Topic: The largest stock market bubble ever seen is finally Ko'd by Covid-19

[conman]

Some people have been calling crisis for the past 10 years- perhaps this is the time it comes true?

It was just a matter of time, as they never solved the previous one. They just kicked the can down the road.

[Red-Soldier]

Just highlights that our current economic/political model is literally a load of bollocks!

[Red-Soldier]

I think the biggest part of the issue is that rather than reflecting the underlying fundamentals of the economy (and businesses) a stock market is effectively a function of confidence, its meaningless. For the past decade, people have thought in a low interest environment central banks will always prop up the system.

But we are now in complete uncertainty were we could have shutdowns of markets for months and potentially a significant reduction in the size of the working population. There is no amount of action that can make you confident in such circumstances.

Some people have been calling crisis for the past 10 years- perhaps this is the time it comes true?

Totally right.

It is absolute bollocks, nothing real about it whatsoever.

[Kekule]

If anyone hasn't seen it yet, you should watch The Big Short, which is an inside view of the beginning of the 2007 crash,

<a href="https://www.youtube.com/v/vgqG3ITMv1Q" target="_blank" rel="noopener noreferrer" class="bbc_link bbc_flash_disabled new_win">https://www.youtube.com/v/vgqG3ITMv1Q</a>

I watched both that and Margin Call about a week ago.

I feel like I’ve somehow jinxed us all! 

[Gnurglan]

I think the biggest part of the issue is that rather than reflecting the underlying fundamentals of the economy (and businesses) a stock market is effectively a function of confidence, its meaningless. For the past decade, people have thought in a low interest environment central banks will always prop up the system.

But we are now in complete uncertainty were we could have shutdowns of markets for months and potentially a significant reduction in the size of the working population. There is no amount of action that can make you confident in such circumstances.

Some people have been calling crisis for the past 10 years- perhaps this is the time it comes true?

Yes, confidence will be an issue.

What we have seen in the last decade is a very distorted market. My view is that it’s because governments have decided to get involved. They have altered the rules of the game and this has meant bad businesses have been kept alive when they should have died a long time ago. If we allowed interest rates to go up say 5% many corporations would go out of business. Many home owners would not be able to pay their loans. This should result in lower prices. That can’t be allowed to happen.

If for example housing prices were to go down, then banks would have less assets. That would put them in a bad situation, possibly threaten their survival if it’s lower prices on a big scale. So when they can’t raise interest rates (it would force prices down), they can’t offer any decent interest for savers either. Saving is meaningless. Because of governments. But borrowing is essentially consumption now instead of in the future. We have consumed a lot of future demand with the amount of debt we now have. The whole setup benefit borrowing and bad behavior and it punishes savers. And all of this is rigged by central banks (and politicians/governments). I’m sure we have a lot of people in the private sector that don’t mind that, but governments should have known better than to save companies that should have gone bust. .

[Ashburton]

Would anyone be willing to comment on the risk of hyperinflation from it being necessary for governments to absorb huge costs from the business community - which they will then need to shed after the crisis?

[Gnurglan]

Would anyone be willing to comment on the risk of hyperinflation from it being necessary for governments to absorb huge costs from the business community - which they will then need to shed after the crisis?

I think it depends on where you live. As I understand it, hyperinflation needs two things. There needs to be a collapse in confidence in government and government need to be in a position where they can’t borrow any more money.

[Ashburton]

I think it depends on where you live. As I understand it, hyperinflation needs two things. There needs to be a collapse in confidence in government and government need to be in a position where they can’t borrow any more money.

From what I understand looking at the bond market, the EU nation bonds are predicated on Germany backing them up.  Lagarde saying she doesn't mind 'spreads' indicates that on the rise of Italy's 10yr bonds it wasn't the job of the IMF to close this down.  Germany are in a position where they're able to sell bonds for negative yields, but considering other nations are likely going to need to increase funding massively over 1-3 months wouldn't you see the bond yields also skyrocket?

My assumption at this point was the only way to reduce this post-crisis was to incur high inflation levels, but my understanding could be wrong on this.

