BarroMetrics Views: Ominous Signs
Long time readers of this blog will know that I have taken this view of the S&P: “long or out”.
The reason for the view?
I believe that QE has distorted the price mechanism. The stock market used to be a forerunner of what we may expect to see in the economy; nowadays, it merely reflects a belief that QE will or will not continue. The worse the economic news, the more the stock market rises because it assumes that the pump priming by Central Banks will find a home in the stock market.
I have also said that at some point, this belief (that the FED and other Central Banks can circumvent economic laws) will be undermined. When that happens, we’ll probably see a depression (rather than the recession I had previously envisaged) – given the massive amounts of excess cash sloshing in Central Banks coffers.
I used to think the belief would be shaken by a ‘black swan’ event; but lately I have been seeing different strands that may come together to produce that event. The event: the abandoning of the US$ as the reserve currency. Let’s face it, the reason the US gets away with it does is because it is the reserve currency. Take that away, and the US will face the same problems as Greece, Spain etc.
So, what are these strands:
- FACTA is having unintended and unforeseen consequences – which if not remedied will adversely affect the US economy. See ‘FACTA is NOT JUST….”. Once US banks move into full swing in their attempt to collect data from non-US citizens, you can expect them to vote with their feet. Since the US government has no jurisdiction to impose its laws on foreign citizens not residing in the US, the remedy to an unacceptable request is to change banks. Added to this the resentment that FACTA is generating in this part of the world. See FACTA TURNING…..
- China is facing a conundrum. On the one hand, it is afraid of inflation; on the other, it’s economy is slowing. The fear is it will move to inflate and that this will cause a bubble to burst. On June 10, the Financial Times reported that ‘China Cuts Reserves Rule in Growth Bid’. Today,the International New York Times reported that Hong Kong Curbs Loans, With An Eye to China’. HK regulators fear that a financial crisis in China will expose HK banks who over-lend to the mainland.
- With the latest offering from the ECB, stocks have moved to new highs and the VIX to lows not seen since 2007. It’s true that the complacency is not the same as 2007. Then, we saw the middle class and the professional end share the same view. The US middle class is now not in any shape to participate (See US Middle Class Worse Off). But whatever the composition of the market, when the ‘shit hits the fan’, the response will be to ‘head for the hills’.
- Finally, FT posted a short note on June 9, that Russian groups will turn to the reminbi if they are blocked from the US$ market. I am not suggesting that, in the near term, the renimbi will supplant the US$. However, the fact that this tidbit hit the frontpage of a respected paper, does imply that confidence in the US$ is weakening to the extent that alternatives are being imagined.
Tying the strands together:
- FACTA worsens the US to an extent not foreseen; world resentment builds against the US to the extent that an alternative to US$ as reserve currency is found.
- In turn, this compounds the FACTA adverse affects.
- The US finds that QE no longer provides a floor to US Stocks and a ceiling to interest rates. Indeed, quite the reveres. US stocks start a long-term bear market; interest rates a long-term bear market.
- Finally, unlike 2007-2008 crisis, China is unable to assist.
After publishing the blog, I came across a relevant article by John Plender. Well worth a read. See