Back prior to The Great Decession of 2007-2009 the Minsky moment was momentous. While market highs were being achieved in late 2007, an unthinkable 30%-plus drop in home prices was about to be triggered, and financial weapons of mass destruction were being launched around the world. There is no such undercurrent today that would produce a deep global recession, but, at the very least, there are a number of risks being glossed over by the markets that could qualify today's market condition as being a Minsky moment "lite."
Below are some of the most disturbing conditions that are seemingly being ignored.
- Our global society/economy is based on short-sighted markets. Throughout this morning's opening missive, there is a common thread - namely, that the fever of short-term thinking nearly always masks the emergence and addressing of intermediate-term problems. The immediate world is one comprised of tweets (though not for me!) and instant messages. We are addicted to the moment (and our smartphones). And short-term market performance is cheered while many ignore the long term (and its consequences). It is also the case that, in our economic and monetary policy, business planning and investing that (with apologies to Warren Buffett) there is no long-term plan either. History shows that ignoring structural issues and emphasizing short-term performance (and solutions) almost always ends badly.
- The U.S. economy is a stone's throw from recession. We face subpar economic growth for as far as the eyes can see. Four years after the global economic near-collapse, the foundation of business activity remains unstable and dependent upon continued ease in monetary policy. Though the Bureau of Economic Analysis has changed the calculation of GDP, the trajectory of growth is weak -- and this was confirmed by Ben Bernanke's commentary in his press conference following the decision by the Fed not to taper. Monetary policy (namely, quantitative easing) has, by most measures, lost its effectiveness, and zero interest rate policy has also exhausted its benefits as the federal funds rate can't be lowered into negative territory. The Fed has recently endorsed and underscored the view that U.S. growth is slowing and that prospective growth is uncertain. Yet, the markets have cheered. I recognize that the market correlates better to money growth than earnings. As the spread widens between P/E multiples and stock prices, however, at what point does the market recognize that our economic problems are more deeply rooted, that low interest rates is not a permanent condition and that profits are vulnerable with profit margins about 70% higher than the mean percentages achieved over the past 50 years?
- Monetary policy is shouldering the responsibility of generating growth. The U.S. remains trapped in subpar 2% real GDP growth, and the job market remains weak relative to past recovery cycles (as, among other issues, the structural disequilibrium in the employment market remains unaddressed). While most believe the Fed and other central bankers will remain easy, easy is a finite state that cannot be open-ended. And end it will -- and so will Mr. Market discount the conclusion of an unprecedented period of cowbell.
- Easy monetary policy is in the later innings, and Mr. Market will begin to discount this. Last week, Stanley Druckenmiller provided a clear explanation of the other side of an expansive policy on CNBC and on Bloomberg: "The average investor who is 'forced' to sell them the bonds and take on more risk ... this has forced us to buy securities at subsidized prices, and when they adjust, at whatever point in the future, they will adjust immediately and on no volume."
- Easy monetary policy holds unintended consequences. A half decade of excessive ease is like "it's Chinatown" -- in the classic movie, when they try to make things better, they somehow make them worse, in spite of the best of intentions. Monetary policy is in a place, like Chinatown, where the biggest consequences (U.S. dollar degradation and inflation) are always unintended. Chinatown is where corruption was the status quo and where regular people are forced into silence. Monetary easing and QE effectively stabilized the domestic economy, but, in its extreme, it is to be avoided, like Chinatown, at all costs.
- "Bubbles Ben" is Being Replaced by "Calamity Janet." The last two years of massive and daily injections of monetary ease have proven ineffective. We are stumbling into the end game of the misbegotten spree of QE and ZIRP and massive manipulation and artificiality of the financial markets. The monetary bureaucrats (then Bernanke, soon Yellen) in the Fed have no idea how to wean Wall Street from easy-money policy -- their only prescription is more cowbell. As it seems to have been written in the monetary bible, Greenspan begets Bernanke who begets Yellen. As Einstein is reported to have said, "Insanity is doing the same thing over and over again and expecting different results."
- Thoughtful fiscal policy aimed at addressing a $17 trillion debt load is nonexistent. Our leaders in Washington, D.C., still don't get it, and based on the continued rhetoric (surrounding the debt ceiling debate), they appear unlikely to ever get it. A government shutdown is survivable, not addressing our deficit/debt load may not be.
- The screwflation of the middle class is approaching the dangerous stage. The expected trickle down in the appreciation of home and stock prices has failed to improve the stead of the average American. As Warren Buffett commented last week, "We have learned to turn out lots of goods and services, but we haven't learned as well how to have everybody share in the bounty.... The obligation of a society as prosperous as ours is to figure out how nobody gets left too far behind." Stanley Druckenmiller also chimed in on the subject, calling monetary easing "the biggest redistribution of wealth from the middle class and poor ever." The middle class continues not only to be relatively unaffected by asset appreciation but, as the costs of the necessities of life rise and wages and salaries stagnate, there are emerging social consequences. (In yesterday's New York Times, Thomas Friedman reminds us that the consequences of an oppressed middle class extend to the Middle East.)
- Sales and earnings are deteriorating, and the prospects for 2014 are not improving. Second-quarter 2013 top-line revenues were barely positive, and profits (excluding financial companies) were negative year over year. The third quarter looks no better.
- The eurozone's recovery is unsteady. Many are taking "a leap of faith that the European economies will experience a steady improvement in fortunes. Not so fast!
- Geopolitical risk remains elevated. Unfortunately, violence is a mainstay in our future, whether it is domestic or overseas (e.g. Syria and Kenya). No longer are complicated plots (e.g., Sept. 11, 2001) the mainstay of acts of terrorism; they are increasingly (as recently witnessed in Boston, the Navy Yard, Damascus or Nairobi) random acts of violence.
- The argument that "there is no alternative" will diminish as interest rates rise. For three or four years, a zero interest rate policy has enforced stock prices, as the stock market has won by default. But the bond vigilantes appear to have come out of hibernation lately. And with the yields on the five-year and 10-year U.S. notes more than doubling in only a few months, the "no alternative" argument has weakened. Any further rise in interest rates will reduce the argument further.
- The market has gotten lopsided. A small group of anointed stocks -- including Tesla (TSLA), Netflix (NFLX), Amazon (AMZN), selected biotech stocks and the like -- have attracted traders and investors. When this happened in other asset classes before (gold two years ago) or in individual stocks (Apple (AAPL) a year ago), it ended badly, as greed overcame sensibility. History rhymes; it will occur again -- maybe sooner than later!
- Market watchers, commentators and investors are unquestioning. Investment performance pressures and human instinct result in too many worshiping at the altar of price momentum. As a response and complement to record market highs, optimism is being lifted, and price targets are being raised as skepticism dissipates.
- We've got black swans aplenty. Whether it is the pension problem, a student loan problem, natural disaster, geopolitics, "the new normal" of terrorism or the potential risk of social uprising (not only around the world but on our shores), these are fragile not durable times, and our markets and economy remain vulnerable to exogenous and unexpected shocks.
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