[Gnurglan]

From what I understand looking at the bond market, the EU nation bonds are predicated on Germany backing them up.  Lagarde saying she doesn't mind 'spreads' indicates that on the rise of Italy's 10yr bonds it wasn't the job of the IMF to close this down.  Germany are in a position where they're able to sell bonds for negative yields, but considering other nations are likely going to need to increase funding massively over 1-3 months wouldn't you see the bond yields also skyrocket?

My assumption at this point was the only way to reduce this post-crisis was to incur high inflation levels, but my understanding could be wrong on this.

Not the right person to talk about bonds. I’ll say this - that it’s even possible to find buyers for bonds with negative yield is crazy.

I believe we are at a stage where governments can’t allow interest rates to rise. If that was to happen, so many (people, businesses, countries) wouldn’t be able to service their debt. What they’ll try is print money. They may try what Hong Kong did and give people money to spend to keep prices from falling. The idea is to inflate the problem away, while pretending that we have no inflation.

[Giono]

Not the right person to talk about bonds. I’ll say this - that it’s even possible to find buyers for bonds with negative yield is crazy.

I believe we are at a stage where governments can’t allow interest rates to rise. If that was to happen, so many (people, businesses, countries) wouldn’t be able to service their debt. What they’ll try is print money. They may try what Hong Kong did and give people money to spend to keep prices from falling. The idea is to inflate the problem away, while pretending that we have no inflation.

Many investors like pension funds etc. must allocate some to fixed income and must be of a certain investment grade. No matter the actual return. And there are bond SICAVs and mutual funds that are restricted by their prospectus as to what theycan own or how much uninvested cash they can  have.

[kavah]

Up and down like a bride’s nightie.

[Gnurglan]

Many investors like pension funds etc. must allocate some to fixed income and must be of a certain investment grade. No matter the actual return. And there are bond SICAVs and mutual funds that are restricted by their prospectus as to what theycan own or how much uninvested cash they can  have.

That's where we are, isn't it? As long as these pension funds have been able to invest in a rising stock market they have had a chance to reach their 7-8% return. Now that the stock market is crashing down it's getting problematic.

And if this crash leads to corporate bonds being downgraded below investment grade, what happens next? Pension funds will be forced to sell. We'll have plenty of sellers and few buyers. Buyers will demand higher interest rates to touch these corporate bonds. But that would put those corporations, behind the bonds, in serious trouble. My guess is we are close to, or already at the stage where many corporate bonds should be below investment grade (just like in The Big Short where the sub prime mortgages were kept AAA way too long).

At some point interest rates will have to go up somewhere. And that's when his goes from really bad to something much, much worse.

Ironically, negative yielding bonds where the loss is defined may be one of the best places for the time being. I think most investors/pension funds would be happy with a 1% loss so far in 2020. Problem being people will still retire and they will remove money from these pension funds.

I may not understand the full picture here, but it looks like a terrible mix to me.

[Gnurglan]

For anyone interested, check out this video https://youtu.be/RvatzH7atsQ

It's not exactly great news, but it's a view of where we could be heading.

[conman]

Would anyone be willing to comment on the risk of hyperinflation from it being necessary for governments to absorb huge costs from the business community - which they will then need to shed after the crisis?

I see that risk if the goverments solutions are similar to 2008, and then we have a few more of these boom/bust cycles. But I doubt we will see it over the next few years.

I actually have "when money dies" by Adam Ferguson on my coffee table, It's about the Wiemar Republic (Germany) collapsing pre WW2. I've had it there since January, but haven't got past the 3rd chapter yet. Maybe I will ahve more time to read now and finish it

[Gnurglan]

I see that risk if the goverments solutions are similar to 2008, and then we have a few more of these boom/bust cycles. But I doubt we will see it over the next few years.

I actually have "when money dies" by Adam Ferguson on my coffee table, It's about the Wiemar Republic (Germany) collapsing pre WW2. I've had it there since January, but haven't got past the 3rd chapter yet. Maybe I will ahve more time to read now and finish it

You don't think the very first thing they will do is to lower interest rates and buy up all the bonds (QE)? I think we will see it take off as soon as next week.

