Why Capex Can’t Catch a Break

December’s durable goods orders showed that capital spending remains anemic

By Justin Lahart

Boeing last month decided to suspend production of it 737 MAX, seen here at its Renton, Wash., facility on Jan. 10. Photo: lindsey wasson/Reuters 

One-off issues keep getting in the way of a capital spending revival. It is time to ask if those issues aren’t the real problem.

The Commerce Department on Tuesday reported that monthly orders for durable goods—long-lasting items ranging from sheet metal to motors—rose 2.4% in December. But that gain came about as a result of a 90% increase in orders for defense goods. Excluding that volatile category, orders fell 2.5%.

Nondefense aircraft and parts orders fell 75%, reflecting Boeing’scontinued travails with its 737 MAX. Nondefense capital goods orders excluding aircraft—a category that economists view as a good proxy for the forthcoming trend in capital spending—slipped 0.9%.

All of this suggests that the slump in business investment that began last year will likely continue into the opening months of 2020. Indeed, matters could get worse before they get better as a result of Boeing’s decision to halt production of the 737 MAX this month and worries that the coronavirus outbreak in China could dent the global economy.

It seems like capital spending just can’t catch a break. Boeing’s worsening woes, trade troubles, soft overseas growth and the General Motors ’ strike were among the hurdles it faced last year.

Now, just as easing trade tensions and forecasts of better global growth suggested there would be a break in the clouds, here come a fresh set of issues.

But just as with a basketball team blaming this or that coach or player for its dismal record, excuses for why capital spending isn’t picking up risk wearing a little thin. If companies were given an overwhelming reason to start spending more, they probably would.

Instead, they have been presented by a U.S. economy that, while steady, has been only growing at about a 2% annual rate. Moreover, rising labor costs have been pressuring profit margins.

The combination of tepid growth and an unemployment rate at a 50-year low clearly is unusual.

While it is true that over the longer run, increased capital spending would eventually help boost productivity and alleviate labor costs, companies tend not to step up capital spending when earnings growth is weak, as it has been for the past year. In an environment where growth is only moderate while unemployment is extremely low, companies’ default position is to play it safe.

Eventually, capital spending should still improve. The problem is that “eventually” could take a while to arrive.

The Economy Is Banks’ Best Friend

Low rates get a lot of attention, but solid economic performance and sentiment are proving more important for the biggest banks

By Telis Demos

Revenue from trading and advisory activity boosted overall revenue at Citigroup in the fourth quarter. Photo: justin lane/Shutterstock

Banks are doing their best to prove an old political adage: It’s the economy, stupid.

Yes, low rates continue to make life more complicated for lenders. But as long as the U.S. economy keeps ticking along, big banks seem equipped to fend off the many ill effects of rates. In the fourth quarter, receding trade-war tensions, tame repo rates and improving corporate sentiment bolstered trading desks and advisory activity. Revenue in those businesses in the quarter surged from the same period of 2018, powering sharp increases in overall revenues at JPMorgan Chaseand Citigroup.

And even when it comes to rates, one lesson from the latest quarter should be that it isn’t just where the Federal Reserve is setting rates but how steepthe yield curve—the difference between short-term and long-term rates—is that defines banks’ performance. The shape of the curve, usually a barometer of feelings about economic prospects, improved dramatically for banks in the quarter.

Banks mostly fund themselves at short-term rates and hold longer-term instruments, both as investments and in trading inventory. Usually, short-term yields are lower, but the yield curve inverted in March of last year in part because expectations for a recession grew. They resumed their normal shape starting in October as recession fears faded. U.S. 10-year benchmark yields were about 0.4 percentage point above three-month bill yields by the end of 2019.

The benefit of that steepening was visible in banks’ trading books, where they hold longer-term corporate and government bonds. Those books grew during a fourth quarter that registered solid client demand for trading services, thanks in part to the Federal Reserve’s successful actions to tamp down volatility in markets with its repo operations, and also to the market’s late-year improvement.

Debt held by JPMorgan’s trading desks was 26% higher on average in the quarter from the prior year and Citigroup’s overall trading inventory was up 18%. And those assets yielded more at Citigroup in the fourth quarter than in the third, powering an overall sequential rise in net interest margin for the bank.

