Stockman on 1/27/2016

David Stockman has a nice piece that sets in context the recent really from lows in context of the deeper economic structural problems.    The piece is quite good because it mixes current events with layman economic explanations and an excellent summary of how it is we got into this mess:

A very relevant gem from that article:

In an honest financial market in which debt is priced by the willingness of savers to forego current use of their money, there could be no “risk parity” trade because the price of stocks and bonds would not be inversely correlated. Indeed, the price of government bonds and blue chips corporates would fluctuate only modestly over time owing to secular changes in the propensity to save, but they would absolutely not vary inversely to the stock average on a short and mid-term basis.

The stock index rose by 11X on a trend basis over the last three decades even as national income (GDP) rose by only 3X. That yawning gap was due to the Fed’s massive financial repression which subsidized the flow of speculative capital into the stock markets.

At the same time, the yield on the 10-year treasury note dropped from 9% to 2%, meaning that the price of the risk free benchmark bond surged by order of magnitude over the period.

So risk parity really worked only because in two stroke engine fashion it deftly moved short-term trading positions back and forth along the rising trend lines of the stock and bond markets, while minimizing the setbacks owing to occasional downward price corrections in both markets.

That, and he correctly refers  to China’s economy as “The Red Ponzi of China” — LOL – while exposing China’s initial success and subsuquent / no unfolding problems and collapse as “the fruits of an utterly stupid mercantilist trade policy and the conversion of a naïve old man, and survivor of Mao’s depredations, to the view that communist party power could be better administered from the end of a printing press than from the barrel of a gun”.

He continues:

Mr. Deng merely unleashed a Credit Monster that sucked in capital and resources from all over the globe into a domestic whirlpool of digging, building, borrowing, investing and speculation that was inherently unstable and incendiary. It was only a matter of time before this edifice of economic madness began to wobble and sway and to eventually buckle entirely.