The Periphery is Failing

For years we've preached the From the Outside In principle of markets: When trouble starts, it nearly always does so out in the weaker periphery before creeping towards the core.

We saw this in the run-up to the housing bubble collapse, as sub-prime mortgages gave way before prime loans, and in Europe, as smaller economies like Greece, Ireland, and Cyprus have fallen first and hardest (so far).  We see this today in accelerating food stamp use among poorer U.S. households.  In each case, the weaker economic parties give way first before being followed, over time, by the stronger ones.

Using this framework, we can often get several weeks to several months of advance notice before trouble erupts in the next ring closer to the center.

Which makes today notable, as we're receiving a number of new warning signs.  The periphery is giving way.

Ever since the current economic "recovery" began, we've been warning of the high risk of a renewed financial crisis.  That risk is now uncomfortably high.  This is because nothing that led to the first round of troubles was actually addressed at the root level.  Instead, prior troubles were simply papered over with central-bank liquidity, leaving structural weakness intact for instance, our ‘too big to fail’ banks are just as big, and our sovereign debt levels are even worse than they were pre-2008.

The next crisis will be larger and more damaging than the last one, principally because nothing got fixed, political capital was spent, and trust has been eroded, leaving everyone depleted and ready to bolt for the financial exits.

With the periphery failing, we likely have only weeks perhaps a month or two until the next big dislocation hits.

Déjà Vu (All Over Again)

We’ve been here before.  We’ve seen trouble start on the outside and progress inwards, and not all that long ago.

In 1999 and 2007, we saw the financial markets blithely trundle along higher, even as clear signs of trouble at the margins were abundant.

One of the common myths about the stock market, often repeated in the press, is that it peers into the future.  The market is the 'great discounting machine.’

But the stock market powered higher into the new millennium, despite being the most overvalued it had ever been in history, before diving violently in 2001.  So much for peering into the future.

And again, the stock market went to new heights in 2007, even as the housing market was obviously deteriorating and about to suffer a truly historic break after an unprecedented and bubbly run to the upside.  The great discounting machine ended up reacting to trouble rather than anticipating it.

Despite these two obvious failures, many still hold to the belief that the stock market is a useful indicator of future health or distress, which means this view is more a matter of faith than fact.

My view has always been that the stock market is a 'great liquidity detecting machine’ – something that fits the data very, very well – and that it’s reacting to liquidity in the system more than anything truly fundamental.  This has not always been the case, but ever since Greenspan opened the Federal Reserve printing presses to each and every minor financial sniffle in the mid-1990s, Fed-supplied liquidity has been the dominant driver of equity prices.

To tilt the conversation slightly, one of the enduring mysteries to me is how we have managed to experience not one, not two, but three full bubbles in the space of less than 15 years.  Tech stocks, then housing, then all stocks and bonds; three bubbles, each bigger than the last.

As I have written extensively in the past, the current all-time highs in both bond AND equity prices (with bonds collectively including everything from 1-month T-bills to the worst junk paper you can buy), is nothing more and nothing less than the biggest financial asset bubble in history.

In order to believe this will all turn out well, you have to believe that this time will be different…not just a little bit different, but 180 degrees away from literally every single other financial bubble in all of history.

This is precisely what is being asked of us each day by the financial press, the Fed, the Bank of Japan, the European Central Bank (ECB), and the politicians in the Western power centers.

Our view here is that it’s never different.  To that we’ll add:

  • A crisis rooted in too much debt cannot be ‘solved’ by creating more debt.
  • Prosperity cannot be printed out of thin air.
  • Rigged systems and markets destroy trust.
  • Nothing can grow exponentially forever, except for the number of zeros printed on your currency.

Collectively, the above list boils down to Anything that cannot go on forever...won’t. [credit: Herb Stein]

Deficits and Debts Do Matter

Deficits don’t matter! Dick Cheney once famously growled, putting to words the belief system that envelops the U.S. today, especially its financial and monetary authorities.  Because we’ve managed over the past three decades to dodge any serious consequences from racking up debts, these folks believe that will always be true. Absence of evidence becomes evidence of absence.

Sticking just to the economic “E” (leaving aside energy and the environment), our diagnosis of the current difficulties is simply that the OECD economies left reason aside and instead embarked on a sustained period of borrowing at a rate nearly twice as fast as underlying economic growth.

