It will be a crash like we’ve never seen before.
SLL has been accused of trafficking in “doom porn.” Guilty as charged. If you don’t like doom porn, don’t read this article, it’s hard core. If you prefer feel good and heartwarming, there are plenty of Wall Street research reports and mainstream media stories about the economy available. Enjoy!
In 1971, President Nixon closed the “gold window,” which allowed foreign governments to exchange their dollars for gold. This severed the last link between any government and central bank-created debt and the real economy. Debt could be conjured at whim, and governments and central banks have done so for the last 46 years.
Not surprisingly, credit creation without restraint has papered the globe with the greatest pile of debt mankind has ever amassed, measured in nominal terms or relative to the underlying economy. A measure of how extraordinary this situation is: most people regard it as normal, if they think of it all. Debt is a first mover, a financial constant. Any exigency small or large can be met from an unlimited credit pool that will always be with us. How to rebuild Houston, Florida, and Puerto Rico? No problem, borrow.
Although fiat credit creation by governments and central banks is unconnected to the real economy, its effects are not. Their debt becomes an asset within the financial system. Through fractional reserve banking, securitization, and derivatives it become the basis for a multiplication of the original debt. That multiplication is many times the multiplier (the reciprocal of the reserve requirement) taught in introductory macroeconomics classes whereby the debt is contained within the banking system.
Nominal global debt is reckoned at between $225 and $250 trillion, or about three times global GDP. Financial, debt-supported derivatives (financial instruments whose prices are derived from the prices of other financial instruments) are estimated at anywhere from $500 trillion to $1 quadrillion notational, or six to twelve times global GDP.
Overpriced houses did not cause the last financial crisis and almost bring down the world’s financial system, securitized packages of mortgages and their associated derivatives did. The Panglossian view of derivatives is that most of them can be netted out against offsetting derivatives, thus actual exposures are far less that notational amounts. The real world view is they can only be netted out as long as all counterparties remain solvent. As we learned in 2009, that is not always a correct assumption.
Globally, unfunded old age pension and medical liabilities, not counted as debt but still promises made that often have the force of law, sum to another $400 trillion. In the US, they are about $210 trillion, or about 11 times US GDP. Demographics amplify the liability: across the developed world, declining birth rates and extensions in life expectancies mean a shrinking pool of workers supports an expanding pool of beneficiaries. In the last month, SLL has posted four excellent articles by John Mauldin for those who want all the gruesome details. (Just enter John Mauldin in SLL’s search box and they’ll pop right up.)
This doom porn, the skeptics will say, is almost as old as Deep Throat (released in 1972). Markets crash from time to time, but they always bounce back. Central banks and governments come to the rescue with fiscal stimulus (increased government debt) and unlimited fiat debt. Why should we worry now?
There are a number of reasons. When the world was less indebted, a fiat currency unit’s worth of debt produced more than a fiat currency unit’s worth of expanded output of goods and services. Sometime within the last year or two, the marginal economic effectiveness of all that government and central bank debt reached zero, and is negative after debt service.
With the world saturated in debt, another fiat currency unit of debt produces no increase in output. Kick in the costs of servicing and repaying that debt, and increasing debt is actually retarding economic growth. It accounts for the long-term slowing growth trend, flat incomes, and “secular stagnation” that puzzle so many economists.
It also accounts for the lack of inflation that puzzles so many central bankers, at least in the price indexes they look at. They are looking at the wrong indexes. The relevant indicia are stock, high-grade bond, real estate, and cryptocurrency prices, still at or close to record highs, and corporate and securitized-debt credit spreads to treasury benchmarks at record lows (indicating massive complacency about corporate credit risk). Here inflation—the speculative kind that blows bubbles—is alive and thriving.
With the Federal Reserve now taking steps to shrink its balance sheet and other central banks making noises about doing the same, global fiat debt creation may go into reverse for the first time in many years. Brandon Smith at Alt-Market.com argues that this is part of plan leading to a crash and global, centralized monetary control.
He may or may not be on to something, however, valuation extremes and sentiment indicators point to the same conclusion concerning a crash. SLL maintains financial markets are exercises in crowd psychology, impervious to government and central bank efforts to control them, designed to separate the maximum number of speculators from a maximum amount of their money.
Robert Prechter, of Elliott Wave International, has written the chapter and the verse on markets and psychology. (SLL reviewed his groundbreaking tome, The Socionomic Theory of Finance.) Consider the following from Elliot Wave International’s October “Financial Forecast.”
Every month another sentiment indicator seems to pop to a frothy new extreme. Last month it was the percentage of cash that members of the American Association of Individual Investors harbored in their investment portfolios. At 14.5%, it was the smallest allocation to this safe alternative since January 2000, the same month that the Dow Industrials began a 38% decline that lasted through October 2002. Last month, we also showed a new bullish extreme for the five-day average of Market Vane’s Bullish Consensus survey of advisors. On September 15, the average pushed to 71%, a new ten-year extreme.
…
The most recent Commitment of Traders Report shows that Large Speculators in futures on the CBOE Volatility Index (VIX) have amassed a record net- short position of 172,395 contracts.
