The Demise of the Phony Bull Market is Now at Hand

The tens of millions of taxpayer money wasted at the G-20’s Shanghai soirée had a silver lining. The assembled masters of world finance came up with a big fat zero on the coordinated global stimulus front.

So doing, they essentially admitted that their money printing central banks are out of dry powder (“…but monetary policy alone cannot lead to balanced growth”) and that they are divided and confused on the fiscal front.

Indeed, the best result of the weekend is that the gaggle of G-20 statists acquiesced to Germany’s absolute “nein” on the foolish notion that a world self-evidently drowning in debt can still borrow its way back to prosperity. With respect to that ragged Keynesian shibboleth, Germany’s intrepid finance minister left nothing to the imagination:

Germany had made it clear it was not keen on new stimulus, with Finance Minister Wolfgang Schaeuble saying on Friday the debt-financed growth model had reached its limits.

“It is even causing new problems, raising debt, causing bubbles and excessive risk taking, zombifying the economy,” he said…….“Fiscal as well as monetary policy has reached their limit.”

So this is not about a failed G-20 meeting; its about the end of a vast, long-running policy scam conducted by global officialdom and their central bankers. In a word, they did not save the world in 2008-2009 with the “courage” of extraordinary policies. They just temporarily buried the symptoms by resort to crank monetary theories and fiscal snake oil.

Indeed, every bit of the financial rot owing to the mutation of financial markets into debt-fueled gambling casinos and the vast economic deformations and malinvestments fostered by massive central bank financial repression prior to the 2008 financial crisis is still with us. Except it has subsequently metastasized into an even more egregious and incendiary form.

In fact, a fair argument can be made that virtually all of the global nominal GDP gain since 2008 is simply the pass through into both investments and consumption of the huge new borrowings enabled by the central bank money printers. That is, total global debt outstanding has increased from roughly $145 trillion on the eve of the great financial crisis(GFC) to $225 trillion at present or by $80 trillion——-a gain that dwarfs the $16 trillion of GDP gain during the last seven years (from $63 trillion to $79 trillion).

That’s right. The global economy incurred about $5 of new debt for every $1 of additional GDP. Given the fact that most of the world was already at peak debt the implication is quite clear. To wit, this was phony GDP that is not organic or sustainable; it will be clawed back in the coming global deflation/recession, meaning that the world’s true leverage ratio has only gotten dramatically worse than it was in 2008.

To be sure, the G-20 statement attempted some whistling past the graveyard, suggesting that financial markets have over-reacted and there is no need for an April 2009 style global stimulus.  Or as clueless Jack Lew  insisted,” don’t expect a crisis response in a non-crisis environment.”

The final communique echoed this head-in-the-sand posture:

“the magnitude of recent market volatility has not reflected the underlying fundamentals of the global economy”, the communique said.

Let’s see. The global trade data for 2016 reported to date is an absolute disaster. China’s exports were down 11% worldwide and by far greater amounts to key boom-time partners like Brazil, where shipments sank by 60% in January over prior year. Likewise, Japan’s exports were off by 13% at the start of the year, and in February South Korea was down by more than 20% on a Y/Y basis.

What the assembled financial apparatchiks didn’t say is that even as the global economy slides southward, they are confronted with barriers to new policy rescues on nearly every front, meaning that the scam which has kept the casinos afloat and the bullish speculators in clover since March 2009 is in its final days.

Just consider what is coming down the pike during the balance of 2016. First and foremost, the Red Suzerains of Beijing have reached a state of blatant desperation and impotence as the worlds’ most fantastic credit bubble shatters. No sooner than the last G-20 honcho left town than they let the yuan resume its downward crawl. At the same time, they lowered the so called RRR (required reserve ratio) to 17.0%—–so as to purportedly release another $300 billion in loanable funds within the banking system.

Right. That’s exactly the thing to encourage further capital flight and weakening of the yuan, even as the move to encourage still more bank lending is essentially designed to bring coals to Newcastle.

For crying out loud. They have spent months talking about the need to rein-in credit growth and reported only a few days ago that January experienced a record eruption of new credit extensions. Bank lending to business was up 73% over prior year and total new social financing amounted to $500 billion in a single month.

As we pointed out a few days ago, that amounts to a $6 trillion annualized run rate of new debt on a wobbling $11 trillion economy that already had $30 trillion of unsupportable debt when the books closed on 2015.

