Thursday, September 13, 2018

Decade of BOOOOM

One thing that the media in general does good is to celebrate anniversaries. The 10th anniversary of the 2008 financial crisis is no exception. Continuous coverage of what happened then and how it was all solved. CNBC basically did a reality show with so called saviors. They called in Henry Paulson, Tim Geithner and Ben Bernanke to give them a pat themselves, each other and how they understood the gravity of the problem and provided the right cure to the ailing economy. They faithfully paid respect to their respective spouses and made some biblical references - which made them look credible than what they actually are. In reality instead of solving a smaller crisis with real medicine, they sowed the seed for a bigger crisis and what they essentially did - was to take the economy back to its artificial highs.

Arguably the bigger culprit of the three was Ben "helicopter" Bernanke. The future would judge him as that one person who would take a nasty hit for his decision to bring the fed funds rate to zero percent and then additionally coming up with monetary experiments like QE. Actually what he did was the easiest of all - print some money and mask the problem instead of solving it. Janet Ellen was never able to raise the interest rate to pre-crisis level even after 8 years since the crisis. The current Fed chairman has raised it significantly but is still low at 2%. He may never be able to raise it the 4.5% that Ben brought it down from. So bottom line - The troubles Ben Bernanke created would never be solved until a bigger crisis hits. Instead of solving the smaller crisis - he blew up the scale of the crisis exponentially and let someone else in-charge to handle that.

Bring down the interest rate was the easiest thing. You don't have to be really smart person to do that. It is a universal truth that you lower the "cost" of money - the business is going to boom. The business would boom so long as the interest rates remains low. Interest rates have been low for 10 years. Even with the 2% now - it is still historic low. Raising interest rate is the hardest part. Usually the interest rates rise because the inflation is rising or to cool the economy from over-heating. With 10-years of low interest rates - the boom is everywhere. In the first decade of the 21st century the boom period were confined to dotcom (3% range) and then to housing (1%). However after the 2008 financial crisis - the boom is no longer confined to specific industries but in multiple industries. Forbes magazine recently called it the "Everything boom". We definitely know the tech-savvy Nasdaq is in 8000 range (5000 range in year 2000 caused the dotcom crash) is most likely in bubble. The housing prices getting back to well above the prices during the housing boom is probably in a bubble too.

Probably the newest bubble in the bond market is the biggest of all and would put the very government that had the authority to fix the last crisis, putting everything in jeopardy. Bond market would include student-load debt, auto-loan debt and credit card debt - all historically high in trillions.

The interest rate on the 10-yr US treasury is around the 2.96 mark now. With the fed going to raise interest in the last week of September - it is almost certain to hit 3% and probably going north after it. Just for an example, let's say you buy the 10-yr bond today for $100,000. The US treasury guarantees you an coupon payment of $3000 dollars every year. At the end of the 10-year term, you get your $100,000 back. With the government's its own CPI number stating that the year-over-year inflation is 2.6%, it is hard to understand why would anyone buy the 10-year bond that yield just 3%. On top of that - you pay tax on your capital gains on the $3000 earned in interest. The CPI is probably on an upward journey. So your coupon rate is not going to change. The inflation rate could rise to 4 or 5 percent or more during this 10-year term. Because of rising interest rates, the principal amount of $100,000 is going to fall in value in the ten-year period. It makes absolutely no financial sense to buy the US bond market whatsoever. There is never going to be shortages of US treasury that is coming to the market in the years to come - as the government is running and will continue to run trillion-dollar deficit budget. The Fed has promised Quantitative tightening - where it will sell the bonds it accumulated in the last 10 years. Bottom line there is going to be a sea of bonds coming to the market. Who is buying it now - Only the person who wants to lose money would buy the 10-year paper. If not - the buyer is propping up the bond market to favor the US treasury.

Ben Bernanke was referred to "Helicopter" Ben for his reference of throwing money from a helicopter to the economy. He is going to be identified as this person - who took the economy in a helicopter to the sky easily with QE and 0% interest rates - but never knew how to land it safely. There by - crashing the helicopter vis-a-vis the entire US economy. (He ejected with a parachute though)

After the financial crisis in September of 2008, Initially George Bush and then Obama - convinced the rest of the world that the crisis was universal and there needs to be coordinated effort from all Central Banks across the world to respond with easy money policy. This month, Subba Rao, the former RBI governor from 2008 to 2012 rightly pointed out that artificial prop up post-crisis, is the primary reason for the Inflation caused in run to the general elections which Congress lost miserably and the NPA problems which Indian banks, particularly public sector banks are facing now. Just as the hot water in the shower - the heat is not when you move the knob to red. It is usually after sometime - there is a lag effect.

The crisis in Turkey - is also distinctly similar. The Central Bank of turkey has raised interest rate to a whopping 24% today. When they try to analyze the reason for its current economic state - they pinpoint to the good old times - when the economy was booming. It is also almost always - unprecedented booms in country's lead to unprecedented corrections. If there isn't a correction - rulers of the country should only blame themselves.

The US market is in so big bubble, the investors are contemplating a scenario where there is never going to be a bear market. It is all going to be rosy from now on. With the longest bull market in history, it cannot be blamed on them - their memory has faded.
It is clear example of misallocation of resources at the time of boom. In that scale the boom in the western world is bigger and longest. The bust is where people realize what all went horribly wrong in the boom. That day will eventually hit the western world soon - and that would make the 2008 financial crisis look like a walk in the park - which Hank, Tim and Ben are now taking credit for solving.

There are some talks that - when the next crisis happens, the US government would continue to the prop up the stock market by buying stocks. For the record - Japan is already buying corporate bonds and stocks. If that happens on America - it will go on to be the day, USA disassociated itself from market economy because it is just broke. It would be no different from fascist or socialism where governments control companies and industries. To overcome a crisis - they will do whatever they can to mitigate the crisis in short-term. Stimulus checks and Quantitative easing in western capitalistic society were very unexpected until they happened. But I really doubt, if it will all work. Would they buy Apple or buy Amazon? Why not Blue Apron? Probably they will buy the Dow or may be Russel 2k only. Those would be desperate times.

I talk to people who started their working career post 2008 and are unaware of the nature of recessions. They keep asking me - how does a slowdown or a crisis look like. As has been always, financial crisis is like a beautiful women. It is very hard to describe to others on how it looks like. But when it comes, pretty much everyone recognize it.