…
This record bet on subdued volatility sets the stage perfectly for the period of “high volatility” that EWFF called for in August.
…
…Large Speculators in the E-mini DJIA futures have pushed their net-long position to 95,976 contracts, more than four times the number of contracts they held in January 2008, shortly after the Dow started its largest percentage decline since 1929. So, investors are betting to a record degree that the stock market will continue to rise and volatility will continue to remain subdued. Paradoxically, these measures indicate that exact opposite.
…
Various media accounts confirm that a rare complacency now dominates the stock market.
One doesn’t have to buy in to socionomics to realize that virtually everyone is now on the same side of the boat, a condition generally followed by the boat capsizing. Using conventional valuation measures, the only time stocks have been more highly valued is just before the tech wreck in 2000.
If one does buy into socionomics, the last few upward squiggles in the stock market will put the finishing touches on intermediate, primary, cycle, supercycle, and grand supercycle Elliot Waves dating back to 2016, 2009, 1974, 1932, and the 1780s, respectively. In other words, this is going to be a crash for the ages.
Given the unprecedented level of global debt, that appears to be the most likely scenario. Every financial asset in the world is either a debt claim or an even less secure equity claim—a claim on what’s left after debt is paid. Much of the world’s real, tangible assets are mortgaged.
When the debt bubble implodes, a global margin call will prompt forced selling, driving down all asset prices precipitously. Most of what is currently regarded as wealth will vanish. Opening up the world’s fiat debt spigots full force won’t stop this one. The notions that governments and central banks have speculators’ backs, that problems caused by excessive debt can be solved with more debt, will be revealed as monumental follies. And markets will not come back, at least in our lifetimes.
Long-time readers will point out that SLL has been issuing warnings for years. Again, guilty as charged. However, we’ll join Mr. Prechter and company in their prediction that US equity markets top out before the end of this year. (They called last year’s top in the government bond market, adding to an impressive list of correct calls.) If we’re wrong, it won’t be the first or last time. If we’re right, given the magnitude of what’s coming, being a few years early won’t matter at all. Our concluding clichés: fear is stronger than greed and markets go down much quicker than they go up.
STRAIGHT LINE LOGIC 
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Reblogged this on The way I see things … and commented:
Truth lies within
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Kondratiev wave how I love thee,
Left me not a pot in which to pee,
Expecting 9 lbs of crap,From a 7 lb sack,
How we wish the clock we could turn back,
Our pooch has been porked it is plain to see.
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One minute you’re riding an Elliott Wave
It turns around and you cannot stave
Your imminent financial demise
A zero balance and the booby prize
You cry, lament, hang your head and moan
Gee, you sigh, if only I had known
Somewhere people will dance and cavort
They’re the fortunate few not long, but short
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Oh my has IP met his peer?
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Mr. Gore, scenario if I may.
Your scenario as calls come due on leveraged assets. This rolls into the real estate market as well, foreclosures ensue. Now I I am in Texas and as a general rule when rentals go into foreclosure the note holder immediately evicts existing tenants.
Query. Do rents rise or fall? (disclosure: I believe they would rise with prejudice.) Your thoughts?
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I pretty much see the price of everything going down. Apartment buildings, like everything else, are purchased with debt, and a crash will operate as a margin call. Some apartment buildings will be sold at a loss, and as a competitive necessity, foreclosure buyers will lower rents.
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They could be sold to the Leviathan who would then use them to house all of the “refugees” that are still infecting this country. Such a scenario gives me nightmares.
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Sublime rhyme.
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It was apparently my time.
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~~~ODE TO DR. DOG~~~
There once was a canine physician,
Sniffing out moonbats was his commission,
He could make a baskerville hound quiver,
Of the liberals he would make chopped liver,
Dare you not persuade him of this mission.
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Bob:
Always enjoy your perspective, though the timing of this article is curious.
When engaging in sex, timing remains everything. So too when choosing to engage in doom pornography.
As I grow older, time grows ever-more relevant. Not so with timing. Having
seen much, and done a great deal of that which I have seen, pornography – particularly the kind you are practicing, wherein not just emotional disappointment but physical destruction awaits, seems less “stimulating.”
Meanwhile, life in the deep woodlands of southern Appalachia remains good.
Will be contacting you shortly regarding the timing of your potential visit to Denver.
Dave
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My “timing” is based on Elliott Waves and the people that I believe have the best track record in interpreting them, plus my gut instincts developed over 28 years of trading. Time will tell if my timing was telling. And I’m looking forward to hearing from you.
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I have a friend who is commodities/futures broker, and he is very good at it. (Guessing) I have shown him irrefutable evidence that the markets are over-bought, and over-priced. And most all of the major players world-wide own their own stock, red flag, the banks have all doubled down on both real debt and derivatives since 2008, red flag, and the dollar is only worth anything because the FedGov says it is, red flag. He even goes so far as to say there is no bubble. THAT is why the S is about to hit the fan. You can almost see those P-40 War Hawks, parked wingtip to wingtip on Hickam Field, in early December, and there’s a little nip in the air………….. This is a lot like that. Everyone seems to know that bad smell means something is rotten, but no one wants to find out where the rot is, or do anything about it.
