We are now under the auspices of a zero-sum game world due to negligible productivity growth rate. Such a shift can be seen as a symptom of trade wars. We believe that the underlying cause can be found in financial manipulations engineered more than twenty years ago. The derivative instruments jumping from less than $100 billion in the late 1990s to over $600 trillion today (they were over $700 trillion just before the crisis), have inverted the asset base of credit creation and in the zombie land, the ultimate objective is to sustain this delusion with whatever tricks can be invented.
It’s not about a savings glut and secular stagnation (let’s not forget that the culprits/engineers of the those derivatives and of the monetary delusion/deception/catastrophe they created, are nowadays the proponents of the secular stagnation myth), but about injecting cancer into the asset pyramid which has led to monetary tricks, negligible productivity growth rate, negative rates and a zero-sum economic game. Hence, it’s a matter of when, not if the next crisis takes place, unless the eternal engine of finance (a.k.a. war) solves our problems.
Between 2000 and 2008 we were shifting risks via the shadow banking system. Nowadays, we do the same via pushing rates to zero and hoping that risk appetite will increase so that we can keep valuations higher, the derivative instruments away from another collapse, and the delusion of progress alive. However, while we are trying to sustain that delusion, the negligible productivity growth rate undermines economic and financial stability, given that fragility is rising not only due to excessive valuations, rising recessionary risks, slowing growth, declining sales, rising costs, but also due to boneheaded policies (economic and foreign).
If we were dealing with a classic case of a debt cycle, then we would recognize that prices are high relative to traditional measures: the bullish sentiment push for higher valuations, leverage and speculation are rising, and accommodative policies inflate the exuberance. If that were the case, then the debt-service squeeze would have started knocking at the door, lending would have slowed down, spending and asset prices would have declined, and the downturn would be in full swing.
However, we reserve significant doubts if the cycle we are in these days can be explained by the classic model of debt deflation. The signs of that can be seen in zero and negative rates, spikes in overnight rates, negligible productivity growth rate, and a sense of marginalization/shrining by the middle classes. Here are some issues that differentiate it:
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- Brexit uncertainty which could complicate EU dynamics
- Chinese slowdown and rising tensions in Hong Kong
- Rising political risks in the US
- US-Chinese economic relationships which may end up being treated as a political weapon
- Turkish policies not just in Syria but also in Eastern Mediterranean related to oil explorations
- Asian trading tensions such as between Japan and S. Korea
- Possible Argentinian collapse at a time when the Brazilian economy may be facing new pressures
- Geopolitical tensions in the Middle East especially between S. Arabia and Iran
- The ongoing dysfunctionalities in the EU
- Joint efforts by China and Russia to reduce the pre-eminence of the dollar in international trade and finance in an effort to increase their power and influence around the world
Given the above, our humble opinion is that in the foreseeable future seeking some yield from preferred securities and yield-producing securities might be a safer option while investors reduce their risk exposure, having at least 5% in precious metals, and overall having a more conservative approach to markets.
Shifting Risks and Unintended Consequences for Portfolios: We Live in a Zero-Sum World
Author : John E. Charalambakis
Date : October 23, 2019
We are now under the auspices of a zero-sum game world due to negligible productivity growth rate. Such a shift can be seen as a symptom of trade wars. We believe that the underlying cause can be found in financial manipulations engineered more than twenty years ago. The derivative instruments jumping from less than $100 billion in the late 1990s to over $600 trillion today (they were over $700 trillion just before the crisis), have inverted the asset base of credit creation and in the zombie land, the ultimate objective is to sustain this delusion with whatever tricks can be invented.
It’s not about a savings glut and secular stagnation (let’s not forget that the culprits/engineers of the those derivatives and of the monetary delusion/deception/catastrophe they created, are nowadays the proponents of the secular stagnation myth), but about injecting cancer into the asset pyramid which has led to monetary tricks, negligible productivity growth rate, negative rates and a zero-sum economic game. Hence, it’s a matter of when, not if the next crisis takes place, unless the eternal engine of finance (a.k.a. war) solves our problems.
Between 2000 and 2008 we were shifting risks via the shadow banking system. Nowadays, we do the same via pushing rates to zero and hoping that risk appetite will increase so that we can keep valuations higher, the derivative instruments away from another collapse, and the delusion of progress alive. However, while we are trying to sustain that delusion, the negligible productivity growth rate undermines economic and financial stability, given that fragility is rising not only due to excessive valuations, rising recessionary risks, slowing growth, declining sales, rising costs, but also due to boneheaded policies (economic and foreign).
If we were dealing with a classic case of a debt cycle, then we would recognize that prices are high relative to traditional measures: the bullish sentiment push for higher valuations, leverage and speculation are rising, and accommodative policies inflate the exuberance. If that were the case, then the debt-service squeeze would have started knocking at the door, lending would have slowed down, spending and asset prices would have declined, and the downturn would be in full swing.
However, we reserve significant doubts if the cycle we are in these days can be explained by the classic model of debt deflation. The signs of that can be seen in zero and negative rates, spikes in overnight rates, negligible productivity growth rate, and a sense of marginalization/shrining by the middle classes. Here are some issues that differentiate it:
Given the above, our humble opinion is that in the foreseeable future seeking some yield from preferred securities and yield-producing securities might be a safer option while investors reduce their risk exposure, having at least 5% in precious metals, and overall having a more conservative approach to markets.