcapacity and destroys pricing power when the demand side, already severely burdened by over indebtedness, fails to meet the added supply. For instance, we are literally running out of storage for crude oil in the U.S. because too much is being produced as drillers borrowed vast sums of money that they thought was too cheap to pass up.
It is not just that oil prices have cratered as inventories hit 80-year highs in the U.S. We can also point to skyscraper mania in Asia and elsewhere, commercial jet production across the planet, student lending, and subprime auto debt as other clear examples of extremely reckless behavior. We wonder how many casual restaurant chains like Shake Shack (now trading near 1,200 times the average estimate for 2015) can IPO before that door closes. As if we did not have enough corporate restaurants that are struggling to fill seats.
Investor protection in junk bonds has hit the lowest level ever according to Moody’s and a huge percentage of the massive amounts of corporate bonds being issued are low quality. Markets have learned nothing from 2008. We do wonder who will buy those very bonds when sellers multiply. Liquidity is already poor on the bid side.
A new endeavor, “crowd” financing has taken on a speculative frenzy in this cycle as retail investors are throwing hard-earned cash at private sector start-ups at a frenzied pace in the hopes of picking the next Twitter, Facebook or Uber (we could do without any of them). We do not think that phenomenon can end well.
Of course, savers are effectively being punished for their thrift and have less money to spend on goods and services. That is not pro-growth! Perhaps nothing sums up the current landscape better than the fact that Switzerland became the first country ever to issue a ten-year bond at a negative yield just as former Fed chairman Bernanke released the title of his upcoming memoir, The Courage to Act. He and his cronies acted alright and stagnation for much of the economy is the result.
We don’t buy the idea that things would be worse now if emergency measures had been stopped years ago. Until the deciders admit that the trillions of legacy bad debt must be restructured and related assets are allowed to fall to clearing prices we cannot achieve sustainable growth. Greece is not the only problem that will not go away, incapable of being papered over with additional debt. Many years of bad lending cannot be made to vanish no matter how hard the Fed and other central banks try. For instance, the data indicates that in the bottom third of the housing market in the U.S. a high percentage of homeowners are still underwater on their mortgages despite all of the stimulus attempts. These are the same homeowners whose wages are not growing like those of the corporate titans and the bankers whose high end homes are doing just fine (for now) thank you very much!
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