There is little doubt in my mind that the world came very close to another “Great Depression.” The credit bubble made trillions of dollars disappear. Central bankers had little choice but to save the banking system and embark on turning on the money printing presses. It seemed crazy at the time that the solution to excess debt is more debt.
The alternative would have seen bank failures, countries defaulting on their debt and consumers facing bankruptcy. No question that the stock market crash of 1929 would have been repeated. However, have Central Bankers gone too far? Is another financial crisis inescapably?
Most economists would agree that the massive amounts of Quantitative Easing (Q.E.) is having little effect on economic growth. In theory, cheap money would allow corporations to expand production and hire more people. Leading to wage growth and more consumer spending. Cheap money in the form of lower mortgage rates would help revive the housing industry, making housing more affordable for first time home buyers.
In reality, corporations are using financial engineering, borrowing money to buy back their shares which automatically increases their earnings per share. IBM is famous for having decreasing quarterly revenue but increasing earnings because of share buybacks. To avoid paying U.S. taxes on foreign income, Apple sold bonds with ridiculously low yields in order to increase their quarterly dividend.
Money is so cheap that corporations are buying growth through mergers and acquisitions. Instead of creating new jobs, they are getting rid of existing jobs by consolidating their operations. Corporations are in a catch-22, they need to see stronger consumer demand before investing in more production capacity but demand is unlikely without corporate spending on capital equipment that would create higher paying jobs.
What is clearly lacking in the global economy is demand. There are many factors contributing to this problem, slow wage growth, technology, globalization and an ageing population just to name a few.
JP Morgan CEO Jamie Dimon warned Wednesday that another financial crisis was inevitable, pointing to recent signs of risk in bond markets.
In his annual letter to shareholders, Dimon said another crisis will inevitably impact financial markets. He cited a range of possible triggers for the looming fallout, including geopolitical issues, a collapse in commodity prices or rapid interest rate hikes by the Fed.
In my humble opinion, the bond market bubble has spread to creating a bubble in the stock market. The recent stock-market volatility has caused the Dow Jones Industrial Average and the S&P 500 to lose nearly all of their gains for 2015. Stock prices seem overvalued when viewed in the absence of GDP and earnings growth.
The monetary duct tape used to rescue the global economy is no longer working. Investors should be cheering any solution that increases consumer demand.