Let me begin with a caveat: confirmation bias is an ever-present risk for
an analyst such as myself.
If you're not familiar with the term, 'confirmation bias' suggests that
once we've invested time and emotional energy into developing a worldview,
we'll then seek information to confirm that view.
After writing about the economy for so many years, I'm now so convinced
that we can't print our way to prosperity that I find myself seeing signs
confirming this view everywhere, every single day. So that’s the danger to be
aware of when listening to me.
I have developed a view, based on lots of historical inputs, that
concludes: Printing money out of thin air can engineer lots of things,
including asset price bubbles and the redistribution of wealth from the
masses to the elites. But it cannot print up actual real prosperity.
As much as I try, I simply cannot jump on the bandwagon that says that
printing up money out of thin air has any long-term utility for an economy.
It's just too clear to me that doing so presents plenty of dangers, due what
we might call 'economic gravity': What goes up, must also come down.
Which brings us to this chart:
It's essential to note that more than two-thirds of the net worth tracked
in the above chart is now comprised of ‘financial assets.’ That is,
paper claims on real things.
As the central banks have printed with abandon over the past decade,
they’ve created the most extreme gap between real things (GDP) and the claims
on those same things (Net Worth) in all of history.
Following the Great Recession, the ‘plan’ of the central banks, such as it
was, seems to have been to jam up people’s paper wealth, under the theory
that people who feel wealthier are more likely to spend more and hopefully
borrow more, too.
That plan has worked rather well, at least from the standpoint of creating
vastly larger amounts of new borrowing (debt and credit). But how
much GDP growth has resulted? Not that much.
The gap between the two only grows and grows at this point. And the
central banks are now stuck at this point. They literally have no idea how to
undo this problem they've managed to create.
At some point that gap is going to have to close. Either GDP growth
recovers to its highest rate in all of history and then stays there for many
years (a complete fantasy if we're being honest), or the global debt pile
starts getting defaulted on (which will have very ugly repercussions).
This is why we’ve focused so heavily lately on central banks. It's why we
recently produced the End
Of Money webinar with an excellent panel of experts (including G. Edward
Griffin, David Stockman and Axel Merk) to increase our understanding of
what actions the increasingly desperate central banks are likeliest to try
next.
As the above chart chillingly shows, the damage down by the bursting of
each previous market bubble blown by the Fed has been worse than the ones
that preceded it. This time will not be the exception. This third bubble, the
largest and most ill-considered of them all -- which we've written
extensively one as The Mother Of All Financial Bubbles -- will be enormously
destructive.
It will be so bad, that here at Peak Prosperity.com, we not only focus on
helping people navigate the tricky world of building and preserving their
financial capital at a dangerous time like this, but
we also advise building true resilience across the other important forms of
capital such as Social, Material, Living, Emotional, Knowledge, Time
and Cultural capital. So much will likely be lost in this next reset that
true wealth in its aftermath will be dependent on more than just money.
Actions, Not Words
Most people take their cues from the price level of the stock market.
Once upon a time, equities were a useful barometer. But that was before the
central banks began intervening heavily in them, starting under Alan
Greenspan. He was responsible for the first big bubble on the earlier chart
above.
If you listen to the words in the public statement of the central banks,
you'll hear a lot about ‘improving conditions’ and ‘nearly full employment’
and ‘strengthening growth prospects’. However, if you then look at their
actions, you'll see they're in complete opposition to these statements.
As always, you should put far more weight on what someone does
rather than on what they say. Actions speak louder than words,
and so here’s all you need to know about the central banks, their influence
on markets, and what they really think about things at the moment:
First, we have the red line trundling up at about a 30-degree angle from
left to right for several years. But then, in early 2016, the
trajectory changed.
Do you remember what was happening then? Emerging markets were in
disarray, many had entered bear market declines, and the dollar was shooting
higher ruining the economies of many developing nations. The western stock
markets started rolling over and appeared ready to suffer a serious decline.
"Not on our watch!" declared the central banks. See what
happened at the same time, as indicated by the orange line rising at a much
steeper 45-degree slope?
That’s right: the central banks began dumping far more money in
the equity and bond markets, in an attempt to save everything from the
inevitable downturn that threatened to result from the prior central
bank printing spree.
Now, here in early June of 2017, the Big 5 central banks have poured a
whopping $1.5 trillion dollars(!) of newly created, thin-air money into the
markets since the beginning of the year.
And because they have, we see things like this, where all the hot
speculative money flows to the very hottest stocks, in this case the
"FANGs"(Facebook, Amazon, Netflix, and Google):
(Source)
The above chart shows that while these hot, sexy stocks have been rising
(remember, we were all genius investors in the 1990’s, too?), the non-FANG
stocks have not. Further, the chart reveals the extent to which such
stock price action has been coincident with central bank money printing
(balance sheet expansion). The connection is completely obvious.
But back to our story. This $1.5 trillion is a record-breaking
amount. As in, never-been-tried-before-let’s-see-what-happens
sort of amount.
So, while the words of the central bankers may be soothing, their actions
are panicky.
What are they afraid of exactly?
Well, that their entire scheme will prove to be another gigantic bust.
The only thing that can bail them out at this point is a swift return to
robust, sustained economic growth. So let’s take a look at growth again,
shall we?
Growth Is The Answer (And The Problem)!
The global growth scene is a mixed bag. Right now, China and Europe
seem to be in better shape than the US or Japan.
However it’s important to remember where we are in the economic cycle.
Nothing grows forever, and we are now very far into this so-called
'recovery'.
In the US, it ranks as the third-longest recovery since WWII:
(Source)
Apparently, not all ‘recoveries’ are built the same. If you look at the
average yearly GDP growth rate over the past decade, it's the same as we
experienced during the Great Depression era of the 1930’s:
(Source)
The above dismal rate of growth perfectly explains the growing gap between
household net worth and GDP. If you boost financial assets ever higher
using central bank stimulus, but the economy remains stagnant, you get a gap.
Global economic growth is weak, has been weak, and will continue to be
weak for many reasons. Not least of which is the massive overhanging piles of
accumulated debt across the global economy, which are very growth unfriendly.
As Professor Steve Keen has shown, if your debt grows at 10%, and this
enables your economy to grow at 5%, anything less than a more rapid rate of
credit growth in the future will cause your economy to contract.
Said another way, as long as you can grow your debts at a faster pace
than your income -- forever -- you'll never have to experience another
economic downturn.
That statement right there, lays bare the entire ridiculousness of
everything the central banks have, and are currently trying to
engineer.
Eventually, reality always catches up. And there are plenty of signs
indicating that reality is now arriving.
And it doesn't look happy.
In Part 2: Get Ready For The Coming Massive Correction we
explain why there's a better than 50% chance of a global recession occurring
in the next year -- and nearly a 75% chance of one in the US.
We then detail out how the coming predicted massive market correction may
well rip the financial markets apart in a way that could take generations to
repair in any meaningful sense.
Click here to read the report (free executive
summary, enrollment required
for full access)
