Monthly Archives: May 2017

The crux of the matter

“Every time the economy stops slowing or contracting, people seem to become irrationally hopeful that means something truly radical and positive even though all experience since 2007 has demonstrated that there actually is no rational basis for that hope. The road to Japanification is surely paved with so much disbelief. It’s completely understandable in a sense since it has been almost eight years of all the “experts” constantly claiming that things were definitely going to get better.”

Jeffrey P. Snider

So much for the Hopium apex of H1 2017. Hope has never been a viable investment strategy, and if you base ten investment decisions on hope, on average you are going to turn out as a loser. But if you do it just once, maybe you can pull it off. Not because hope helped your chances of success (it sure didn’t), but because what you were hoping for just happened.

So right now, this is a binary risk. Like tossing a coin for heads or tails. After ten years extending and pretending (in fact a couple more if you take into account some pre-GFC central bank practices), we are about to find out which side of the intellectual divide of our economics profession got it right. Can we reignite a credit cycle without cleaning up the previous excess, or is it correct to state that Japanification is our course, and no sustainable recovery can take place in this context?

Everything I read or hear points to a state of mind where investors have decided that the time has come for an economic take off after the crisis. This must be it, everybody thinks. Yeah, lots of risks looming, but experience has taught them that BTFD is the thing to do. Central Banks will prevail. And it has unsurprisingly become a self-fulfilling, self-reinforcing, prophecy. Investors keep on buying the tiniest dip in spite of nuclear war threats, or even a couple of FOMC members coming out “en masse” to suggest that the time has come for the Fed to shrink its balance sheet. Nothing can stop this train.

Monetary Policy started this last tranche of the bubble (the “everything bubble”) when credit growth flopped in 2007. Ironically, this last 2017 bull market blow off comes at a time when monetary policy is being accepted as nearly exhausted everywhere. Isolated and pretentious as they are, even CB politburo members have begun to realize the long-term dangers of shoring up monetary and credit aggregates. Not only The Fed openly suggests it is going to reduce its balance sheet, but the Dutch parliament gives Draghi a warm welcome with a beautiful tulip -to remind him of one of the best bubbles of all times. Very subtle. I’ve got more examples, but I feel these two suffice. Confidence in monetary policy has declined markedly, at least in academia.

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