Jeffrey Snider: All Signs Point To Systemic Reset
by Tyler Durden | Aug 21, 2016 4:20 PM | Zero Hedge
Submitted by Aaron Chan via MacroVoices.com,
The prolific Jeff Snider of Alhambra Partners launched a full-scale attack on central bank policy on this week’s MacroVoices podcast. The full interview is worth a listen, and is summarized below.
The full podcast (74 mins.) is definitely worth a listen. The podcast begins with a weekly market review, and the interview with Snider begins at 13:37. There’s also a discussion of bitcoin and blockchain after the interview with Snider.
Pulling no punches and delivering analysis and commentary on a much higher level than one typically finds in a retail-targeted financial podcast, Snider backs up his call for a global monetary reset in the 40-minute interview with a 30-page book of charts and graphs (some excerpted below) that read like an indictment of central bank policy.
Snider opens by observing that (1) earnings estimates have consistently and repeatedly been revised lower since 2014, and (2) the fair value of the S&P 500 as imputed from actual or post-revision earnings estimates is markedly lower than where it has traded previously:
Snider remarks, “What we see is a dramatic deviation from what was supposed to happen. We were supposed to have a full blown recovery on the idea that QE would create a successful and sustainable economy. But in the middle of 2014, the trend in earnings deviated sharply. What was supposed to be $145 in 2015 trailing 12-month earnings turned out to be about $87, so it was a massive deviation between what was supposed to happen and what did happen.”
When MacroVoices host Erik Townsend asks how long this will continue, Snider doesn’t mince words: “The economy itself is NOT getting better, and certainly not at a pace that would generate a return to earnings growth. Economists and analysts have underestimated the degree of the problems that existed, and they are dragging on longer than anyone anticipated. So we have this process where they keep expecting earnings to recover quickly, but they don’t, quarter after quarter after quarter… The fact is that the earnings recession is there in 2015 and 2016 has yet to become the recovery.”
Snider goes on to observe that corporate profits and cashflow are outright collapsing, and that this correlates perfectly with what he’s seeing in constantly re-re-re-revised (downward) earnings:
Townsend then presents a view that’s old news to ZeroHedge readers, positing that the entire equity rally since 2009 has been based on central bankers propping up asset markets with liquidity conjured out of thin-air with printed money (QE), and asks Snider to comment on that view. Interestingly, Snider’s take is divergent. He claims that QE does influence markets (via impacting portfolio allocations) through bond-buying, but he believes that the actual transmission mechanism is not liquidity but rather, confidence: “I think that what’s happened in stocks is more a myth than actual reality. Investors in stocks are buying at ridiculous valuations based on the premise that the Fed can create a recovery through liquidity. And what 2014 and 2015 show us is that this simply wasn’t true! The earnings that were supposed to justify the valuations based on the premise that QE worked never happened, and still haven’t happened. So the longer the earnings recession lingers, the higher the risk that stock investors will realize that they’ve been following the wrong story all along!”
Townsend then addresses the U.S. Dollar rally, which he asserts will affect almost everything else in markets. Snider expresses the view that the world faces what he calls a “Chronic and Acute Dollar Shortage” globally. Snider walks the audience through a series of graphs and charts showing everything from TIC (treasury international capital) flows to official treasury holdings to inflation break-evens to up-trending repo fail rates. The inescapable conclusion: There is no recovery, things broke in 2007-2008, and nothing has truly been fixed:
Snider goes on to demonstrate that the offshore EuroDollar system has effectively become the true reserve currency, and it’s just as broken as everything else. The commentary is too detailed to reproduce in full here, but the conclusion is clear: The data are telling us that the global EuroDollar system is convulsing:
Snider goes on to observe that not only is the TED-Spread trending upward now, but it’s also seen a marked increase in volatility since late 2015:
There’s considerable discussion about the inability of the Eurodollar system to support the global economy, a phenomenon that Snider says has persisted since 2007. There are quite a few more charts than included here which are discussed in detail in the full interview.
