Bubble Watch

Central bank folly continues

It's been six years since the 08 financial crash that almost wrecked the world economy. Governments claim that the crisis is since long over but central bankers are still pulling on all levers, now governing market behaviour,  in trying to reach their inflation targets. But unemployment is still at all time highs in Europe and sanctions aimed at Russia have also hurt many European businesses. Over-indebtedness is the problem but central banks believe that the solution is to borrow more, not less. They have tried this method for several years now, Japan for the last 20 years, and the only thing that has happened is that economic inequality has risen dramatically. Thats what happens when you have a zero sum game i.e. running out of cheap resources to produce a surplus. In this case savers are punished and debtors are rewarded. So people with pensions are the first to lose, and banks/people with massive loans the first to gain. 

This week the Swedish central bank (Riksbanken) announced negative interest rates of -0.25%, in the belief that "doing more of the same will yield a different result". This comes after the European Central Bank (ECB) announced its new quantitative easing (QE) program on January 22nd. Since then, only three months ago, we now see a massive formation of bubbles with warning signals showing up in European Equities and Global Fixed Income. At least according to the March report from the Financial Crisis Observatory. 56% of all the European Stoxx Equities Sector Indices gives clear warning signals, a month ago that was 0%. The market is overvalued and turned red almost in an instant. However, it is very difficult to anticipate market movements in these global markets that are guided by central banks' over the top measures. It is not free market capitalism any longer, but rather, central bank folly that governs the market. 

The US dollar strengthening is global and warning signals can be seen in many currency pairings, for example FX US dollar/Swedish krona. While the Euro and the Russian Rouble has continued momentum downwards. Energy, softs and metals, show negative (undervalued) bubble signs which probably imply weak global demand. The massive increase in warning signals in European Fixed Income is largely due to the size, purchasing 220% of the total net issuance over 1 year, of the ECBs QE announcement. After a 15% rise in 2 months, 56% of all European sector indices show clear bubble signals. This is important to note, especially since the implied Vol, risk perception index, has dropped instead of risen. In the case of Sweden it has now become even cheaper to borrow money, which will fuel the housing bubble and probably end in tears at some point in the not to distant future. Similarly to what happened in the early 90s.

Cauwels, P. & Sornette, D. (March, 2015)


Out of the ashes into the fire

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