Reality Returns To Wall Street, Rickards Warns “This Will Not Be A Soft Landing”

Thursday, February 8, 2018
By Paul Martin

by James Rickards via The Daily Reckoning,
Wed, 02/07/2018

Barely a week after it set another record high, the Dow just suffered its worst one-day point loss in its entire history.

While the latest turmoil hasn’t reached the crisis level by any means, I’ve been warning about a correction for months.

Warnings about an imminent collapse of developed economy stock markets, especially the U.S. markets, have been everywhere.

Whether you use Shiller’s CAPE ratio, Warren Buffett’s preferred market-cap-to-GDP ratio, or traditional P/E ratios, markets were overpriced and ready to fall. Of course, that did not mean they would fall anytime soon, or on anyone’s timetable.

As we saw in the bubble of 1996-2000, and the housing bubble of 2002-2007, so-called “irrational exuberance” can last longer than the skeptics believe. However, some warnings perhaps deserve more attention than others.

Anyone can sound warnings about doom and gloom or stock market crashes. But those Cassandras are not worth listening to unless they offer facts and analysis to support their views. Opinions without something solid to back them up are just that — opinions. The warnings I pay most attention to are those from establishment insiders.

These are the kinds of individuals who attend Davos and routinely discuss market conditions with central bank heads, finance ministers and people like Christine Lagarde, head of the IMF.

The credibility of such insiders is enhanced ever further when they come with serious academic credentials such as an economics Ph.D. from a top university in the field.

William White is such an individual. He was former head of the OECD review board and former chief-economist for the BIS, the “central bankers central bank” based in Basel, Switzerland.

In a recent interview, White flatly declared, “All the market indicators right now look very similar to what we saw before the Lehman crisis, but the lesson has somehow been forgotten.”

You can’t get much more of a blinking red light than that.

Heading into this year, I called 2018 “The Year of Living Dangerously.”

That description seemed odd to lot of observers. Major U.S. stock indexes kept hitting new all-time highs, which continued through the end of January.

Even in strong bull market years there are usually one or two down months as stocks take a breather on the way higher. Not last year. There was no rest for the bull; it was up, up and away.

The unemployment rate has been at a 17-year low. U.S. growth was over 3% in the second and third quarters of 2017. It underwhelmed in the fourth quarter at 2.6%, but it was still above the tepid 2% growth we’ve seen since the end of the last recession in June 2009.

The U.S. hasn’t been alone. For the first time since 2007, we were seeing strong synchronized growth in the U.S., Europe, China, Japan (the “big four”) as well as other developed and emerging markets.

In short, all has been right with the world.

Or not.

To understand why I said 2018 may unfold catastrophically, we can begin with a simple metaphor. Imagine a magnificent mansion built with the finest materials and craftsmanship and furnished with the most expensive couches and carpets and decorated with fine art.

Now imagine this mansion is built on quicksand. It will have a brief shining moment and then sink slowly before finally collapsing under its own weight.

That’s a metaphor. How about hard analysis? Here it is:

Start with debt. Much of the good news described above was achieved not with real productivity but with mountains of debt including central bank liabilities.

In a recent article, Yale scholar Stephen Roach points out that between 2008 and 2017 the combined balance sheets of the central banks of the U.S., Japan and the eurozone expanded by $8.3 trillion, while nominal GDP in those same economies expanded $2.1 trillion.

What happens when you print $8.3 trillion in money and only get $2.1 trillion of growth? What happened to the extra $6.2 trillion of printed money?

The Rest…HERE

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