https://en.wikipedia.org/wiki/Ray_DalioRaymond Dalio (born August 8, 1949) is an American billionaire investor, hedge fund manager, and philanthropist. Dalio is the founder of investment firm Bridgewater Associates, one of the world's largest hedge funds. As of January 2018, he is one of the world's 100 wealthiest people, according to Bloomberg.
https://news.goldcore.com/us/gold-blog/imf-issues-dire-warning-great-depression-ahead/Is another “Great Depression” on the horizon? It would be easier to dismiss these words from Nouriel Roubini, Marc Faber or other doom-and-gloom prognosticators. Coming from Christine Lagarde’s team, though, they take on a new dimension of scary.
The International Monetary Fund head isn’t known for breathlessness on the world stage. And yet the IMF sounded downright alarmist in its latest Global Financial Stability report, stating that “large challenges loom for the global economy to prevent a second Great Depression.”
Even some market bears were taken aback. “Why,” asks Michael Snyder of The Economic Collapse Blog would the IMF use this phrase “in a report that they know the entire world will read?”
Perhaps because, unfortunately, the findings of other referees of global risks – including the Bank for International Settlements – hint at similar dislocations.
Ten years after the Lehman Brothers crisis, these worrisome warnings that will be explored in depth at this week’s annual IMF meeting in Bali. The tranquil setting, though, will offer few respites from cracks appearing in markets everywhere – from Italy to China to Southeast Asia, where currencies are cratering like it’s 1998 again.
Potential flashpoints and a long line of dominos
Italy is the current flashpoint – and the latest target of “domino effect” chatter in frothy world markets. China’s shadow-banking bubble, and the extreme opacity and regulations that enable it, also came in for criticism. And, of course, the 800-pound beast in any room where global investors gather these days: Donald Trump’s assault on world trade.
But the real worry is the health of foundations underpinning these and other risks.
As the BIS warned on Sept. 23, the global economy faces a potential “relapse” of the “Lehman shock” of 2008. “Things look rather fragile,” says BIS chief economist Claudio Borio. Equally worrying, he adds: “There’s little left in the medicine chest to nurse the patient back to health or care for him in case of a relapse.”
A similar connection of dangerous dots runs through the IMF’s latest report. The big problem, says Malhar Nabar, deputy chief of IMF research, is the one that investors tend to ignore or explain away: how much of the Lehman fallout is still with us.
“There are many countries, even today, that are operating below pre-crisis trends,” Nabar says. “And what’s interesting is not just countries that suffered banking crises in 2007-2008 but also other countries outside of that epicenter that were affected through trade links or through financial links.”
Increased inequality is one troubling side-effect. Yet Nabar highlights, “possible long-lasting effects of the crisis on potential growth” that might seem tangential to Wall Street’s crash – lower birth rates, lower fertility and even “some evidence of slower technology adoption.” All this, he says, “can affect productivity growth and potential growth going forward.”
There is no doubt that many of the official policy actions taken since 2008 “seemed to have helped limit the harm.” But the costs of those efforts are only beginning to get calculated.
2008 crisis measures cast long, dark shadow
Excessively loose monetary policies have exacerbated the widening inequality trends unfolding pre-Lehman crackup. At the same time, there’s been, in the words of the IMF, a “large accumulation of public debt and the erosion of fiscal buffers in many economies following the crisis point to the urgency of rebuilding defenses to prepare for the next downturn.”
Yet all the diplomatic speak in the world can’t sugarcoat the roughly $250 trillion crisis unfolding in slow motion. That’s the level to which the world’s debt burden ballooned since the Lehman crash. That’s 18 times China’s annual gross domestic product.
And with official rates from Washington to Tokyo still at ultra-low levels historically, there’s little ammunition to battle the next reckoning.
Italy’s debt woes are an obvious weak link. One reason: just as with US officials after 2008, Europe did more to treat the symptoms of its woes than address underlying causes.
So is China’s unbalanced economy, one being trolled by US President Donald Trump’s tariffs arms race. This year’s 6.4% drop in the yuan is raising eyebrows for good reason. For one thing, it coincides with a marked slowdown in exports, industrial production, fixed-asset investment and an 18% plunge in Shanghai stocks this year. For another, it raised the specter of sizable defaults on dollar debt, which would reverberate through the global economy.
And therein lies Asia’s problem.
In general, the region has journeyed a long way since the darkest days of 1997 and 1998. Financial systems are stronger and governments are more transparent. Currencies are more flexible. Foreign-exchange reserves have been rebuilt. That leaves advanced economies from South Korea to Singapore reasonably well equipped to withstand fresh turmoil.
