Category Archives: demographics

Only China Can Restore Stability in The Global Economy, by Raúl Ilargi Meijer

There are many candidates, but the Chinese real estate bubble may be the biggest bubble out there. From Raúl Ilargi Meijer at theautomaticearth.com:

For those of you who don’t know Andy Xie, he’s an MIT-educated former IMF economist and was once Morgan Stanley’s chief Asia-Pacific economist. Xie is known for a bearish view of China, and not Beijing’s favorite person. He’s now an ‘independent’ economist based in Shanghai. He gained respect for multiple bubble predictions, including the 1997 Asian crisis and the 2008 US subprime crisis.

Andy Xie posted an article in the South China Morning Post a few days ago that warrants attention. Quite a lot of it, actually. In it, he mentions some pretty stunning numbers and predictions. Perhaps most significant are:

“only China can restore stability in the global economy”

and

“The festering political tension [in the West] could boil over. Radical politicians aiming for class struggle may rise to the top. The US midterm elections in 2018 and presidential election in 2020 are the events that could upend the applecart.”

Here are some highlights.

The bubble economy is set to burst, and US elections may well be the trigger

Central banks continue to focus on consumption inflation, not asset inflation, in their decisions. Their attitude has supported one bubble after another. These bubbles have led to rising inequality and made mass consumer inflation less likely. Since the 2008 financial crisis, asset inflation has fully recovered, and then some.

The US household net worth is 34% above the peak in 2007, versus 30% for nominal GDP. China’s property value may have surpassed the total in the rest of the world combined. The world is stuck in a vicious cycle of asset bubbles, low consumer inflation, stagnant productivity and low wage growth.

Let that sink in. If Xie is right, and I would put my money on that, despite all the housing bubbles elsewhere in the world, the Chinese, who make a lot less money than westerners, have pushed up the ‘value’ of Chinese residential real estate so massively that their homes are now ‘worth’ more than all other houses on the planet. Xie returns to this point later in the article, and says: “In tier-one cities, property costs are likely to be between 50 and 100 years of household income. At the peak of Japan’s property bubble, it was about 20 in Tokyo.

To continue reading: Only China Can Restore Stability in The Global Economy

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Hard Core Doom Porn, by Robert Gore

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.

Alt-Historical Fiction!

AMAZON

KINDLE

NOOK

Global Retirement Reality, by John Mauldin

Here’s the reality: there won’t be enough money for most people to have what we now consider a decent retirement. From John Mauldin at mualtineconomics.com:

Today we’ll continue to size up the bull market in governmental promises. As we do so, keep an old trader’s slogan in mind: “That which cannot go on forever, won’t.” Or we could say it differently: An unsustainable trend must eventually stop.

Lately I have focused on the trend in US public pension funds, many of which are woefully underfunded and will never be able to pay workers the promised benefits, at least without dumping a huge and unwelcome bill on taxpayers. And since taxpayers are generally voters, it’s not at all clear they will pay that bill.

Readers outside the US might have felt smug and safe reading those stories. There go those Americans again, spending wildly beyond their means. You are correct that, generally speaking, we are not exactly the thriftiest people on Earth. However, if you live outside the US, your country may be more like ours than you think. Today we’ll look at some data that will show you what I mean. This week the spotlight will be on Europe.

First, let me suggest that you read my last letter, “Build Your Economic Storm Shelter Now,” if you missed it. It has some important background for today’s discussiion, as well as a special invitation to attend my Strategic Investment Conference next March 6–9 in San Diego. With so much change occurring so quickly now, next year’s conference is an event you shouldn’t miss.

Global Shortfall

I wrote a letter last June titled “Can You Afford to Reach 100?” Your answer may well be “Yes;” but, if so, you are one of the few. The World Economic Forum study I cited in that letter looked at six developed countries (the US, UK, Netherlands, Japan, Australia, and Canada) and two emerging markets (China and India) and found that by 2050 these countries will face a total savings shortfall of $400 trillion. That’s how much more is needed to ensure that future retirees will receive 70% of their working income. This staggering figure doesn’t even include most of Europe.

