Playing with Financial Plutonium

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I am still dumbfounded by the level of complacency in financial markets. How  can there be any confidence in our financial system?  Reality is that confidence continues to wane. I mentioned a while back that the headline stock index in Europe has no financial stocks in it. Never in my history in financial markets have I witnessed this. It isn’t because other stocks have got bigger. Financials in Europe have shrunk to such irrelevant levels that they don’t make the cut. Argue all you want about FinTech revolutionizing banking as we know it however don’t dismiss that the core of financial markets resembles a rotting carcass with so little meat that even vultures are considering vegetarianism so slim are the pickings. If the financial sector is sick and it is what greases the economy beware this signal.

One thing that hasn’t changed is the arrogance of the banks. Deutsche proudly protesting that the DoJ’s $14bn fine is just a “starting point” all the while its shares dwindle at all time lows.  Europe’s most powerful bank 1/3rd the size of Australia’s NAB. I’m working on a report looking at the deterioration of financial profitability and market relevance.

All the while though I keep shouting from the rooftops like the tramp from Blazing Saddles and the bell chimes right as I try to warn of impending  global economic disaster.

“The world economy is dying (clang!)”

“what did he say?”

“I think he said the world economy is flying!”

“No, goddamnit!, I said the world economy is dying (clang!)”

You get the picture. What people still haven’t grasped is the velocity of money continues to slow rapidly. For every dollar pumped into the economy, smaller fractions of GDP are created. In Europe it takes €7 to create €1. In China it takes RMB8 to create RMB1. In the US it takes around $4.5. The more morphine that is pumped into the patient the less efficacy. The debt burden mounts to unsustainable levels. Asset bubbles abound. Central banks keep pushing on sweeping the damage under the carpet. Europe is at stall speed. France and Italy didn’t grow last quarter. The US stumbled into 1% territory while the previous quarter was revised to 0.8% – hardly cracking growth.

The most recent worrying red flag is Greenspan weighing into the central bank policy debate. If there was ever a tail-end Charlie behind the curve he is it. I look at the propaganda pushed by the White House in a self congratulatory tone. This idea that everything is fine. American wealth at all time highs and poverty at 50 year lows. The problem with such fiction is that Main Street is actually living the struggle. They are not theory. They are reality. Whether crushing pensioners with a lack of sensible low risk income products, or celebrating recent inflation through rent rises and healthcare costs is not to pat one’s back over. Real wages are falling, consumption is waning and life is getting tougher. Steeper Obamacare prices and higher rents don’t boost economic growth. This is bad inflation and most other items continue to struggle under the weight of chronic overcapacity. Hanjin Shipping woke us up to that sad fact.

It’s brutal out there but the Democrats talk of prosperity at the same time complaining at the lack of progress on welfare despite having their wise sage Obama at the helm for the past 8 years.

More misguided central bank policy continues in group think like fashion.  It is as if they are enriching financial plutonium to such dangerous levels that imminent detonation could occur. The experiment keeps going but the scale of the collateral damage is growing exponentially. Many central bankers know how bad things have got but pray they can leave their ivory towers and seek shelter before it blows up on their watch so they can evade direct responsibility.

For all of the pump priming, toxic asset buying and NIRP strategies of central bankers, there is one constant in all of this. Pain must eventually be taken to restore equilibrium. The longer we store up the gangrenous irradiated mess that has and is being created for almost two decades the bigger the scale of fall out.

So many are totally unprepared for the coming event. People will still argue that the most experienced and brightest minds work within these banks so we should back their collective wisdom but I’d bet money that most if not all have no idea about how the average Joe and Joanne works. Funny thing is the average Joe and Joanne are feeling the pain everyday as they struggle to get by. They’ve had enough.

I’m surprised the Democrats, the party that is supposed to favour the afflicted, continue to miss the obvious. Trump would never have seen the light of day had the establishment listened to their cries for help.

In closing, I feel the same vibes I did when I called the impending crisis that was GFC1. This time will be much worse.  Financial plutonium is too rich and reaching fissile levels. Discount everything coming from the authorities. Pure common sense tells us the numbers don’t match reality.

There will be no “I told you so!” moment for me. Who would want to bask in misery?

2 comments

  1. Great piece MN. $9 of debt for every $1 GDP generated here in Aust – hey, but it’s ok, my home value has increased another 3% this month and some poor sap can rent it on a 1.2% yield for 30% of their weekly salary (which hasn’t gone up in 5 years).

    Liked by 1 person

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