[conman]

You don't think the very first thing they will do is to lower interest rates and buy up all the bonds (QE)? I think we will see it take off as soon as next week.

I meant that I doubt we'd see the prospect of hyperinflation for another few years (decades).

[Gnurglan]

I meant that I doubt we'd see the prospect of hyperinflation for another few years (decades).

Aha, agree with that. Stagflation?

[conman]

Aha, agree with that. Stagflation?

Yea, and a loss of confidence in the system that continously needs interventaion to be saved.

[Gnurglan]

Yea, and a loss of confidence in the system that continously needs interventaion to be saved.

Not the kind of future I am hoping for, but probably what we have ahead.

[conman]

Not the kind of future I am hoping for, but probably what we have ahead.

Yea, i'd say it is what we are facing.

What's about to happen to the U.S. monetary base in the next few years is similar to what happened in 1937; the next exponential leg up.

Here's the log form chart of the U.S. monetary base over the past century:



source: https://twitter.com/LynAldenContact/status/1238899516629286914

[Gnurglan]

The US is one thing. I believe they can keep things going for a little longer. My main concern is what happens in Europe. Things were already slowing and now we are about to get a total stop. 

[conman]

The US is one thing. I believe they can keep things going for a little longer. My main concern is what happens in Europe. Things were already slowing and now we are about to get a total stop. 

Yea, we are in a right state over here.

The ECB have very little ammo left. To be honest, I've no idea how it will pan out. I even think this virus is going to push Brexit out a few years, then who knows if it will actually happen. People's opinions may have changed by then. I'm not near smart enough or informed enough to figure this out. Maybe Realvision have some videos on it. I'll go check.

[Gnurglan]

Yea, we are in a right state over here.

The ECB have very little ammo left. To be honest, I've no idea how it will pan out. I even think this virus is going to push Brexit out a few years, then who knows if it will actually happen. People's opinions may have changed by then. I'm not near smart enough or informed enough to figure this out. Maybe Realvision have some videos on it. I'll go check.

Nobody knows. I don't trust the ECB, never have. The Euro is built on sand. When we throw in a few troubled banks (Santander, Deutsche, Commerzbank,...), Greece, youth unemployment and a Germany heading for recession, plus Brexit and the issue with refugees we have a really bad mix. The ECB and their negative interest rates have of course made capital flow out of Europe, in to the US where it's possible to get a positive return.

[thejbs]

Yea, we are in a right state over here.

The ECB have very little ammo left. To be honest, I've no idea how it will pan out. I even think this virus is going to push Brexit out a few years, then who knows if it will actually happen. People's opinions may have changed by then. I'm not near smart enough or informed enough to figure this out. Maybe Realvision have some videos on it. I'll go check.

Weirdly, I think this pandemic will strengthen anti-eu sentiment. I think open borders will be pointed to. However ignorant, this can definitely be twisted.

[conman]

Weirdly, I think this pandemic will strengthen anti-eu sentiment. I think open borders will be pointed to. However ignorant, this can definitely be twisted.

I think so too. It should be a reality check.

[conman]

From @CaitlinLong_

1/ HOW TO UNDERSTAND WHAT'S GOING ON IN FINANCIAL MKTS. Western world built up a debt bubble of stunning proportions over past ~50yrs. It's deflating now, just as it tried to do in 2008, 2001, 1997, 1994, 1987, 1981 & 1974. Each time, tho, there was enuf balance sheet capacity...

2/ ...to reinflate the system by pumping more debt into it. In other words assets still existed that hadn't yet been encumbered by debt (directly or indirectly)--meaning the countries were SOLVENT. That's why their fiat currencies had value--assets were still available...

3/ ...that lenders didn't yet have a claim upon (ie, assets not yet mortgaged). Important to understand that when debt expands, liquidity grows--& mostly it just pushes up financial asset prices (for vrs. reasons). Reverse is also true. Debt has grown for ~50 CONSECUTIVE years...

