The Eye of a Massive Hurricane
Saturday, April 13, 2019 12:09
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“The Eye of a Massive Hurricane”
by Charles Hugh Smith
“OK, let me see if I have this right: The stock market has been soaring because the economy is softening, so the Federal Reserve panicked and went from raising rates to considering cutting rates. It seems markets are now assuming a rate cut is already locked in, given the Fed’s commitment to cease trimming its balance sheet by September. This dovish reversal means liquidity is flooding back into stocks and bonds, so stocks have been rising once again since “the Fed has our backs.”
OK, I get it. But the market is also rising because punters and pundits are assuming the soft spot in economic expansion has ended, and growth is already resuming globally. The positive data out of China are taken as proof-positive of this resumption of expansion.
Now wait a minute — the market is rising because growth is softening and also because growth has resumed? Sorry, Stock Market, you can’t have it both ways. Either the global economy is stagnating, forcing central banks to flood the financial system with more liquidity, or growth is resuming, in which case raising interest rates are back on the table, especially if wage inflation kicks in. If growth resumes, not only will the Fed have a green light to raise rates, it will also face pressure to resume trimming its bloated balance sheet.
Many observers have noted that the sharp decline in Treasury bond yields is signaling fear that the global economy is recessionary, and central bank goosing isn’t going to reverse the slowdown. Meanwhile, stocks are schizophrenic: going up because growth is slowing and Fed rate cuts are now in the bag and going up because growth has resumed.
Central bank and financial authorities are keen to continue the schizophrenia because markets have no excuse to drop: If growth has stagnated markets will continue soaring, and if growth has resumed markets can continue in overdrive.
Eventually reality will intrude in this pleasant madness: Either the global economy slips into recession and corporate profits tank, kicking out the props of high stock valuations, or global growth resumes, opening the door to stock-market-killing rate increases and balance sheet reductions.
There’s one way to visualize this moment in history: Global financial markets are in the eye of a massive hurricane. Below, I show you how the world is being “Japanified.” Read on.”
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“The Japanification of the World”
By Charles Hugh Smith
“A recent theme in the financial media is the Japanification of Europe. Japanification refers to a set of economic and financial conditions that have come to characterize Japan’s economy over the past 28 years: “Persistent stagnation and deflation, a low-growth and low-inflation economy, very loose monetary policy, a central bank that is actively monetizing debt, i.e. creating currency out of thin air to buy government debt and a government which funds “bridges to nowhere” and other stimulus spending to keep the economy from crashing into outright contraction.”
The parallels with Europe are obvious, but they don’t stop there: the entire world is veering into a zombified financial, economic, social and political status quo that is the core of Japanification.
While most commentators focus on the economic characteristics of Japanification, social and political stagnation are equally consequential. If we only measure economic/financial stagnation, it appears as if Japan and Europe are holding their own, i.e.maintaining the status quo via near-zero growth and near-zero interest rates.
But if we measure social and political decay, the erosion is undeniable. Here’s one example. Few Americans have access to or watch Japanese TV, so they are unaware of the emergence of the homeless as a permanent feature of urban Japan.
The central state propaganda media is focused on encouraging tourism, a rare bright spot in Japan’s moribund economy, and so you won’t find much media coverage of homelessness or other systemic signs of social breakdown. If you watch Japanese detective police procedural dramas, however, you’ll find constant references to homeless people and homeless encampments: detectives seek witnesses to a crime in the nearby homeless encampment; a homeless man living in an abandoned warehouse is found murdered, etc.
Here’s the core dynamic of zombification/Japanification: the top 25% are doing whatever is necessary to maintain the status quo because it works well for them, but the system is failing the bottom 75%, who must be politically, socially and economically neutered so they can’t upset the apple cart.
Depending on the economy/society in question, one could argue that it’s the top 40% defending the status quo and disenfranchising the bottom 60%, or it’s the top 20% disenfranchising the bottom 80%. The exact ratio doesn’t matter; what matters is the status quo no longer works for the majority, but they are powerless to change the system because it’s controlled by the minority who benefit so greatly from it being locked in its present setting. By the way, this is not the result of free market capitalism, but crony capitalism on a massive scale. A true free market system would afford far more opportunity and mobility.