Yield on debt held for trading purposes ticked a bit lower at JPMorgan, but less than on other assets. Overall, fixed-income trading revenue, including fees, surged 86% from the prior year at JPMorgan and 49% at Citigroup.

The two banks also blunted the impact of low rates by managing to grow their loan books—though JPMorgan gets an asterisk on this point because it also is in the process of reducing its holdings of home loans due to their high capital charges. Consumer loans grew sharply once again in the fourth quarter, notably in credit cards.

Corporate loan growth was more tepid, rising 2% globally at JPMorgan. Citigroup’s corporate lending picked up 4% in North America, but was down globally. Yet combined revenue at the two banks from advising companies on mergers and fundraising rose 5% as deal-making picked up late in the year.

“Trade certainly stabilized,” JPMorgan’s Chief Financial OfficerJennifer Piepszaktold analysts. “So we saw sentiment improve a little bit, which I think contributed to the overall success of the fourth quarter.”

Banks’ high valuations imply that they will not only be able to keep growing but also to improve their earning power. Indeed, both JPMorgan and Citigroup improved on their efficiency scores, with noninterest expenses at the two banks combined falling from 59% of revenue to 57%.

Wells Fargoremains a different story for now, facing higher costs in the quarter as a consequence of its long-running fake-account scandal.

The threat of a surge in credit costs still looms, but that only reinforces the point that the economy’s health, rather than rates, proves the best guide to banks’ performance.

Trump’s Near Miss with Iran

The drone strike that killed Qassem Suleimani not only brought the US and Iran to the brink of war; it exposed for all to see the disarray of US foreign policymaking under President Donald Trump. A majority of Americans think the episode has left the US less safe, and the incompetence displayed by Trump's team suggests they may be right.

Elizabeth Drew

drew50_SAUL LOEBAFP via Getty Images_trump

WASHINGTON, DC – The recent tense, dangerous exchanges between the United States and Iran have revealed a great deal about US President Donald Trump’s management of his foreign policy. The main conclusion is that he doesn’t have one.

Weighty decisions are made on the basis of gut reactions and often-contradictory impulses – for example, simultaneously seeking agreement and threatening the use of force. If there is any overarching vision or philosophy, it is that he wants to avoid another long, costly war. And yet he almost blundered into one anyway.

When he campaigned for president, Trump promised to bring US troops home. He has sometimes declined to respond to provocations, particularly by Iran-backed groups around the Middle East. This lulled the Iranians – and almost everyone else – into thinking that he would continue to turn the other cheek.

Eventually, some on the right wing of his Republican Party, and, most important, Fox News commentators, were calling him weak. This is a dangerous thing to say about Trump: his presidency shows why an insecure person should not be elected to that office.

Another characteristic of Trump’s conduct of foreign policy is that he is currently surrounded by a coterie of mediocrities. There is not a far-ranging mind, creative strategic thinker, or independent spirit among them. Trump is now on his fourth national security adviser in three years, his second secretary of defense, and second secretary of state; numerous other key foreign-policy jobs remain open.

The lesson for others is clear: the only way to last with Trump is not to challenge him. This expectation of blind deference is all the more problematic when the president knows little and lacks curiosity.

Mike Pompeo, the bumptious secretary of state, is widely viewed as the most accomplished sycophant among Trump’s top advisers. Pompeo, a former member of the US House of Representatives, is also a talkative alumnus of the Iran “regime change” caucus in Congress.

We learned after the fact that Pompeo had been pressing Trump for some time to order the assassination of Qassem Suleimani, the commander of Iran’s Quds Force, which the US has designated a foreign terrorist organization.

According to one report, when Trump finally did decide to order the killing of Iran’s second-most-important political leader on January 3, “The new team was cohesive and less inclined than its predecessors to push back against the president’s wishes.”

In the absence of a declaration of war against Iran, the killing of a foreign official – by a drone strike on Iraqi territory – was possibly illegal. But such niceties do not perturb Trump. The evidence is that Trump’s decision was taken without consideration of the possible consequences.