But there are cracks in the region’s developing markets, as the ferocity of currency plunges in India, Indonesia and the Philippines show. Investors may argue they’ve learned from past misstates, but still fall prey to herd mentalities.
It’s an urgent wakeup call for India’s Narendra Modi, Indonesia’s Joko Widodo and Rodrigo Duterte of the Philippines to narrow current-account and budget deficits. Leaders also need to devise macroprudential firewalls against global contagion.
The problem for Asia: contagion could come as much from the West and its own backyard.
Trump’s fiscal incompetence – including a $1.5 trillion tax cut America didn’t need – could roil global rates and the dollar. A recent spike in 10-year yields to 3.2%, the highest in seven years, could be a bad omen. Trump, too, is publicly dueling with his hand-picked Federal Reserve chairman. And given Trump’s legal woes, the odds of new tariffs or even military action to distract voters can’t be ruled out.
Any new assault on China could devastate Japan’s reflation effort. True, epic Bank of Japan easing and a weaker yen boosted exports. It pushed Nikkei 225 index stocks to 27-year highs. Yet Asia’s No. 2 economy is in harm’s way if the US-China brawl trumps the region’s key growth engine.
Even before most policy makers and financiers arrive in Bali this week, the IMF is signaling that global growth has plateaued. It downgraded output to 3.7% from 3.9%.
That not the end of the world, per se. But with trade battles intensifying and dormant old devils re-emerging, all bets could soon be off.
That is a lot more than depressing: it’s terrifying.
"We have no ability to turn the economy around," said Martin Feldstein, President of the US National Bureau of Economic Research.
"When the next recession comes, it is going to be deeper and last longer than in the past. We don't have any strategy to deal with it," he told The Daily Telegraph.
Professor Feldstein, a former chairman of the White House Council of Economic Advisors, described a bleak scenario more akin to the depressions of the 1870s or the 1930s than anything experienced in the post-War era.
He warned that a decade of super-low interest rates and monetary stimulus by the US Federal Reserve has pushed Wall Street equities to nose-bleed levels that no longer bear any relation to historic fundamentals. Stock prices will inevitably come plummeting back down to earth.
Prof Feldstein said the next bear market - most likely triggered by a spike in 10-year Treasury yields - risks setting off a US$10 trillion (NZ$15 trillion) crash in US household assets. The cascading 'wealth effects' will drain the retail economy of US$300bn to US$400bn a year, causing recessionary forces to mestasasize.
"Fiscal deficits are heading for US$1 trillion dollars and the debt ratio is already twice as high as a decade ago, so there is little room for fiscal expansion," he said, speaking earlier on the sidelines of the Ambrosetti forum on world affairs at Lake Como.
The eurozone faces an even worse fate when the global cycle turns since the European Central Bank has yet to build up safety buffers against a deflationary shock. The half-constructed edifice of monetary union almost guarantees than any response will be too little, too late.
"The Europeans don't have a fiscal back-up. They don't have anything. At least you have your own central bank and treasury in Britain, so you will be happier," he said.
"Mario Draghi is going to be very happy when he has left the ECB because it is not clear how they are going to get out of this when they still have zero rates. They can't play the trick of the cheap euro again," he said.
With growth now fading after the Trump tax cut boost (there will be no tax cuts in 2019), the debt-to-GDP ratio is now up to 106%, since debt is growing faster than GDP.
As Grant points out, the national debt has registered compound annual growth of 8.8%, but only 6.3% for GDP. That’s not a sustainable situation. And it’s not at all clear that GDP will close the gap.
Basically, the United States is going broke.
https://www.zerohedge.com/news/2018...ars-days-global-reserve-currency-are-numbered... the CEO of the world's largest asset-management firm said Tuesday during a panel discussion at the New Economic Forum in Singapore that the US dollar's status as the world's dominant currency wouldn't last forever.
And instead of citing external factors like China's expanding economic clout and influence, or an insurgent Russia, Fink pointed to the widening US budget deficit as the biggest risk to the dollar's status as the global hegemon. And while it might not happen tomorrow, or next year, over time, as US interest rates rise and the federal government strains under its tremendous debt burden, the creditors who were once eager to buy up Treasury bonds will gradually disappear.
The US will have a "supply problem" as the widening deficit requires more borrowing. The threat of "interest rates becoming too high to sustain the economy with its growth rates" is becoming a real concern for the US.
Here’s a note from Economic Cycle Research Institute’s Lakshman Achuthan:Yes, you read that right. In the last year, the world’s largest economies are generating debt 10X faster than economic growth. Adding debt at that pace, if it continues, will boost the debt-to-GDP ratio at an alarming rate.Notably, the combined debt of the US, Eurozone, Japan, and China has increased more than ten times as much as their combined GDP [growth] over the past year.
