Greyerz: The Global Reset Will Come Like A Thief In The Night

As the world edges closer to the next crisis, today the man who has become legendary for his predictions on QE and historic moves in currencies, told King World News that the global reset will come like a thief in the night.

Where have all the dollars gone? Long time passing
Where have all the dollars gone? Long time ago
Where have all the dollars gone? Uncle Sam has spent them everyone
When will he ever learn? When will he ever learn?

The Global Reset Is Coming

Egon von Greyerz:  "When Pete Seeger wrote the famous song "Where have all the flowers gone" back in 1955, little did he know that the total US debt, which was a few hundred billion dollars at the time, would, 63 years later, be almost $70 trillion. 

But there is no reason why Seeger should have known. He was a singer-songwriter and his legacy will last a lot longer than Nixon's, Greenspan's, Bernanke's, and all the other players that have contributed to this massive growth in credit and destruction of the dollar. While Seeger's song – a work of art – is likely to be around for at least another 50-100 years or longer, all the opportunists that have destroyed the US economy, and thus the world economy, will soon be forgotten...

Egon von Greyerz continues:  "It is absolutely unreal how the world pays so much respect to mediocrity or even incompetence when it comes to running the financial system.Central banks and their heads have created this monster balloon which is now waiting to be popped. They have given the world the impression that they have been instrumental in saving the world economy. The central bank chiefs that managed to retire before the balloon burst can count themselves lucky. In my view, the luck is now in the process of running out for the present ones.

These chiefs believe so much in their own ability as saviors of the world that they don't understand that all they are doing is creating a much bigger monster by printing and printing and printing. They are so arrogant that they can't even call their actions by an honest name. What they are doing is sheer Money Printing or MP. But instead they call it QE or Quantitative Easing. What an absolutely ridiculous name that is designed to hide their own inadequacies as well as cheating the people. Nobody understands what QE means and that is, of course, deliberate. They simply confuse the people and mislead them into believing that their hocus pocus is actually some alchemistic formula that creates eternal prosperity. 

These central bank heads are now so confident of their control of the situation that they are turning the QE to QT (Quantitative Tightening). That is, of course, utter and sheer arrogance. QE hasn't worked. All it has done is to turn a fragile financial system into the biggest bubble in history. Even with zero or negative interest rates combined with massive MP, real GDP is not growing (measured with real inflation). Also, several dollars, euros or pounds of credit expansion are required in order to create just one dollar, euro, etc, of GDP growth.

Since QE, MP, or whatever you call it, hasn't worked, why the hell does anyone think that QT will work? This is like taking away the punchbowl from a chronic alcoholic who will die from his drink or die due to lack of drink. And it is exactly the same for the global economy. It will collapse with more QE and and will collapse from QT. So QE / QT = TE (THE END). 

"When will they ever learn, when will they ever learn" that you can't create prosperity by printing money? And remember that money printing is not just what central banks do directly. Money printing also means credit expansion by banks, credit card, and finance companies, etc. All of these lend out 10-50 times the deposits or capital they receive. There is, of course, only one way to learn a lesson properly, which is the hard way. And the hard way in the case of the world economy is that the monster bubble pops. And like with many bubbles, this one only contains hot air.

Thus, the $2.5 quadrillion monster bubble contains just empty promises that all disappear when the bubble is popped. These promises are not only words, but also $2.5 quadrillion of monetary promises or IOUs. To keep the bubble from deflating, central banks have had to constantly pump it up bigger and bigger. So more and more debt will fill the bubble together with inflated assets and even more empty words from bankers and politicians to make it all look plausible. 

The debt explosion is not just a US disease. It is a US-led global phenomenon that has infiltrated most nations around with a central bank that can print money. Just look at the chart below illustrating how global debt has tripled since 1999 from $80 trillion to $240 trillion today.

GLOBAL DEBT: The $240 Trillion Nightmare

When the global debt and asset bubble pops, the world will find out that there was nothing inside. Of course, there are real assets and real wealth, but the problem is that when the bubble pops, all the debt will implode because no one can repay it, and with that, a lot of the assets will become worthless. 

The only question is if stocks, bonds, property, and other assets, will go down by 75% or 95%. In my view, the biggest bubble in history will lead to the biggest collapse. There is no one that can save the world from the biggest financial calamity in history. MP (QE) will have zero effect except for causing temporary hyperinflation. A lot of assets will decline by 100%, such as money in the bank, bubble companies which are heavily leveraged – like Tesla – and many others. Even very valuable assets will be able to be purchased (in today's money) for pennies on the dollar, euro or pound. 

Paper money has always come and gone throughout history since no fiat currency has ever survived. For 5,000 years gold has represented stable purchasing power and the only money that has lasted for thousands of years. This is why countries that understand the importance of physical gold continue to accumulate, countries such as Russia, China and India. In the meantime, the rest of the world has invested less than 0.5% of world financial assets into physical gold. 