The national security system established under Dwight D. Eisenhower, designed to prevent such reckless measures, is broken to non-existent, with ever-greater power placed in the hands of the president. If that president is unstable, the entire world has a very serious problem.

In fact, all-out war with Iran was narrowly avoided because the Iranian leaders were shrewder than Trump. The greatest loss of life in this dangerous episode was caused by the tragic downing of a Ukrainian civilian flight that had just taken off from Tehran’s airport, killing all 176 people on board. The plane had been allowed by Iranian air authorities to depart about three hours after Iran had fired missiles at Iraqi military bases housing US troops.

This carefully targeted retaliation – no one was killed – for Suleimani’s death, plus back-channel messages carried by the Swiss, signaled that the Iranians wanted to stop the dangerous escalation.

They would lose a war with the US, but would almost certainly inflict serious damage on US assets, including through cyber attacks. A relieved Trump accepted the Iranians’ message and followed suit.

A rattled Congress demanded administration briefings on the rationale for killing Suleimani, and the lack of a clear one backfired on Trump and his national security officials. Conflicting and shifting rationales were offered, and the administration failed to persuade lawmakers that an “imminent” threat had forced the president’s hand.

That, coupled with the administration’s characteristic contempt for Congress and its members’ constitutional duty to hold the executive branch accountable and the legislature’s sole constitutional authority to declare war, led to a new congressional movement to curb the president’s war-making powers in the case of Iran.

But the House and the Senate (which is controlled by Trump’s Republican allies) are unlikely to agree on an approach, much less devise a measure that would survive a presidential veto.

Meanwhile, the relationship between the US and Iran is worse than ever, with the US having lost more since killing Suleimani. Iran announced that it would no longer observe limits on its nuclear program, lowering the estimated time it would take to develop a warhead from almost 15 years when Trump took office to just five months.

The US is coming under increasing pressure to withdraw its troops from Iraq – Suleimani’s longtime goal.

The US military’s training of Iraqi forces to fight the Islamic State – the reason the US was invited back into Iraq during Barack Obama’s presidency – is now on hold. Instead of withdrawing troops from the Middle East, as he promised, Trump has now committed thousands more to the region.

Meanwhile, inevitably, Trump and his acolytes are claiming victory and accusing critics of being sympathetic to Iran and even partial to the vicious Suleimani. Currently, there are signs that the public isn’t buying it.

A majority thinks the episode has left the US less safe, and they may be right: though the hostilities between the US and Iran – as well as its numerous proxies – have subsided, few believe the lull will last.

Elizabeth Drew is a Washington-based journalist and the author, most recently, of Washington Journal: Reporting Watergate and Richard Nixon's Downfall.

Evaluating the Importance of Recent Events

By: George Friedman

There are moments when the entire world seems to be coming apart, as if Armageddon itself were upon us. Public attention tends to be able to handle just one Armageddon at a time, and even though the end of the world would probably entail more than one calamity, newspapers have room for only one alarmed headline a day, and Twitter seems confined to one overwhelming rage attack at a time.

I am of course referring to the high-profile confrontation between the U.S. and Iran and the much lower profile Turkish deployment to Libya.

Catastrophic though they may seem, it is prudent to consider their current state, just a week or two after the panic, and to consider other panic-ridden global processes. What, after all, happened to China and Brexit?

The pattern of informational flow and emotional intensity does not derive from the underlying issue – the issues are still there. History grubs its way forward ineluctably, but we only sometimes notice it, usually when something happens that is both unexpected and noisy. Since humanity tends to expect tomorrow not to be any different than yesterday, and since its attention is drawn by noise, it assumes what was once unnoticed is now catastrophic.

Consider the unexpected and noisy events in Turkey and between the United States and Iran.

They are significant but the frantic noise drowns out their importance, which unfolds over years, decades and generations.

Iran's struggle to create a sphere of influence, the Shiite crescent as it is sometimes called, is challenged by its opponents. On one side are Iranian non-state proxies in Lebanon, Syria and Iraq. On the other side are Israel, Saudi Arabia and the United Arab Emirates.

The Iranians have tried to focus the struggle on Iraq, using substantial but far from overwhelming support among Iraqi Shiites. The United States has focused its efforts on Iran itself, using economic sanctions to undermine the regime and to block it in Iraq. Neither side has been successful.

