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Happy Markets in an Unhappy World

by John Rubino on July 23, 2014 · 15 comments

The old Dickens quote “It was the best of times, it was the worst of times” is pretty much always applicable to a world as big and complex as this one. But lately, as the disparity between financial markets (best of times) and geopolitics (worst) has grown to almost comical proportions, Dickens has been sounding even more apropos than usual. To take just a few “worst of times” examples:

  • Palestinians are shooting rockets at Israel, which is responding with a full-scale invasion that will end up killing many hundreds, including an appalling number of kids.
  • A coalition of Islamic radical groups called Islamic State for Iraq and Syria (ISIS) is grinding towards Iraq’s capital, home of the small city that is the US embassy. What we’ll do should it be taken is anybody’s guess, but odds are it won’t be pretty. Meanwhile, Iraq’s Christians are the largely-unnoticed victims of the fundamentalist resurgence.
  • Someone using advanced anti-aircraft missiles shot down a civilian passenger jet over Ukraine, and Russia, Europe and the US are making all kinds of threats and counter-threats as they try to apportion blame. There are an awful lot of soldiers in a small space, and the press is now full of “Archduke Ferdinand moment” kinds of analysis.

Meanwhile, global growth isn’t looking so hot. See World GDP Hopes Are Collapsing, which comes with this dramatic chart:

World GDP Est 2014

Now, contrast this dark vision with the financial markets, where the picture has literally never been brighter. The US on Wednesday July 23: Stocks mostly higher; S&P 500 in record territory.

And that’s the tame part of the equities world. Emerging market stocks are absolutely soaring. See: EMERGING MARKETS-Indonesia, Russia gains push emerging stocks to new 17-mth high.

So what’s happening? One would think that rational investors would be cautious about buying volatile assets like stocks when there are so many geopolitical landmines just waiting to blow up — and when global growth is failing miserably to meet economist expectations. Instead they’re buying with abandon.

One possible explanation is that the world’s major economies continue to flood the financial system with credit which has to go somewhere. And with bonds yielding next to nothing, equities (and real assets like San Francisco houses and fine art) are getting the bulk of it.

China’s runaway train of an economy is exhibit number 1. See China’s debt soars to 250% of GDP:

China’s debt has soared to two and a half times its economy, Standard Chartered estimates, highlighting the difficulties Beijing faces in balancing growth with the risk of bubbles forming in its economy.

Total financial credit has surged to 251 percent of gross domestic product from 147 percent at the end of 2008, the bank said.

The article contains a must-watch interview with a guy from Motley Fool who asserts, among other things, that China can borrow as much as it wants because it owes the money to itself, and if it eventually needs to ease its debt burden it can just devalue its currency and/or mandate higher consumer spending.

This is from the “current trends will continue forever because the government will make it so” school of thought that typically marks the end of a given binge. When people can no longer rely on fundamentals to make their case, they turn to the delusion of omnipotent powers-that-be. Just go back to the dot-com and housing bubbles for tons of such assertions from now-mostly-forgotten pundits.

To repeat something that’s heard a lot these days, it’s 2007 all over again, and 2008 can’t be far off.

  • Fred

    How would the United States react if Canadians crossed the border, kidnapped three teenagers and then shot them in the back of the head?

    • Bill Johns

      Knowing Obama, we’d probably attack Mexico.

      • Wilbur T

        You’re confused. That’s a Bush specialty, along with tax write-offs for the rich, bailouts for the banks and personhood for corporations. Get your gremlins right.

        • Bill Johns

          Well, OK. I often confuse the two.

    • Bruce C

      That would depend upon their race and ethnicity.

    • nuff

      Depends, is there proof that the Canadians actually did it, or is this another US false Flag to prevent a Canadian Unity government

    • Steve Amundson

      Would they have to be teenagers?

    • Bill Johns

      Well I dunno what the US would do, but civilized countries would initiate an effort to identify the guilty individuals, work with the leaders of the country the guilty are citizens of and then work to make sure those guilty are so dealt with so that they will never repeat that action.
      Going to war is INSANE. Killing hundred of civilians of that country to “teach them a lesson” is INSANE.
      You ask what the US would do. I have no idea. I do know what the US did in Iraq.
      Draw your own conclusions.

