Crises always take longer to arrive than you think, and then happen much quicker than they ought to.
– Rudiger Dornbusch
An eerie calm has taken over the world markets. Volatility is crashing, and economic and political shocks come and go without any noticeable effect on the asset markets. Inflation and interest rates are also low. So ‘Goldilocks’ is here, right?
Well, no. I have written a collection of dark pieces about the world economy this year. They have followed the tone set in our business cycle forecasts. In March, we took a deep dive behind the faade of the economic expansion to discover the sources of growth. We found them to be unstable, depending on political decisions and thus prone to crash.
In our latest forecast, we envisaged how the world economy would respond if the foundations of global growth would break. It was not pretty. Here I present the main takeaways.
I consider the Figure 1 (below) to give the most compelling picture on the absurdity we have arrived to. It presents the yield of the US 10 year treasury bond, the yield of Italian 10 year bond and yields of junk bonds of European and US companies as well as the QE:s of the ECB and the Fed. It implies that the default probability of an average European junk-rated company is smaller than that of the US government. This, naturally, is just absurd and it only tells the tale of a massive central bank induced market distortion. The pricing of risk in the normal sense does not exist in the capital markets anymore.
This post was published at Zero Hedge on Dec 20, 2017.