Juggling Dynamite

Morgan Stanley and Goldman Sachs see only global strength ahead…what? the risk sellers see no signs of a downturn? Surprise, surprise…

Bloomberg’s Simon Kennedy reports on the global economy and the risk of a recession.  Here is a direct video link.

The downside of using QE to ‘stimulate’ risk assets far above global growth the past 4 years, is that it only worked on the assumption that global growth would catch up and justify the high prices. With the global economy weakening, not strengthening today, the over-valuation in asset prices grows more garish by the hour.

Many finance types today say they are confident that stock markets will continue to rise because they do not see a recession ahead. [The sell side, never does, but that aside.] In saying this they are ignoring the fact that high stock and high yield debt prices are the strongest evidence bulls point to of an economic “recovery” the past 5 years. Once prices recouple again with true global growth trends (that are much lower), the evidence of the much touted recovery evaporates as well. In other words, once the veneer of rising asset prices is removed, an enduring recession will be self-evident.

As commodities rallied 2002 to 2008, most people were oblivious to the huge role that a falling US dollar was having in inflating the price of other assets. We referenced the following teeter totter chart many times in our presentations.
Since 2011 as the US dollar has strengthened, the inverse relationship has held to the surprise of most. The ride may have just begun….

“Crude oil prices face several factors that could send it below current levels, notably the quickly strengthening U.S. dollar, Raoul Pal of Global Macro Investor said Tuesday.

“The probability of a dollar breakout is very big. So, if that happens, then the chances of the dollar moving much more rapidly than we’ve seen for many, many years, and that would lead oil to go much further,” he said. “So, prices in oil could go down to $30, $40 easily if the dollar moves in the way that I’m thinking it possibly will.”

Here is a direct video link.

This is an encouraging story:  having watched the repeated boom/bust of increasingly rigged financial markets the past 15 years, recent research finds that 20 and 30 somethings today want little to do with equities, and trust no one when it comes to money.  4 in 10, said that they prefer building up savings in cash.

This is how generational cycles move full circle.  Having seen their parents repeatedly burned by bubble pricing and financial sales firms, millennials have developed a very healthy loathing and aversion to scams and “investment” brokers.  Risk aversion is the perfectly logical response to present high risk-low return conditions, and a focus on saving more and risking less will serve well in developing fiscal strength and disciplined habits which can serve over a lifetime.  It also will help spur a much needed consolidation in today’s cesspool of financial services. Finally a true road to recovery: stuffing the vampire squid back in the bottle for another generation.

“According to a survey from brokerage UBS, …the typical millennial investor holds more than half of his or her portfolio’s assets in cash, a stance more appropriate to retirees. In fact, the millennials’ fear of stocks more closely mirrors that of the World War II generation than it does either Generation X or baby boomers.”  Here is a direct video link.