4/ ...but peppered by deleveraging periods when the total debt outstanding actually shrinks (eg, 2008 & now). Typically, mainstream economists call for central banks & govts to offset that credit contraction by creating new debt (monetary & fiscal stimulus) to fill the hole...

5/ ...What they're really doing is back-filling for shrinking debt by creating new public sector debt, in an attempt to counter the financial asset price correction that inevitably accompanies a credit contraction (aka debt deflation). That's what we're seeing now...

6/ ...The shrinking debt is caused by capital destruction, where capital was consumed by businesses that earned a return less than their cost of capital. Entire industries have done that (housing going into 2008, shale producers going into 2020, etc)--& in these debt deflations..

7/ ...the magnitude of the capital destruction that was building all along is revealed (it just wasn't obvious bc new debt injections were able to paper over it). Why wasn't it evident as it was building? Bc interest rates are mispriced--artificially low--& this is why you see...

8/ ...entire industries making the exact same (bad) biz decisions at exact same time. Example: let's say a biz invests in a project expected to return 10% has a weighted avg. cost of capital (WACC) of 8%. No prob--it would earn real economic value of 2% x the capital invested...

9/ ...But what if the WACC were really 12% instead of 8%? Recall the expected return was only 10%, which thus means the project destroyed capital (2% x the capital invested). The project never should have been pursued! How did the biz make such a bad mistake? Bc mkts misled it...

10/ ...Bc mkts mispriced its cost of borrowing. How? Bc interest rates were held artificially low--by central bank policy trying to rev up the economy. So, what they thot was a good project turned out to be bad. Every single co in the industry invested badly at the same time...

11/ ...every single competitor made the exact same mistake, in same direction. They weren't idiots--their mistake was believing the flow of artificially cheap money wld last. And why not? It lasted for ~50yrs. Every time trouble came, they were bailed out by govt action...

12/ ...(either monetary or fiscal stimulus--actually both in recent crises). But the prob=the magnitude of such stimulus needed to revive the system keeps growing, since the amplitude of crises keeps growing. Mkts have now shrugged off MASSIVE stimulus of both types...

13/ ...&this time, the hole that the Fed & the govt are trying to backfill is much bigger than in 2008. Why? Bc debt ballooned since then, so this credit contraction much bigger. For perspective, debt in US nonfinancial sectors (households, biz, govt) went up 10% in past 2 yrs!!!

14/ ...Yep. TOTAL DEBT SHOT UP A WHOPPING 10% IN THE U.S. JUST IN PAST 2 YEARS!!! That's $83.3 trillion of total debt in the US nonfinancial sectors at year-end 2019, up from $75.8 trn in 2017 (I exclude financial debt bc that's mostly just a pass-thru to nonfinancial sectors).

15/ ...Here's the data. I've been tracking it ever since 2008. That's when I learned how the US economy had been hollowed out by decades of bad economic decisions (by both political parties). The US was consuming more than we produced & borrowing to do it. https://federalreserve.gov/releases/z1/20200312/z1.pdf

15/ ...So, to put this week's multi-trillion$ monetary & fiscal stimulus into perspective, how much of that $7.5 trn of new debt in just 2 yrs do u think produced a real economic return? Prob not much. Prob most of it=destroyed capital. Ponder whether all the corporate debt...

16/ ...issued to finance stock buybacks at much higher stock prices generated a real return? Or the massive misallocation of capital in energy industry?) This is why the Fed's "bazooka" $1.5 trillion stimulus--stunningly large--hasn't worked & is just pushing on a string...

17/ ...Bc the debt bubble is even more staggering in size. One of my hero analysts--Doug Noland--predicted last Fall that the Fed's balance sheet would swell from $4 trn to $10 trn in the next financial crisis. Well, it's here. At the time I tweeted his estimate was too low...

18/ ...& I hope you see why now--bc writing off just the last 2 years of bad debt alone wld need a $10 trillion Fed balance sheet to fill the hole! What does this mean? Strap in for some serious volatility. We ain't seen nothin' yet. I've read a lot of history abt what happens...