The sanctions have created unhappiness, reflected in the university-based demonstrations over the downing of a Ukrainian plane. But student uprisings rarely bring about regime change. Others must join, and to this point, the regime is under pressure but not falling.

Turkey, meanwhile, made a significant move to exert its control over the Eastern Mediterranean and in Libya, the goal of which is strategic. The chaos of the Middle East increasingly impinges on Turkey, yet Turkey is, second to Israel, the major power in the region.

The assertion of power to the east changes the perception and reality and gives Ankara access to major oil supplies, which it needs to control for national security reasons. The expectation was that its move into Libya might create conflict with Russia.

The move into the Mediterranean might create tensions with Israel and Greece, both backed by the United States. Such tensions have not surfaced thus far, and indeed Turkey’s control of the Eastern Mediterranean is still in the concept development phase.

What is interesting is there seems to be something of an entente with Russia over Libya. Russia does not want to alienate Turkey, nor does Turkey want to alienate Russia. What happens later will happen. For now, a mistrustful bargain will do.

Both of these events were unexpected enough and noisy enough to capture the world’s attention. As a moment in a far longer drama, they were not trivial events.

Nor were they decisive enough to transform or endanger the world. It is interesting to look at two other events that just a few months ago seemed destined to endanger the world.

One was Brexit. Over three years ago, the British government called for a referendum on whether Britain should leave the EU. It was called because it was expected the British public would dismiss the idea as unworthy of the name. Instead, the British voted to leave. There followed a storm worthy of a Wagnerian opera.

If Britain left, it would collapse into nothingness. If it stayed, it would collapse into nothingness. The EU would punish Europe’s second-largest economy by isolating it. The Easter Rebellion in Ireland would be resurrected, and on and on.

Now, we are weeks away from the beginning of the divorce, and while it is still mentioned widely, Brexit has had the venom drawn from it. Europe needs Britain because it absorbs a vast number of exports.

The threats the EU made at the time weren’t credible, and the panic of the City died down as the finance world considered how it might make money out of Brexit without moving to Frankfurt.

The world will change in some way, but the fundamental reality on which Britain and its relationship to Europe rests will not change quickly. That relationship is a weighty thing, and moving it is like moving the Tower of London. It won’t happen quickly.

The other event was China. The Chinese did not welcome American exports, so the United States became unpleasant about Chinese exports. This was seen as a new Cold War, a struggle between two equal powers. The fact was that China was still staggering financially from 2008.

Its economy was a fraction of the size of the American economy (measured in something other than the mythical purchasing power parity). The Chinese economy was heavily dependent on exports, particularly to the United States. The U.S. is not heavily dependent on exports. Pig farmers and Apple execs were portrayed as being in agony. In fact, trade wars are common.

That was what the EU was threatening Britain with. And China was the weak hand. It could not allow its domestic market to be swamped by American goods, and it could not substitute for exports. It was a deadlock with intermittent threats and announcements of something or other.

We have now reached the point of intermittent statements and discussions on obscure websites like our own.

The point is that geopolitical analysis lays out the broad format and direction of events. It is easy to see noisy events outside the context of geopolitics and therefore to vastly overstate their significance.

The events between the U.S. and Iran last week are startling only if you fail to see the broad process underway, without which the important is overwhelmed by a mere set of events that flow from the important but are contained in the predictable emergence of Turkish power.

The events in the Mediterranean and North Africa are part of that. They did not occur out of nothing but out of geopolitical necessity. The same can be said about China and Brexit.

As time passes, the event is slowly forgotten, and the gradual evolution of history is something you get used to.

Coronavirus and the End of Boom and Bust

Doug Nolan

The market week began with cases of the coronavirus jumping to 222, including four outside China. China’s National Health Commission confirmed human-to-human virus transmission. By Friday, more than 1,200 infections had been confirmed, with 41 deaths (8,420 under observation according to the Washington Post). China on Thursday suspended flights and travel out of Wuhan, a city of 11 million. The virus has quickly spread to Taiwan, Japan, South Korea, Thailand, Malaysia, Vietnam, Pakistan, Nepal, France, Australia and the United States.

