Wednesday, 28 September 2016

“The Time Has Come to Leave the Dance Floor”


The easy money bubble is about to pop, says Justin Spittler from Casey Research in this guest post.

As you probably know, the American Federal Reserve has been desperately trying to stimulate the economic system since the 2008–2009 financial crisis.

It’s held its key interest rate near zero for the past eight years. And it’s “printed” more than $3.5 trillion out of thin air.

These radical policies were supposed to grow the economy. But all they’ve done is inflate financial asset prices.

The S&P 500 has soared 218% since 2009. A few weeks ago, it set an all-time high. Bond and commercial property prices have also soared to record highs.

At first glance, one might think the U.S. economic system is doing well. After all, financial assets are supposed to follow the economy. But the US economy is barely standing right now.

Since 2009, American GDP has grown at just 2.1% per year. That makes the current “recovery” the slowest on record. And it’s only got worse this year. Through June, GDP grew at an annual rate of just 1.0%.

This clearly isn’t sustainable. Eventually, financial assets will have to come down to earth.

That’s why we’ve been encouraging readers to get out of the stock market. Now, many of the world’s smartest investors are saying the same thing.

Tad Rivelle thinks the Fed is losing its grip on the markets…

Rivelle is one of the world’s most respected investors. He is the chief investment officer of TCW Group Inc., which manages more than $160 billion.

Last week, Rivelle published a chilling letter. He warned that the eight-year easy money bubble was about to burst:

While every asset price cycle is different, they all end the same way: in tears
[S]uccessful, long-term investing is predicated on not just knowing where the happening parties are during the reflationary parts of the cycle but, even more importantly, knowing when the time has come to leave the dance floor.
    In our view, that time has already come.

Like us, Rivelle says the Fed created this dangerous situation…

Rivelle wrote last week:

The Fed’s playbook on this is well worn: first, policy rates are lowered. This triggers a daisy-chain of events: low or zero rates promote a reach for yield; the reach for yield lowers capitalisation rates across a variety of asset classes which, in turn, spurs a rise in asset prices. Rising asset prices – the so-called wealth effect – “rescues” the economy by rebuilding balance sheets and restoring the animal spirits. And voila! Aggregate demand rises, businesses invest, and a virtuous growth process is launched. [Or so they think – Ed.}

Of course, the Fed’s easy money policies never “rescued” the economy at all. All they did was lift stock, bond, and commercial property prices.

Rivelle says the Fed’s “stimulus” measures were doomed to fail…

According to Rivelle, economies grow when companies “make themselves more productive by delivering goods more efficiently or by innovating products valued by the marketplace.”

But that was never the Fed’s plan. Its goal has always been to get people to borrow and spend more.

According to Casey Research founder Doug Casey, these kind of policies don’t just fail… They actually destroy economies:

It’s part of the Keynesian view, in which spending and consumption drive the economy. This isn’t just wrong, it’s the exact opposite of what’s true. It’s production and saving that drive an economy. You have to save to build capital, and capital is necessary for…everything. What these people are doing is destructive of civilisation itself.

U.S. financial assets have never been more out of touch with the “real” economy…

The chart below compares the value of financial assets (stocks, bonds, and real estate) with the proxy measure for economic output that is GDP.

Remember, financial assets and the economy should generally track together. When the value of financial assets greatly exceeds the value of the economy, it’s called a bubble.

You can see that the current bubble is far bigger than the one that triggered the 2008–2009 financial crisis.


Rivelle says “we’ve lived this story before”…

As you may remember, American housing prices skyrocketed in the early 2000s. Eventually, home prices became so disconnected from the real world that they crashed in 2007.

The collapse of the US housing market nearly triggered a full-blown banking crisis. The S&P 500 plunged 57% in just two years…and the US economic system entered its worst downturn since the Great Depression.

Rivelle says we’re in a similar situation today. Unfortunately, the US economy is even more fragile today than it was then.

According to research by The TCW Group, the amount of US federal debt held by the public has jumped from 35% of GDP in September 2007 to 76% today.

Meanwhile, gross leverage, which measures how indebted US companies are, is now 2.9 after peaking at 2.1 in 2007. (The higher the ratio, the more debt a company has.)

All that debt comes at a steep price…

Rivelle warned last week:

[B]uying growth today with credit that needs to be repaid tomorrow is not a free lunch!
[…]Leverage goes up faster than the income available to service it. As such, the credit-fuelled expansion inevitably comes to a bad end. We’ve lived this story before: indeed, while every cycle is distinctly different, they all end up suffering from the same central banker induced maladies.

According to Rivelle, it’s only a matter of time before the average investor realises “the central banking Emperors have no clothes.”

Whether the government admits it or not, the economy is headed for serious trouble…

* * * *

Chart of the Day

American corporate debt levels are spiralling out of control.

Since 2010, US corporations have borrowed almost $9 trillion in the bond market. That’s 50% more than US corporations borrowed in the seven years leading up to the financial crisis.

This huge explosion in corporate debt wouldn’t be such a big problem if the economy was doing well. But that’s not the case. Remember, the U.S. economy is limping through its worst recovery on record.

You can see in today’s chart why this is so concerning. This chart shows how much debt non-financial corporations owe relative to GDP. The higher the ratio, the more outstanding corporate debt there is relative to the size of the economy.

You can see that this key ratio is now approaching a record high. The last three times corporate debt raced ahead of the economy like this, recessions followed.

Justin Spittler



  1. Absolutely agree about not being in stock markets. Trouble is there's no decent returns anywhere else (in once considered prudent investments). Keynesian central banking really has destroyed the concept (and act) of saving. Reckon - as does Stockman - the corporate bond market going belly up is where the next panic starts, and a lot of retirees who've ended up there in desperation for a return will get burnt (which will be sad, and which the anti-capitalists who don't own anything will call, stupidly, greed).

  2. "What these people are doing is destructive of civilisation itself." I don't think Casey's comment is over the top if the dancing is to stop. The crisis will be blamed on capitalism, and even more grey ones will be spawned.
    The islamic threat becomes rather moot if the islamists have far less to scavenge off; and considered less of an issue (in the West) when struggling with economic survival

  3. You gotta laugh at the commentary from and for the mainstream. There is a woman who has been given the microphone and her name is Smalley--analogous to her perspicacity.

    Rachel’s mouthing on about rising house prices, and welcomes Londonistan’s mayor’s actions to investigate the subject. After being rubbed up the wrong way by Chinese money she, and her Muslim mayor buddy, wants to investigate--for transparency’s sake.

    Like a stopped clock supposedly telling the correct time twice a day, her punchline is “If you want to get to the heart of an issue, then often the first step is to ask the government of the day to step aside.”

    That’s correct Rachel—if the tentacles of government were absent—there wouldn’t be an issue!!


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