  • Tom

    The Fed is buying 80% of all treasury bond issuance. Central banks around the world are dumping US treasury bonds and have poured trillions into equities. That’s what is driving up stocks all around the world. The idea being that the bonds will be worthless and the stocks will retain some level of value. Today the SEC implemented new rules on money market funds. They can break the buck and the government can freeze withdrawals for up to 10 days and probably while the dollar collapses. Bond rates are rigged, bank accounts pay zero, the banks can simply take your money since you’re an unsecured creditor, stocks are propped up with bank purchases to prevent a total collapse of the Western pension systems. It’s a great day in America!!

    Now, I ask you John. If these financial markets are all manipulated and precious metals are held down then what should an investor be buying who just wants to survive the coming calamity? I think we both know.

    • QEternity

      Farmland. In politically stable areas.

      Oh yeah, and gold.

    • Bruce C

      Just survive? That’s all?

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  • Bill Johns

    When all the dust settles and the folks that are left crawl out from their bunkers and someone picks up a pen and starts to write a true, unbiased and accurate history of the financial markets 1990-2020, it will not be accepted for publication as history but rather as fantasy/fiction. How will anyone ever explain what is currently going on with a straight face to econ students 20 years from now. Not possible.

  • Mgmike

    This economy reminds me of the ending of the wizard of oz:
    “Pay no attention to the man being the curtain” (or woman) “the great and powerful oz (or fed) has spoken”. “The economy is fine, rates are low and [most] stocks are not in a bubble”
    Yellen can only pull the illusion levers for so long before a little dog spoils the entire plot.

  • IMF reserch

    End Of Days for US and EU and World Economy total economic crash predicted by Geneva by BBC UK 10:14am, monday July 21 2014 from london UK End Of Days for US and AU and World Economy total economic crash predicted by Geneva think tank headed by Arthur Swenson depression 20x worse than 1930s. A Think tank in Geneva tracked Dr Swenson. Stated World Economic downturn 20x’s worse than Great Depression to start in Fourth quarter of 2014. Peaking in 2015 and lasting till 2017. Money will have no value all basic sevices will be off, you will have to be prepaired to ride it out. Geneva think tank states comoditys will be the currency during this Depression the likes of the World has never scene. Arthur Swenson states the best things you can do to ready yourself and your family are.Buy all the Silver you can untill end of2014 to retain some wealth. Find a small home or peice of land in an unpopulated area if you can not buy a small home put a camper on the land and drill a well have a pump. Things you need a generator and fule to run the generator 6 hours a day for 2 or more years. Buy a ham radio (there will be no internet)buy 2 or more guns and cartriges 300 or more each. Stock pile canned/dried goods and everything else you would need. Put togeather a medical kit with antibiotics and a medical referance book plus instuments. (there will be no emergency rooms in operation)Also have packs of seeds to grow squash is easy to grow as is Swiss Chard and beets.Have a 4 wheel drive car and extra basic parts for it most importsnt a battery, and 2 100 liter drums of fule for the car incase you need to get out of the area your in.REMEMBER thoses who did not plan will attempt to steal from your and your family and group. If desperate they may even attempt to kill you trust no one outside your group. Over a million Americans Have Been Making ready to survive in isolated areas. They are stockpiling Supplies to last years. The 3 best spots to build a secrete refuge are Montana Vermont and Colorado. Anyone who fails to prepare is going to not weather the Economic crash. Predictions range from Other think tanks. 2012 to 2016. Genius DR. Swenson predicts April 2015 as the final collapse thats the date Americas debt interest will equal the GNP product but fast downturn will start Fourth quarter of 2014. Swenson states I started hoarding supplies last year and expect to have 10 years worth at My Vermont refuge. Read more at http://investmentwatchblog.com/current-economic-collapse-news-brief-jul-19-2014/#Wee1C5HXJRsSD5c3.99


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