Central Bank

Follies

Q-review 4/2018: The path to the Global Depression

The world economy has never faced a more perilous situation. While many have just started to debate whether a recession will start in 2019 or 2020, very few perceive the ’black hole’ the global economy is about to get sucked into. 

The hole has two main “gravitational forces”: the wide-spread mispricing of risk and stagnating productivity growth. Central bank meddling with their bond buying programs (QE) have seriously distorted prices in the capital markets, which means that risk has also been mispriced in vast magnitude. The implications and repercussions of the six-year period of stagnating global productivity growth has also not been understood. These intertwined developments will lead the world economy into a serious economic downfall, a Global Depression.

We devoted most of the March issue of our Q-review to explain how the asset purchase (QE) programs of the central banks have created an environment which encourages risk-taking, leverage and yield-hunting. At the heart of it is the suppression of yields on assets considered safe, most crucially government bonds, which have been the primary target of their QE-programs. QE created a stupendous, multi-year pulse of artificial central bank liquidity forced into the financial system. As the major central banks kept on pumping it eventually ended up increasing the price of almost every single asset class in the world with the possible exception of precious metals.

DYI:  Unfortunately the odds of a worldwide depression has grown exponentially as 1^st world central banks employed either sub atomic low or negative interest rates jacking up asset prices [except precious metals] to insane valuations.  Huge distortions will be worked off as the economy attempts to regain some sense of balance.  Of course the dislocation will result in sky high unemployment as long as 3 to 5 years devastating many of our citizens.  As high as 10 to 15 percent could actually become homeless creating a national emergency that could actually make matters worse depending upon the Fed’s course of action.  Be as that may be; DYI envisions a decline of the S&P 500 from top to bottom between 60% to 75% over a multi-year time period.

So buckle up the ride is going to a bit bumpy.

DYI