In late 2001 I had a bad feeling in my bones. The tech bubble had already collapsed and then Fed Chairman Alan Greenspan essentially opened the monetary floodgates to prevent the global economy from taking the necessary pain. In my head all that would turn is “this is going to end up bad”. I told my then clients in the face of constant criticism that “Alan Greenspan would go down as one of the most hated central bankers.” Many would claim that how could I know more than the Maestro? To me it made perfect sense. The stories of recklessness, of 125% loan to value mortgages, of 1,000s of property appraisers warning the authorities of fraudulent loan brokers getting non-registered appraisers to artificially pump up the value of home prices to collect bigger fees. So people were unwittingly buying properties valued 25% higher than reality so were underwater before they moved in. The rest is history. The 2008 GFC came, Lehman collapsed and the average punter had to bail out the financial sector.
As I wrote in my previous piece about the rapidly declining velocity in money. Central banks are losing the battle around the world. I have been negative for several years now but this velocity data sent the same chills I had had in 2001.We have manipulated currency, credit and equity markets. Governments are monetising debt but the problem is that at the same time we have inflated asset values, the economy is not turning properly. Have a look at US employment data. Non farm payrolls have declined aggressively since Feb which perhaps reflects the fact that the underlying economy is struggling. Milton Friedman often said that the economy generally slows 6-9 months after the money supply contracts in the “real economy”. Money supply can grow all it wants in the fake economy of debt monetisation.
What we are facing is simple. Central banks have been riding on the gullibility of the masses. Unfortunately economics are being played with on an unprecedented scale. They are losing the ability to fix things with money supply. With interest rates heading toward negative levels, holding cash carries positive yield. So the central banks have to keep flooding markets with more and more liquidity to stand still. When markets lose faith in central banks (this is rapidly approaching) financial markets will collapse. Of course the central banks might move to buy up markets to restore stability the reality is that will be too little too late. I think 20-30% collapses from here are totally feasible. Perhaps more. Asset markets are over inflated.I think Aussie banks will need to be bailed out. With 60% of their loan portfolio in mortgages in an overinflated property market with an economy facing a credit downgrade and a population that is over stretched. If you have a property in Australia that you don’t own outright – SELL IT.
What do you buy in a market like this? GOLD .The most hated asset class. The most mocked,scorned and criticised hard asset. I bought mine in 2002 and have never sold it. I think it is yet to see its day.
I hate to be the bearer of bad news. However if you thought GFC in 2008 was bad, this will be much worse because the world will finally have to take the pain they’ve avoided for the last 16 years. Party is over folks.