QUESTION: From reading your blog, my understanding of your view is that all relationships are in flux with respect to markets and market drivers, except for confidence. For example, the stock/bond relationship can change over time, so stocks do not ultimately go up or down based on what bonds do but based on where confidence stands. If that is correct, then I would submit that both stocks and bonds globally reflect a high degree of confidence in the authorities to “manage” the situation without an accident. European bond market yields reflect complete confidence in the EU and ECB. The US stock market is exactly positively correlated to the belief that the Fed has things under control (see Wednesday’s reaction). Logically, loss in that confidence would obliterate stocks. Yet you suggest we are on the verge of a massive collapse in confidence in government and its agencies and that stocks will double. How do I reconcile?
ANSWER: I am finishing up a new book on the global economy. The interpretation of CONFIDENCE you assume is actually post Great Depression. This relationship between bonds and stock did not exist previously. Even when the Federal Reserve was formed and people argue that was a Jekyll Island Conspiracy, they too judge the past by the present. When the Fed began it had a direct tool to manage the economy. To stimulate it would buy corporate paper stepping in when banks would not lend. That made PERFECT economic sense. However, that was 1913. When World War I erupted and government needed to borrow, they instructed the Fed to buy their debt and not corporate. As always, they never returned the Fed to its original intent – a quasi-FDIC for banks.
The rates today no longer reflect CONFIDENCE in the state – only manipulation by the state. You will see divergences emerge between state bond rates and private. This took place even during the Great Depression. What will emerge is capital will migrate to stocks and private sector bonds at first for yield. This will cause the central banks to eventually have to buy government debt themselves (monetize) or allow rates to rise. This is what the Fed Tapering is all about. I have already reported that the Fed was going around and informing the banks to re-calibrate their models. They have been warning behind the curtain that they DO NOT SEE a flight to quality for the next decline. This is part of the negative nonsense coming from Summers.
There will be a split with this post-Great Depression thinking that government debt is best. This is the change on the horizon and the Fed even knows this. So open your mind and observe the subtle movements that are revealing the change in trend on the threshold of this chaos. Our sources are real. I do not bullshit with my “opinion” for like assholes, everyone has one. I report facts. That is what my clients expect. I am neither Republican nor Democrat. I am for practical economics.
