Make Delusion Great(er) Again

5 Feb

The new decade has proven quite the breeding grounds for new and different events that threaten the bounds of credulity. Having just witnessed the SOTU last evening, one delusion that has been perpetuated over and over again, only to be ultimately reconciled,  with falling (usually steeply) prices is the delusion that the economy and the capital markets are one and the same. The Donald loves to perpetuate this delusion as it is simplistic and can easily be explained to him in pictures and crawls at the bottom of Fox News. The plain facts are that capital markets and economic fundamentals can diverge, and often do so for extended periods of time. We are going through such a time, but how could this not be the case, we have just encountered phenomena never, ever experienced in the history of advanced economies namely:  coordinated and planned central banking, planned and manipulated interest rates globally irrespective of normalized growth and the  institutional acceptance of moral hazard. Simply reflect on this one statistic when you think that things are going so swimmingly with the real economy : Since 2007 Global Debt has gone up by $128Trillion while Global GDP has gone up by only $27 Trillion.  To put this in more simplistic terms, it has taken almost a five fold increase in leverage ( and thus systemic risk) to generate one  incremental dollar of global economic growth.

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