Thursday, June 7, 2018

Economic Reality Will Soon Be Knocking On The Gate

Among all the recent news about euphoria and a market "melt-up" several reasons exist to be cautious. During the last two and a half years central banks and countries around the world have added more fuel to the fire which has postponed the day of reckoning. This has made all of us thinking the market was about to turn south looking rather silly and underscores the fact that trying to time economic events is both confusing and complex. Still, many problems give credence to the argument that like so many times over the decades economic reality is again about to come knocking on the gate. Clearly, the numbers don't work whether we are talking about pension funds or government debt. When reality does arrive we should not be surprised if it is accompanied by its good friend chaos.

Central banks can stack the deck but when it gets too high and begins to fall they may not be able to control the direction or who it will crush. The article below is a look at the unfolding story and questions the idea that thinking the economy will adjust and grow its way out of many problems we have tried so hard to ignore. We put ourselves at risk when we ignore the obvious fact that the numbers simply do not work. Developed economies across the world are struggling with sustainability and demographic issues which are putting great pressure on their less developed brethren. It is very important people understand that economic growth does not necessarily equal economic strength and that not all economic growth is equal. Efforts to fudge the numbers and bend reality can only mask the truth for so long.

Corporate Debt Is A Problem As Interest Rates Rise
Moody's recently warned of a global problem brewing in the corporate bonds. This follows the International Monetary Fund cautioning a year ago that companies had taken on far too much debt and that some 20%, or $3.9 trillion, of the total global corporate debt is in danger of defaulting once rates rise. Concern is growing over the possibility of a huge number of junk bond debt defaults. This will be a windfall for those bankers involved in restructuring, but will not bode well for the average investor. Daniel Pinto of JPMorgan investment-banking said that a 40% correction, triggered by inflation and rising interest rates, could be looming on the horizon.

If Thing Turn Ugly, Will You Be Able To Walk Away?
This should make investors question the idea the economy will simply be able to adjust and grow its way out of many problems we have tried so hard to ignore. The simplistic idea we can just muddle along and thrive in the process defies what history has taught.  It is based on a view of history that often overlooks the many who have "lost it all" in prior periods of economic chaos. As we focus on the fact the system always moves forward we tend to forget how it has a way of sacrificing many investors for the "better good", this is fine if you are not one of those being sacrificed.

We should not be blind when it comes to recognizing a slew of less optimistic scenarios exists concerning our economic future. A key assumption of the current mantra that we have reached "escape velocity" is based on the false assumption that we have all the time in the world to deal with our problems. By adopting the scenario that all is well we discount the notion that forward progress may at any time be fouled by events often beyond our control. It is important to note the feeling all is well is strengthened by the government's optimistic projections and numbers that fail to recognize how another recession could skew future tax revenue and cause spending to soar.

Computer Screen Showing Inaccessible Sites!
Off to the right is the image of a computer screen showing inaccessible sites. This is what investors saw come up on their computer screens during the time when fears of a default by Greece ran high. In many ways, it warning that investors should heed. It shows dozens of servers as being "inaccessible" and is an indication of how fast markets lock-down when things turn ugly. Take this as a warning and solid reminder that we must not allow ourselves to become complacent and think we have plenty of time to take action. In our modern world of instant communication, it is becoming increasingly common that options can vanish in a blink of an eye. If we wait too long we may find all doors closed and there is no place to hide.

When it comes to economics, it is best not to have a great deal of faith in our economic system which is severely flawed when it comes to dispensing pain. It is the average Joe (or Jo) will get crushed in the coming collapse. Without a doubt some wealthy people will take a hit, however, overall the pain will fall squarely on the shoulders of the masses. Do not be deceived into thinking the elite .01% play by the same rules as you and I. Those who have worked and saved will see their wealth vanish and at the same time be surprised to find how resilient debt and obligations can be.

Looking across the world to places like Europe we see yields on Italian debt soaring and the populist and separation movement heating up in both there and in Spain. The rumblings of war and trade issues fill the news. These events should sound as a warning and an indication that we have become far too complacent considering the risk before us. While few people think so, Italy's collapse could become the catalyst that fuels the fire that finally brings down the house. If it does not, the light from its flames should surely illuminate and expose the fact that similar flaws and massive debts exist in many other countries across the world.

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  1. I'm guessing that the era of NIRP, ZIRP, was designed to try to buy sufficient time to allow for economic recovery and to allow for the debt problem to rectified.

    It gives some indication of the economic morass that even after 10 years of direct intervention by central banks to try to address the economic and debt problems, that the world faces higher debt levels than ever before at any time in human history.

    These central bank policies have thus far failed to repair the debt problem. In fact, central bank policies have exacerbated the debt problem to such an extent which is difficult to fathom. Nominal debt levels continue to rise in the meantime.

    Acquiring more debt to try to resolve legacy debt does not work.
    This is shown by the evidence throughout the last 10 years.

    For every single debt, there are at least two parties. A debtor and a creditor. If a debt gets defaulted upon the debtor is impacted upon but so too is the creditor.

    My advise is to try to become personally debt free as much as possible.

    1. fully agree!; yet so many 'savers' are being punished ( ones who behave & did everything right! ), including pension funds.

  2. we all, and it's just human..., pick at times somebody to blame!. paper/fiat money came to the market as a convenience, much lighter than heavy bullion in our pockets. but serious commercial transactions and/or capital flights needed sporadically some 'elastic' moneys!; thus the creation of central banks. yet they, in turn, became subservient to the governments ( starting with Roosevelt ) by being ordered to buy US Treasuries, and so their legacy started to 'limp'. i have learned it from this colossal & amazing mind of Martin Armstrong, who like you here, are willing to share your talents & smarts. if you want to treat yourselves mentally, historically, economically, etc., please subscribe to ""!; i assure you, you'd want even your friends to know about it. cheers