Just look at China's astonishing gold accumulation in the chart below. Another 140 tonnes was purchased in June, taking the total up to 16,000 tonnes with virtually all of it acquired since 2007.

China's Gold Purchases Since 2007 Exceed 16,000 Tonnes!

Like A Thief In The Night

When the monster, 'everything' bubble pops, so will the paper markets in gold, silver, and other precious metals. The size of this market is at least 100-times bigger than the physical market. The rise of this market is very much linked to manipulation of the precious metals by central banks, the Bank for International Settlements (BIS), and bullion banks.When the paper metals markets pop, there will be no gold (or silver) offered at any price. This is the time when overnight or over a weekend the price will go from $1,250 to $10,000 or even $100,000. This might sound totally unreal to some, but this will be the most likely consequence of the monster bubble popping and everyone in markets running for the exit. 

Most people believe that the status quo can go on forever and that central banks will continue their ridiculous game of pretending that air is real money that can create wealth. The few people who believe that there is a serious risk that the system will not survive in its present form, and that their assets — be it cash, bonds, or stocks — could decline substantially in value, must seriously consider insurance. 

The next decline in financial markets is likely to start in late 2018 or early 2019. And this will not be an ordinary decline or normal correction. Instead, it will be the beginning of the biggest global bear market in history. And this time central banks and governments will fail in their attempts to save the system. They will, however, certainly print a lot of money and try to reduce interest rates. But as global bond markets collapse, rates will go up rapidly. This means that bonds and stocks will both crash along with most assets.

The only real insurance against what is coming is physical gold and some silver, obviously held outside the banking system. There is absolutely no argument against holding precious metals to protect against the risks in the financial system. The only question is, should you hold 10% of your financial assets in gold or more than 50% as some of our wealth preservation clients do? In my opinion, this is the time in history that you need to be fully protected. The reality is that each individual needs to decide for themselves what full protection means. Just remember that this time it will be costly to underinsure. Hopefully no one reading this will ask when it is too late:"When will we ever learn?" 

Morgan Stanley: Our Conviction Has Only Grown Stronger That "Easy Is Over".

In our Global Strategy Mid-Year Outlook: The End of Easy, published in mid-May, my research colleagues and I suggested that multiple tailwinds from the last nine years were abating. While the outlook for macro economies remained promising, the outlook for risky assets was less so. A structural tightening in monetary policies, led by the total size of global central bank balance sheets peaking in mid-2018, stood at the heart of our concerns.

Now that we have entered the second half of the year, it makes sense to reassess this view. In short, our conviction has only grown stronger that easy is over. Monetary conditions continue to tighten across the globe, led by those in the US. What's more, financial conditions are tightening as well. The Fed's balance sheet normalization process not only continues, but accelerates this quarter and next. The caps that limit the amount the Fed's balance sheet can shrink by increase from US$30bn in 2Q18 to US$40bn this quarter. Then, in the final quarter of the year, the caps increase to US$50bn where they max out.

As the caps go up, so too does US Treasury issuance. As the Treasury supply related to balance sheet normalization hits the market, it soaks up the cash that may have otherwise gone into riskier assets. It's the once positive portfolio balance channel effect from the Quantitative Easing (QE) era – which supported risky assets all throughout that period – in reverse. QE has become QT (Quantitative Tightening) in the US. At the same time, the positive portfolio balance channel effect from the European Central Bank (ECB) is set to diminish further. On the ECB's own guidance, QE will be done by year-end.

Sounds complicated? It may get more so next year.

Earlier this week, several of my colleagues and I came out with a view that the Fed's balance sheet may not shrink as much as most people expect. We believe that the Fed will halt the normalization of its balance sheet by September 2019 and start growing it again in 2020 to ensure that the effective fed funds rate remains within the range the Fed targets.

We expect the Fed's System Open Market Account (SOMA) portfolio to be just above US$3.8 trillion at the end of 2020. In contrast, primary dealers and market participants polled by the New York Fed place a 68% and 60% probability, respectively that the SOMA portfolio will be smaller than US$3.5 trillion at the end of 2020.

Importantly for markets, we expect the Fed to begin guiding investors toward the end of balance sheet normalization in the minutes of its December 2018 meeting. While December may seem ages away, the topic is sure to be increasingly on the minds of FOMC participants into year-end. This raises the risk that guidance may come earlier than we expect.

To be sure, we do not believe that a technical adjustment to the size of the balance sheet will alter FOMC participants' views on appropriate rate policy. Balance sheet normalization will continue into next year even if the Fed ends the process earlier than it anticipated originally.