In short, China is heading straight for a crash landing. And the evidence was unfolding right under the noses of the G-20 pettifoggers who pointedly agreed not to stumble into a race to the currency bottom and to take Beijing’s word at face value:

 Jeroen Dijsselbloem, chairman of euro zone finance ministers, said G20 members had agreed to inform each other in advance about policy decisions that could lead to devaluations of their currencies.

G20 host China used the meeting to try to allay concerns about the world’s second-biggest economy, and Beijing’s ability to manage it, that have grown since a market rout and a surprise devaluation last August.

“Monetary policy will probably have to be kept appropriately loose, even though people have realized that its role cannot replace fiscal policy,” said China’s Finance Minister Lou Jiwei.

Chinese policymakers reiterated pledges not to devalue the yuan CNY=CFXSagain, and Premier Li Keqiang told the G20 opening session on Friday there was no basis for continued depreciation of the yuan.

C’mon. And the fact that this risible pledge lasted less than 24 hours is only the half of it.

What is actually happening is that the Keynesian and statist officialdom that led the world into the netherworld of crank finance after 2008 is now lost and is repairing to a fetal position when it comes to policy. They are just mouthing clichés and gumming platitudes that bear no resemblance to the real world crisis that is rapidly emerging.

Thus, after crushing its exchange rate by 40% during the last 30 months in order to jump start its terminal, debt ridden economy, Japan’s top policy makers claim to have won global assent for the most overt beggar-they-neighbor FX depreciation campaign since the 1930s.

Japan implemented negative interest rates this month to spur growth, and Bank of Japan governor Haruhiko Kuroda said he had “fully gained (their) understanding” from G20 ministers about the BOJ’s thinking with regard to negative rates as a tool for escaping the deflation that has dogged its economy for years.

Japanese Finance Minister Taro Aso said he had urged China to carry out currency reform and map out a mid-term structural reform plan with a time frame.

“Chinese authorities need to present a mid-term structural reform plan with concrete schedule and a package of measures to stabilize yuan, based on recognition that communication between Chinese authorities and markets has caused market volatility and capital outflows,” he told reporters.

Likewise, a torrent of ink and official interviews from the sidelines stressed that going forward “structural reform” is the route to salvation. Faster progress on structural reforms “should bolster potential growth in the medium term and make our economies more innovative, flexible and resilient”, intoned the final communique, “we are committed to further enhancing the structural reform agenda”.

Here’s the thing. Structural reform is a euphemism for rolling back five decades of welfare state expansion, regulatory dirigisme and labor law protectionism that has accreted in virtually every developed economy in the world since the 1950s.

It’s not going to happen, and especially not in an world sinking into a deep and long-lasting deflation/recession cycle for want of new credit infusions to keep the bubble afloat.

So the real meaning of the “Shanghai Communique” that didn’t happen is that the Keynesian parlor trick of cheap money and hocking business and household balance sheets is over and done. And it didn’t take long for the crybabies in the casino to figure out that they have finally been stranded high and dry, as underscored by today’s late session reversal to the downside.

Yes, the market is heading back down and this time the 1870 Maginot line will be taken out with alacrity. After all, what lies ahead for the casino is one disappointment and shock after the next.

The upcoming ECB meeting, for example, will reveal that the Germans have had “all they can take” from Draghi’s monetary madness, meaning that there will be no leap deeper into NIRP or QE.

Likewise, Kuroda recently got pounded during a Parliament grilling for the second time in a week on the matter of his lunatic plunge into negative interest rates. Even the long-compliant Japanese politicians have had enough.

The same is true here. The Fed may well pass on the previously scheduled March rate increase, but the statement will be a tour de force of incoherence, self-contradiction and blatant obfuscation. This time, the robo-machines will ignore the rumor and sell the news.

And if they dare even hint at NIRP in the midst of a fraught political environment and GOP civil war, the backlash will erupt suddenly and massively. The Donald will be all-in against the confiscation of wealth from savers and retirees in a heartbeat.

Indeed, sometime within the next 60 days, it will become apparent that The Donald has clinched the GOP nomination; and that we are heading for election year brawl in which the already deep, existing dysfunction in Washington will emerge from its Bubble Finance camoflauge into plain view.

When the most recent dead cat bounce hit the 1950 barrier on the S&P 500, the market was trading at 21X the index’s honest-to-goodness GAAP earnings of $91 for 2015.  In the alternative, at 14X  earnings that are rapidly shrinking, the indicated price of the S&P would be 1275.

At the end of the day, the meaning of Shanghai is that the demise of the phony bull market fueled by global officialdom and their central bankers is now at hand. And the next bottom is a (very) long ways down.

Regards,

David Stockman
for The Daily Reckoning

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