China has moved to quarantine 13 cities involving an estimated 46 million, according to Bloomberg “the first large-scale quarantine in modern times.” From Bloomberg (Lisa Du): “‘The containment of a city hasn’t been done in the history of international public health policy,’ said Shigeru Omi, who headed the World Health Organization’s Western Pacific Region during the SARS outbreak in the early 2000s. ‘It’s a balance between respecting freedom of movement of people, and also prevention of further disease and public interest. It’s not a simple sort of thing; it’s very complex.’” Included in the 46 million are foreign nationals now unable to leave China.

A 1,000-bed emergency hospital is to be constructed in ten days in overwhelmed Wuhan, as 400 military doctors are deployed to support local providers. In Beijing and throughout the country, officials have cancelled “Year of the Rat” Chinese New Year’s celebrations. Beijing’s Forbidden City is closed to tourist until further notice. Across China, there is fear of going to markets, restaurants, movies and public events.

Nations around the globe have isolated ill patients awaiting coronavirus test results. That this scare is coming at the height of flu and cold season in the U.S. and other northern hemisphere countries adds further complication to a rapidly escalating crisis.

Florida Senator Rick Scott is urging the Trump administration to declare a public health emergency. Missouri Senator Josh Hawley has called for the administration to impose a temporary travel ban on flights from China. The coronavirus has the potential to turn highly disruptive to the Chinese economy, with wide-ranging effects on global markets and economies.

The Shanghai Composite dropped 2.8% in Thursday trading, and was down 3.2% for the week. Hong Kong’s Hang Seng index fell 3.8%, with the Hang Seng China Financials index sinking 4.9%. For the most part, Asian equities ended the week with modest losses. Financial stocks were under pressure around the globe.

My Bubble thesis views China as the marginal source of both global Credit and demand for commodities. Any development posing risk to China’s vulnerable Bubble rather quickly becomes a pressing global issue. It’s worth noting the Bloomberg Commodities Index dropped 3.1% this week. WTI crude sank 7.4%, while Copper was hit for 5.7%. Nickel fell 6.9%, Tin 5.4% and Zinc 3.6%. China’s renminbi declined 1.2% versus the dollar. In the face of notable investor optimism and attendant financial flows, EM currencies reversed lower this week.

Global safe haven bonds appeared to believe this week’s developments were a big deal. Ten-year Treasury yields dropped 14 bps to a three-month low 1.685%, and German bund yields fell 12 bps to negative 0.34%. The two-year versus 10-year Treasury spread declined almost eight bps this week to a six-week low 18.5 bps (after ending 2019 at 34bps). The market now prices in a 41% probability of a rate cut by the July 29th FOMC meeting, up from last week’s 29%. While on the subject of safe havens, gold bucked this week's commodities market selloff to gain 0.9% to $1,572.

U.S. stocks were under moderate pressure in early Thursday trading, but by the close the S&P500 was positive for the session and back near record highs. The situation turned more concerning by Friday. The S&P500 ended the session down 0.9%, with a loss for the week of 1.0%. The Bank index dropped almost 2% in Friday trading.

January 22 – Reuters: “U.S. home sales jumped to their highest level in nearly two years in December, the latest indication that lower mortgage rates are helping the housing market to regain its footing after hitting a soft patch in 2018. …Existing home sales increased 3.6% to a seasonally adjusted annual rate of 5.54 million units last month, the highest level since February 2018. November’s sales pace was unrevised at 5.35 million units… Existing home sales, which make up about 90% of U.S. home sales, surged 10.0% on a year-on-year basis in December. For all of 2019, sales were unchanged at 5.34 million units.”

Between the impeachment trial and the coronavirus, noteworthy housing data received scant attention. Housing and mortgage finance in 2020 will reemerge as prominent factors in U.S. Bubble Analysis, especially if global developments continue to pressure market yields (and mortgage rates) lower. While December Existing Home Sales (seasonally-adjusted) were the strongest in almost two years, more notable was the decline in available inventory to 3.0 months. This was down from November’s 3.7 months (and September’s 4.1) to the lowest level in the 20-year history of the data series. The chief economist for the National Association of Realtors stated, “America is facing a dire housing shortage condition.” Little wonder home prices have begun to accelerate.

