A Financial Crisis Is Coming?

A provocative article in USNWR. We’ve been warning about unsustainable asset prices built on unsustainable debt leverage for the past 8 years (which only means we were waaaaay too early, but not necessarily wrong!) For all this time we’ve been focused on growing total debt to GDP ratios, which means we’re not getting much bang for all that cheap credit, trying to borrow and spend our way to prosperity.

The PE ratios of equities and housing reflect a disconnect with fundamental values based on decades of market data. For example, one cannot really pay 8-10x income on residential housing for long, or pay near to 50% of income on rents, as many are doing in our most pricey cities.

Nose-bleed asset prices on everything from yachts to vacation homes to art and collectibles to technology stocks and cryptocurrencies are indicative of excessive global liquidity. Soaking up that liquidity to return to long-term trend lines will be a long, jarring process. Nobody really knows whence comes the reckoning since we have perfected a particularly successful strategy of kicking the can down the road.

A Crisis Is Coming

All the ingredients are in place for a catastrophic economic and financial market crisis.

By Desmond Lachman Opinion Contributor USNWR, Feb. 14, 2018, at 7:00 a.m.

MY LONG CAREER AS A macro-economist both at the IMF and on Wall Street has taught me that it is very well to make bold macroeconomic calls as long as you do not specify a time period within which those calls will occur. However, there are occasions, such as today, when the overwhelming evidence suggests that a major economic event will occur within a relatively short time period. On those occasions, it is very difficult to resist making a time-sensitive bold economic call.

 

So here goes. By this time next year, we will have had another 2008-2009 style global economic and financial market crisis. And we will do so despite Janet Yellen’s recent reassurances that we would not have another such crisis within her lifetime.

 

There are two basic reasons to fear another full-blown global economic crisis soon: The first is that we have in place all the ingredients for such a crisis. The second is that due to major economic policy mistakes by both the Federal Reserve and the U.S. administration, the U.S. economy is in danger of soon overheating, which will bring inflation in its wake. That in turn is all too likely to lead to rising interest rates, which could very well be the trigger that bursts the all too many asset price bubbles around the world.

A key ingredient for a global economic crisis is asset price bubbles and credit risk mispricing. On that score, today’s financial market situation would appear to be very much more concerning than that on the eve of the September 2008 Lehman-bankruptcy. Whereas then, asset price bubbles were largely confined to the U.S. housing and credit markets, today, asset price bubbles are more pervasive being all too much in evidence around the globe.

 

It is not simply that global equity valuations today are at lofty levels experienced only three times in the last one hundred years. It is also that we have a global government bond market bubble, the serious mispricing of credit risk in the world’s high yield and emerging market corporate-bond markets and troublesome housing bubbles in major economies like Canada, China, and the United Kingdom.

 

Another key ingredient for a global economic crisis is a very high debt level. Here too today’s situation has to be very concerning. According to IMF estimates, today the global debt-to-GDP level is significantly higher than it was in 2008. Particularly concerning has to be the fact that far from declining, over the past few years Italy’s public debt has risen now to 135 percent of GDP. That has to raise the real risk that we could have yet another round of the Eurozone debt crisis in the event that we were to have another global economic recession.

 

Today’s asset price bubbles have been created by many years of unusually easy global monetary policy. The persistence of those bubbles can only be rationalized on the assumption that interest rates will remain indefinitely at their currently very low levels. Sadly, there is every reason to believe that at least in the United States, the period of low interest rates is about to end abruptly due to an overheated economy.

The reason for fearing that the U.S. economy will soon overheat is not simply that it is currently at or very close to full employment and growing at a healthy clip. It is rather that it is also now getting an extraordinary degree of monetary and fiscal policy stimulus at this very late stage of the cycle.

Today, U.S. financial conditions are at their most expansionary levels in the past 40 years due to the combination of very low interest rates, inflated equity prices and a weak dollar. Compounding matters is the fact that the U.S. economy is now receiving a significant pro-cyclical boost from the unfunded Trump tax cut and from last week’s two-year congressional spending pact aimed at boosting military and disaster-relief spending.

 

Today, in the face of an overheated U.S. economy, the Federal Reserve has an unenviable choice. It can either raise its interest rate and risk bursting the global asset price bubble, or it can delay its interests rate decision and risk incurring the wrath of the bond vigilantes who might sense that the Federal Reserve is not serious about inflation risk. In that event, interest rates are apt to rise in a disorderly fashion, which could lead to the more abrupt deflating of the global asset bubble.

 

This time next year, it could very well turn out that today’s asset price bubbles will not have burst and we will not have been thrown into another global economic recession. In which event, I will admit that I was wrong in having been too pessimistic about the global economic outlook. However, I will fall back on the defense that all of the clues were pointing in the opposite direction.

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The Death of Text?

 

The following short essay was published in the NY Times feature called The Fate of the Internet. Frankly, it’s difficult to take these arguments too seriously, despite the transformative effects of technology.

Welcome to the Post-Text Future

by Farhad Manjoo, NY Times

I’ll make this short: The thing you’re doing now, reading prose on a screen, is going out of fashion. [Which means what? It’s popularity is fading as a communication channel?]

We’re taking stock of the internet right now, with writers [Hmm, what’s a writer without a reader?] who cover the digital world cataloging some of the most consequential currents shaping it. If you probe those currents and look ahead to the coming year online, one truth becomes clear. The defining narrative of our online moment concerns the decline of text, and the exploding reach and power of audio and video. [Yes, but where does real “power” really reside? In cat videos and selfies? Those behind the curtain are really smiling.]

This multimedia internet has been gaining on the text-based internet for years. But last year, the story accelerated sharply, and now audio and video are unstoppable. The most influential communicators online once worked on web pages and blogs. They’re now making podcasts, Netflix shows, propaganda memes, Instagram and YouTube channels, and apps like HQ Trivia.

Consider the most compelling digital innovations now emerging: the talking assistants that were the hit of the holidays, Apple’s face-reading phone, artificial intelligence to search photos or translate spoken language, and augmented reality — which inserts any digital image into a live view of your surroundings.

These advances are all about cameras, microphones, your voice, your ears and your eyes.

Together, they’re all sending us the same message: Welcome to the post-text future. [No, they are welcoming us to the distractions of circuses. That’s what entertainment is.]

It’s not that text is going away altogether. Nothing online ever really dies, and text still has its hits — from Susan Fowler’s whistle-blowing blog post last year about harassment at Uber to #MeToo, text was at the center of the most significant recent American social movement.

Still, we have only just begun to glimpse the deeper, more kinetic possibilities of an online culture in which text recedes to the background, and sounds and images become the universal language.

The internet was born in text because text was once the only format computers understood. Then we started giving machines eyes and ears — that is, smartphones were invented — and now we’ve provided them brains to decipher and manipulate multimedia. [Yes, but civilization was not born with the ASCII computer language. Computers are becoming clever tvs, but they still deliver a lot of trivia as content and video formats probably amplify that. Perhaps we are seeing the trivialization of popular culture? Has it ever not been trivial?]

My reading of this trend toward video as a substitute for text applies to certain types of media and content. Certain commentators have adapted readily to YouTube channels to transmit knowledge and ideas and the educational potential is just being tapped. But true power in the world of ideas is controlled by those who know how to manipulate text to understand abstract intellectual ideas that govern our world.

The question is, is technology turning us into sheep or shepherds? Because for sure, there are wolves out there.

As John Maynard Keynes wrote,

The ideas of economists and political philosophers, both when they are right and when they are wrong are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back…

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