The other dynamic of zombification/Japanification is: past success shackles the power elites to a failed model. The greater the past glory, the stronger its hold on the national identity and the power elites. And so the power elites do more of what’s failed in increasingly extreme doses. If lowering interest rates sparked secular growth, then the power elites will lower interest rates to zero. When that fails to move the needle, they lower rates below zero, i.e. negative interest rates.
When this too fails to move the needle, they rig statistics to make it appear that all is well. In the immortal words of Mr. Junker, ‘when it becomes serious you have to lie’, and it’s now serious all the time.
The necessity of neutering the majority politically, socially and economically manifests in two destructive ways: young people who opt out (or are frozen out) of the failed status quo do not mate and have children, do not buy houses, new cars, etc. This sets off a demographic time bomb that guarantees the implosion of the financial promises made by the self-serving status quo. This is social depression, and once it is embedded it is essentially impossible to reverse.
Needless to say, if young people no longer have kids and no longer make enough money to buy houses, cars, etc., the economy is doomed to stagnation and decline as old people don’t spend much. That leaves the entire economy’s spending and borrowing on the top 10% who are doing splendidly. But the top 10% cannot hold up the entire economy for long. That fragility is exposed once one of the many rotten props holding up the status quo collapses.
The second option is political upheaval, i.e. populism. When the losers in the winner-take-most economies of the world (and every economy is now winner-take-most once you scrape away the PR and propaganda) have had enough, they take to the streets. Beating them, shooting them, vilifying them and so on only hardens their resolve to bring the status quo crashing down, regardless of the damage.
Either way, the brittle status quo collapses from political rebellion. Or from social depression or the fragility that arises from pursuing ever more extreme measures of defending the status quo’s winners at the expense of the many losers.
Zombification/Japanification is not success; it is only the last desperate defense of a failing, brittle status quo by doing more of what’s failed. Japan has perfected the art of managing decline while maintaining the illusion that the status quo is solid and permanent.
In this, the entire global status quo is embracing Zombification/Japanification. By all the usual economic measures — growth, national debt, percentage of tax revenues devoted to interest on the debt, and so on — it is heading down the same track. How long can the status quo continue to maintain the facade of solidity?.
Meanwhile, a classified Federal Reserve memo sheds new light on the Fed’s confidence in its control of our own economy and the stock and housing markets. In effect, the Fed is guaranteeing that there will be no recession for another 10 years, and that stocks and housing will remain in a permanent uptrend. Paraphrasing the memo, we have the tools to insure that stocks and housing do not just remain at a permanently high plateau but continue to move higher in a permanent uptrend.
I’ve marked up a chart of the S&P 500 and the Case-Shiller Housing Index to illustrate the Fed guarantee. As you can see, stocks and housing will at a minimum double in the 2019-2029 period, and could do much better.
The Fed memo refers to the enormous success of the Fed’s dovish about-face since December: (again, paraphrasing the memo): “The Federal Reserve’s management of policies and market expectations since December prove that we can reverse any downturn and reignite expansion of stock and housing valuations at will. We can thus guarantee a permanent expansion of stock and housing valuations into the indefinite future.”
The memo also notes that there are many policy extremes such as negative interest rate policy (NIRP) that the Fed holds in reserve. In other words, the toolbox is full of shiny new tools the Fed hasn’t even used yet. This is one reason for the memo’s supreme confidence: there is no slowdown or downturn that the Fed can’t reverse within a few weeks via policy tweaks and perception management via public pronouncements and PR campaigns.
So as the charts illustrate, owners of stocks and houses can take the Fed guarantee to the bank: huge permanent gains in collateral and capital are in the bag, Baby, because “the Fed has our back big-time:”
There is one fly in the ointment the memo mentions: the Fed is powerless to push wages and earned income higher along with stocks and housing. So while stocks and housing soar to the moon, wages will continue stagnating or losing ground as rising prices for healthcare, rent, childcare, college tuition, etc., continue chipping away at the purchasing power of earned income.
Those who own stocks and housing now will continue getting richer, those who don’t will be priced out of these markets. In other words, the Fed’s policy of making the rich richer and the Devil take the hindmost is permanent. As with Japan, the status quo will remain until a political and social Cultural Revolution sweeps away the central bank and the rest of the parasitic ruling elites.”
Source: http://coyoteprime-runningcauseicantfly.blogspot.com/2019/04/the-eye-of-massive-hurricane.html
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