19/ ...when credit systems die. The volatility is staggering. The 5% swings in both directions we're seeing now is nothing! Try 20%. In one example, near the end the swings were 50%. YES, 50% INTRADAY SWINGS UP & DOWN!! Will that happen here? Dunno, but don't be surprised if yes.

https://twitter.com/CaitlinLong_/status/1238915150368792576

[conman]

Pomp will interview Caitlin Long later today if anyone wants to tune in. I certainly will.

https://twitter.com/APompliano/status/1239179402283569153

[Gnurglan]

Saw that link. Good that you took the time to post it.

[surfer. Fuck you generator.]

In the interest of fair analysis, it's best there's a bit of background on the people giving those thoughts. A number of the people you've shared on here, conman, have a very large stake in the advancement of digital tokens / currencies, including Caitlin. A person of her background will know enough to both state the facts accurately while yet arranging and presenting them in such a way as to fit her aim. All these people stand to make a lot of money from another round of public mania, the type that fueled the first bitcoin surge and fuels the hoarding of masks, toilet paper now. 

[Gnurglan]

Weirdly, I think this pandemic will strengthen anti-eu sentiment. I think open borders will be pointed to. However ignorant, this can definitely be twisted.

It will contribute, but I think there are other factors. One is about demographics. We are at a stage where the population is moving in the direction of being less risk taking and people value safety and security. Closing borders fits with it.

Then we have what I believe is a flaw in the EU, which is the Euro. It has been good for some countries, but a terrible thing for others. If the EU can't benefit enough countries then some will want to leave or at least change how things work.

And then we have the refugee crisis, where the EU shot themselves in the foot, making people anti-EU and anti-immigration.

We have many factors, but I believe all of them contribute and yet the biggest fear I have is that one of the major banks (read Deutsche Bank) will crash. That could really break things apart on so many levels.

[conman]

In the interest of fair analysis, it's best there's a bit of background on the people giving those thoughts. A number of the people you've shared on here, conman, have a very large stake in the advancement of digital tokens / currencies, including Caitlin. A person of her background will know enough to both state the facts accurately while yet arranging and presenting them in such a way as to fit her aim. All these people stand to make a lot of money from another round of public mania, the type that fueled the first bitcoin surge and fuels the hoarding of masks, toilet paper now. 

I'll try to do so in future, but i welcome more people too add some balance too, as I cannot provide all sides to everyone.

I'm trying to give evidence of what's happening so that we can all have a better undertanding. I don't have an interest in who's going to make money out of all this, but I suppose those who understand what's happening are more likely to do so. So why not share their analysis to everyone.

These people that I follow for financial information are mostly macro traders and hedge fund managers and they clearly have a much better picture of what's happening than anyone else. Because it's their job to do so. The fact that many of them (but not all) have an interest in crypto, merely shows that they actually understand it and have run the numbers.

Plan_B

Pseudenym for an Dutch quantative analysit.
Has degrees in economics and law and is part of a team that manages a hedge €100m+ hedgefund in The Netherlands.

Mark Yurko

Mark W. Yusko is an American investor, hedge fund manager, and philanthropist.
He is the founder, chief investment officer and managing director of Morgan Creek Capital Management, an investment management firm that advises pension funds, endowments and wealthy individuals.
He is also Pomp's partner.

Pomp (Anthony Pompiano)

Co-Founder and Partner of Morgan Creek capital with Mark Yusko.
Formerly a product manager in facebook and growth manager in Snapchat.
He's invested in pensions, bitcoin, bonds and a an early investor companies, such as Uber (where he met Mark Yusko for the first time), Uber eats, skedaddle, and many more that i don't know of.

Caitling Long

Education: Harvard Law School (JD, 1994), Kennedy School of Government (MPP, 1994), University of Wyoming (BA, 1990)
Blockchain evangelist.
22 years of corporate finance experience, 1994-2016 (Morgan Stanley, Credit Suisse, Salomon Brothers); Managing Director 2001-2016
Started & ran 3 successful businesses in pensions and insurance; was a top-rated equity research analyst; worked directly for the co-CEOs
Inc. list of 10 business leaders changing the world through tech in 2016.
Institutional Investor list of most influential people in pensions.

