...alarming evidence is amassing that the global recovery is shaky, stock markets are over-hyped and the large western banks, for all the talk of reform, remain a serious liability. The reality, and it gives me no pleasure to write this, is that we could see a re-run of the ghastly credit crunch of 2007/08.
To paraphrase Clubber Lang, the following are 15 reasons that the central banking party fueling our economy will end in "pain".
1. The US Gross Domestic Product fell at an annual rate of 2.9 per cent on official figures, the first drop we’ve seen since the dark days of 2011.
2. The Eurozone, meanwhile, remains on the brink of recession, with GDP across the 18-nation currency area expanding a mere 0.2 per cent.
3. Despite this lack of growth, stock indices in the US and across the western world have repeatedly hit all-time highs in recent months.
4. Even though U.S. GDP is contracting and that US first-quarter corporate earnings were down 3.4 per cent, the S&P500 (the world’s most watched stock index) has broken its daily closing price record more than 20 times this year.
5. The reason for this dichotomy is the Federal Reserve’s money-printing machine, which has created thousands of billions of virtual dollars since 2008. Much of this has found its way into global stock markets, sending equity prices sky-high. Designed as an emergency measure, QE has since become a lifestyle choice, the financial and political equivalent of crack cocaine.
6. While the Fed has begun ‘tapering’ -- slowing down the rate of its de facto money–printing -- the scale of QE remains vast, some $45 billion a month. That’s driven the absurd ‘bad news is good news’ mantra in which weak economic numbers make it more likely the Fed will relent and slow down or even reverse its tapering, turning up the funny–money dial, and thus stock prices, even more. Forget economic growth and forget corporate earnings. It’s all about the Fed.
7. Even insiders are growing troubled, with the Swiss-based Bank for International Settlements, an umbrella organisation for the world’s leading central banks, warning of ‘euphoric’ equity valuations. ‘It is hard to avoid the sense of a puzzling disconnect between the markets’ buoyancy and underlying economic developments globally,’ it argued in its annual report published earlier this month.
8. Systemic global risks today may be greater than before the Lehman crisis, the BIS warns, as debts have risen. Across the developed world, the average combined public and private debt ratio is at 275 per cent of GDP, compared with 250 per cent in 2007.
8. With QE having pumped up credit markets across the developing world, many of the large emerging markets are now in the throes of a dangerous credit boom. Such countries have taken on over $2 trillion of foreign currency debt since 2008, the BIS points out. Having helped stabilise the global economy after the last credit crunch, even helping to pay for western bailouts, the big emerging markets now themselves pose systemic risks.
9. For those willing to look, numerous technical stock-market indicators are now flashing red. For one thing, the S&P500 sports an average cyclically adjusted price-earnings ratio of 25.6, according to Professor Robert Shiller of Yale University. That’s way above the historic average of 16.5, suggesting prices are unsustainably high.
10. Trading volumes, meanwhile, are wafer thin, with just 1.8 billion shares trading daily within the S&P500 over recent months — that’s a six-year low. High valuations and low volumes amount to classic crash conditions.
11. US stocks have gained over 200 per cent since 2009, despite the lack of a convincing economic recovery. Last year, the S&P500 rose no less than a third.
12. Experts are particularly concerned about the growth of derivatives, designed for the legitimate hedging of risk but famously dubbed ‘weapons of financial mass destruction’ by American investment guru Warren Buffett. Total global derivatives outstanding currently amount to $620 trillion, a jaw-dropping ten times global GDP and back above the pre–Lehman total.
14. The balance sheets of the six largest western banks totalled $14.6 trillion at the end of 2012, compared with $10.7 trillion in 2007. In March, the International Monetary Fund admitted such banks still receive annual implicit subsidies of $590 billion, with creditors judging that state bailouts will indeed be forthcoming when reckless, highly leveraged investments go wrong. This flies in the face of political rhetoric that the problem is solved and taxpayers will never again have to bail out bonus-fuelled traders.
15. This autumn, as the end of Fed ‘tapering’ and rising interest rates loom larger, overvalued western stock markets will come under intense pressure. Our largely unreformed, debt-soaked, loss-hiding banks mean a sharp asset price correction could spark a systemic crisis.
What? You think I didn't know there were two number 8's? I was just testing you.
Hat tip: BadBlue Money News.