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Will there be a correction at some point in the future? Sure. There always is. Will the correction be the end of the world? No.
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Robert,
Excellent, excellent article. Economic reality, no matter how naked and perverse and obscene it is…it is not porn or a spectator sport…it is hard core tomorrow.
To paraphrase a famous quote: “I know what economic obscenity is when I see it coming.” And I agree it is coming.
I would be interested in your take on % of precious metals (physical of course) and cash outside the digital pen we are all being herded into. I am 100% out of stocks, bonds, can’t wrap my mind around or trust cryptos, and don’t depend on or will need (when it goes POOF!) just in time inventory (retired on a modest working farm).
I’m prepped/stacked in every category since 2008…and this article is reinforcement as I circle my wagons.
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It sounds like you’ve done a good job of preparing and for living a fairly self-sufficient life. I don’t recommend percentages of physical precious metals and physical cash, but enough to last a while under an adverse scenario. My guesstimates are no better than anyone else’s.
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A couple thoughts on physical precious metals and cash:
Junk silver (pre 1965 US coinage, primarily dimes and quarters) should be the initial PM emphasis for most people, especially those with modest amounts of capital. Premiums are high relative to other forms of silver (although they have been trending lower lately) but you’ll get most of the premium back if you sell, and the recognizability factor will be a big plus in a SHTF scenario.
Physical cash – here’s an outside-the-box idea – current base metal US coinage, especially nickels. Although the initial crash most likely will be deflationary, it could very well be followed, and in not too long a time, by serious inflation. It won’t take much inflation to push the metal value above the face value, and if inflation gets to the point where electronic FRNs start to break down I predict that base metal coinage will play a significant role in trade – they can’t be produced at the touch of a computer keyboard any more than PMs can. There is also the possibility that in a recall / devalue paper currency event coins will retain their nominal face value just because they would be too costly to replace and there isn’t that much of them in face value terms, anyway. They are bulky and heavy, but on a farm there should be plenty of places to hide them, and the bulk and weight does make them harder to steal. They will also significantly benefit from the recognizability factor.
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Suggestions worth thinking about. Do you have any good online sites for the junk silver?
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Robert,
I’ve been reading numerous articles trying to gain a level of understanding about the debt bubble. I’m not a financial or economics wizard, just a regular joe with a little common sense. I recognize that the markets are inflated, assets are overpriced, and I liquidated my investments over a year ago and am mostly in cash now. My issue now is I am basically frozen like a deer in headlight not sure what to do. If everything’s declines in value when the S hits the fan, I would think there is some inverse action in other assets but struggle to understand what those may be. Short of just focusing on being debt free and liquidating higher or overpriced assets, what can you provide as insight into what would weather the storm better or even increase in value as this monster of a mess unfolds?
Tracey
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Tracey,
Debt contractions are deflationary, so the prices of most everything will deflate. That said, it is a good idea to have a fair amount of physical precious metals and some cash. It is also a good idea to have a good stockpile of provisions, in case financial stress leads to civil unrest and a loss of basic services. There are many good websites that can help you with that, including Western Rifles Shooters Association, Daisy Luther, and Survival Blog. During the coming crash, preserving assets becomes paramount. The time to worry about what to invest in will be after the crash, when many assets should be at distress prices.
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Tracey,
I agree with Robert 100% on his excellent article and his answer to your question. Everyone’s situation, resources, present location etc. is completely different but some of the foundational basics in my mind are:
1. A wide and deep detailed PLAN
2. Water
3. Food
4. Shelter
5. Self Defense
6. Then hard assets (precious metals, including cash) “outside the banks” in your hands and all of the above as quietly as possible.
I have no connection to the author but I would recommend: “The Preppers Blueprint” by Tess Pennington, subtitled “The step by step guide to help you prepare for any disaster” as a start to help anyone wrap their mind around preparing for the greatest transfer of wealth in the history of the world during a time that will come upon the most spoiled, unaware, and snookered people in the history of the world…the American “useful idiot” people.
The chance for civil unrest at a level never seen before in modern times, especially in the cities, is in my mind (as many will be pouring on gasoline) is also inevitable.
As a serious student of economic history never in my wildest dreams did I think this gigantic debt, credit, derivative, FIAT international bankster corrupt government bubble would be pumped up to this level this long without bursting.
No one knows what snowflake is going to trigger the coming avalanche or when it will thunder down covering everyone partying with the punch-bowl in the lodge…but I’m betting before 2020. I’m into my 10th year of preparing for it (I got out of the market in late 2006 as 2008 confirmed my suspicions. The reelection of Obama in 2012 told me we were now circling the toilet at an unstoppable rate and I immediately supersized all my Preps.
Wise steps/planned moves can dovetail into self sufficiency, independence, and a lifestyle – mindset that has many rewards no matter what happens.
Best wishes and GOD BLESS you!
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