Credit Bubble Bulletin

“The worst turmoil since the Great Depression” provoked incredible policy actions. In 2013, after witnessing previously unimaginable central bank or investment company interest-rate manipulation, monetization and the specific policy goal of inflating securities markets, I had been compelled to again revise Minsky’s levels: “Government Finance Quasi-Capitalism”. As finance has a proclivity of doing, “Money Market Capitalism” evolved over time to be increasingly unpredictable.

Policy replies then nurtured a freakish financial backstop that greatly incentivized leveraged speculation throughout the securities and derivatives marketplaces. This process fundamentally loosened financial conditions and spurred risk-taking and spending. The policy response to the 2008/2009 crisis was nothing lacking phenomenal. A Trillion of QE from the Fed, zero rates, and massive bailouts.

Still, the Fed at the time claimed to be focused on returning to the prior policy regime when practical. The Fed devoted significant resources toward mapping out a return to normalcy, going as far as releasing in 2011 a detailed “exit strategy” for normalizing rates and returning its balance sheet to pre-crisis levels.

But with the European turmoil at the brink of turning global back in 2012, it had become clear by that point that thoughts of time for so-called “normalcy” were illusionary. It could have been the ECB’s Draghi speaking “whatever it takes,” but he was speaking for global central bankers just about everywhere. QE was no longer just a crisis measure.

It would very easily provide unlimited ammo for which to inflate securities marketplaces and spur risk-taking and financial activity. If zero rates weren’t providing the expected market response, no good reason not to go negative. If buying sovereign bonds wasn’t getting the work done, move to corporates and equities. Such a deviant policy backdrop in conjunction with an already deeply distorted and speculative market environment ensured descent into a freakish financial landscape. Most obvious, marketplaces have come to disregard the risk mainly. Serious cracks in China and Europe have been overlooked by global markets mainly. The alarming geopolitical backdrop is totally disregarded more and more.

  1. ► February (7)
  2. Research and analysis
  3. 10,000(1 + .055 X 5) = $12,750.00
  4. ► July (7)
  5. Investment Date: 3/14/17
  6. Lower profits
  7. Fixed Or Split Loan Rate

Brexit was deemed – for about a trading session. Global financial vulnerability is on full display, though massive QE and negative-yielding developed country sovereign personal debt ensure a “money” deluge into the corporate debt marketplace. Concern for risk has hurt performance. Recurring bouts of concern puts one’s career in danger – whether you are a portfolio manager financial advisor, traders, independent investors, strategist, or analyst. The financial and institutional arrangements which I collectively make reference to as “Government Finance Quasi-Capitalism” have as time passes had profound impacts on the securities markets.

Policymakers have mainly removed volatility from equities (VIX ends the week at 11.39) and fixed income. U.S. commercial debts issuance remains at near-record pace. Stock prices are in all-time highs in the U.S. Relationship prices all over the place are near information almost. Risk premiums generally have collapsed. Why is unease so widespread throughout the securities marketplaces then? For just one, it’s impossible these days to gauge risk.

How much are QE and rate insurance policies impacting securities prices? Will global policymakers have the capacity to withdraw from unprecedented measures, or have they become trapped in disproportionate stimulus without real way to avoid it? How big is the downside? How will the near future policy backdrop play out? The truth is that nobody – certainly not the policymaker community – has any idea what the future holds for policy or the marketplaces. A reverse in direction of reasonableness and “normalcy” or a further spiral out of control?

There’s a strong argument that trading has been largely relegated to something of the past. If risk is completely unclear, it’s impossible to determine risk versus incentive. Furthermore, how are company basic principles (i.e. revenue, cash-flow, etc.) impacted by massive financial and fiscal stimulus? How about the macro-economy? And if risk vs. ‘s delusional to make reference to “investment”.

A defining feature of Government Finance Quasi-Capitalism is that speculation now completely dominates investment. An unintended result of policymakers suppressing volatility and masking risk are that active management has been severely disadvantaged relative to passive management. Traditional investment analysis and risk management have been a substantial detriment to performance. Why bother, when fees are lower with passive anyway? So “money” has flooded into ETFs and other index products simply to speculate on “the market.” Passive management really couldn’t care and attention less about China, European banking institutions, Brexit, Japan, Bubbles, or policymaking more generally.