Junk Bond Crash Imminent? HY ETF Shorts Hit All Time High

It has been a tough year for junk bond funds, if not for junk bond spreads, which as we noted recently have shown impressive resilience and have solidly outperformed IG since the start of the year (largely thank to a scarcity in HY supply, and a deluge of IG bond issuance to fund a new M&A cycle as Goldman discussed last week).

Meanwhile, as junk has refused to sell off, junk bond funds have been far less lucky, and the constant stream of outflows that began before the start of 2018, hit a record 34 weeks of outflows at the start of July (it did however reverse last week, with a modest $0.5 inflow) prompting many to ask where is the high yield bid coming from?

To be sure, much of the negativity surrounding HY funds is the result of growing "late cycle" fears for credit (as discussed most recently last week), which according to Morgan Stanley willpeak in just two months (and in December for stocks)...

... coupled with concerns about Trump's global trade war.

Meanwhile, in a surprising development, even as junk bond spreads have failed to widen alongside their IG peers, investors are growing convinced it is only a matter of time before the junk bond market suffers an "event."

But first, a quick trip down memory lane: investors will recall that immediately before and after the market VIXplosion on February 5, when countless vol ETFs imploded as a result of massive short gamma exposure to the VIX, one of the side effects was a surge in high yield ETF short interest as many were convinced that the vol-induced market shock would promptly slam junk bonds next. This is what JPMorgan wrote at the time:

Both HYG and JNK short interest are at their highs for the period we track data from, suggesting that institutional  investor participation via shorting ETFs has contributed to the sell-off in recent weeks. This is similar to the rise in the short interest ratio on the largest investment grade corporate bond ETF, LQD, which has moved higher during the same period this year, albeit from very low levels.

To the surprise of many, this did not happen, however the lack of a HY crash appears to have only cemented the bearish bias, because fast forward 6 months to today, when according to the latest JPMorgan Flows and Liquidity data the short interest in Global HY ETFs as a % of outstanding shares, is on the verge of hitting 25%, and is by far the highest on record.

How should one read this peculiar divergence in the data: on one hand, the record HY shorts point to the risk of a sharp blow out in credit spreads in the coming weeks should risk-off sentiment return, if traders start selling ahead of the ECB's QE end at the end of the year, if trade war escalates further and hits the high beta credit space, or alternatively, if oil and energy names - all heavily represented in the junk bond sector - tumble as a result of a drop in oil.

Alternatively, should a negative catalyst not emerge, the risk for the shorts is one of a historic squeeze, and one which also collapses spreads to record tights.

Needless to say, the first outcome is more concerning from a broader, market perspective. And while a move wider in spreads would not be catastrophic, it could still lead to a broad liquidation panic at the synthetic credit level, at which point the main risk becomes the underlying threat latent within all ETF products, first voiced by Howard Marks in March 2015: "what would happen, for example, if a large number of holders decided to sell a high yield bond ETF all at once?" This is how Marks answered his own question:

in theory, the ETF can always be sold. Buyers may be scarce, but there should be some price at which one will materialize. Of course, the price that buyer will pay might represent a discount from the NAV of the underlying bonds. In that case, a bank should be willing to buy the creation units at that discount from NAV and short the underlying bonds at the prices used to calculate the NAV, earning an arbitrage profit and causing the gap to close. But then we're back to wondering about whether there will be a buyer for the bonds the bank wants to short, and at what price. Thus we can't get away from depending on the liquidity of the underlying high yield bonds. The ETF can't be more liquid than the underlying, and we know the underlying can become highly illiquid."

Of course, there is the very real possibility that "someone knows something", and is putting on a massive short bet, even as the broader market refuses to budge. In any event, based on the record accumulation of junk bond ETF shorts, we may soon find out if Marks' "worst case" scenario plays out as envisioned, and what exactly happens when everyone tries to sell a synthetic product that is far more liquid than its underlying constituents, especially during a market panic., or alternatively, a historic short squeeze.

World's Largest Shipping Company Collapses As Trade War Reality Strikes

While US equity markets (well a few mega-cap tech stocks anyway) have remained resilient in the context of rising protectionist fears, the world's largest shipping company is seeing its stock eviscerated as investor anxiety over trade wars finds an outlet that makes rational sense.

A.P. Moeller-Maersk A/S may struggle to make a profit this year after the U.S. and China descended into a trade war that is already showing stress in sentiment surveys.

As Bloomberg reports, Maersk, which is based in Copenhagen, has already lost almost a third of its market value this year as investors gird for more bad news, and it is losing value in line with the collapse in the US Treasury yield curve.

Trade protectionism means less demand, and history suggests the shipping industry will struggle to make the necessary supply cuts. What's more, Maersk is now more exposed to shipping as the former conglomerate divests its energy business.

Per Hansen, an investment economist at Nordnet in Copenhagen, saysMaersk is currently "in the eye of the hurricane" when it comes to the damage that will be inflicted by a trade war.

