Unraveling

2015 steadily confirmed that the global credit bubble was coming unhinged.  Yet mainstream market optimism remained deeply entrenched at precarious heights.

As we often noted during the build-up to credit cycle crisis that culminated with the collapse in 2008, there is a Wile E. Coyote phenomenon at work that preys on the psychology of most all market players and economic analysts.   The economic road turns sharply, yet they all proceed straight as usual — right off the cliff.

Given that markets and, to some degree, economic activity merely reflect the general sentiment / consensus on valuations and economic opportunity, the collective operates “business as usual”, and despite there being nothing of substance to support their altitude, they remain afloat on a mass of self-reinforcing hot-air analysis provided by our generation’s ordained crew of Super Geniuses at the Fed and other major Central Banks, as well as from our venerable Wall Street institutions, Congress and the White House.

Collectively, these opinion shapers are nothing more than a self-enriching, liquidity and politically corrupted echo-chamber of economic analysis and asset valuation support.  Yet given most everyone has received the same neo-Keynesian / monetarist indoctrination that these groups espouse, those plying the market dutifully herd around what they say.   Simultaneously, business owners continue to work on the same assumptions, throwing good money into a situation that grows more precarious by the day.

And that’s where we stood on 12/31/2015.

Now, in the second week of 2016, we appear to finally be hitting what we called in 2004-2007 the “Wile E. Coyote moment”, that inevitable point in time where the herd suddenly looks down at the same time and sees clearly, for the first time, there’s been nothing to support their misinterpretation of reality.  And the more they look at it — the collapse of commodity values, the carnage in the U.S. shale credit markets bleeding into HY, the devastation in Emerging Markets and related debt, the more they realize that the foundation they’ve rested on has been unsupported for a long time! How could they not see it!?!

Back in pre-2008, we couldn’t say exactly when that “Oh Shit!” moment would finally be realized, other than to say it was an inevitability and that the longer it was delayed, the more catastrophic it would be the since extra time would only permit more good capital to be stretched into reckless areas of the economy that were doomed to collapse.

To say our situation in the U.S. and world today is dramatically worse than it was in the lead up to 2008 is, well… a dramatic understatement. The U.S. economy grew probably in the 2% range in 2015, well below any conventional analysts expectations, a recovery since 2009 that is nothing short of dismal given the massive and prolonged ultra-loose monetary backdrop.

Meanwhile, as President Obama crowd about his economic achievements a few nights ago during his State of the Union address, we note that the national debt increased during that time by $ 8 trillion — a 77% increase, while GDP has only increased a measly 13% over that time.   Compare that to organic business spending, where a dollar borrowed or spent is expected to earn a multiple of that, our government know-it-alls have spent $3.71 to buy $1.00 of GDP growth.   He constantly referenced all the jobs he created — some 14 million (if you embrace the highly flawed methods used to conclude such numbers).  Doing the math on debt, they spent nearly $600,000 in government debt per job created.

Combine that with the massive expansion of the Fed’s balance sheet (not to mention the world’s CBs collectively), and you have monetary expansion at a level that was simply unfathomable to an economist twenty years ago, as unfathomable as a man landing on the moon would have been to someone alive during the Civil War.

Where has all that mass monetary and spending interventionism gone?   Much of it has flooded into inflating asset values, into bonds and stocks and real estate.   On the government balance sheet, it’s gone to the usual parasitic capitalism that feeds at the government trough, largely providing services people would not purchase with their money were it not wrested from their control via outright taxation or through monetary expansion, which is functionally nothing more than a hidden tax on dollar holders.

Obama crows that ours is “the strongest, most durable economy in the world”.   Assuming that, too, is true, we may as well be crowing that we’re the healthiest horse in the glue factory.

As it appears that the unraveling is REAL, more to come.

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