The Gathering Storm

I was going to call this piece “The Perfect Storm” after the confluence of storms that sank the Andrea Gail, but then thought that an allusion to Churchill’s book was more appropriate. Churchill correctly foresaw the futility of Chamberlain’s policy of appeasement, and advocated the policy of standing up to dictators and terrorists which has, since then, been generally accepted by world leaders.

Today, we face a different threat, that of economic collapse. Central banks around the world are attempting to keep the threat at bay by printing money to keep feeding and satisfy the beast that is excessive and overweening government. But the beast is never satisfied, any more than Hitler was.

The side effects of money-printing and cheap credit are becoming apparent. Some of these pose systemic risks in and of themselves.

  • Chinese bubbles. The bubble in Chinese real estate started to burst and was promptly replaced by an even bigger bubble in shares. That bubble, in turn, appears to be bursting as prices have fallen about 30% from peak in a matter of weeks. It is asserted that the bubble has been fueled in large part by privately arranged margin debt at high rates. Fallout is to be expected, and the government is being blamed for encouraging inexperienced individuals to become speculators.
  • Puerto Rican debts. Its governor has recently declared that Puerto Rico’s debts are “not payable” and it needs debt relief to pull out of a “death spiral.” (Sound familiar? Expect to hear this more and more as U.S. states are forced to come to grips with huge obligations for pensions and retiree healthcare. ) P.R. has about $72 billion in debt, much of which is stuffed into mutual funds. Shares of the bond insurers that have guaranteed much of this debt are already cratering.
  • Greek debts. Enough bandwidth is already being spent on this, so sufficient to say that the real underlying issue is not the euro, but the failure of Keynesian economic policies to provide the promised growth. The euro is merely making it more difficult to paper over the problems. Speaking of papering over…
  • U.S. recession. It is clear that the U.S. is already in recession, although the propaganda machine is operating at full power to advance the contrafactual view that all is well. This view will become steadily more difficult to sustain as the lagging data flow catches up with reality. There is a corresponding huge divergence between company earnings growth and share price growth. This will be closed.
  • Deflation. Global demand is weak, and pricing for commodities and manufactured goods is under pressure. The GSCI is well below the 2009 lows of the previous cycle and PPIs are stalled, even while share prices are making new highs. But really there are only two prices that matter – energy and labor. It appears that oil prices are breaking down again from the $60 or so plateau of the last few months. I expect oil to end up in the $20s. Labor prices are being maintained by government supports for the time being.
  • Overvaluation. Stock markets around the world are trading at prices which portend negative returns for years to come. Pension funds and people investing for retirement seem not to understand this reality and are unwilling to stand aside and wait for better opportunities, presumably fearing being left behind.
  • Be careful out there.

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