That is, we collectively fell for the idea that one could simply borrow more than one earned...forever.  I'm always surprised by how an entire culture can collectively believe in something that no individual would ever hold to be true.

We know that we cannot individually borrow more than we earn forever.  And we are equally sure that this remains true if we pool ten people together.  But we accept the idea that a sovereign nation can somehow magically pull this off.  This either represents a profound inability to apply logic, or a form of cultural schizophrenia, or both.

Hot-Money Bubble Dynamics

For years now, ever since the Fed et al. embarked on the global rescue plan that involved little more than flooding the world with historically unprecedented amounts of freshly printed money (a.k.a. “liquidity”), that money has been sloshing around looking for things to do.

With interest rates on ‘safe’ investments at 0% (or close enough), that hot money has been looking for anything that resembles a decent yield.  This ‘yield chasing’ went to every corner of the globe and piled into any and every market that it could.

Some of these markets were the headline U.S. and European equity and bond markets, and some of them were so-called 'emerging markets,' such as Brazil, India, Thailand, the Philippines, and Indonesia.

As this hot money flowed into these emerging markets, the respective countries in order to prevent their currencies from rising too much did the usual and recycled the money-flows back into U.S. Treasury paper, German Bunds, and other sovereign debt instruments.

Now, all of this is being undone.

It is a hot-money machine running in reverse, and it is creating the usual distortions, difficulties, and hardships for the afflicted countries.  Currencies are plummeting, as are local equity and bond markets.

In short, to understand where our financial markets are and where they are headed, you don't need to know much about fundamentals at all.  Earnings, GDP, job growth, etc. are secondary to liquidity flows.  That’s why the various markets are so keyed on the Fed’s next statements and when and how extreme the ‘tapering’ might be.

That’s all that really matters.

Well, that’s not entirely true.  For reasons that cannot be entirely explained nor controlled, sometimes bubble dynamics just end.  People stop believing.  And what was once a virtuous cycle suddenly morphs into vicious one.

I believe that’s the moment where we are now.  And, as always, it's starting from the outside in.

In Part II: Blast Shields Up! Prepare for Incoming! we look at the growing number of klaxons warning that central bank policies to prop up the global economic system are failing at an accelerating rate.

There are many fronts on which this losing battle will be fought, but our biggest concerns lie in the bond markets ultimately and including U.S. Treasurys.

Defensive maneuvers are the name of the game now for the prudent.  Make sure you're one of them.

Click here to access Part II of this report (free executive summary; enrollment required for full access).

This is a companion discussion topic for the original entry at

i agree with chris that something is in the works to explode in the next few weeks, however i use a different set of tea leaves…which is fine… it's always good to see evidence on other fronts point to the same thing.
i'll stick my neck out.

i say people do things for a reason…including TPTB. so when things don't add up like chris is reporting, i have to ask what is really going on? so i sit back and observe

my guess what we will see: the us military will be taking risks and the possible back lash on us here at home via terrorist activity. if nothing happens with us attacking syria, then iran is next. and hell breaks loose with that. i see it as calculated.

if you understand what chris has been saying you will understand what a large terrorist attack will set off a chain reaction in the financial front and then cascade from thereto suppy chain.

people will accept printing of money for a" necessary war" .this time there will be no " glorious 50's or 60's recovery"

this war may not make you run with your children for shelter(well maybe), but it will disrupt the lifestyle we have known.and deflate to a less wealthier lifestyle.

i believe TPTB believe they have things in place to take the next move…in sept…or oct…

our focus is not on this

our focus is to try to keep life calm for ourselves. and neighbors

civil unrest at home is more threatenng that terrorists. we help by showing strength. we show strength when we are confident and prepared.

Why do you think that we have found "Weapons of Mass Distraction" in Syria?
I feel sick.


Why do you think that we have found "Weapons of Mass Distraction" in Syria?
For the same reason as always...this is the time to keep your eyes firmly on the edges and trust that whatever the mainstream press is most urgently focused on is worse-than-useless information; it's the brief movement by the prestidigitator that prevents you from seeing what you need to see to know what is actually happening. As it has always been, it currently is. The great part about all this is being able to rely on tradition to guide you.  
Chris wrote: I'm always surprised by how an entire culture can collectively believe in something that no individual would ever hold to be true.
Well... we have collectively believed for over a century that we have infinite resources and can have infinite growth on a finite planet. Who doesn't like their cake?

