Global stocks on the brink
Markets plunge on Greek default and bursting of China stock bubble
Until just recently, stocks in nearly all the developed nations were making all-time highs, boosted by seemingly unlimited monetary and global fiscal stimulus and ignorance by investors that nothing could ever go wrong. Not anymore.
While these problems been with us seemingly forever- a Greek default, stubbornly low economic growth rates, excessive global debts exceeding $180 trillion USD, etc. it seems they suddenly matter now. In my last post I proposed an ending diagonal chart pattern in US and global stocks was unfolding that if validated could result in a much bigger plunge than most could imagine and would shock so many leveraged and complacent investors. That remains the primary count as farces and absurdity are evident everywhere you look, especially in the state controlled Chinese stock markets.
Oops! Recent dramatic moves by China are incoherent
In fact China has plunged 30% from it’s all-time high on June 12th, when it’s total market cap topped $10 trillion for the first time ever, to bear market status in less than three weeks. This is very sobering all investors. A serious and unwelcome reality check has set in for Chinese investors who now realize that growth in stock margin debt can’t exceed levels of 15,000% per annum without some real damage. Or that the disconnect from the recent $10 trillion USD all-time high has occurred just as their GDP levels hit thirty year lows. The price action across their primary exchanges this month has been nothing less than the theater of the absurd that reigns at market cycle tops marked by excessive leverage, overcapacity, and ignorance by market participants.
China matters to us all, and more than we think. China has accounted for more than the lion’s share of global economic growth for over a decade and now they are slowing down faster than anyone dared believe despite all the desperate measures by their government to prevent a naturally occurring economic winter that is long overdue after decades of hyper growth and excessive debt levels. One must now wonder how bad things could be now in China given the sheer magnitude of their desperation recently in slashing interest rates every few days and initiating other stimulative moves at such a dizzying pace. Are they in full panic mode? Yes, of course. Have they blundered even more by telegraphing their panic to us all? Yes, of course.
Their low vibration measures would even make Stalin blush in that they are bold all day long but without any sense. Here China chooses to increase stock participation by millions of novice investors through margin buying, serving the big casino that spots markers to anyone who breathes. In recent weeks the measures taken by their government have been confusing, desperate, and confounding as they have sought to goose their growth while also reigning in margin requirements. Their left hand sends signals to goose economy while the right says- hey wait minute, our markets have gone too far. So what are investors to think? It has been all to clear for the past year they are trying to overcome their housing bubble crash by creating another bubble in their stock markets to coax their gambling prone citizens into yet another unsustainable bubble.
That has been the case with China for years and no doubt the real growth numbers are much worse than reported. This has been common knowledge to most in the know for years and this discrepancy is best reflected in two aggregate measures that cannot be so easily fudged- electricity demand in China and the CRB index of global commodities that has crashed in the past two years due to its heavy dependence on China demand. Both measures suggest China is in deeper trouble than most believe.
Keynesian failures now take center stage
Recent developments in China, Greece, and other nations underscore a universal truth that remains hidden plain sight- there is just too much global debt for any enduring prosperity. We have advanced here since our 2007 debut that the abysmal failure of the Keynesian model, born out of the 1930’s Great Depression and since then the global standard, would eventually implode in grand fashion. After all, this theme is at the very heart of K-Wave theory that claims that excessive debt is perilous and is grotesquely inefficient and also does not promote capital chases its highest utility. There can be no doubt this has been the case since the global financial crisis yet it has been overlooked by most because stocks and bonds have surged to record highs. But the tide turned in May when the absurdity of negative bond yields peaked in so many sovereign markets by topping out at an astonishing $5.3 trillion USD equivalent in sovereign debt yielding negative returns. What do you think the history books will say about those negative bond yields on sovereign countries that so pathetically indebted?
Many of the major developed countries now have trillions in debt that are just unpayable. Given that the bailout price tab for Greece has risen by tens of billions in recent weeks and with their banks still closed and their economy imploding the likelihood of an enduring solution could remain elusive, further underscoring the absurdity and audacity of the Keynesian model once and for all. If the baseline premise the Keynesian model were to ever be betrayed as doomed, which is clearly inevitable, then the acute ramifications to paper asset valuations are unspeakable.