David McWilliams

David McWilliams (born 1966) is an Irish economist, writer, and journalist.
He is a faculty member of Trinity College & Dublin business school. 
McWilliams initially worked as an economist with the Central Bank of Ireland, UBS bank and the Banque Nationale de Paris.
Since 1999, he has been a broadcaster, writer, economic commentator. Since 2001, he was warning about the property bubble that eventially crashed in 2007/8. He's been warning about this latest one too for some time. 

[surfer. Fuck you generator.]

I'll try to do so in future, but i welcome more people too add some balance too, as I cannot provide all sides to everyone.

I'm trying to give evidence of what's happening so that we can all have a better undertanding. I don't have an interest in who's going to make money out of all this, but I suppose those who understand what's happening are more likely to do so. So why not share their analysis to everyone.

These people that I follow for financial information are mostly macro traders and hedge fund managers and they clearly have a much better picture of what's happening than anyone else. Because it's their job to do so. The fact that many of them (but not all) have an interest in crypto, merely shows that they actually understand it and have run the numbers.

Plan_B

Pseudenym for an Dutch quantative analysit.
Has degrees in economics and law and is part of a team that manages a hedge €100m+ hedgefund in The Netherlands.

Mark Yurko

Mark W. Yusko is an American investor, hedge fund manager, and philanthropist.
He is the founder, chief investment officer and managing director of Morgan Creek Capital Management, an investment management firm that advises pension funds, endowments and wealthy individuals.
He is also Pomp's partner.

Pomp (Anthony Pompiano)

Co-Founder and Partner of Morgan Creek capital with Mark Yusko.
Formerly a product manager in facebook and growth manager in Snapchat.
He's invested in pensions, bitcoin, bonds and a an early investor companies, such as Uber (where he met Mark Yusko for the first time), Uber eats, skedaddle, and many more that i don't know of.

Caitling Long

Education: Harvard Law School (JD, 1994), Kennedy School of Government (MPP, 1994), University of Wyoming (BA, 1990)
Blockchain evangelist.
22 years of corporate finance experience, 1994-2016 (Morgan Stanley, Credit Suisse, Salomon Brothers); Managing Director 2001-2016
Started & ran 3 successful businesses in pensions and insurance; was a top-rated equity research analyst; worked directly for the co-CEOs
Inc. list of 10 business leaders changing the world through tech in 2016.
Institutional Investor list of most influential people in pensions.

David McWilliams

David McWilliams (born 1966) is an Irish economist, writer, and journalist.
He is a faculty member of Trinity College & Dublin business school. 
McWilliams initially worked as an economist with the Central Bank of Ireland, UBS bank and the Banque Nationale de Paris.
Since 1999, he has been a broadcaster, writer, economic commentator. Since 2001, he was warning about the property bubble that eventially crashed in 2007/8. He's been warning about this latest one too for some time. 

That's fine, and appreciate you giving a bit of background on all.

If this were a circle of people where you (generally speaking) can already go with assumed knowledge, then the background is unnecessary; on here it's better to have that disclosure. Ultimately it's up to the individual reader to dig and find out all angles of course.

I agree with a number of her assessments, and have mentioned the issues with the bond markets before as well.

[Gnurglan]

There is a lot of people who will point their finger at the central banks. Short story being they lowered interest rates to escape the crash in 2008-09 without a depression. What that did was to increase asset prises and it encouraged even more borrowing (which is what caused the housing bubble of 2008-09). Cheap money then led to corporations borrowing money to buy back their own shares. Now everything comes to a halt at the same time and we have record debt for consumers, corporations and countries. I think this is a fairly common view.

How to get out of this is anyone's guess. We should be sceptical to anyone who is prepared to sell us the one thing that will save us or make us rich.

[Iska]

From @CaitlinLong_

What I think that thread is missing (specifically nos. 10, 11 and 16) is in attributing loose interest rates to the central banks alone, when I’d say it’s more a product of transfer of production to China, producing enormous surpluses there which are being loaned back to our governments at very low rates.