I know you subtracted out Energy and Environment, but I find it interesting that the Syrian dilemma is heating up at the same time when we are seeing the dumping of treasuries and equities in anticipation of the Fed's tapering. Putting energy back into the equation, It seems to me that Syria is just an excuse and stepping stone to force our "interests" in Iran. The dots seem to be easier to connect, but who knows.

Oh and "Absence of evidence becomes evidence of absence" …great line!

Geez Arthur and Chris, were we all just thinking the same thing? This is getting scary.

I am so sick of the absolute BS rhetoric, or what should more appropriately be called propaganda from our media & government.  This whole Syria charade, while predictable, is disgusting and makes me ashamed to call myself an American.  How far we have fallen.We close on our home in 13 days.  My wife and I will essentially be debt free (minus $30k or so in student loans and one car payment).  We're getting ourselves mentally ready & prepared for whatever comes. Such is life.

the thing i rely on to guide me is common decency and common sense,not news dictate.
we will be ok no matter what happens over there. not to be snob. but because we think and listen and have resilence and Tptb want the war there ther terrorist think otherwise.

there are big things  about to take place.

so for those of us not in harms way , we pray, we act solid,

not because the gov't says so, because  it's the right way to be human

this may possibly be the time to stand for goodness in the face of crap.

my heart sinks tonight for what mankind may do to itself

my heart rises tonight for what we can do for mankind.


think good kind thougts and prayers…we all bleed the same.

be strong as we pass thru this cloud.

do not succumb to useless thought

in your heart you know kindness and whats the right thing to think.

pray for mercy


this may be premature but apropriate at some point.


Great article Chris, thanks.
When I think about what is happening in Syria I am reminded of many of the references made by George Friedman in his two books "The Next 100 Years" and "The Next Decade". In these books he walks us through his take on the big picture chess game that is being played out. I seem to recall him saying that the Bosporus region was of significant strategic importance, one of which is as a critical waterway which sees significant flow of petroleum products from Russia to Europe. According to an article I googled on the Bosporus:

This body of water serves as a primary highway for the transport of energy to Europe from Russia and western Asia. In 2005 over 55,000 ships, including almost 6,000 oil tankers passed through it, most carrying Russian oil.
In addition, control of this area would provide the US with the ability to move against Russians from the Black Sea. When I look at maps of the whole middle East, I see Syria as being a key location, and therefore a country in need of being controlled, oil reserves aside.

On the other hand, Friedman also made the case that Russia and China are going to keep up their game playing on these skirmishes with the end goal being to keep the US stretched to the max. This is in keeping with some of the US strategy, that being that it is not necessarily important to win a war as much as it is to de-stabilize and prevent any given country or coalition from developing any real power. The name of the game is destabilize. So I am guessing that Russia and China are in cahoots and doing all they can to keep the US mired in various conflicts that tax them on all fronts. It makes sense to me.

Is this whole thing merely WMD the epilogue? Who knows. All I know for sure is that the big picture chess game is using real live pawns in the form of innocent civilians. How many untold millions have been and will continue to be sacrificed to the psychopaths that are masquerading as our leaders.

This makes me want to throw up. If ever there were time to do a pull back and restore things to sanity this is it. But given how the MSM reports, and how the average Joe/Jane is more concerned with back to school sales or the latest idiotic thing out of the entertainment world, I am not optimistic on any kind of an uprising which will cut the head off of this beast.

What a mess. And Chris is right I believe. Hunker down and prepare for some really interesting stuff to happen in the next short while.


…through inside information way back. This isn't new, it's been up on the board for quite some time. Oil! It's all about Oil and I'll say this here and you all know it's true: We would, as the people of the United States be very upset without our fix. We demand it.

We make our own truths but we are all guilty of our glutonous ways.

