We have entered 2014 with such extreme optimism in the Western World, which has been widely reported in the mainstream media with soaring stock markets, house prices bounding ahead and the Middle East uprisings ostensibly diminished – all is well in the World.
Now I am not writing this piece as the proverbial ‘Merchant of Doom & Gloom’, but this widely accepted economic and asset based optimism should be heavily tempered with a dose of reality.
If you stubbornly believe that all is well and our all-powerful Central Bankers and Governments will ultimately save the day then stop reading here – “ignorance is bliss”, apparently, although rather painful when reality hits !
There have been several huge trends and macro developments that have pre-occupied my investment thinking over the last 7 to 8 years. I am not going to explain these points in great detail here (as the facts are now so numerous this piece would never end) or my reasoning behind such theories as my previous articles and postings have covered them all. I will continue to cover their trends within the on-going economic car crash we are living through with many more postings, which will finally culminate in a collapse of our present Monetary System (as we presently know it).
But a quick overview see below, followed by my conclusions (forecasts if you like) of what to expect in the markets……
Now there are 3 predictions one can make at this present time that is as sure as ‘death and taxes’.
1. Interest rates will go up. As of 2012 rates were at 320 year lows, any lower and they would be negative (real rates are already heavily negative), although Mr Summer’s is suggesting that very development (completely insane). UK Base rates were lowered to 0.5% in March of 2009 (March 2014 will be the 5th Year on this historical emergency policy response). Rates lower than the Napoleonic Wars, 1st World War, 1930′s Depression and the 2nd World War, nothing perverse to see here then !!
2. Our present Monetary System will collapse. Average life span over the last few centuries is between 30 to 40 years for any standing monetary system, this one being in it’s 43rd year. No FIAT currency standard has ever survived throughout history !
3. US Empire will go the way of all empires.
Timing these massive developments to ultimately protect your wealth is another thing all together. But we are very close to enormous volatility and change. Now the main issues as far as I see them going forward are….
- Massive accumulation of Debt Worldwide far beyond any pre-conceived notions of mathematical sustainability, not only in Consumer Debt but Corporate and Government Debt loads. Including of course the massive skeletons in the closet – Government and Pension Fund Un-funded Liabilities. World debt loads have actually surpassed the 2007 debt mountain peak by over 30% as a share of GDP (not including the expansion in derivatives, particularly interest rate swaps), which back in 2008/09 very nearly took the whole system down !! The BIS’s latest quarterly review points out that yield compression is back with a vengeance, and in some respects is actually now worse than it was in the lead-up to the crisis. The share of “leveraged loans” or extreme forms of credit risk, used by the poorest corporate borrowers, has soared to an all-time high of 45% – 10 percentage points higher than at the peak of the crisis in 2007. Read here and here. Domestic Consumption has become the predominant driver of economic growth these last few decades, along with personal debt growth. Personal Consumption Expenditure is rolling over and has formed a perfect ‘head & shoulders’, a move lower in consumption will take the economy down….
- Rates. The manipulation of the largest market on planet Earth by the Worlds Central Bankers – the Credit market is about to break free. Interest rates are now and have been for the last 5 years at least, heavily in negative territory (Base rates minus ‘Real’ Retail Price Inflation). Within a FIAT Monetary System Interest Rates have to be positive (again – interest rate minus real inflation) to give value to Currency and retain confidence, negative rates for any real length of time is unheard off and clearly indicates the system is broken. You can only control and manipulate a market for so long and the credit markets (Interest Rates) are the Dinosaur in the room. As you can see from the chart below 10-Year US Treasury Debt was yielding the lowest rates ever recorded in 2012 and are now ultimately headed much higher.
- Consumer disposable income is shrinking overall at the fastest sustained rate recorded since the 2nd World War (especially true in the Industrial West). Considering the massive accumulation of debt and interest rates now heading higher from 320 year lows, to describe this as a time-bomb is a small understatement.
- Demographic disaster mixed with massive unfunded liabilities in the West, but lead clearly from the front by Japan, which has just recorded a record plunge in population of 244,000 in 2013 alone.
- Massive expansion of the credit system and money aggregates by Central bank printing and Government arm twisting of the domestic banking systems since the crisis of 2008/09 to lend through various Government sponsored schemes (see UK in particular). This has not shown itself as of yet in much higher inflation expectations due to the fact that Money Velocity is presently broken (all time historical lows), massive debt-load leverage and huge domestic banking reserves (all time recorded highs) held at the US Fed by the banking system is the ‘inflation tsunami’ waiting to happen. It seems this central bank credit expansion is not making much sense in market valuations, see below…
Now if you think Credit expansion (Central Bank increase in their balance sheets) since 2008 in the USA, ECB, BOJ and the BOE, you have not seen anything. Credit expansion in China is nothing short of spectacular… Courtsey of Zerohedge , China credit crisis fears as central bank again inject funds, read here
- Peak Energy Theory - I have read a great deal of research on peak energy and all the claims these theories may actually be bogus. Clearly we have a massive problem going forward that we simply have never experienced in modern human history, Peak Energy is a fact and hence the cost of energy is only going to rise considerably over the next few decades (sustained (GDP) economic growth is not possible within a rising energy price and shortage environment). Considering our very tepid (supposed) economic recovery with all it’s ‘fits and starts’ and the (so called) ‘shale oil and gas revolution’ why are oil prices still trading around US$ 100 a barrel, why is oil not US$ 70 or even US$ 50 at this present time ?
