Crisis Progress Report (15): Happy New Year, by Robert Gore

In 2016, investors need to understand three things.

This economic and financial contraction will not be an ordinary cyclical recession. It is the backside of decades of debt growth in excess of economic growth and the peak of underlying social optimism which produced that unsustainable disparity.

Debt contraction and reversing social mood will be the unifying element of many seemingly unconnected stories this year. Raúl Ilargi Meijer at theautomaticearth.com noted this unification in an article featured on SLL.

If there’s one thing to take away from this year’s developments in markets and economies so far, it’s that they are all linked, they’re all part of the same thing. If you can’t see that, you’re not going to understand what’s happening.

Looking at falling oil prices as a separate thread is not much use, and neither is doing the same with Chinese stocks, or the yuan, or the millions of Americans who are one paycheck away from poverty, for that matter. It’s all one story.

This linkage extends beyond markets and economics. A driver of the mounting discord in the Middle East and consequent refugee flow has surely been the 65 percent decline in the price of oil, the region’s chief resource, since mid-2014.

Finally, while announcements of government and central bank measures during the downturn will trigger bursts of optimism and soaring short-covering rallies, everything they do will prove at best ineffectual and, much more likely, counterproductive. That is not, as some commentators argue, because they have exhausted their remedies addressing the last financial crisis—there is no limit to their stupidity and desperation—but because their remedies were never remedies in the first place. Government issued debt and its exchange for central bank debt at suppressed interest rates did not solve the problem of debt that was unsustainable in 2007, it only added to it. Debt has increased over 58 percent, from $142 trillion in the fourth quarter of 2007 to an estimated $225 trillion now. Consequently, this crisis will be that much worse than the last one.

Long running bull markets in equities and bonds have entrenched tenacious optimism. Seventeen out of seventeen Wall Street strategists polled by USA Today expect the stock market to be higher at the end of 2016, and 60 out of 60 economists surveyed by The Wall Street Journal’s Economic Forecasting Survey see no possibility of even one quarter in which GDP contracts. The quickest part of the debt contraction will probably be the financial crash phase if, as SLL has conjectured, markets fall like a guillotine blade after participants lose faith in governments and central banks. The timing of that realization is uncertain, but brutal as the new year’s first week was, it’s just a warm up.

Based as it is on debt, a lot of what people think of as wealth will simply disappear as debt vanishes through defaults and write-offs, financial assets are sold, and prices deflate. Depending on just how counterproductive governments’ and central banks’ efforts are, the necessary adjustments in the real economy will take years. Superfluous mines, factories, infrastructure, skyscrapers, warehouses, retail establishments, and so forth will have to be eliminated to resolve gluts and uneconomic prices. On this front, pessimism is in order, as many projects begun during the boom are coming on-line in the next few years. They will have relatively low cash operating costs and add to already substantial gluts. Despite crashing prices last year, global production of many raw materials and factory goods, including oil and steel, actually increased, and more of the same is in store this year.

Where things are going and why they are going there are not difficult to understand, but at this point those that do so are ahead of 99-plus percent of the population.

Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.

Charles Mackay, Extraordinary Popular Delusions and the Madness of Crowds

It will be years before most of the herd comes to its senses and the adjustments necessary to foster bona fide recovery are made. Review the natural gas price chart in “The Shape of Things to Come” (LINK) and the article for an idea of how long that process may take. On the financial side, the Japanese stock market made its high in 1989 and has yet to regain even half of that former height.

Patience as an investment strategy has traded at a deep discount to its intrinsic value for years. It will be one of the few assets whose value climbs during the coming depression. The wise investor will resist the siren song of temporary rallies and the supposed safety in numbers of 17-out-of-17 and 60-out-of-60 consensus calls, and lay in a goodly store of patience while it is still a screaming bargain.

A NOVEL TO BRIGHTEN UP THE DEPRESSION!

AMAZON

KINDLE

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