To continue reading: Global Retirement Reality

The Welfare State’s Legacy, by Walter E. Williams

Government has hurt far more than helped blacks. From Walter E. Williams at lewrockwell.com:

That the problems of today’s black Americans are a result of a legacy of slavery, racial discrimination and poverty has achieved an axiomatic status, thought to be self-evident and beyond question. This is what academics and the civil rights establishment have taught. But as with so much of what’s claimed by leftists, there is little evidence to support it.

The No. 1 problem among blacks is the effects stemming from a very weak family structure. Children from fatherless homes are likelier to drop out of high school, die by suicide, have behavioral disorders, join gangs, commit crimes and end up in prison. They are also likelier to live in poverty-stricken households. But is the weak black family a legacy of slavery? In 1960, just 22 percent of black children were raised in single-parent families. Fifty years later, more than 70 percent of black children were raised in single-parent families. Here’s my question: Was the increase in single-parent black families after 1960 a legacy of slavery, or might it be a legacy of the welfare state ushered in by the War on Poverty?

According to the 1938 Encyclopaedia of the Social Sciences, that year 11 percent of black children were born to unwed mothers. Today about 75 percent of black children are born to unwed mothers. Is that supposed to be a delayed response to the legacy of slavery? The bottom line is that the black family was stronger the first 100 years after slavery than during what will be the second 100 years.

At one time, almost all black families were poor, regardless of whether one or both parents were present. Today roughly 30 percent of blacks are poor. However, two-parent black families are rarely poor. Only 8 percent of black married-couple families live in poverty. Among black families in which both the husband and wife work full time, the poverty rate is under 5 percent. Poverty in black families headed by single women is 37 percent. The undeniable truth is that neither slavery nor Jim Crow nor the harshest racism has decimated the black family the way the welfare state has.

To continue reading: The Welfare State’s Legacy

America’s Fiscal Doomsday Machine, by David Stockman

Washington will not let the debt ceiling stop the Doom Loop. From David Stockman at dailyreckoning.com:

Maybe the Democrats did win the 2016 election. Or at least the the Deep State and its accomplices among the beltway political class, K-Street lobbies and the media did.

That’s because the media won a giant victory against something they deplore and despise more than anything else — the public debt ceiling. They sanctimoniously admonish that it’s a relic of the nation’s fiscally benighted past. They operate on a belief that this is an episodic tendency to threaten America’s credit and to offer Capitol Hill an opening to grandstand about the fiscal verities is a blight on orderly governance.

So the Donald’s latest burst of impetuosity — agreeing with Sen. Schumer to permanently abolish the public debt ceiling — has descended on the beltway like manna from heaven. Not Barack Obama, Bill Clinton, Jimmy Carter or even the Great Texas Porker, Lyndon Johnson, dared to utter the thought of it — at least not in polite company.

Suddenly, and notwithstanding all the good he has done disrupting the status quo, the Donald has become the foremost enemy of America’s very financial survival.

The Federal budget is a Fiscal Doomsday Machine. The depository of American wars and entitlements have run rampant. Under the pile drivers of a global empire and the retiring baby boom, it is rapidly propelling the nation toward fiscal catastrophe. That grim outcome is virtually guaranteed if the only remaining safety brake — the debt ceiling — is summarily abolished.

Due to entitlements, debt service and the slow pipeline of appropriated spending there is no such thing as an annual Federal budget or accountability for how much Uncle Sam spends and borrows. Instead, the $4.1 trillion that Congressional Budget Office (CBO) projects the Federal government will spend in FY 2018, and the $563 billion it will borrow, reflects the dead hand of the past.

Entitlements and other mandatory spending alone is projected to reach $2.566 trillion or 63% of total FY 2018 outlays.

Another $307 billion will be required for interest on the nation’s $20 trillion public debt, while upwards of half the $1.22 trillion for so-called “discretionary” or appropriated programs also reflects funds appropriated years ago.

Altogether, $3.5 trillion, or 85% of outlays, will be essentially baked into the cake before a single Congressional vote is taken on anything regarding the FY 2018 budget.

