::: ANALYSES 2016 :::

1st quarter musings

by Franco SEGUSO

April 2016: When central bank go all-in one

After the first two weeks of the year metamorphosed from the worst ever for equity markets into another epic market reflation, risk assets managed to finish the quarter more or less unchanged notwithstanding a barrage of downbeat macro economic data and news. As with each preceding market drawdown, the easy money cacophony grew louder with each tick lower in the S&P until the monetary suzerains delivered their goodies. And delivered they did! This will be remembered as the quarter when all major central banks took out their monetary bazookas: first off to the race was the PBOC with a mind blogging credit expansion of over half a trillion dollar in January alone (that’s almost the Swiss GDP) and a projected 3 trillion dollars for the full calendar year (add a Germany GDP to the credit tab). China credit bubble of 35 trillion dollars and counting is truly on its way to put to shame the US sub-prime bubble.(more)

::: ANALYSES 2015 :::

by Franco SEGUSO


The bubble is dead, long live the bubble  In a house of debt like the world economy, saturated in $230 trillion of outstanding credit, it’s mathematically impossible to exit from a four decades-long incremental credit cycle without precipitating a debt-deflation of epic proportion. There is simply too much debt chasing too little demand. The Fed decision to end QE and to initiate a mini-tightening cycle is suddenly testing this hypothesis as credit-withdrawal is already impacting aggregate demand on a global scale: in a game of front-running the easy money-printers, the first tightening move is the inflection signal. Never in the past were such levels of ‘promises to pay later’ accrued while the world keeps pushing the outer-limit of peak-debt and unfunded entitlements. Our current economic model assumes that debt don’t matter as long as future expected growth keep it sustainable, no matter how dismal real growth is eventually realized. Only in the aftermath of post-bubble recessions, when even expected growth becomes impaired as in 2002 and then again in 2008, central banks set out increasing rounds of financial repression to preserve debtor sustainability as asset-deflation is simply no longer tolerable to a world awash in debt. This is the extend-and-pretend policy that is in force since the early 2000.(more)