For ten long years, the world’s central banks have dragged everyone along for one last attempt at scaling Mount Credit.
And here we are again in 2018, warning everyone of the same risks. Starting back in August of 2018 we were questioning whether “it” had arrived and then were declaring that it had throughout October and November.
“Until and unless” the central banks reverse course 2019 will see even more of the same. More stock market volatility, more bond losses, and falling real estate. Eventually these credit stresses will impact those portions of the economy dependent on continued access to more dumb money.
Weak companies that cannot sustain themselves without borrowing more will go out of business and lay people off. Major corporations seeing that writing on the wall will reel in their own hiring and expansion plans.
Eventually all the of the highly leveraged trading strategies have to pack up shop and go home and that’s when we discover that these “markets” are as fake as a spray on sun tan. No actual liquidity, only the appearance of such as temporarily afforded by all the computer algos out there.
As we head into 2019, we’re expecting to see a lot more volatility and even more losses as reality once again steps back into vogue. It never really left, of course, only was kept away for a while with monetary Botox administered by self-delusional bankers and politicians unable to face their many failures directly.
Every recovery eventually ends and this one is no different.
In our view, however, any recovery built on a foundation of cheap credit will not only end but end badly.
What’s the plan here? Continue to pile up debt at a faster pace than economic growth forever? What about the idea that economic growth has slowed of late and cannot grow forever for resource related reasons? Is anybody in power paying even the slightest bit of attention?
Most importantly, what happens when ~40 years of excessive debt accumulation comes to an end? Do financial systems and institutions even function anymore?
Nobody has a good answer to those questions, which is why the Federal Reserve, et al., are terrified to find out what happens when their grand debt bubble experiment comes to an end. Mad max is not out of the question folks. A lot of things very suddenly no longer work when the credit not only dries up, but goes in reverse. Very basic things like food and gasoline distribution networks and public safety payrolls become difficult to maintain. Just ask Venezuela.
Until and unless the central banks do something very, very different in the months ahead, it’s over.
Because of just how dire it might be to end a 40 year long, and very ill-advised credit bubble, we are 99.98% certian the central banks will fight tooth and nail to keep it going. Just a little longer, for as many months or years as they possibly can, but they'd kick the can forever if they could.
40+ year-old credit bubbles to not end either easily or gently. Everything that people think they know about how things work, especially in finance and economically, will be ripped apart.
Eventually we revert to how things were all through history before the great credit wizards got their hands on the levers. Capital is built up slowly from the efforts of humans, and banking and finance will be small portions of the overall activity, no more than 5% of the pie, dedicated to safely moving capital from A to B.
Between here and there? A world of pain as expectations are forced back down to reality. If we’re lucky that happens over many decades in a fairly predictable glide path.
If we’re not lucky, then it happens rather suddenly, or in a series of short, sharp shocks like a bowling ball falling down a set of stairs. That could be a war in the middle east that drives the price of oil over $300/barrel, or a gigantic financial crisis that closes financial borders and causes one or more currencies to utterly fail (I’m looking at you Japan!).
Or a pandemic, or a solar EMP. Who knows? In a world of interdependent, just-in-time delivery systems anything that disrupts the supply chains for more than a month will be the same as our bowling ball skipped three stairs before landing extra hard on the fourth.
Is any of this certain or guaranteed? No, of course not. They are merely probabilities. Smaller in the past, larger today, and growing.
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