January 17 – Bloomberg (Prashant Gopal): “U.S. home prices rose the most in 19 months in December, fueled by low mortgage rates and the tightest supply on record, according to Redfin. Prices jumped 6.9% from a year earlier to a median of $312,500, the biggest annual increase since May 2018… Values fell in just two of the 85 largest metropolitan areas Redfin tracks: New York, with a 2.4% decline, and San Francisco, down 1.7%... Some of the most-affordable cities in Redfin’s study had the biggest price gains, led by Memphis, Tennessee, with a 16% jump. The inventory of available homes for sale nationwide tumbled 15% from a year earlier. There were fewer properties for sale last month than at any time since at least December 2012…”

January 21 – CNBC (Diana Olick): “Homebuilding took a sharp turn higher to end 2019, but it is far from enough to satisfy the current demand. The U.S. housing market is short nearly 4 million homes, according to new analysis from realtor.com. Analyzing U.S. census data, the report showed that the 5.9 million single-family homes built between 2012 and 2019 do not offset the 9.8 million new households formed during that time. Even with an above average pace of construction, it would take builders between four and five years to get back to a balanced market. The shortfall today can be blamed on the epic housing crash of more than a decade ago… With loans available to even the riskiest buyers, builders responded by putting up 1.7 million single-family homes at the peak of the construction boom in 2005, according to the U.S. census. That was about 5 million more than the 20-year average.”

January 23 – Wall Street Journal (James Mackintosh): “The Davos consensus can be a powerful counter-indicator, but this year it is worrying me for all the wrong reasons. Two years ago the elite assembled for the World Economic Forum in the Alps strongly believed in global growth, and were completely wrong. A year ago they were concerned, and again entirely wrong as markets subsequently soared. This year the problem is that I find myself sharing the consensus view, justifying high stock valuations on the basis of easy monetary policy. It is a deeply uncomfortable place to be.”

Bob Prince, Co-CIO of Bridgewater Associates (in a Bloomberg Television interview from Davos): “2018 I think was a lesson learned. The tightening of central banks all around the world wasn’t intended to cause a downturn – wasn’t intended to cause what it did. But I think lessons were learned from that. And I think it was really a marker that we’ve probably seen the end of the boom and bust cycle.”

Bloomberg’s Tom Keene: “Is it the end of the hedge fund business in modeling portfolios off the guestimates of what central banks will do?”

Prince: “That won’t play much of a role nearly as it has. You remember the eighties when we sat and waited for the money supply numbers. We’ve come a long way since then… Now we talk 25 plus [bps Fed rate increase] – 25 minus. We’re not even going to get 25 plus or minus and we have negative yields. That idea of the boom/bust cycle – and that history that we’ve been in for decades – is really driven by shifts in credit and monetary policy. But you’re in a situation now where the Fed is in a box. They can’t tighten, and they can’t ease – nor can other central banks, particularly the reserve currencies. And so where do you go from here? It’s not going to look like it has.”

Bloomberg’s Jonathan Ferro: “Bob, you just said it twice – and I’m still surprised. And you said it before the interview started… It’s the end of the boom/bust cycle?”

Prince: “As we know it.”

Ferro: “There was a man called Gordon Brown, former Chancellor of the United Kingdom, a famous scene in Parliament of him standing up and saying, “It’s the end of the boom/bust,” and it was right before the financial crisis. It’s the end of the boom/bust cycle? What does that mean?”

Prince: “Cycles in growth are caused by the boom and bust in Credit. Credit expansion, Credit contraction. And those expansions and contractions of Credit are largely driven by changes in monetary policy. And so we’re in a situation today where with interest-rates close to zero and secular deflationary forces, you’re not going to get a tightening of monetary policy. They learned that lesson last year and got the unintended effects of that. You’re not going to get a tightening, and one of the reasons you’re not going to get a tightening is because they can’t ease. If you can’t ease you don’t want to tighten to cause a problem for yourself that you can’t get out of. Therefore, you’re in a box; you don’t tighten, and you don’t ease.”

