Wednesday, January 21, 2015

"When this bubble bursts, 2008 will look like a picnic."

January 21, 2015

The Biggest Bubble In Financial History is Bursting

The mainstream financial media likes to focus on stocks because:

1)   The stories are a lot sexier than bonds or currencies

2)   They make for better hype jobs than bonds or currencies

If your job is to sit in front of a camera selling the notion of getting rich from investing, you’re not going to talk about bonds or currencies (maybe the latter is of interest but only with insane amounts of leverage which usually bankrupts a trader in his or her first trade).

However, today stocks are in fact a very minor story. They are, in a sense, the investing equivalent of picking up pennies in front of a steamroller.

That steamroller is the $100 trillion bond bubble.

For 30+ years, Western countries have been papering over the decline in living standards by issuing debt. In its simplest rendering, sovereign nations spent more than they could collect in taxes, so they issued debt (borrowed money) to fund their various welfare schemes.

This was usually sold as a “temporary” issue. But as politicians have shown us time and again, overspending is never a temporary issue. This is compounded by the fact that the political process largely consists of promising various social spending programs/ entitlements to incentivize voters.

This type of social spending is not temporary… this is endemic.

The US is not alone… Most major Western nations are completely bankrupt due to excessive social spending. And ALL of this spending has been fueled by bonds.

This is why Central Banks have done everything they can to stop any and all defaults from occurring in the sovereign bonds space. Indeed, when you consider the bond bubble everything Central Banks have done begins to make sense.

1)   Central banks cut interest rates to make these gargantuan debts more serviceable.

2)   Central banks want/target inflation because it makes the debts more serviceable and puts off the inevitable debt restructuring.

3)   Central banks are terrified of debt deflation (Fed Chair Janet Yellen herself admitted that oil’s recent deflation was an economic positive) because it would burst the bond bubble and bankrupt sovereign nations.

The bond bubble, like all bubbles, will burst. When it does, everything about investing will change.
Bonds have been in bull market since the early ‘80s. Thus, an entire generation of investors and money managers (anyone under the age of 55) has been investing in an era in which risk has generally gotten cheaper and cheaper.

This, in turn, has driven the rise in leverage in the financial system. As the risk-free rate fell, so did all other rates of return. Thus investors turned to leverage or using borrowed money to try to gain greater rates of return on their capital.

Today, that leverage has resulted in $100 trillion in bonds with over $555 trillion in derivatives based on bonds.

This bubble, literally dwarfs all other bubbles. To put this into perspective, the Credit Default Swap  (CDS) market that nearly took down the financial system in 2008 was only a tenth of this ($50-$60 trillion).

When this bubble bursts, 2008 will look like a picnic."

(Source: Graham Summers, Phoenix Capital Research)

Friday, January 16, 2015

"China will NOT have a soft landing. It will fall like an elephant."

China’s Ultimate Debt Bubble:
27 Times Growth in 14.5 Years

"We have shown many times in the past how the U.S. debt bubble mushroomed in the boom that started in 1983. U.S. debt grew 839% in 25 years into the bubble peak of the first quarter of 2009. That was 2.68 times GDP growth.

How can you have debt grow 2.68 times GDP and not have a debt crisis?

Any economist that didn’t and doesn’t see that as a problem (think Paul Krugman) should be driving a limo instead. At least they could keep the suit that way.

But as you would suspect, China makes that look like nothing. Just since 2000, or 14.5 years, China’s total debt grew from $1 trillion to $27.35 trillion or 2,635% while GDP grew from $1 trillion to $9 trillion.

Look at this chart…

China’s debt grew 3.43 times GDP for 14.5 years. That has got to be the fastest growth rate of any major country ever.

Yet many economists praise China’s new state-driven capitalist model. Yes, now governments can take debt and leverage to extremes that the free market system could never dream of… That’s a good thing?

The U.S. and most developed countries have now taken over the economy and are setting short and long-term interest rates at zero or less when you adjust for inflation and target growth and inflation rates.

The central bankers want to run our economies like a machine as if it were an inorganic process when it is actually a very dynamic organic process that plays on opposing forces: boom and bust, innovation and creative destruction, inflation and deflation, and success and failure. That’s the secret to the golden goose of free market capitalism.

Many investments will always fail, that is how we learn and evolve. But governments in a top-down and less accountable process will almost always make worse investments than the bottoms-up free market system.

China now has 27% of urban homes vacant, excess capacity of 30% to 40% in major industries from cement to aluminum, and hordes of empty malls, offices, roads, bridges and rail systems. Real estate has gone up over 7 times since 2000 – does that sound like a bubble to you? The U.S. real estate bubble was a mere 2.2 times.

The government has suddenly pushed 220 million unskilled people from rural areas into urban areas where they’re not even registered citizens. What happens to these people when the bubble bursts?

China is going to finally prove once and for all that top-down, centrally planned economies are far inferior to bottoms-up free market ones. Russia wasn’t enough proof for clueless economists. They’re going to have to eat their words on this.

You could look at China’s debt to GDP ratio of 2.64 times versus that of the U.S. and say that’s not as high as us at 3.54 times. But emerging countries have much lower debt ratios than developed ones as their consumers have much lower incomes and are much less credit worthy.

China’s debt ratios are more than twice that of similar countries like Brazil or India.

China’s capital investment from the government has been far higher and has lasted far longer than any other emerging country. This investment and debt binge is truly unprecedented!

The best comparison with the U.S. would be to compare China’s debt growth for a similar time frame into the peak of the U.S. bubble, or 14.5 years from the third quarter of 1994 into the first quarter of 2009 as the chart below shows.

China’s total debt grew 8.74 times as fast as U.S. debt in 14.5 years. Holy crap, we have no idea what a debt bubble is!

China will NOT have a soft landing. It will fall like an elephant.

Those 220 million people that they forced into urban areas are screwed. They will be jobless and likely not even have the option to go back to their rural farms for self-subsistence as those areas have now been paved over with empty condos.

At least they’ll have those empty condos for squatter rights.

We’ve also been warning that the Chinese government will start restricting the growing exodus of the most affluent Chinese (the smart money getting the hell out of Dodge). They just announced a crackdown on taxes owed for foreign income.

The next step could be restrictions on leaving the country without a major exit tax.

We are about to witness the greatest economic and social disaster in modern history."

Harry Dent