The company said earlier in the week it will need to temporarily scale back its service between Asia and North Europe as a result.

"It's highly likely that Maersk's valuations could sink to its trough valuations in the coming months as investors avoid shipping stocks until more excess capacity is being removed," said Corrine Png, chief executive officer and founder of Crucial Perspective, a Singapore-based research provider focusing on transport.

So just keep buying Amazon and Netflix, oh and for good measure, keep buying bonds.

The Market Gods Are Laughing

President Trump escalated the trade war this week, making a kamikaze attack on a vast armada of Chinese imports – $200 billion in total – headed for California.

The Chinese say they will retaliate.

Phony Wars

Last month, we opined that the trade war wouldn't go any better than Vietnam… or Iraq… or any of the feds' other phony wars – against drugs, poverty, or terrorists.

It will be expensive, futile… and perhaps disastrous.

But that doesn't mean it won't be popular. Wars give the spectators something to live for – us versus them… good guys against bad guys… winners versus losers.

Their hat size swells as their champion wallops the Chinese. Their girth shrinks as he challenges and taunts the Canadians. Their manhood grows when the enemy gives in and admits defeat.

But while this puerile entertainment is taking place in the arena, the real action is going on in the expensive skyboxes, where the elite collude against the fans.

Wars shift resources from the boring and productive win-win deals in the private sector to the magnificently absurd win-lose deals of the feds and their cronies. The only real winner is the Deep State.

Weatherman David

We saw our colleague, former U.S. budget chief under President Reagan, David Stockman, on TV this week. The interview was painful to watch.

He was bravely trying to explain the trade deficit and why it was caused by monetary policy, not by trade ramparts that were too low.

But the young, know-it-all newscasters were such numbskulls – so lacking in any experience, theory, or historical perspective – he might as well have been instructing a walrus on how to chew gum. The lesson was in vain.

The three TV experts saw no problem with the trade deficit… and no danger approaching from Trump's war on it.

If there were any clouds on the horizon, they didn't see them; if there was any thunder, they didn't hear it; whether lightning was striking the light posts near them or not, they had no idea. They wouldn't even look out the window.

Instead, they seemed eager to get Weatherman David out of the studio so they could go back to their bubble chatter.

They were so confident… so vain… and so dismissive of all risk…

…we thought we heard a bell ringing.

Bubbleheads

The bell, of course, was the one they don't ring just before the market collapses. They don't ring it because they are all sure that nothing could go wrong. And there hasn't been any real trouble for so long that they've forgotten where they put it.

Trade deficits have been growing ever since the U.S. went off the gold standard in 1971 (while tariffs have been going down!).

The stock market has been going up (with only three significant slips… in 1987, 2000, and 2008) since 1982.

The bond market, too, has been rising since 1980 (though it probably topped out two years ago).

The current GDP expansion has been going on since 2009 – and is now the second-longest expansion in history.

And the USA has been a going concern, growing in power and wealth since 1781, when the French beat the English at Yorktown, Virginia and thereby rescued the American Revolution.

All of these trends – except the current economic expansion – are older than any of the three bubbleheads David confronted on CNBC. David had to give them a "heads up" on trends: "They go on until they stop," he warned.

Market Gods

We could practically hear the cackling of the market gods as the twits on TV assured David that nothing could go wrong:

"Oh yeah?"

Will the economy suddenly tip into recession? Will the stock market crash? Will the bond market sink?

Yes… most likely… all of those things will happen.

But what will set them off? What trick will the gods play? What trap will they set? What surprise have they got waiting for us?

We don't know. But the trade war gives them more to work with.

Tariffs on lumber coming from the evil Canadians are adding about $9,000 to the cost of a new house, according to the National Association of Home Builders.

Washing machine prices have jumped some 15% this year, the fastest increase ever recorded by the Bureau of Labor Statistics.

As for auto prices, CBS News reports:

Consumers may see an average price increase of $5,800 if a 25 percent import tariff that Mr. Trump has threatened goes into effect, according to estimates cited by the Alliance of Automobile Manufacturers (AAM), a lobbying group for carmakers.

That's a "$45 billion tax on consumers," the group said, citing an analysis of Commerce Department data.

Automotive news website AutoWise says the top 10 best-selling automobiles will see price increases from $1,000 to $3,600.

Farmers are getting hit hard, too.

The American Farm Bureau says it expects farm incomes to drop to a 12-year low this year, largely because of the trade war.

An agricultural economist at Purdue University, Christopher Hurt, added that 1,000 acres ofcorn and soybeans would have made a farmer a $42,000 profit on June 1. Now, it could net him a $126,000 loss.

Still, small potatoes? Maybe.

They don't ring a bell when the end comes. But they do put bubble-brains in front of TV cameras.