- Europe is a disaster and continues to slide into an ever deeper depression driven by a bankrupt / insolvent banking system, negative growth in banking credit to consumers and SME’s, insolvent Sovereign Countries driven into further indebtness by austerity measures that forces GDP lower along with lower tax receipts and higher unemployment. A vicious circle made worse by an incompetent Central Bank (ECB) with its hands tied behind it’s back by the Germans. The French have now approved the new upper band of income tax of 75%, which as history proves time and time again ultimately destroys their tax base while destroying their economic performance. France have just announced their 22nd consecutive month of contraction in factory activity. IMF solution to an insolvent European banking system with an average of 26 to 1 leverage (a fall in value of just 3.8% in their asset holdings wipes out their Capital base) is to consificate every bank account holder 10% of their funds, this is coming.
- Wars ? Global security system unravels – with echoes of 1914, China & Japan read here. Civil unrest or Country wars look very much part of the landscape going forward. Youth unemployment escalates and with that a lost generation is occurring, tensions are literally bubbling under the surface ready to erupt at any moment. President Giorgio Napolitano has warned that Italy faces violent civil unrest in 2014 as anti-EU demonstrations intensify in response to the country’s worsening economy and a total loss of faith in the state.
My Market and Investment Assumptions
This has led me to several conclusions on where we are headed over the next few years (not necessarily in order)……….
1. We are heading into a Sovereign debt crisis, rapidly rising interest rates. This development alone will have huge profound ramifications.
2. Valuations on highly debt-leveraged assets classes will be decimated, but not for another 18 months (Housing bubbles in London, Sydney, Beijing, Shanghai, Singapore, Manhatten, Vegas, etc..!!)
3. This will be met with more explosive money printing and credit growth policies. A USA reversal in tapering and hence an expansion of QE.
4. Confidence in the FIAT Currency System itself will ultimately be lost.
5. Precious metals will be massively revalued to compensate the massive increases in credit and monetary aggregates (instigated by a loss of confidence in the system itself), but ultimately used to re-liquidate the system as a balancing item (Gold). The metals are historically the most oversold in history (as long as accurate data is kept), as you can see below Silver is at extreme levels and really has only one way to go !! For more charts read KWN here.. Hence a physical allocation to metals here is essential in the form of coins - no paper exposure whatsoever !!
6. Bond outflows will be truly enormous, investment / pension funds desperate to exit a trade that has ultimately turned for the next 20 years and a requirement to earn a yearly return plus some capital appreciation. This will lead into much higher stock market valuations not based on value metrics but major capital flows, ultimately achieving a fantastic valuation bubble over the next 2 years. I updated here.
7. Exposure to Energy, Agriculture, Water, Mining and Precious Metal equities is a pre-requieste in my portfolio. But only as a maximum 10 to 15% allocation of your total investment portfolio.
This really is not all doom and gloom and one can invest to not only protect your wealth but actually grow it substantially. A realisation of what we face is all that is required. If you look through the history books you will discover the remains of many currencies and monetary systems, this really is a normal development and will effectively be our 4th generation of monetary system within the last 100 years.
But lets be honest here, there has been no natural organic and sustainable growth anywhere to speak of. Any GDP growth officially announced has been artificially inflated by using a very forgiving ‘GDP Deflator’ (real GDP is lower) also a large part of the GDP growth we have seen in the last 2 Quarters has come from massive inventory rebuilding / stuffing. Considering consumer spending is down there will be negative repercussions to GDP with this huge inventory build up. Any recovery that we have seen has been rammed down our throats from our illustrious leaders with a policy to re-expand the credit bubble, extreme artificially low interest rates, central bank money printing, re-expanding the housing bubbles and targeting stock markets in the West that only benefits the 5%. A normalization of interest rates and a reversal of the massive monetization of debt by the central banks would send any of these so-called recoveries directly into the dustbin.
We Are In a Giant Debt Bubble of Unprecedented Proportions. The World should have been allowed to de-leverage back in 2007,all the major banks should have been allowed to fail or nationalised (if insolvent and unsustainable) to send a message that horrendous bank governance and leverage is simply not allowed and supported by the tax payer. Senior bank executives should have served jail time without question. Massive Central bank support of the remaining banking system to support future growth. European peripheral nations should have left the broken Euro system, defaulted on a good amount of their debt and embrace a substantial devalued Currency of it’s own to set its own people back on the path to recovery.
Yes this would have been enormously painful over 5 to 7 years, but we have built up a giant 40-year credit bubble that had to be put back on a sustainable path, paying the piper is unavoidable. Throwing more debt at a debt bubble only compounds the pain on our eventual day of reckoning.
Look at the UK and their grotesque London housing bubble breaking all records of un-affordability and overall country debt the largest in the industrial world along with Japan. Europe and its broken socialistic dream in which the leaders refuse to buckle away from and continue to create human suffering of its people. Asia, (China, Singapore, etc.) with its giant credit and housing bubbles (Singapore experiencing its first civil riots since 1969). Canada and its spectacular housing bubble engineered by the UK’s new Central Bank Governor. The USA, which has turned it’s back on free markets and capitalistic values, have instead embraced a powerful Socialistic Oligarchy of interests to support their industries and to keep the party going by a massive injection of funds and monetary life support of tax payers money / burden. I had great hope for Obama, but he destroyed that very quickly indeed and will not be remembered well in the history books, I feel.
But that’s all passed now, it is what it is… We now have to plan and protect ourselves from our economic day of reckoning.
I am a great Optimist for our future, but our World leaders have dictated a massive economic collapse and you have to prepare and invest accordingly.
On a positive note - I could be completely wrong with my assumptions and our illustrious leaders have set us up for a huge sustainable growth pattern which will engender our youth with fantastic career opportunities……you decide.
Happy New Year