Everybody is trampling all over themselves to raise bullish targets. $SPX 3,300, $SPX 3,350, $SPX 3500, do I hear Dow 31,500? Yes I am. The big driver of course the Fed and central banks cutting rates again to save the global economy.
And amid all the hype and excitement you see headlines like this:
Bullish U.S. Stock Buyers Are Positioning for a Giant Windfall
Equity options strategy could deliver a 13-fold return…
…If the S&P 500 gains another 11% by the end of this year
The free money excitement is great.
But I have a question:
Why does the global economy need rescuing after 10 years of non stop monetary stimulus?
— Sven Henrich (@NorthmanTrader) July 16, 2019
I also have an answer and it’s an unpleasant one. Because by bailing out markets and economies at every sign of trouble over the past 10 years central banks have given politicians license to do nothing. And nothing is what you get as political discourse fragments and majority solutions are impossible to come by.
But not only are majority solution impossible to get nobody even wants to even talk about them. Why? Because they involve pain. Voters don’t want to hear pain. Hence all you hear is free money. Tax cuts in 2016. Now we hear free college, health care and debt forgiveness for 2020 and who knows maybe more tax cuts.
Nobody wants to campaign on pain. I get it. But does anyone really think solving the structural problems that are behind slowing growth after 10 years of monetary stimulus are easily solvable?
Heck, they may not be solvable at all, hence it’s easier to create a political climate of hate, division, distraction and outrage.
Everybody talks about the outrage of the day, it’s a hyped up atmosphere by design. Because the architects of the conversation know the truth, and that is: As long as people are distracted by outrage, fear, anger and emotion they will not think about how the system is actually utterly screwed.
Debt ceiling? Nobody takes it seriously and the supposed enemies labeling each other currently as racists and socialists will suddenly find a solution and compromise to raise the debt ceiling. They always do. It’s always drama, and talk and hand wringing, but it never means anything.
Remember fiscal conservatives? They only exist when they are not in power. Nobody really wants to do anything but offer free money in one form or another. On either side.
In debt we trust:
But apparently central bankers are getting a sense that they can’t do it alone, that they need help from the politicians:
Central Bankers Are Sick of Rescuing the World Economy Alone
“Global central bankers are again in the driving seat when it comes to propping up the world economy, but many are demanding governments join them in the rescue effort.
Amid slowing global growth, the Federal Reserve, European Central Bank and perhaps even the Bank of Japan are all set to ease monetary policy in coming months. But with less room to act than in the past, their leaders are telling politicians they will need to act if a downturn takes hold”.
Be clear their solution is to add more debt. That’s it. Stimulus. Because without stimulus nothing works.
Cause we really need stimulus as trillion dollar market companies such as $MSFT are going parabolic:
Nobody is talking about structural solutions. Not the politicians, not the voters, not the central banks.
You know when structural solutions will be discussed? When it’s too late. When the next crisis, crash, depression, whatever you want to call it, will force people to wake up and force them to come together and actually look at the problems. This will not happen now, not with this lot, and not with markets high, unemployment low, and central banks ready to throw free money around again.
No, central banks are now the impediment to progress, they are not only bailing out markets, but they are extending a license to politicians, a license to do nothing, but add more debt.
And that is the rise of insanity.
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So true Sven what you write. Nobody wants to say/hear the truth. We are all utterly screwed. Only a matter of time when it all implodes….People only reform when they are forced to.
For the system it is a cycle. For now, deflationary powers still have some steam left because of global stability, current technology cycle, structural changes in consumption patterns/ participation in the job-market, aging population in most OECD countries. So the central banks are keen to revive inflation with very accomodative policies. But doing so pushes all asset prices up thus setting the stage for unstable political situations (“Gilets Jaunes” anyone ?) while also creating inadequate incentives for capital allocation (zombie companies, neg rate on corporate/ sovereign junk bonds, “helicopter” money). But do not worry : Sub-efficient capital allocation will, time helping, moderate technological improvements (are new iphones really much better now ?). The average man in the street suffers because real inflation is, well, real so his velleity of buying tangible assets like real estate or intangible like higher-education will soon be out of his salary league. In the presence of increased political pressure from disgruntled populations, markets will ask for a premium when buying political uncertainty, thus re-establishing a stricter capital allocation process. The problem is not the cycle, the system will be fine. But on a human-life scale, the friction going from one state of equilibrium to another can be devastating. That’s what worries me. How many friends and relatives will be caught off-guard when the music stops ? And I don’t mean stop-losses.
I hear pigs squealing and bells ringing. How about you?
Seems to play right into the crypto fear. Did you see what the congress did to FB and libra today? Would you want to be holding $ when you finally figured out you are screwed. The only question is how long it will take?
Bread & Circuses
Until the barbarians are at the gate.
Then all the fun and games end. Margin call, all accounts settled.
Insanity… repeating the same experiment expecting different result. By that definition it is not insane – they keep pumping and it keeps rising. Some of us think we see a flaw in this, sooner or later it stops working and TSHTF. Who is right I wonder? So far it is them, but I fear before too long it will be us.