Spring is in the air, stock markets are driving higher than ever before, and happy days are here again.
Or are they?
The facts are that last night Japanese machinery orders fell 13% in January, despite the Japanese government pledging to “beat deflation” with new monetary operations (read: printing money) that has driven the Yen weaker by some 20% in the last couple of months. That move started in December and as such should have been reflected in January’s order figures — if anyone believed it in Japanese business.
They clearly don’t.
Then there’s China. They have a major property bubble problem, which is what always comes when you start printing cheap “money” (really credit) and allowing it to go into the real estate market. In China’s case it’s built to the point of literal cities with nobody living in them. That will eventually burst, and when it does you’ve got trouble. China has the “luxury” of having an effective command economy since they’re a communist nation, but even that won’t change the laws of mathematics.
Finally we have Europe. It’s a basket case. Europe has failed to deal with its banks, it has failed to deal with its budget deficits and it is still trying to find a way to “pull forward demand” to fill fiscal holes. It’s not working because it can’t — the leverage was never taken out. Not there and not here.
We’re “printing” $85 billion a month and yet can only muster a 0.1% GDP print? Let’s assume we manage to “rebound” and get a 2% GDP number. We’re diluting purchasing power by ~8% annually! Where is that going? Right into the middle class and below’s pocketbook; like a thief in the night it comes and steals their buying power and that ultimately has to reflect in what they purchase — and thus what people sell.
There are those who argue that the housing market has “turned.” Really? Look at Las Vegas, where there are tens of thousands of homes sitting with people in them who haven’t made a mortgage payment in three years!
… The key question: Is this a stable environment or is it another bubble that will bust when cap rates fall? And if the latter, and you erroneously bet on a “housing recovery”, are you going to get reamed twice in a decade?
In short what we have here is a market that is levitating upward not due to an improving macro environment but rather due to Fed monetary games. This can and has worked for a while, but like all sleight-of-hand games it cannot continue forever, and won’t. The structural imbalances that have been built over the last four years set the table for a snapback move worse than 2008.
This morning CNBS is playing a card that we “should” put forward fiscal policy mirroring The Fed’s views. These clowns actually believe that the laws of mathematics have been repealed?
Give me a break. The guy who decides he doesn’t need more than 2 hours of sleep a night and starts shoving coke up his nose to achieve that outcome may indeed produce more work with less sleep and appear to be more productive.
For a while.
But eventually he has a heart attack, and the question becomes this: What are you going to do when you collapse due to the abuse you have heaped on your body and now are able to produce nothing?
Our economy is experiencing chest pains and rapidly-escalating amounts of coke are going up the nose on a daily basis.
Source: Karl Denninger’s Market Ticker
Fundamentally, nothing has changed since 2007. The only thing keeping the stock market rising and the economy seemingly stable is the literal Trillions of dollars of funny-money being slammed into the system on a regular basis. They did it in the U.S., in Europe and in China.
As Karl Denninger points out, this is akin to a cocaine addict continuously snorting to maintain their high. It always ends badly for the addict, as it will for us.
There is a strong chance that we see a stock market crash, or at the very least a massive correction, in coming weeks or months.
But, there is also the possibility that it keeps going higher, an effect of the Fed’s monetary easing and cheap money being given to banks who then leverage that money in stocks and other financial instruments. In this scenario, as we’ve seen since 2008, prices for essential goods continue to rise. What won’t rise is wages commensurate with the price inflation, which means that things like food, gas, and electricity become so expensive that disposable income shrinks to near zero (or goes negative) for the majority of Americans.
There is no way out.
All roads lead to a detonation of the financial, monetary and economic systems as we have come to know them.
When the economies of the world’s ‘super regions’ finally collapse, and hundreds of millions of people are left destitute and with no hope of recovery, the end result may very well be nuclear engagements across the globe.