Predicting the future is hard. If it wasn't, I'd be a lot richer. I have dared to make some predictions in this blog which haven't come to pass. Or at least, not yet. Specifically, I predicted that the brief interlude between the 2008 crisis and its continuation was coming to an end last year. But it didn't. I don't feel too bad about this. I just think I was a little early. I still feel good about my previous predictions about the 2008 financial crisis and Trump's campaign success.
In a way predicting the next crisis is easy. There's always going to be a next crisis. The hard part is getting the specifics and the timing correct. The crisis itself however, is guaranteed. Central banks have created an artificial boom by keeping interest rates too low, monetising government debt and printing up money to buy other assets. Booms always bust. The bigger the boom, the bigger the bust.
And boy, have we had a boom. The dow is up over 350% since its 2009 low. Government, corporate and individual debt is at record levels in the western world. Loss-making companies with unproven business models are getting sky-high valuations. The crypto asset bubble, real estate prices in some markets and record prices at auctions are yet more anecdotal evidence of the boom.
But this boom is tired. It is old and it is looking for pins. Air is starting to come out and the central banks know it. In fact, the Fed has already started to ease and has already spent a lot of its ammunition. Hang on, interest rates haven’t been cut yet and quantitive tightening is still happening, how is the fed easing? The easing already began last year, when they changed their guidance about future interest rate moves. From four interest rate hikes in 2019, the guidance is for no increases. QT is no longer on "auto-pilot" and the verbal groundwork for QE4 is already being expressed.
This massive turnaround is a lot of bullets already unloaded from the feds magazine. This volley did manage to stop the slaughter in the stock market, but it hasn't been able to bring on a new bull. If the market resumes its downward trend as corporate earnings disappoint, the fed will be quick to go from 2.5% back to zero. That's not a lot of stimulus, so QE4 will also be needed. Asset purchases will likely have to be north of $100Bn a month as early as this year to try and hold back the tide of recession.
Ok, so the longest expansion in history will come to an end soon. That’s an easy prediction. The central banks will do what they said they will do, cut rates and print money, that’s an easy one too. Now on to the difficult prediction, the one actually worth making: Failure by central banks to normalise interest rates or balance sheets will finally unleash market pressures on inflation. The currencies of these markets, particularly the USD will decline markedly which will in turn create massive price increases in commodity prices and eventually consumer goods.
Asset prices simply have to return to normal, in real or nominal terms. The central banks only get to choose which: either a deflationary recession where asset prices come down or an inflationary recession where the price of everything goes up to bring asset prices back into line. This prediction is ultimately assured because of the simple fact that you cannot print prosperity. One cannot suspend a ball in mid air. However, if one throws it high enough, for a while, it can appear to be done.
So, this early phase of the next crisis didn’t happen in 2018. We've had a good quarter for financial assets. Will we have another one? Another three? Time is running out, and I hazard another prediction. ZIRP and QE are going to be back with a vengeance before 2019 is gone. The 2008 financial crisis will be remembered as a prelude to a bigger problem. The "Great Recession" will be like the "Great War": it will have to be renamed and it won't be great.
Columbus, OH April 9th 2019
TLDR: The crisis hasn't come, the crisis is coming.
In a way predicting the next crisis is easy. There's always going to be a next crisis. The hard part is getting the specifics and the timing correct. The crisis itself however, is guaranteed. Central banks have created an artificial boom by keeping interest rates too low, monetising government debt and printing up money to buy other assets. Booms always bust. The bigger the boom, the bigger the bust.
And boy, have we had a boom. The dow is up over 350% since its 2009 low. Government, corporate and individual debt is at record levels in the western world. Loss-making companies with unproven business models are getting sky-high valuations. The crypto asset bubble, real estate prices in some markets and record prices at auctions are yet more anecdotal evidence of the boom.
But this boom is tired. It is old and it is looking for pins. Air is starting to come out and the central banks know it. In fact, the Fed has already started to ease and has already spent a lot of its ammunition. Hang on, interest rates haven’t been cut yet and quantitive tightening is still happening, how is the fed easing? The easing already began last year, when they changed their guidance about future interest rate moves. From four interest rate hikes in 2019, the guidance is for no increases. QT is no longer on "auto-pilot" and the verbal groundwork for QE4 is already being expressed.
This massive turnaround is a lot of bullets already unloaded from the feds magazine. This volley did manage to stop the slaughter in the stock market, but it hasn't been able to bring on a new bull. If the market resumes its downward trend as corporate earnings disappoint, the fed will be quick to go from 2.5% back to zero. That's not a lot of stimulus, so QE4 will also be needed. Asset purchases will likely have to be north of $100Bn a month as early as this year to try and hold back the tide of recession.
Ok, so the longest expansion in history will come to an end soon. That’s an easy prediction. The central banks will do what they said they will do, cut rates and print money, that’s an easy one too. Now on to the difficult prediction, the one actually worth making: Failure by central banks to normalise interest rates or balance sheets will finally unleash market pressures on inflation. The currencies of these markets, particularly the USD will decline markedly which will in turn create massive price increases in commodity prices and eventually consumer goods.
Asset prices simply have to return to normal, in real or nominal terms. The central banks only get to choose which: either a deflationary recession where asset prices come down or an inflationary recession where the price of everything goes up to bring asset prices back into line. This prediction is ultimately assured because of the simple fact that you cannot print prosperity. One cannot suspend a ball in mid air. However, if one throws it high enough, for a while, it can appear to be done.
So, this early phase of the next crisis didn’t happen in 2018. We've had a good quarter for financial assets. Will we have another one? Another three? Time is running out, and I hazard another prediction. ZIRP and QE are going to be back with a vengeance before 2019 is gone. The 2008 financial crisis will be remembered as a prelude to a bigger problem. The "Great Recession" will be like the "Great War": it will have to be renamed and it won't be great.
Columbus, OH April 9th 2019
TLDR: The crisis hasn't come, the crisis is coming.
