We are fast approaching the time when it will become obvious to all that
mortally-wounded economies cannot be resuscitated by a massive increase in
credit from central banks. Nations that suffer from tremendous capital
imbalances, debt capacities and asset bubbles cannot be healed by printing
money. Quantitative easing and zero percent interest rates have the ability
to provide GDP growth that is merely illusory and ephemeral. This is because
it can temporarily levitate equity, real estate and bond prices, which causes
an artificial boom in employment and consumption. But the
"benefits" of making the cost of money free has its limits, and it
also comes with dire consequences.
Further hope in economic growth generated from central banks is quickly
fading because the transmission mechanism is now broken. Central banks can
print money; but if new assets aren't purchased by private banks there is
less of an increase in broader money supply growth. Now that most central
banks have set borrowing costs at rock bottom levels there isn't much room to
go lower. And it is becoming clear that governments are really good at
creating asset bubbles, but woefully inadequate at creating sustainable
growth.
For example, the Bank of Japan was fairly successful at creating inflation
(YOY CPI up 2.4%), but after more than two years of Abenomics and its attack
on the yen, GDP is lower today than in 2012. The growth dynamic isn't much
different in China, where GDP growth in 2010 was 5% higher than it is today,
according to official government numbers, as the PBOC tries to slowly let the
air out of an overwhelming fixed asset bubble.
But now all hopes for central banks to save the world rests on Mario
Draghi and the ECB. Two years after promising to do "whatever it
takes" to bring down skyrocketing bond yields, the ECB will officially
start buying bonds in March. The problem is that Mr. Draghi's well
telegraphed move has only served to allow private banks to front run his bid.
Therefore, sovereign bond yields are already near zero percent and any
artificial benefit derived from lower borrowing costs has already been
accounted for. And now these banks, which are saturated with EU debt, are now
just waiting until March to say to Mr. Draghi, "sold to you." But
these same banks won't be in any rush to make new loans with the ECB's credit
or buy additional sovereign debt because the assets in question offer
virtually zero profit motive.
The United States has been basking in the afterglow of the Fed's ability
to temporarily re-inflate home prices and the pockets of Wall Street bankers.
But sorry to say, once again growth on Main Street appears to be chronically
illusive. U.S. Q4 2014 GDP growth was less than half of what it was in the
prior quarter. And so much for all the drivel about finally achieving,
"escape velocity" last year. The 2.4% GDP growth for all of 2014
was still less than the 2.5% growth seen during 2010-the first year out of
the Great Recession.
Central banks have destroyed any vestiges of the free market with the
primary goal of creating inflation. But with the growth benefits derived from
free money (if any) now in the rear view mirror, what do we have to look
forward to? Investors have the pleasure of witnessing the massive reversal of
bond yields, as the failure of central banks and governments to create viable
GDP growth is realized. For instance, the Japanese 10-year Note yield has
rallied to 0.46%, from the low of just 0.2% on January 19th of this year. And
yields have begun to rise in Europe and the U.S. as well.
The turnaround in global sovereign bond yields is not due to a rise in
inflation, nor is it because of an increase in growth. Rather, it is because
QE's efficacy has run its course. Therefore, we are left with sovereign
yields that must now discount the inflation risk represented by the
tremendous increase of central banks' balance sheets, along with the massive
increase in IOUs piled up since the Great Recession ended. Most importantly,
without the manifestation of this growth promised by central bank money
printing, there just isn't any way for sovereign nations to maintain the
illusion of solvency. Indeed, since the start of the financial crisis at the
end of 2007, total global debt has risen by nearly $60 trillion, which is
286% of GDP, up from 269% seven years ago.
As confidence in central banks to save the world fades, interest rates
have started to rise. Rising interest rates is Quantitative Easing in
reverse. The increasing debt service payments combined with crumbling asset
bubbles will cause spurious global GDP to collapse. On top of this, the
Federal Reserve is threatening to raise interest rates into an environment of
slowing GDP growth around the world. With the total market cap of U.S. stocks
at an incredible 124% of GDP and a world-wide historic bubble in government
debt, investors across the globe need to get ready to relive the Great
Recession all over again.