To continue reading: America’s Fiscal Doomsday Machine

Muslims Tell Europe: “One Day All This Will Be Ours”, by Giulio Meotti

If you look at Europe’s indigenous non-Muslim birthrates versus Muslim birthrates in both Europe and the Middle East, the headline prediction looks inevitable. From Giulio Meotti at gatestoneinstitute.org:

  • The Archbishop of Strasbourg Luc Ravel, nominated by Pope Francis in February, just declared that “Muslim believers know very well that their fertility is such today, that they call it… the Great Replacement. They tell you in a very calm, very positive way: One day all this, all this will be ours…”.
  • Hungarian Prime Minister Viktor Orbán just warned against a “Muslimized Europe”. According to him, “the question of the upcoming decades is whether Europe will continue to belong to Europeans”.
  • “In the coming 30 years, the number of Africans will grow by more than one billion people. That is twice the population of the entire European Union… The demographic pressure will be enormous. Last year, more than 180,000 people crossed in shabby boats from Libya. And this is just the beginning. According to EU Commissioner Avramopoulos, at this very moment, 3 million migrants are waiting to enter Europe”. — Geert Wilders, MP, The Netherlands, and leader of the Party for Freedom and Democracy (PVV).

This week, yet another Islamic terrorist attack targeted the Spanish city of Barcelona. As it was for many years under Muslim rule, it is, therefore, like Israel, land which many Islamists believe they are entitled to repossess.

At the same time, far from Spain, elementary schools have been closing, shuttered by the state after the number of children dropped to less than 10% of the population. The government is converting these structures into hospices, providing care for the elderly in a country where 40% of the people are 65 or older. That is not a science-fiction novel. That is Japan, the world’s oldest and most sterile nation, where there is a popular expression: “ghost civilization“.

According to Japan’s National Institute of Population and Social Security Research, by 2040 most of the country’s smaller cities will see a dramatic drop of one-third to one-half of their population. Due to a dramatic demographic decrease, many Japanese councils can no longer operate and have been closed. Restaurants have decreased from 850,000 in 1990 to 350,000 today, pointing to a “drying up of vitality”. Predictions also suggest that in 15 years, Japan will have 20 million empty houses. Is that also the future of Europe?

To continue reading: Muslims Tell Europe: “One Day All This Will Be Ours”

Doug Casey On The End Of The Nation-State

Let it not be said that SLL is all gloom-and-doom. Here’s an upbeat prediction from Doug Casey: the imminent (in historic time) end of the nation-state. From Casey at internationalman.com:

Doug Casey on the End of the Nation-State

There have been a fair number of references to the subject of “phyles” in Casey Research publications over the years. This essay will discuss the topic in detail. Especially how phyles are likely to replace the nation-state, one of mankind’s worst inventions.

Now might be a good time to discuss the subject. We’ll have an almost unremitting stream of bad news, on multiple fronts, for years to come. So it might be good to keep a hopeful prospect in mind.

Let’s start by looking at where we’ve been. I trust you’ll excuse my skating over all of human political history in a few paragraphs, but my object is to provide a framework for where we’re going, rather than an anthropological monograph.

Mankind has, so far, gone through three main stages of political organization since Day One, say 200,000 years ago, when anatomically modern men started appearing. We can call them Tribes, Kingdoms, and Nation-States.

Karl Marx had a lot of things wrong, especially his moral philosophy. But one of the acute observations he made was that the means of production are perhaps the most important determinant of how a society is structured. Based on that, so far in history, only two really important things have happened: the Agricultural Revolution and the Industrial Revolution. Everything else is just a footnote.

Let’s see how these things relate.

The Agricultural Revolution and the End of Tribes

In prehistoric times, the largest political/economic group was the tribe. In that man is a social creature, it was natural enough to be loyal to the tribe. It made sense. Almost everyone in the tribe was genetically related, and the group was essential for mutual survival in the wilderness. That made them the totality of people that counted in a person’s life—except for “others” from alien tribes, who were in competition for scarce resources and might want to kill you for good measure.

To continue reading: Doug Casey On The End Of The Nation-State