Lakshman continues....Remarkably, then, the global economy—slowing in sync despite soaring debt—finds itself in a situation reminiscent of the Red Queen Effect we referenced 15 years ago, when tax cuts boosted the US budget deficit much more than GDP. As the Red Queen says to Alice in Lewis Carroll's Through the Looking Glass, “Now, here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!”
More: http://gata.org/node/18694The pillars of the global financial system are fundamentally unstable and could lead to a frightening chain-reaction in the next crisis, the world's top watchdog has warned.
Giant "central counterparties" (CCPs) that clear much of the $540 trillion (L428 trillion) nexus of derivatives are themselves vulnerable to failure in times of extreme stress.
This is a worry looming ever larger as rising US interest rates expose the weak links in global debt markets.
The Bank for International Settlements said in its quarterly report that the CCPs could cause "a destabilising feedback loop, amplifying stress."
The implicit message is that well-meaning regulators may have made the financial architecture more dangerous by mistake.
The notional value of the derivatives cleared worldwide is 4.4 times world GDP, up from 2.8 times in 2008. JP Morgan alone has a $30 trillion book.
The BIS warned that regulators have inadvertently created a "CCP-bank nexus" -- somewhat akin to the sovereign/bank doom loop in the eurozone -- in which the two feed on such other.
The rotten apple contaminates the healthy banks. A fire sale of assets spreads contagion. Banks may be forced to hoard liquidity to protect themselves. The BIS said "balance sheet interlinkages" and what it calls the "CCP default waterfall" could unravel with "potentially system-wide effects."
The BIS says the nature of the world’s business cycle has entirely changed over the last three decades. For most of the 20th century booms turned to bust when rising inflation forced authorities to jam on the brakes.
This is no longer the case. Globalization and the inclusion of China and emerging Asia in the trading system have suppressed inflation. What now brings the party to an end is excess credit and rising debt service ratios. As conditions tighten, the financial system eventually buckles under its own weight.
he thrust of BIS research is that we may be close to this inflexion point. Standard & Poor's says the number of junk bonds rated B minus or below has jumped from 17 to 25 percent over the last year. This is now the highest since global financial crisis.
The average yield on U.S. junk bonds has risen 165 basis points to 7.2 percent over the last year. A cascade of downgrades has begun. The spike has been even more dramatic in the eurozone where stress is nearing danger levels, leaving credit analysts baffled by the European Central Bank’s decision to halt quantitative easing this month.
The BIS fears a waterfall effect. "The bulge of BBB corporate debt, just above junk status, hovers like a dark cloud over investors. Should this debt be downgraded, if and when the economy weakened, it is bound to put substantial pressure on a market that is already quite illiquid," said Mr. Borio.
Before the 2008 crisis most derivatives were cleared by trading parties in direct dealings. The G20 shift has lifted the share of CCPs for interest rate derivatives from 20 to 60 percent. The effect is to concentrate risk. The BIS warns that the system may encourage a rush for the exit in events of extreme stress.
The International Monetary Fund has also flagged the dangers. It warned this year that CCPs "increase the risk of a failure of the infrastructure itself" and could lead to a "catastrophe" if the all layers of defense were overrun by a big default. It would be like the failure of the Maginot Line.
The G20 may have made the world financial system more hazardous.
More: https://news.goldcore.com/us/gold-blog/yellen-warns-another-financial-crisis-is-brewing/Former Federal Reserve Chairperson Janet Yellen told an audience in New York that she fears there could be another financial crisis brewing.
She warned of leveraged loans and the inability for the Fed to bail out banks. ...
More: https://www.zerohedge.com/news/2018...acks-trump-warns-fed-let-bubble-unwind-slowlyStanley Druckenmiller established himself as one of the most successful hedge fund managers of his generation thanks to an uncanny ability for recognizing signals in asset prices that portended an coming recession. So when he warns about rough times ahead, it's probably worth listening.
Though he's kept a relatively low profile since closing Duquesne Capital in 2010 and opening a family office based in midtown, Druckenmiller's name has been popping up in the headlines of the financial press more frequently lately where his criticisms of the Fed were ridiculed (back in September he warned that we we are at the point in the tightening cycle where "bombs are going off") before they were echoed by no less a figure than the president himself. Over the weekend, Druckenmiller offered his latest contrarian screed against Wall Street pearl clutchers by arguing in an op-ed published with former Fed Gov. Kevin Warsh that Trump has a point, and that the Fed already missed its opportunity to safely tighten monetary policy. Now, the Fed has two choices: either reconsider its plans to raise rates to 3% and beyond over the next year, or risk destabilizing asset markets and the broader economy.