I don’t know quite how that fits in here, or more concerningly whether it will continue, but to have raised interest rates at that time would have been to transfer that wealth back to China unnecessarily.  The better thing might have been to take money out of the system through tax instead, but what western country ever votes for that?

I need to give it more thought, but I think there’s a more complicated feedback loop happening than that thread suggests.

[Gnurglan]

What I think that thread is missing (specifically nos. 10, 11 and 16) is in attributing loose interest rates to the central banks alone, when I’d say it’s more a product of transfer of production to China, producing enormous surpluses there which are being loaned back to our governments at very low rates.

I don’t know quite how that fits in here, or more concerningly whether it will continue, but to have raised interest rates at that time would have been to transfer that wealth back to China unnecessarily.  The better thing might have been to take money out of the system through tax instead, but what western country ever votes for that?

I need to give it more thought, but I think there’s a more complicated feedback loop happening than that thread suggests.

The problem is interest rates have been kept artificially low by central banks and for way too long.

Everything is screwed up. There are places where you have to pay the bank interest to keep money in a savings account. Under those circumstances, saving money is stupid. Reverse it and raise rates and many, many couldn't afford to pay off debt. This causes a trap. Raise rates and the whole system would be under stress. We saw that back in 2018. It's insane. You wouldn't accept lending me £100 and a year from now I pay you £99 and we are even. In particular not when the central banks think it's great for you if that £100 should he worth £98 next year. In fact, it's supposedly better for you if it's worth £95. Any common sense tells us that rates should be higher.

[Iska]

The problem is interest rates have been kept artificially low by central banks and for way too long.

Everything is screwed up. There are places where you have to pay the bank interest to keep money in a savings account. Under those circumstances, saving money is stupid. Reverse it and raise rates and many, many couldn't afford to pay off debt. This causes a trap. Raise rates and the whole system would be under stress. We saw that back in 2018. It's insane. You wouldn't accept lending me £100 and a year from now I pay you £99 and we are even. In particular not when the central banks think it's great for you if that £100 should he worth £98 next year. In fact, it's supposedly better for you if it's worth £95. Any common sense tells us that rates should be higher.

Agree mostly with all of that, except that I don’t think it’s artificial.  I think it’s more a function of China in particular making astonishing amounts of cash and being willing to lend it to our governments at rates that wouldn’t make sense were both lending and borrowing taking place within the same economy.  We’ve outsourced production to them to get stuff cheap, this creates capital for them that they don’t lend there because they can’t create further useful production capacity there, so there’s a massive amount of surplus capital that has to lent somewhere, and it comes here with our governments offering much lower interest rates than seem sensible to us.

The trouble is that there’s only one interest rate, and it ends up dictating how our economy works.  So we end up with businesses running on tiny profit margins - because 1% profitability looks good if you can borrow at 0.5% - but which have absolutely no capacity for things to go wrong.

That I think is the most important driver here.  Obviously it’ll be far more complicated than I can understand or convey, but the root difficulty is something like globalisation creating vast profits, but not the vast demand that would enable them to be invested more rationally.  To put it another way, it’s tethered together two economic spheres that haven’t converged anywhere near enough yet.

[Gnurglan]

Agree mostly with all of that, except that I don’t think it’s artificial.  I think it’s more a function of China in particular making astonishing amounts of cash and being willing to lend it to our governments at rates that wouldn’t make sense were both lending and borrowing taking place within the same economy.  We’ve outsourced production to them to get stuff cheap, this creates capital for them that they don’t lend there because they can’t create further useful production capacity there, so there’s a massive amount of surplus capital that has to lent somewhere, and it comes here with our governments offering much lower interest rates than seem sensible to us.

The trouble is that there’s only one interest rate, and it ends up dictating how our economy works.  So we end up with businesses running on tiny profit margins - because 1% profitability looks good if you can borrow at 0.5% - but which have absolutely no capacity for things to go wrong.

