Will Citizens turn their Rage towards Central Bankers?

Monthly Market Commentary: July 1, 2017

My friend Albert Edwards at Societe Generale recently wrote an excellent strategy report entitled, “Theft redux: the citizens will soon turn their rage towards Central Bankers.

According to Edwards, “While politics in the West reels from a decade of economic crisis and stagnation, asset prices continue to surge on the back of continued rapid growth in G3 QE.
In an age of ‘radical uncertainty’ how long will it be before angry citizens tire of blaming an impotent political system for their ills and turn on the main culprits for their poverty – unelected and virtually unaccountable central bankers? I expect central bank independence will be (and should be) the next casualty of the current political turmoil.”

Personally, I do not believe that there is really such a thing as “central bank independence.” Furthermore, the financial and real estate sector and wealthy people in general are always highly supportive of expansionary monetary policies. It lifts their asset prices and wealth. Like Edwards, I also condemn the “monetary madness” of central banks but I accept that there were then, as there are now, mitigating circumstances.

Edwards further opines that, the “Evidence of the impact of monetary madness on assets prices is all around if we care to look. I read that a parking spot in Hong Kong was just sold for record HK$5.18 million ($664,200). What about the 3.5x oversubscribed 100 year Argentine government bond? Sure, everything has a market clearing price, even one of the most regular defaulters in history. But what concerned me most about the story was it was demand from investors (reverse enquires) that prompted the issue. Is it just me or can I hear echoes of the mechanics of the CDO crisis? ……. But no one cares when the party is still raging and investors, drunk with the liquor of loose money, are blind to the inevitable catastrophe that lies ahead.”

Edwards makes a good point. “Monetary madness,” as he calls it has fueled little consumer goods price inflation, so far, but a colossal asset bubble around the world. The suppression of interest rates (particularly so in Japan and the Eurozone) have also compressed the interest rates on junk bonds to extremely low levels. These securities are bought by investors that are desperate for higher yielding fixed interest securities.

Concerning the 100-year Argentinian bond though, Philip Grant of Grant’s Interest Rate Observer had this to say: “Eight times in its 194 year financial history has Argentina defaulted on its borrowings, most recently in 2014 amidst its dispute with creditors from its prior episode of financial ruin in 2001. At its historical pace, the soon to be-issued 7.125s of 2117 (priced at $90 to yield around 7.92%) will default more than four times over before that so very-distant prospective maturity date.

My friend Michael Gayed at Pension Partners (he has been a regular contributor to this report) recently wrote that many market participants seemingly were simply forgetting that volatility mean-reverts, and that stocks tend to go down much faster than they go up and that “the time to panic is upon us.

I am not sure that “the time to panic is upon us,” but even if the US stock market were to move higher a change in leadership would not surprise me with FANG type of stocks no longer advancing.

I wish my American readers a wonderful July 4 celebration and don’t forget Charles MacKay’s observation that,
“Men, it has been well said, think in herds; it will be seen that they go mad in herds while they recover their senses slowly and one by one.”

Kind regards
Yours sincerely

Marc Faber

P.S. Since we discussed political correctness repeatedly, I urge my readers to watch the following video with a speech by George Carlin. Watch it to the end. It is wonderful.

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