And in an interview that bears similarities to Jeff Gundlachs' "truth bomb"-strewn chat with CNBC, Druckenmiller sat down with Bloomberg for an hour-long interview where he warned that market conditions are about to get a lot worse.
The only question, in Druckenmiller's mind, is not whether the selloff will worsen, but by how much? Because the indicators that Druckenmiller used to anticipate the last four downturns are once again turning red, suggesting the "highest probability is that we struggle going forward."
The world may still be some distance from the next Lehman moment, but nearly a decade at zero rates bred massive malinvestment that cannot withstand a rising interest environment. Unless the Fed starts printing, and soon, and a lot, Lehman will come.
Harvard professor Ken Rogoff said the key policy instruments of the Communist Party are losing traction and the country has exhausted its credit-driven growth model. This is rapidly becoming the greatest single threat to the global financial system.
"People have this stupefying belief that China is different from everywhere else and can grow to the moon," said Harvard professor Ken Rogoff, a former chief economist at the International Monetary Fund. "China can't just keep creating credit. They are in a serious growth recession and the trade war is kicking them on the way down," he told the Telegraph, speaking before the World Economic Forum in Davos.
"There will have to be a de facto nationalisation of large parts of the economy. I fear this really could be 'it' at last and they are going to have their own kind of Minsky Moment," he said.
This refers to the financial instability hypothesis of Hyman Minsky. It is when a seemingly unstoppable debt bubble suddenly collapses under its own weight in a cascade of falling asset and property prices. The authorities can cushion the crash but they cannot escape the brutal mechanics of reversion.
Prof Rogoff is co-author of a magisterial history of debt delusions, This Time is Different: Eight Centuries of Financial Folly, written with former IMF firefighter Carmen Reinhart.
He said it was an error to think that China's current slowdown is entirely deliberate and calibrated. While the People's Bank undoubtedly wishes to curb the credit boom it is also riding a tiger that it cannot fully control.
"I fear this will be the third leg of the global debt supercycle, after subprime in the US and the debt crisis in the eurozone. Nobody knows how this is going play out but it could be on the scale of 2008 and it is will be very bad for Asia, and there will be spillovers in Europe," he said.
The eurozone is already suffering the fall-out from the Asian downturn. Most of the region is in industrial recession. Germany and Italy buckled in the second half of 2018, and confidence has slumped to crisis-level lows in France.
"I am very sceptical that the eurozone system can handle another big shock. It is a house half built and if there is something like 2008, it is all going to blow up. Some countries will have to be ring-fenced with capital controls," he said.
The eurozone has little policy powder left to fight deflation. Interest rates are already minus 0.4 percent and the European Central Bank's €2.6 trillion blitz of bond purchases has pushed the institution's balance sheet to 43 percent of GDP. The political bar to renewing quantitative easing is very high.
Europe's leaders have yet to build a crisis machinery fit for purpose. There is still no proper banking union with shared deposit insurance, let alone a fiscal union. The rigid rules of the Stability Pact inhibit use of budget stimulus a l'outrance in a recession.
Prof Rogoff said there is a danger that China and Asian tigers could be forced to pull in some of their trillions of offshore global funds to cover urgent needs at home, drying up or even reversing the so-called Asian ‘savings glut'.
This would have the unpleasant effect of driving up ‘real' interest rates across the world, which would be awkward for the US at a time when President Donald Trump's trillion dollar deficits risking crowding out bond markets. Higher real rates would would trial by fire for parts of Europe.
More: https://www.cnbc.com/2018/12/11/gun...lued-and-the-fed-is-on-a-suicide-mission.htmlJeffrey Gundlach, Wall Street's bond king and respected prognosticator on all financial markets, is painting a bearish picture of the stock and corporate bond markets, as well as the U.S. economy.
In a webcast Tuesday, he cited weak chart patterns, a rising deficit, signs of an economic slowdown and the Federal Reserve's shrinking balance sheet.
"It certainly looks like the U.S. [stock market] is going to break down to me and to a lower level," the founder and chief executive officer of DoubleLine said. He said stocks look headed back to their lows in February and could break below them.
https://www.zerohedge.com/news/2019...-crashing-down-and-total-rejection-any-policyAs Davos wraps up today, what have we got so far so far from the cockpit of globalisation? Warnings of rising nationalism. Fears of recession. Worries that everything could come tumbling down again. And a total rejection of any policy alternatives regardless. It’s as if the Captain of the Titanic admits to the passengers early into the journey that the ship is sinkable, and indeed they will all drown horribly when it goes down, but then reassures everybody he’s sticking to the same route towards the iceberg anyway. Before flying home in his private jet.