Skip to main content

You Never, EVER Go ‘Full Krugman’

Financial Crisis 2016? Mr. Krugman, are we having fun yet?
  • Author:
  • Updated:

This morning I spent time trying to get a sense of who thinks the new year financial route will turn around or, as some bears are calling for: “S&P could plunge 75% to 550”. The phone calls with clients and industry friends felt like that moment Roy Scheider said “we’re gonna need a bigger boat”.

The agreed consensus points to crude prices, China, geopolitical instability, the ending of ZIRP (the Fed’s zero interest rate policy, or cheap money), and a much needed deflation of bubble markets.

Three months ago I wrote about the likelihood of an impending recession, which took into account horrible U.S. economic indicators, commodity deflation, asset bubbles, and the global Keynesian central bank planning which has increased debt to levels only imagined in a Paul Krugman dream sequence.

And then there’s this: Leading statistical indicators are pointing to some deeply concerning numbers. These suggest that Black Swan risks have risen to the highest level ever. If you reread that last sentence, it’s enough to ensure your generators and freeze dried food stocks are current.

Since that post, the Fed announced a much expected, but probably horribly timed interest rate hike.

Financial ‘experts’ (as economists), all have their opinions, some carrying more weight than others. These days the bearish Marc Faber’s, Peter Schiff’s and Nouriel Roubini’s look positively giddy compared with SocGen’s Albert Edwards who just released an alarming explanation of what is currently happening.

As MarketWatch reports:

If a 6% slide in the S&P 500 in only the first six days of trading in 2016 didn’t scare investors, then Albert Edwards’s recent prediction might.

Investors are coming to terms with what a Chinese renminbi devaluation means for Western markets,” Edwards begins, in a note dated Wednesday. “It means global deflation and recession,” he adds, matter-of-factly.

According to Edwards, global strategist at Société Générale and prominent perma-bear, the stock benchmark SPX, -2.50% could fall as much as 75% from the recent peak of 2,100 to trade around 550. Edwards argues that stocks are already in a bear market—commonly defined as a 20% fall from a recent high—and that U.S. industrial production is shaky and could represent the beginning phases of a recession. That’s bad news for stock-market bulls.

Prosperity illusion ‘shattered’

In a report published on Wednesday, the SocGen bear elaborated on his pessimistic outlook. He explained that the “coming carnage” is an indirect result of the quantitative easing program launched by the Federal Reserve after the financial crisis in an effort to ease pain in the economy. However, the aggressive stimulus measures have done little to stimulate growth and instead served to inflate “global asset prices into the stratosphere,” Edwards said.

“A commodity bubble and the resultant U.S. shale investment boom were all consequences of the Fed’s QE. The illusion of prosperity is shattered as boom now turns to bust. But I do hope this time around the [British] Queen won’t ask, as she did in November 2008, why nobody saw this coming,” he said.

He further noted that for previous bear markets, it has taken four to six recessions to shake off the weak sentiment, as laid out in the chart below. That means, that after only two recessions in this current cycle, the bear market has not yet been completed.

Zero Hedge, never missing a chance to hype the fear factor:

I have always said that if inflating asset prices via loose monetary policy were the route to economic prosperity, Argentina would be the richest country in the world by now and it is not! The Fed’s pursuit of negligently loose monetary policies since 2009 is a misguided attempt to boost economic growth via asset price inflation and we will now reap the whirlwind (the ECB, Bank of Japan and the Bank of England are all just as bad). One of the main problems has been the overconfidence with which the Fed pursues their objective. Yet in the run-up to the 2008 Global Financial Crisis they demonstrated their lack of understanding of the disastrous impact of excessively low Fed Funds. Even in retrospect they remain in denial – as evidenced by Bernanke’s recent book. Why can’t these incompetents understand that they are, once again, the midwife to yet another global unfolding economic crisis? But unlike 2007, this time around the US and Europe sit on the precipice of outright deflation.

ZH continues with the effect a ‘decoupling’ of manufacturing and services.

What comes next? The collapse of the US manufacturing “renaissance” (and we put that term in quotes for a reason):

Indeed US manufacturing seems to be suffering particularly badly already.

I believe the Fed and its promiscuous fraternity of central banks have created the conditions for another debacle every bit as large as the 2008 Global Financial Crisis. I believe the events we now see unfolding will drive us back into global recession.

Zero Hedge opines:

With rock bottom rates and a still bloated balance sheet, the Fed would be working with exactly zero counter-cyclical slack, which means there would be no way for Yellen to avoid an all-out unwind of the much ballyhooed wealth effect that’s served to restore the 401ks for any Americans still foolish enough to retain a seat at a casino run by crazed PhD economists, vacuum tubes, and modern day robber barons.

Since 2009 America has experienced several short lived down-cycles while enjoying a prolonged appreciation of equities and real estate. In an election year where no White House wants a recession to occur, Janet Yellen may now be feeling the pressure to reconsider further increasing interest rates. As mentioned in my aforementioned post, Yellen is not a politician, but is surrounded by them.

The American economy is 70% consumer based. Many predicted lower oil prices would lead to increased consumer spending. It hasn’t. Will possible even lower oil prices stimulate spending? It won’t. I believe that is due to other living costs increasing ie: rent, health insurance, servicing debt, etc.

If this current down market continues into the abyss as some predict, consumer confidence will surely plummet, and then we may be looking at a very dangerous cycle. The difference between 2008 where banks and certain corporations were ‘too big to fail’ and 2016 is that the banks now may be ‘too big to save’.

I hope we hear more about this at the GOP debate.