Keene: “It sounds like you read (Ray) Dalio’s book.”

Prince: “We work together” (laughter).

Ferro: “…What are the investment implications…”

Prince: “The nature of the economic environment is changing. So, we are converging on something – a slow growth environment, I’d say close to stagnation – approaching stagnation. That’s why interest rates are at zero. That’s why real interest rates are negative – is because central banks have to make cash very unattractive…, but also they have to make bonds unattractive. Central banks have taken cash and bonds and they’ve made it a funding vehicle – not an investment vehicle. And they’re trying to keep that rate low so that money goes from bonds to assets.”

Noland: I’m always fascinated when highly intelligent market professionals say peculiar things. I’m still not over Ray Dalio’s concept of “beautiful deleveraging” from some years back. When I first heard Prince’s comments, I thought immediately of the eminent American economist Irving Fisher and his infamous, “Stock prices have reached what looks like a permanently high plateau” - just days ahead of the great 1929 stock market crash.

But there is an analytical framework behind Prince’s view worthy of discussion. I’m with him completely when it comes to, “Cycles in growth are caused by the boom and bust in Credit.” In a historical context, I can accept “those expansions and contractions of Credit are largely driven by changes in monetary policy.” I agree “you’re not going to get a tightening of monetary policy.” Prince says central banks are “in a box,” while I prefer “trapped.”

But it is as if Mr. Prince is suggesting there is now some type of equilibrium condition that precludes a boom and bust dynamic. I would counter that central banks are locked in a position of administering extreme monetary stimulus, fueling a runaway boom that will end in a historic bust. Markets clearly expect ongoing aggressive stimulus (QE) from all the major global central banks.

And I don’t buy into the “rates are near zero because of stagnation” argument. The Fed cut rates three times in 2019 due to market fragility and the risk of a faltering Bubble - that had little to do with U.S. economic performance. Global rates are where they are because of acute global Bubble-related fragilities and resulting extreme monetary stimulus. Low global market yields (and negative real yields) are more a Bubble Dynamic than a reflection of deflationary forces. A historic boom/bust dynamic has global bond markets anticipating enormous prospective central bank bond purchases (QE).

The critical question: Can runaway booms descend into busts without a tightening of monetary policy? The answer seems a rather obvious “absolutely”. I don’t believe the Fed’s timid tightening measures in 1999 and early 2000 precipitated the bursting of the Internet and technology Bubble. The Fed was cutting rates aggressively into 2002, yet that didn’t arrest the bust in corporate Credit. I would strongly argue the Fed’s even more cautious 2006/2007 rate increases were not the catalyst for the bursting of the mortgage finance Bubble. In reality, in the face of strengthening Bubble Dynamics, financial conditions loosened significantly as the Fed tiptoed along with its so-called “tightening” cycle.

The Fed emerged from the 1994 tightening cycle recognizing that contemporary finance – with its hedge funds, speculative leverage, derivatives and Wall Street securitized finance and proprietary trading– carried an elemental propensity for excess and instability. That was effectively the end of Federal Reserve policy tightening cycles. From then on, it was cautious little “baby steps” to ensure the Fed wouldn’t upset the markets.

The “tech” and mortgage finance booms were left to inflate free from central bank restraint. Uncommonly painful busts were inevitable. Today’s most protracted all-encompassing global boom has not only been left free to inflate, central bankers continue their multi-trillion spending spree to pressure nonstop inflation. I do agree: when this fiasco runs its course, it certainly won’t be boom and bust “as we know it.”

January 21 – CNBC (Yun Li): “Billionaire investor Paul Tudor Jones said the stock market today is reminiscent of the latter stages of the bull market in 1999 that saw a giant surge that ultimately ended with the popping of the dot-com bubble. ‘We are just again in this craziest monetary and fiscal mix in history. It’s so explosive. It defies imagination,’ Jones said… ‘It reminds me a lot of the early ’99. In early ’99 we had 1.6% PCE, 2.3% CPI. We have the exact same metrics today.’ ‘The difference is fed funds were 4.75%; today it’s 1.62%. And back then we had budget surplus and we’ve got a 5% budget deficit,’ Jones added. ‘Crazy times.’”