Confidence Is All That’s Left

Many readers may already know of David Stockman, he was the Director of the Office of Management and Budget under President Ronald Reagan.  In an interview last week he was asked how much longer this global monetary stimulus program can last and this is what he had to say:

“No one really knows.  That’s the problem.  We are in such uncharted waters.  None of this has ever been tried before.  None of this is sustainable.  It defies every law of common sense and sound economics and finance.  Therefore, you are building up a larger and larger combustible element in the system that sooner or later will blow.

This is the final spasm of a dying bull market that has been entirely fuelled by central bank money printing.  But if you look at the underlying trends both in the domestic and in the global economy and the outlook for earnings, everything that matters is heading south and the real global recessionary forces are just getting started."

Bank of America yesterday said there are over $17 trillion of government bonds now yielding less than 1%.  In other words the ‘smart money’ is so afraid of financial markets they are happy to get a return of less than 1%.  There are now many examples throughout Europe where bonds are yielding negative returns.  The US Fed themselves said they would go there if necessary.  This is not normal and common sense says it is not good.

Stockman also had this to say:

“We’re headed for a very severe monetary crisis and period of great instability — the very opposite of what has been experienced for the last six or seven years, when these markets have been effectively tranquilized by the central banks and their massive quantitative easing and intrusion into financial markets...

But it’s going to change because we’re reaching the point where they (central banks) are out of dry powder.  I don’t think the central banks have infinite power.  I don’t think they can keep interest rates suppressed forever if confidence is lost.”

His point is a salient one at a time when holders of gold and silver may be feeling disheartened at the declining (USD) price.  Irrespective of his credentials, it is a simple statement of logic.  We have experienced an unprecedented and desperate economic experiment that has accumulated global debt eclipsing anything before it supported by near zero and negative interest rates – but much more than that, by confidence.  To take on such debt, to spend that credit on shares and property supported by the very same debt with consumers and businesses buying stuff on credit is, in its most simplistic basis, a confidence game.  You are confident that everything will be awesome and that somehow this is not a Ponzi scheme.  Confidence is a fickle beast.  When this house of cards comes crashing down you may well just reflect on this recent period as simply the buying opportunity of a lifetime for the one thing that maintains it’s value.