Prepare for Turbulence | Thoughts from the Frontline Investment Newsletter | Mauldin Economics

Prepare for Turbulence | Thoughts from the Frontline Investment Newsletter | Mauldin Economics

...The way we assess problems depends on our perspective. People can look at the same set of facts and reach quite different conclusions based simply on their circumstances. This is why it’s good at times to get away from your normal environment...

... A host of indicators show a softening of the economy. For instance, , with a glut of more than 7 million previously leased cars clogging the auto market, new-car production is projected to continue to fall. Consumers are financially stretched, and credit card and student loan defaults have begun to rise....

... And we have put in place all sorts of profitability- and productivity-reducing regulations. While these may be appropriate for larger financial institutions, they are choking the life out of smaller community banks, and thereby reducing the availability of capital to small businesses. Is it any wonder that we are seeing more businesses failing than being launched?...

... the next financial crisis will be fought on different fronts, with entirely different components and opponents. There is an appalling lack of liquidity and market-making available in the major fixed-income markets, something the banks used to provide, and now by regulatory statute they can’t. Oh, everything is just fine right now, but the moment we hit a speed bump, the liquidity and market-making capability that is left will simply dry up...

...We have once again created all kinds of new debt instruments as investors reach for yield in this low-rate environment, and there will simply be no market liquidity for them in a crisis. A flight to safety will ensure that long-term Treasury rates will plunge to levels that we have not yet seen...

...Former Eurogroup leader Jean-Claude Juncker admitted as much: “When it becomes serious, you have to lie,” he said in the throes of Europe’s 2011 debt crisis...

...This is a problem, because markets can’t function on false information, at least not indefinitely. The best thing for everyone is to let markets adjust naturally, even though confronting reality can mean short-term pain for some participants....

...Financial-stability and macroeconomic risks are already elevated. Debt isn’t simply piling up; it’s up to the ceiling and pouring out the windows. Risk-taking in financial markets can hardly gather any more steam without blowing its top...

...While I believe it is appropriate to raise rates slowly, I simply cannot understand why they would want to reduce their balance sheet at this late date, at the same time that they jack up rates. They could have been letting the balance sheet roll off for four years, but to do so now in conjunction with raising rates simply increases the risk of a policy error. But I don’t think they will see that as their problem...This Fed is going to raise rates a few more times, start reducing the balance sheet, and then get the hell out of Dodge...

...Without major reforms in place, the Trump Fed will face a recession, serious global economic issues, and a resulting major equity bear market.

... Federal Reserve policy affects the entire world. Like it or not, the US dollar is the entire planet’s ultimate medium of exchange. One way or another, almost every financial transaction eventually settles in dollars. ...

...Think of all the dollar-denominated debt owed by various emerging-market governments and businesses. Higher US rates will strengthen the dollar and make that debt costlier to service, almost certainly causing some defaults. ...

also: 
http://www.mauldineconomics.com/frontlinethoughts/angst-in-america-part-7-the-angst-of-the-millennial-generation