In a recent posting I said this has been going on all of my life. That encompasses the backside of King Hubbert's curve, the first oil embargo, the second and the rise of these knuckleheads in the Middle East. All these folks wanted was what we had, and they wanted a seat at the table but we have all the guns. We win. China and Russia do not concern me in the least. In the end, this all gets divided up. Might makes right is the story. The Petro Dollar survives until it don't and then maybe there ain't nothing left, so take a deap breath and enjoy every moment this world gives you and give this shit a rest. I personally am going to pray for the best, hope for the best because if we lose the world is vacant, and the rise of another super species will begin. It's just the way of the World. Time to go spoon the Lady after a good night kiss.



Chris wrote: " I'm always surprised by how an entire culture can collectively believe in something that no individual would ever hold to be true".
Nietzsche wrote: "Insanity in individuals is something rare – but in groups, parties, nations, and epochs, it is the rule".


said…"Lucidity is a uniquely individual accomplishment". I think he did, but i wasn't there.

Two alernate views:
The War Tard: The Syrian Regional War: NATO on deck! (August 28, 2013)
"Assad is not a stupid man.Why then use nerve gas when the rebel factions are fracturing, fighting amongst themselves and Assad's forces are winning. Why use chemical weapons and hand NATO the golden invitation to walk into Syria? It doesn't make sense."

Reddit user illz569 (August 27, 2013)
"The entire conflict has become a proxy war for major powers in the area. On the side of President Assad and the Alawite-Shia part of the nation, we have Iran, the other major Shia-ruled country, supplying aid in an attempt to keep their ally afloat. We have Hezbollah, a Shia militia group, fighting in and out of Syria against the Sunnis. Finally we have Russia, who is interested in keeping Assad in power as their only real ally in the Middle East, and as a major buyer of Russian weapons, although the Russians have been scaling back their support for Assad as the reports of mass killings have continued to come forth. With the most recent sarin gas attacks, they may begin changing their position."


npr has been testing the emergency broadcast test almost daily lately.
it's these little subtle nuances that cue me TPTB are about to do something with no real regard to my well being.

Here is Foster Gamble's  ( take on the big picture … it pretty much coincides with Chris's perspective including the timing.   The link has both audio and the transcript:

Seems the answer is to let as many people know about this charade as possible…  We must  change the course of history and stop this madness.

-Bob O


C-130 cargo planes have been taken off and landing at Niagara Falls air force base all day long 
                                                 pat the rat


I often read Paul Krugman's blog, and much of what he says makes sense to me.  I would appreciate any thinking anyone wishes to share on this Krugman post about the current emerging markets issue:   I don't think Chris is a fan of Krugman (and that could probably be said of many of the Peak Prosperity readers), so I bet some of you see some flaws here, and I'm interested to hear your rebuttal.  Thanks!  

    A collapse will be horrible for those working for the gov't and those on food stamps.  But on the otherside, what can we safely assume will happen?  Well people will do what is best for them.  They will act in their own self interest as they always try to do, but now there is no gov't to curtail or stop their efforts.  
    If there is no one to enforce the marijuana laws, wouldn't people start growing their own hemp plants?  Where will that get them?  Well it can get them fuel.  One acre of high thc MJ will produce up to 200 gallons of hemp seed oil, that can be burned in a diesel engine, like maybe a tractor.   The center stalk of the hemp plant(marijuana) broken up and mixed with lime can produce a concrete like block that is stronger, yet lighter than concrete.  Hemp fibers can be made into insulation and can also be made into fiberglass like roofing panels.  Viola, you just grew you own house.  clothing can be made from those same fibers.  Hemp seed can be eaten.

  Housing.  With no one to enforce all the ridulious laws concerning housing, people will be able to sort out their own way of providing housing.  Starting with a homeless person who has an extra refrigerator cardboard carton to rent to someone.  Then up the ladder, with a lot of co-op housing of all kinds.

  Farming will become a prized endevor again, with lots of people working for their food and again no one to interfere with agreements made between anyone anywhere.

  Sports, there probably won't be anymore million dollar players anymore.  Just those who like to play enjoying a local game.

  Just a few changes that come to mind.


i see krugman as an unofficial mouthpiece for the gov;t. want to know their spin, read krugman.i also see him as a waterdown last to party town cryer. his value lies in it's what the gov't wants people to believe. read chris , mish etc and they expose his crap. way before he speaks it sometimes.