{"id":37385,"date":"2013-04-08T12:37:37","date_gmt":"2013-04-08T16:37:37","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/?p=37385"},"modified":"2013-04-08T12:37:37","modified_gmt":"2013-04-08T16:37:37","slug":"this-is-not-a-rally-its-a-credit-bubble-of-epic-proportions","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2013\/04\/08\/this-is-not-a-rally-its-a-credit-bubble-of-epic-proportions\/","title":{"rendered":"This Is Not a Rally… It’s a Credit Bubble of Epic Proportions"},"content":{"rendered":"

By Chris Hunter<\/strong><\/p>\n

An explosive rise in asset prices always generates concern that a
\nbubble may be developing and that its bursting might lead to broad and
\ndeep economic distress.<\/em><\/p>\n

\u2013 Fed governor Frederic Mishkin, August 2007<\/p>\n

On Friday, the Bank of Japan ushered in a new era of monetary stimulus.<\/p>\n

Under new governor Haruhiko Kuroda… and under massive pressure from
\nnew prime minister Shinzo Abe… the BoJ promised a $1.4 trillion debt
\nmonetization program.<\/p>\n

This will start next year and will double the country’s monetary base
\n(currency in the hands of the public plus commercial bank deposits at
\nthe Bank of Japan).<\/p>\n

Following the news, the Nikkei 225 ended the session up +1.6%. The
\nyen fell more than -2% versus the dollar… and -4% versus the euro. And
\nthe yield on the 10-year JGB hit a record low.<\/p>\n

We are in unchartered territory regarding monetary easing<\/a><\/strong>.
\nWe are living through a giant academic-led monetary experiment \u2013 the
\nlargest in history by far \u2013 that is being pursued without regard for the
\npotential for nasty unintended consequences.<\/p>\n

The central banks<\/strong><\/a>
\nof the “big three” developed economies \u2013 the US, the EU and Japan \u2013 are
\nnow committed to doing “whatever it takes” to keep bond yields low.
\nThey have no choice. If yields go higher, stock market gains will
\nevaporate and rising interest costs on sovereign debt would put huge
\npressure on governments. We would see another giant asset bubble deflate
\nand have no monetary “ammo” in reserve to ease the pain it would cause.<\/p>\n

Relative to the size of its economy, the BoJ’s stimulus plan is now
\neven more intense than the Fed’s. As Japan bond bear Kyle Bass points
\nout, “The BoJ is now monetizing at a rate around 75% of the Fed on an
\neconomy that is one-third the size of the US.”<\/p>\n

What many don’t understand… or don’t want to see… is that in
\nJapan (and in the US), this stimulus is not reaching “Main Street” by
\nway of bank lending. Although monetary base is rising, wider measures of
\nmoney supply have been flat or are falling.<\/p>\n

This means that credit easing ends up exclusively boosting asset
\nprices (most notably, equities) by way of cheap leverage, margin buying
\nand “carry trades.”<\/p>\n

But the fundamentals are not keeping up… As former Reagan budget advisor David Stockman pointed out in a recent piece in The New York Times<\/em>, “State-Wrecked: The Corruption of Capital in America”:<\/p>\n

Since the S&P 500 first reached its
\ncurrent level, in March 2000, the mad money printers at the Federal
\nReserve have expanded their balance sheet sixfold (to $3.2 trillion from
\n$500 billion). Yet during that stretch, economic output has grown by an
\naverage of 1.7% a year (the slowest since the Civil War); real business
\ninvestment has crawled forward at only 0.8% per year; and the payroll
\njob count has crept up at a negligible 0.1% annually. Real median family
\nincome growth has dropped 8%, and the number of full-time middle-class
\njobs, 6%. The real net worth of the “bottom” 90% has dropped by
\none-fourth. The number of food stamp and disability aid recipients has
\nmore than doubled, to 59 million, about one in five Americans.<\/em><\/p>\n

Of course, Stockman’s views have gone down like a lead balloon in the
\ncorridors of power and in the mainstream media \u2013 which abhor his
\nhard-money views and which cling to a painless Keynesian solution to the
\n2008 credit collapse.<\/p>\n

What should you do in the current environment? Exercise extreme
\ncaution. Try to think independently of the crowd. And remember your
\nhistory…<\/p>\n

As barometers go, stock markets, under conditions of high levels of
\nmargin borrowing and other forms of leverage, are less than perfect.
\nOtherwise, the much-feted 1929 rally would not have happened \u2013 a full
\nyear after commodity price deflation had set in.<\/p>\n

Fast-forward to 2013, and we see that the three best<\/em>-performing
\nsectors in the US equity rally are the anti-cyclical and defensive
\nhealth care, consumer staples and utilities (with an average
\nyear-to-date gain of 14%). The three worst<\/em>-performing sectors
\nare the highly cyclical and growth-sensitive materials, tech and energy
\n(with an average year-to-date gain of less than 3%).<\/p>\n

This is not a rally. It’s a credit bubble of epic proportions<\/strong><\/a>.<\/p>\n

\n
\n

Disclaimer<\/span><\/span><\/span><\/h3>\n
\n

Article brought to you by Inside Investing Daily. Republish
\nwithout charge. Required: Author attribution, links back to original
\ncontent or www.insideinvestingdaily.com<\/a>. Any investment contains risk. Please see our disclaimer<\/a>.<\/em><\/p>\n

 <\/p>\n<\/div>\n<\/div>\n<\/div>\n","protected":false},"excerpt":{"rendered":"

By Chris Hunter An explosive rise in asset prices always generates concern that a bubble may be developing and that its bursting might lead to broad and deep economic distress. \u2013 Fed governor Frederic Mishkin, August 2007 On Friday, the Bank of Japan ushered in a new era of monetary stimulus. Under new governor Haruhiko … <\/p>\n

Continue reading “This Is Not a Rally… It’s a Credit Bubble of Epic Proportions”<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-37385","post","type-post","status-publish","format-standard","hentry"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/posts\/37385","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/comments?post=37385"}],"version-history":[{"count":0,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/posts\/37385\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/media?parent=37385"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/categories?post=37385"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/tags?post=37385"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}