The interview moves on to the subject of Snider’s contention that QE “Did not work and cannot EVER work”. He starts with the history of treasury yield curves:
Snider opines, “Even Janet Yellen and Ben Bernanke would agree that the real route to higher interest rates is actual economic recovery”, but then goes on to tear apart the assertion that any meaningful recovery has occurred since 2008: “What these yield curves tell us is that the myth that Central Banks have the power to do anything meaningful to restore the economy is exactly that: a myth!... The stock market is overvalued because of a myth that is increasingly being proven to be a myth by credit and dollar markets”. From there Snider dives into the hard data and examines the effects of QE since 2009:
“It shows that even if we believed in what the fed was trying to do, it shows that it was not effective”. Next, Snider points out the marked departure from long-term trend that has persisted since 2008. The Keynesian train is off the debt-slicked tracks and no amount of QE is getting us back on:
The dotted line shows the growth that would be required to continue economic expansion on the scale that existed prior to 2007. Snider observes “For the so-called great recession to have just been a recession, we’d have to have gotten back [to the dotted line]… This shows that what’s happened since 2008 is not simply a cyclical deviation. It was in fact a permanent structural problem, which is why we have monetary contraction, why the economy has been lack-luster, and why generally there has been no recovery since 2008.” Snider goes on: “The Eurodollar system as it existed prior to August 2007 has not been restored, and it never will be restored! The picture here is that this is a permanent disruption in monetary supply throughout the world."
Snider’s chart book ends with a striking chart showing that the decline in EuroDollar money supply has continued unabated through all three rounds of QE. It is the slow-motion train-wreck that is U.S. monetary hegemony:
“This puts together all of the derivative books, and they’re shrinking… It goes back to the interest rate fallacy. It’s contracting money supply, exactly as Milton Freedman described, and it’s increasing market risk.”
The commentary really heats up after the chart book discussion, when Townsend asks Snider to elaborate on how this whole crazy story of monetary policy recklessness will eventually play out. Snider goes for the kill: “Longer term, what we’re headed toward is a systemic reset: the realization that the system as it is structured now just isn’t working, and furthermore, it cannot work. The main policy levers since 2007 have been how do we rebuild the status-quo? How do we solve what we think is a cyclical problem? And what we find now in 2016 is that those were faulty premises to begin with. It was never a cyclical problem, so status-quo policies aren’t going to work, and in fact they’re actually harmful, because they prevent the rest of the system from identifying actual workable policies for the needed systemic reset.”
Snider broadens the conversation from there: “What does a systemic reset imply? It’s more than a financial problem. There’s social unrest that can stem from this. There’s political unrest to consider. Not just the election here in the U.S., but things like Brexit, the political situation in Brazil, China, Japan… It’s a global problem where the economy just doesn’t work any more. At some point we’re going to be forced to deal with the facts. Whether that means something like the 1930s where complete failure of the economy led to social disarray and disorder… we have to ask whether it’s something benign like redesigning the Eurodollar system to potentially the worst types of scenarios." Unfortunately, the preponderance of evidence suggests that the rate of entropy is accelerating beyond our ability to organize and the gap will continue to expand the longer the mass delusion persists.
Townsend asks Snider whether there’s a monetary policy cure for these woes. Snider responds by sharply criticizing central bankers: “I don’t think there is under the current central bank format, an answer, because the central banks are committed to a monetary system that hasn’t actually existed in 50 years. And they have proven time and again that they’re not going to change their ways. They’re not going to grow in terms of how they manage the economy. They’re not going to change their beliefs about how these things work. They’re going to keep doing the same things that don’t work? I mean, how many QE programs have there been around the world? And none of them have worked, yet that’s all they still talk about!”
When asked about whether governments will “not let a crisis go to waste”, and use whatever happens next to justify the need for a global currency, global central bank, or even global government, Snider doesn’t mince words: “That will probably be their solution to it… the idea that we need a single global currency. Now of course it’s completely unworkable, but the only available pushback to that will be whether anybody still believes in them. Because when you look at these markets… The LIBOR market… The Repo market… What they can be classified as is growing mistrust of central bankers and central bank programs. I also think there’s a coming populist revolt against this type of “elite answer”; the idea that they keep saying the recovery is coming and its working but when everybody knows it’s not the case."
Snider concludes “The current global monetary system, the current Eurodollar system is unworkable. It cannot go on as it is. It’s an unstable system that will reset somehow.”
Townsend takes the interview from there to the political backdrop and Snider acknowledges the wasted opportunity:“Policymakers have wasted the years since 2008. Back then people may have been ready to work together to actually address the real problems. But now we’ve reached the point where serious political unrest is a risk. Central bankers had the opportunity to focus on real solutions and they wasted it on policies that didn’t address the real problems…. The history of the world teaches us, especially in prolonged economic crises, that once people get to a certain point, they’re fed up enough that no amount of reason will talk them back from the ledge. The wasted years since 2008 have increased that risk, not decreased it.”
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Jeffrey Snider: All Signs Point To Systemic Reset
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