Today, we have bad news and good news.
The good news is that there will be no 25-year recession. Nor will there be a depression that will last the rest of our lifetimes.
The bad news: It will be much worse than that.
Yesterday, the Dow rose another 43 points. Gold seems to be working its way back to the $1,200 level, where it feels most comfortable.
“A long depression” has been much discussed in the financial press. Several economists are predicting many years of sluggish or negative growth. It is the obvious consequence of several overlapping trends and existing conditions.
Old People Are Dead Wood
First, people are getting older. Especially in Europe and Japan, but also in China, Russia and the US.
As we’ve described many times, as people get older, they change. They stop producing and begin consuming. They are no longer the dynamic innovators and eager early adopters of their youth; they become the old dogs who won’t learn new tricks.
Nor are they the green and growing timber of a healthy economy; instead, they become dead wood.
There’s nothing wrong with growing old. There’s nothing wrong with dying either, at least from a philosophical point of view. But it’s not going to increase auto sales or boost incomes – except for the undertakers.
The Cure for Debt? More Debt!
Second, most large economies are deeply in debt. The increase in debt levels began after World War II and sped up after the money system changed in 1968-71.
By 2007, US consumers reached what was probably “peak debt.” That is, they couldn’t continue to borrow and spend as they had for the previous half a century. Most of their debt was mortgage debt, and the price of housing was falling.
The feds reacted, as they always do… inappropriately. They tried to cure a debt problem with more debt. But consumers were both unwilling and unable to borrow. Their incomes and their collateral were going down. This left corporations and government to aim only for their own toes.
Central banks created more money and credit – trillions of dollars of it. But since the household sector wasn’t borrowing, the money went into financial assets and zombie government spending. Neither provided any significant support for wages or output. So, the real economy went soft, even as the cost of credit fell to its lowest levels in history.
The Cronies Are in Control
Third, the developed economies have been zombified. The US, for example, is way down at No. 46 on the World Bank’s list of places where it is easiest to start a new business. And only one G8 country – Canada – even makes the top 10.
Paperwork. Expenses. Regulation. High taxes. High labor rates. Entrenched competition with aging, loyal customers. All are endemic from Boston to Berlin to Beijing.
Leading industries – heavily controlled and regulated, including defense, education, health and finance – are practically arms of the government. All are protected with high barriers to entry and low expectations. Competition is barely tolerated. Innovation is discouraged. Mistakes are forgiven and reimbursed.
Meanwhile, the masses are encouraged to become zombies too, with generous rewards for those who 1) do nothing, 2) pretend to work or 3) prevent other people from doing anything. After all the zombies, cronies and connivers get their money, there is little left for the productive economy.
The Solution Begins When Markets Crack
Typically, these problems – too much debt, too many zombies, and too many old people – lead to financial crises. Then, they are “solved” by either inflation or depression. And the solution begins when markets crack.
Markets never go up forever. Instead, they go up, down and even sideways. They breathe in and out. And after sucking in air for the last 30 years, US financial assets are ready to exhale. Legendary asset manager Bill Gross comments:
When does our credit-based financial system sputter/break down?
When investable assets pose too much risk for too little return.
Not immediately, but at the margin, credit and stocks begin to be exchanged for figurative and sometimes literal money in a mattress.
When that happens, problems begin to take care of themselves, in one of two ways…
A quick, sharp depression wipes out the value of credit claims. Borrowers go broke. Bonds expire worthless. Companies declare bankruptcy. The whole capital structure tends to get marked down as debts are written off and financial assets of all kinds lose their value.
Or, under pressure, the feds print money. Debts are diminished as the currency loses its value. The zombies still get money, but it is worth less. Inflation adjustments cannot keep up with high rates of inflation. Pensions, prices and promises fade.
Either way, the slate is wiped clean and a new cycle can begin.
But what rag will clean the slate now?
More tomorrow…
Regards,
Bill
Market Insight:
Invest in What the Fed Can’t Destroy
by Chris Hunter, Editor-in-Chief, Bonner & Partners
Publisher’s Note: Market Insight editor Chris Hunter is away on holiday this week. In the meantime, we thought you might enjoy an excerpt from the March issue of Bonner & Partners Investor Network. In it, Chris speaks with financial iconoclast and truth-teller David Alan Stockman about how to invest in a stimulus-drunk market such as this.
CH: You once said, “I invest in anything that Bernanke can’t destroy, including gold, canned beans, bottled water and flashlight batteries.”
How can our readers protect themselves from the dangers ahead? What one piece of advice would you give somebody who’s worried about another major credit collapse?
DAS: Three big points on this.
First, capital preservation – that is, not losing money – is more important for your readers than capital gains when government and central banks have gone rogue and have chronically violated every known rule of fiscal rectitude and sound money.
That means getting out of harm’s way in all the financial markets – debt, equity, commodities and derivatives – because when the big correction comes they will all experience a thundering collapse.
Second, short-term liquid investments and cash are not as bad as their microscopic yields imply.
The 20-year worldwide central bank credit boom has generated vast overinvestment in mining, manufacturing, transportation and distribution capacity worldwide. But now that the credit inflation is reaching its outer limits, and we are entering what I described as the “crack-up” phase, the forces of global deflation will drive down the price of goods and many consumer services as well.
When the next crisis fully materializes, cash will be king. It will buy more everyday goods and services and will have command over drastically marked-down financial and real estate assets of every kind.
Third, the impending collapse of the global central bank credit bubble will generate unprecedented volatility and drastic movements in asset prices of all kinds.
