When the Pursuit of Greatness Leads to Inevitable Failure…

"When I grow up, I want to be a loser."

Chances are, no one anywhere ever said that.

Indeed, British rock band Queen seemed to understand that we’d rather all be champions … of the world. Sure enough, Donald Trump was rocking the GOP Convention with their famous anthem.

What’s crazy is when our pursuit of greatness guarantees our inevitable failure.

For example …

Wait a second — raise your hand if you know the example I’m about to make.

Eh?

OK, put your hand down now before people in eyeshot start worrying about you.

The example I want to showcase briefly is none other than the Federal Reserve.

Now, you could probably substitute in any other major world central-bank counterpart, especially the Bank of Japan or European Central Bank. Or really any globalist government regime, for that matter. But the Federal Reserve is more or less the poster child for crazy.

OK, maybe "crazy" is a bit vague.

The crazy I’m talking about is the implicit mission to coordinate global economic growth at all costs.

More Stimulus? Sure — but how about a public backstop instead?!?!?

When the world starts to worry about systemic threats to the financial system, it turns to the Federal Reserve for reassurance.

But it’s clear now that the Federal Reserve is in a different place than its counterparts.

When people wonder whether the Fed will hike interest rates, they ask in the same breath whether the ECB and Bank of Japan will do something to cut rates. (Or some other measure to increase their own monetary accomodation.)

Last week, the European Central Bank said they’d consider more monetary stimulus if and when needed.

But the bigger takeaway — at least for the commentators — was the option of providing a public backstop to banks bogged down by nonperforming loans, et al.

Ahh, yes.

A public backstop, with emphasis on "public."

Emphasis on "taxpayers."

Emphasis on precisely what the "bail in" approach — to put junior debtholders on the hook for backstopping corporate solvency — was designed to avoid.

But that was so yesterday and so populist.

Today we’re talking about helicopter money.

That is, a socially-agreeable campaign to shift some of the "growth at all costs" burden off of monetary policymakers and onto fiscal authorities.

Pardon me, I just threw up in my mouth a little bit.

But I’ll recover.

Just like government spending …

Here are a few words Bloomberg included with that chart back at the start of June:

"The reasons for the pick-up in spending are manifold: Chinese authorities are pulling fiscal levers to buoy activity, state-level spending has increased in the U.S., Germany has been forced to expand spending in light of the refugee crisis, France’s leaders have cut corporate taxes in a pre-election year, and in Canada, a new government is increasing investments in infrastructure."

If you thought the monetary authorities were running out of juice, the fiscal gods have returned to help save the world.

And thank goodness …

***

Feeling Junky

S&P Global Ratings hit the financial press last week with this:

"Central banks remain in thrall to the idea that credit-fueled growth is healthy for the global economy. In fact, our research highlights that monetary policy easing has thus far contributed to increased financial risk, with the growth of corporate borrowing far outpacing that of the global economy."

Simply: Accomodation increases risk.

Why?

How?

Debt.

Not pretty.

Neither is this … which S&P Global included with the comments I mentioned a moment ago:

Since I’m in the business of making sense of this for you …

In the next four years, global corporate debt is projected to rise by about 50%.

Right now, you could walk away with this information and start accumulating bearish positions in high-yield corporate debt ETFs that have about as much business climbing to obscene heights as my 2-year-old daughter.

In fact, the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) might be a good place to start. You can sell it short or buy put options that expire in three to six months.

Or you could try an inverse ETF that goes up when junk goes down: ProShares Short High Yield ETF (SJB).

Because frankly, the amount of money pouring into high-yield corporate bonds lately is staggering …

By the way, that "January 2012" marker didn’t mean much for HYG.

But the surge of capital into high-yield debt at the start of 2015 coincided with an 18% decline in HYG over 12 months. The only thing I can think of to explain the difference in reaction is the expectations for Federal Reserve interest rate trajectory.

The odds of another Fed rate hike in 2016 have risen back to above 50% without anyone really paying it much attention.

Be careful with HYG, though.

If global governments are willing to step up their efforts with initiatives like a "public backstop," the Federal Reserve may just surprise us when they let their hawks out of the bag.

Do right,

JR Crooks

Your thoughts on “When the Pursuit of Greatness Leads to Inevitable Failure…”

  1. i think you just wrote the american epic of the 21st century. the federal reserve is our trojan horse.

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“JR” specializes in trading commodities, currencies and options. He has spent nearly 10 years analyzing financial markets and writing about global economics. JR honed his trading techniques and global-macro worldview alongside his father, Jack Crooks, at Black Swan Capital. JR also…