Dear Reader, Market dynamics have changed. While markets can technically be classified as being in the ‘bull’ phase, the overarching trend is bearish. The overhang from a decade-long corporate debt binge can be ignored but that doesn’t make it go away. Massive stimulus programmes and temporary debt relief measures are masking the underlying reality…job losses, business closures, growing civil unrest. V-shaped recovery? Implausible. And when you do the numbers on what it takes to not just get back to where we were BUT also resume trend growth, the implausible becomes laughable. Over the past decade, a US dollar of GDP growth has been derived from US$3.80 of debt. Year | Global Debt USD | Global GDP USD | Debt/GDP Ratio | 2008 | $142 trillion | $58 trillion | 2.4 : 1 | 2019 | $253 trillion | $87 trillion | 2.9 : 1 | Increase | $111 trillion | $29 trillion | 3.8 : 1 |
But that was then…in the good times when confidence was high, unemployment and default rates were low.
Generating a net US$3.80 in borrowings (to create a dollar of GDP growth) in an environment of defaults, high unemployment, lending caution and general uncertainty is going to be extremely difficult. The fact that hardly any mainstream commentary recognises the crucial role ever-increasing debt has played in GDP growth continually astounds me. If NET debt levels (new borrowings, less defaults) do not resume the pre-COVID-19 trajectory then economic growth is at best, in the very slow lane and at worst, contracting. Neither options produce a V-shaped recovery. Fierce competition for the shrinking consumer dollar is going to apply pressure to profit margins. Highly indebted businesses are literally living on borrowed time. Those that remain in business will look to trim overheads…labour and rental expenses are the obvious cost-cutting choices. Creating a vicious spiral in defaults (mortgages, consumer finance, commercial property loans, corporate debt), unemployment, lending caution and uncertainty. At present the share market is not pricing in this scenario. There remains an unbridled belief in the Fed’s ability to (once again) conjure up a debt-fuelled economic recovery. Can the Fed make the debt soufflé rise again? If they can’t, it definitely won’t be for the want of trying. We crossed the Rubicon on sound economic management in September 2008…when Lehman Brothers collapsed. Quantitative easing (QE) entered our collective vocabulary. There is no going back. The unorthodox is now accepted as orthodox. No amount of intervention/meddling can be too much. Be assured, the central banks are absolute and resolute in their commitment to blow another debt bubble. The only other option is to let the system correct itself. And, for political and economic academia reasons that’s not going to happen. Get ready for central banks to mount a concerted and sustain effort to move debt levels (much, much) higher. Whether society responds in the same Pavlovian way as it did on previous occasions is an unknown. In anticipation of a more reserved consumer attitude towards credit, the Fed has a bag of treats ready to tempt/bribe/cajole people into resuming old habits. I’ve had a sneak peek inside the Fed’s bag of goodies and this is what I saw… Forward guidance on interest rates as far as the eye can see. In pre-COVID times, the Fed could tempt or temper markets with ‘cash rate’ forward guidance. An announcement to the effect of ‘we expect rates to remain low’ was a green light to go to the Wall Street casino. Alternatively, ‘we are going to gradually raise rates’ put the skids under the market. Having seen how effective ‘forward guidance’ can be in setting the market mood, expect to hear the Fed announce ‘the cash rate will be held at zero for five years or longer’. While that will be greeted with initial enthusiasm, it’s hardly the ‘big bang’ that markets have become accustomed to…they always want more. Negative rates are coming. Not possible. Won’t happen. It’s not our intention. Yeah, heard all those protestation before. And guess what? What was once inconceivable, became, not only conceivable, but very achievable. Constitutional roadblocks will be picked up and shifted…just like the once sacrosanct ‘debt ceiling’ now keeps getting raised. Negative rates will be the ‘BIG news’ that puts a rocket under the market. The failure of the market to question how bad is the economy for rates to be taken into the negative? will be a mere oversight when the animal spirits take charge. QE becomes a Formal Programme. Previously the creation of dollars was done on an ‘as needed basis’. QE1, 2 and 3. In this current crisis, additional money is needed on a daily basis. ‘…the Treasury Department said the gap between what the U.S. government spends and what it collects in taxes widened to [US] $1.88 trillion for the first eight months of this fiscal year [2020]…’ The Washington Post, 11 June 2020 The US government needs an extra US$2 trillion to cover its budget shortfall. The annual deficit is not going to get any less in the coming years with either a Trump OR Biden administration. Both will spend (much) more — especially if it’s decided to pay a universal wage — than what’s collected from a stagnating tax base. The US Treasury’s ability to raise the funding needed (on a continual basis) from the private sector is limited. The Fed will print and buy Treasuries and continue its corporate debt buying for good measure. They’ll do everything possible to stop the corporate debt bubble from deflating. Which leads into… Yield Curve Control (YCC). They’ll do it. They have no choice. Creating this much Federal debt means long rates — five-, 10- and 30-year bonds — need to be suppressed. The Fed says it’s ‘considering’ and ‘investigating’ the merits of yield curve control. That’s like me saying I am ‘considering’ and ‘investigating’ whether I should take my next breath. It’s going to happen. The Fed commitment to blowing another debt bubble is absolute and unwavering. YCC is an integral part of that plan. The policy has already been preordained by the same wackos that sanctioned the previous bubble blowing efforts (emphasis is mine): ‘Prior to the COVID-19 crisis, current Fed Governors Richard Clarida and Lael Brainard, as well as former Fed chairs Ben Bernanke and Janet Yellen, said the Fed ought to consider adopting YCC when short term rates fall to zero.’ Brookings, June 2020 Well, short-term rates are (almost) at zero. And it’s not like YCC hasn’t been used by other central banks… ‘The Bank of Japan (BOJ) committed in 2016 to peg yields on 10-year Japanese Government Bonds (JGBs) around zero percent, in a fight to boost persistently low inflation. To hit that yield target, the BOJ has a standing offer to purchase any outstanding bond at a price consistent with the target yield.’ Brookings, June 2020 If the intent of Japan’s YCC programme was to ‘fight to boost persistently low inflation’, then the BOJ has lost the fight. Japan’s core inflation (at best) rose to 1%, but has now fallen to MINUS 0.2%. But this minor detail won’t stop the Fed. They have to tinker, meddle and be seen to be doing something…even if it does more harm than good. Buying shares. The Fed will follow the BOJ’s lead on this as well. As reported by ETF Stream in February 2020 (emphasis added): ‘Unconventional monetary policies in Japan have gone way beyond just interest rates and government bonds and since 2013 have extended into the area of central bank buying of equities. ‘In the seven years since the BoJ embarked upon is own QE programme or ultra-easy monetary regime, the holdings have now reached phenomenal level. According to the BoJ funds flow report for Q3 2019, the bank now owns some 8% of the entire Japanese equity market, mostly through the current ETF-buying programme.’ The purchase of share ETFs has helped pushed the Nikkei 225 Index higher…but it was coming off a very low base. During the recent market downturn, not even the might of the BOJ could stop the index plunging almost 30%. While the BOJ might own 8% of the market, all it takes is a few weak hands amongst the other 92% for the market to fold. Again, that logic will be dismissed in the Fed’s pursuit to leave no stone unturned in its bubble blowing endeavours. A few of the reasons why the Fed will go down this path are… The US share market has become a proxy for economic strength.‘U.S. stocks are closing out a terrific year and President Trump loves it. He’s bragged about the stock market hitting record highs six times this week alone on Twitter. On Friday, he boasted “Trump stock market rally is far outpacing past U.S. presidents,” and he vowed that the “BEST IS YET TO COME!” Trump is making the economy and stock market a key focus on his re-election campaign.’ The Washington Post, 28 December 2019 Share prices need to stay elevated to maintain the pretence of pension fund solvency.Lower share prices translate into higher borrowing costs for corporates. The Fed is already bailing out enough of these zombies and would be keen to avoid adding to the list.These treats were the ones on the top in the Fed’s bag of tricks. Are there more treats we don’t know about? Probably. Desperate times call for desperate measures. Central bankers may possess academic smarts, but they must be some of THE dumbest people walking this Earth. Why so harsh? Let’s say these extraordinary and unconventional efforts actually work. Consumers and corporates do their patriotic duty and borrow in even greater amounts. The economic outlook is once again rosy. GDP growth is on trend. Then what happens when this even BIGGER debt bubble bursts in five or 10 years’ time? Why they persist with an economic model that is so seriously flawed and will continually require the application of even more desperate measures to remain functioning, speaks volumes about the mental capacity of these so-called prudent stewards of the economy. Whether we like it or not, these nutters are going to dig deep into their bag of unconventional tricks. Their dumb decisions mean we have to make intelligent choices on how to position our portfolios. That’s the challenge we’re all facing in the coming years. Regards, | Vern Gowdie, Editor, The Rum Rebellion |
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Our History and Move On By Bill Bonner Week 16 of quarantine ‘In this great future, you can’t forget your past; so dry your tears, I say.’ ‘No Woman, No Cry’ by Bob Marley Out with the old; in with the new! Forget the past! Let’s march into a glorious future…blind, deaf, and dumb to everything that came before us! Word reaches us that Princeton University is taking down Woodrow Wilson’s name. It’s about time. Wilson was a scoundrel and a fool. But his name is coming off the letterhead because of his ‘racist thinking’. Here’s ABC: ‘Princeton University announced the removal of Woodrow Wilson’s name from the University’s School of Public and International Affairs, which will now be known as the Princeton School of Public and International Affairs.’ And over on the other coast, statues are coming down. From Newsweek: ‘Protesters in San Francisco, California, toppled a statue of Ulysses S. Grant, the 18th president of the U.S. who led the Union Army during the Civil War, among other monuments at Golden Gate Park on Friday. ‘The statues of St. Junipero Serra, the first saint of the Roman Catholic Church to be canonized in the U.S., and Francis Scott Key, the author of the lyrics to “The Star-Spangled Banner,” were also torn down at the park on the same day.’ And the war against the past continues. Here’s more from Newsweek: ‘On Friday, protesters in Washington D.C. were reported to have torn down a statue of Confederate General Albert Pike and set it on fire near the Washington D.C. police headquarters. ‘Two Confederate monuments were also dismantled Friday in downtown Raleigh in North Carolina, including one which was dragged through the street before being abandoned on the courthouse steps. ‘On Thursday night, a statue of George Washington, the first president of the U.S., was torn down by a group of people in Portland, Oregon. ‘A U.S. flag was seen burning at the head of the statue before it was toppled using a rope. ‘Another U.S. flag was seen burning over the statue after it was pulled to the ground. The statue was spray-painted with the words “genocidal colonist”.’ Devil or saint? OK…Pike, fighting for the South — obviously a ‘racist’. And George Washington, one of the richest men in the colonies…well…he was obviously a bad man. No doubt about it. But dear readers might wonder WTF Spanish missionary St Junipero Serra had done to attract the ire of the history-scrubbers. We had to look it up, which took us to the National Catholic Register… ‘Ben Leaños of the nearby town of Camarillo, one of those demanding the removal of the statue, stated: “We’ve been seeing around the country and the world statues of racist and genocidal people being taken down and we think it’s time that happens in Ventura.”’ That’s right. If others are doing it, we should too! Serra tried to help the indigenous people of California by setting up missions. That’s why the major cities of the state are named for saints — San Diego, Santa Barbara, San Francisco — and not the pagan tribes who lived there. But was Serra a devil or a saint? We don’t know. We never met the man. So we’d give him the benefit of the doubt. No doubt But doubt is not something the monument-topplers will tolerate. After 5,000 generations of humans on planet Earth, finally, they’ve got the truth. So, hooray! Now, we can feel superior to our fathers, our grandfathers…and all of those many generations who erred and strayed like lost sheep. Now, we are free from our sordid past…like a new species, brought forth only in the 21st century. Now, we bathe in the bright, warm light of TODAY…unlike the morons who came before us. What kind of idiots would put up a monument to Christopher Columbus? Didn’t they know that Columbus was a crypto-fascist, patriarchal, white-privileged imperialist, at least partially responsible for millions of deaths (from European diseases) in the New World? But that’s the point. They didn’t know. But now, we do, thanks to the many savants who walk among us…many of them carrying ropes and spray paint. This top financial expert just returned from a private meeting with members of the Senate Financial Services Committee… It is as if the millennial generation had suddenly gained 20 IQ points. And now, with the internet, they go online and, in seconds, discover just what low-lifes and fools their ancestors were. What kind of dumbbells would elect George Washington as their president, they ask themselves? Or Thomas Jefferson — he was a ‘rapist’; at least, that’s the rap laid on him by today’s all-knowing activists. And what about the two Adams, John and John Quincy? Weren’t they New England’s white privilege in the flesh? Bleaching history Yes, Dear Reader, we are so lucky to be living now, rather than back then, when humans had tails. Now, our voters walk upright, and our presidents are paragons of wit, charm, and virtue…with none of the taint of sin and ignorance that marred the past. Now, with knowledge at our fingertips and our hearts overflowing with goodness, like a clogged sewer, we can get out the brushes and soap and wash away the stains of colonialism, male domination, fascism, sexism, institutional racism, gold-backed money, mullets, and all the other things we no longer like. We can bleach our history…and, with the help of the public schools, make sure that no one ever comes in contact with those bad ideas again. And, with the help of the Federal Reserve, we can print the money we need to right the wrongs of the past…shut down the economy to protect us from COVID-19…and otherwise make the world a better place. (What is really stunning is that our ancestors never realised the magic they could do by printing trillions of dollars. They must have been even dumber than we thought.) Today’s heroes So, let’s begin by applauding our heroes. Not the nurses and doctors. Not the ‘warriors’ in Iraq or Afghanistan. Not the old fuddy-duddies in bronze or granite. We’re talking about today’s heroes — the protestors. They’re right. It’s high time we gave the statues the heave-ho. Lincoln, Wilson, both Roosevelts — rascals and scalawags, every one of them. Take them all down! But Padre Serra…Robert E Lee…Chief Justice Taney…Ulysses S Grant? Nobody is perfect. All are stained by sin and indelibly marked by the waters in which they swam. As far as we can tell, they were decent men who conducted themselves with grace and courage in difficult circumstances. Would any of us have done better? Regards, | Bill Bonner, For The Rum Rebellion |
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