That I think is the most important driver here.  Obviously it’ll be far more complicated than I can understand or convey, but the root difficulty is something like globalisation creating vast profits, but not the vast demand that would enable them to be invested more rationally.  To put it another way, it’s tethered together two economic spheres that haven’t converged anywhere near enough yet.

Honestly, I don't think we are alone in not understanding this. I sometimes think the central banks and the press are clueless. I say this because I heard a story about the Federal Reserve. Why did they use a crappy consumer index, when they knew it was wrong? Because their models would break if they didn't... There are exceptions, but lowering interest rates can't be the solution for every situation, yet it is being treated and accepted as such.

I haven't seen your view being key before. Doesn't mean it's wrong, I just need to try and understand it. I agree with the view that China is the producer, they make money and they have invested it partly in US bonds.

But from my view it's not just the US, all central banks have done the same thing and for quite some time. Look at Japan. So it wasn't China that caused all of them to do it. It has been the standard operating procedure for 30+ years and it has ’worked’. The result has been a new and bigger bubble. They have failed to increase interest rates when times have improved. If anything, the US have tried to reverse things, but it took them too long and when they tried, it was about to cause a crash. So they backed down and now we are where we are. Close to or even below zero. There is no room left to try the same trick.

[conman]

https://www.youtube.com/c/AnthonyPompliano/live

they are live now

maybe you can ask some questions in the chat there, they will do a Q&A

[Iska]

I haven't seen your view being key before.

It’s not all my own work!  It did get discussed quite a lot when rates first really started to drop, so about fifteen years ago, but the term used was something like ‘savings glut’.  I’ll see if I can find an old link - I haven’t been paying as much attention recently as I did then, but I do think about it and have come to the view that it’s probably right, this is being driven primarily by there being too much spare money around and that probably isn’t the fault of the central banks.  Though of course it’s all one big system and someone should have dealt with it, but it’s hard to say who and how.

I said China in my post but it’s not just China, it’s also other savers, specifically increasing pension funds in an ageing population.  It’s interesting that you mention Japan, because it happened there first, and that was undoubtedly the result of domestic factors - local pension savings seeking investments locally, causing first a nikkei bubble and then low interest rates ever since as they lent to the Japanese government regardless of interest rates.  I think we’ve been on a basically similar track, but ten years behind and complicated by there being other actors involved.

Edit: https://en.wikipedia.org/wiki/Global_saving_glut  Ben Bernanke seems to have coined it exactly fifteen years ago, so I got that bit right regardless of whether the rest of it is true.

[Gnurglan]

It’s not all my own work!  It did get discussed quite a lot when rates first really started to drop, so about fifteen years ago, but the term used was something like ‘savings glut’.  I’ll see if I can find an old link - I haven’t been paying as much attention recently as I did then, but I do think about it and have come to the view that it’s probably right, this is being driven primarily by there being too much spare money around and that probably isn’t the fault of the central banks.  Though of course it’s all one big system and someone should have dealt with it, but it’s hard to say who and how.

I said China in my post but it’s not just China, it’s also other savers, specifically increasing pension funds in an ageing population.  It’s interesting that you mention Japan, because it happened there first, and that was undoubtedly the result of domestic factors - local pension savings seeking investments locally, causing first a nikkei bubble and then low interest rates ever since as they lent to the Japanese government regardless of interest rates.  I think we’ve been on a basically similar track, but ten years behind and complicated by there being other actors involved.

Edit: https://en.wikipedia.org/wiki/Global_saving_glut  Ben Bernanke seems to have coined it exactly fifteen years ago, so I got that bit right regardless of whether the rest of it is true.

OK, interesting. This was news for me, so thanks for showing a new angle. I have been reading and watching a fair amount of stuff, but nobody has brought it up so I need some time to process it. My views are naturally based on what I have come across. I believe this is a better description of what we are seeing

”This new bubble has been induced by central banks' artificially low interest rates which are creating the TINA effect, which stands for "there is no alternative." This effect is found in markets where hungry investors are forced to buy high risk assets like stocks because other assets offer worse returns.”

https://edition.cnn.com/2019/08/12/perspectives/central-bank-fed-bubble/index.html