Bernanke misnomer in famous “Helicopter Ben” speech
While the ruins of global sovereign and municipal fiscal deficits are no doubt worthy of a jaundiced eye, and perhaps scorn, so too is the excessive multi trillion debt levels of global central banks. These extreme debt levels have their roots in a 2002 speech given by one Ben Bernanke and I suspect most don’t appreciate the importance of this speech. In 2002 BB was a humble Princeton professor who had shown for years a particular zeal in his expression of what he perceived was a timid a policy response from the Federal Reserve in the 1930’s in battling the Great Depression. He embraced Japan style QE wholeheartedly as the ideal remedy to post modern deflation so long as it was a much larger response that the Japanese all-in monetary response to their deflationary woes that began in the early 1990’s. As a long wave buff this troubled me to no end so I was sure to follow Ben as I noticed his views on this matter were uncommonly aggressive and oh so passionate. He was a zealot of the highest order, but most saw him as just the gentlemanly professor type, hardly one who would become iconic. Yet his Napoleon style monetary aggression had been laid bare for all see.
So did President George W. Bush, who appointed him to the Federal Reserve Board in 2002 and then to Fed Chairman in late 2005 to replace the retiring Alan Greenspan. President Bush had been advised that Bernanke would prove to be the most dovish and aggressive monetarist of all time and this is what they wanted at the time. In hindsight, he proved them right, and then some. I knew Bernanke would be a force unto himself given his outspoken nature proclaiming he has the RX for any deflation so I included most of all his magnum opus was his 2002 speech was titled “Deflation” making sure it doesn’t happen here”. My purpose in showing this to advocates and students of K-Wave theory was to advance the notion that such a capricious approach to battling economic downturns was problematic and rife with conflicts. I maintain strongly however it this a must read for anyone seeking to understand the dynamics of monetary policy in the modern age and It can be found here in our Fiat Currency section under the TABOO tab.
This is because the canons of K-Wave theory promote that classic fiscal Keynesian or monetary schemes cannot propel true economic recovery until the excesses of the previous cycle are rooted out. By nature any policy that goes out of its way to promote the opposite is heresy to me, much like K-Wave theory is heresy to monetarists and those Keynesians the world over. But I had to include that speech into the site content as I suspected that speech could form the battle lines of battling this long wave winter.
It is not too hard today to make the case that the premise of that 2002 speech was deeply flawed given that central global bankers cannot produce one ounce of inflation during a prolonged six year winter of unprecedented fiscal and monetary stimulus, much like Japan since the 1990’s. Instead, the so-called remedy that has emerged has helped the wealthy and has severely punished all savers. In hindsight, perhaps Bernanke’s 2002 speech could have been more appropriately titled “Paper asset inflation- making sure it happens here.” Global central bankers have taken Bernanke’s lead and global stocks have surged while global economic growth has stagnated under the central policies that mandate exponential debt is required to stimulate national economies. Today the futility of this approach all too clear to me.
These policies have not promoted the general welfare nor the common good nor price stability or economic growth as per the mandate. Instead they have promoted stock bubbles, an escalation in the levels of income inequality among the population and much more. The sad truth here is also ironic in that central bank policies to defeat naturally occurring slowing growth instead feeds the very deflation monster they loathe so much. This flawed approach of the Federal Reserve, still now unchecked after over 100 years of abysmal failure, should make us wonder if Bernanke’s 2002 speech could have been also renamed another way- Deflation- making sure it happens here. Mission accomplished.
The enduring deflation evident today can be regarded perhaps as merely severe price dis-inflation right now given that we are not yet in a terminal phase of asset deflation. But if you polled any stock analyst, financial journalist , or pundit today I suspect that less than 5% would advance the idea that deflation was alive and kicking. In fact, deflation is considered R.I.P. while some are taking a victory lap or declaring mission accomplished in the battle against deflation. But maybe the case for deflation today can be best seen through the chart of the global CRB index of commodities that now stands at 217, down over 30% in the past year alone. This broad index by its very nature can’t be so goosed by all the monetary stimulus and manipulation that dominate most other financial charts. It foretells a world awash in overproduction, saturated by a glut of products financed by cheap easy money. When the gig is up, several trillions of global debt will begin to default and it will begin with the weak sisters like Greece, Puerto Rico, etc. and spread form there. If it begins with China however the terminal phase of this fourth Kondratieff Winter of the modern era will begin with a much bigger bang to put it mildly. History was made this week with the first default to he IMF from a major country yet global markets continue to whistle by the graveyard. But for how long?
Global paper assets for the moment still enjoy the “Greenspan, Bernanke, Yellen put” and the 11th commandment is Thou Shall Not Fight The Fed. But really, for how long? On this matter, K-Wave theory in unwavering- the global forces of deflation at the tail end of any economic winter are so enormous that no monetary scheme can overcome. Keep this in mind as you see global central banks lose control of the monetarism that has enforced a failed Keynesian system for so many decades.