John Mauldin is one of the economist/traders I follow. His analysis is well researched and his experience in the markets lends credibility to his predictions. I find his ability to explain difficult subjects in common terms.
His recent series on Train Crash Preview, details how we’ve moved from business cycles of expansion and contraction (recession and boom), now being replaced by credit cycle boom and bust cycles. Government intervention into the credit market is causing abnormal investments and asset inflation. His theory is that the bing of corporate debt will be the spark that starts the run for the doors. The series is well worth a read.
Below is the ‘what happens when that happens’ portion of his analysis. It ain’t going to be good for retail investors and employees.
Mauldin’s prediction is that from 2020 to 2030 it’s going to suck. He believes we’ll whiplash between Republican and Democratic administrations with the cry from the voters to DO SOMETHING. What will we do? Pump up the debt. The entire globe has already been taking on massive amounts of debt. From central bankers to corporate to consumer, we are on a once in a 5000-year debt run. Speaking of once every 5000 years, Mauldin is predicting what I asked one of our local Congressman on air about 3 years ago … ‘what’s the end goal with all this debt binge? Are we just going to reset the decimal point and refactor debt?’ A good old Biblical debt jubilee.
To put some numbers behind the debt:
An exception to this is the Bank for International Settlements (BIS), which has been making loud noises about the toxic level of global debt and the anticipated bubble. It recently reported that the global debt of 2008 was $60 trillion, small when compared to the current debt of $170 trillion. To make matters worse, today’s global debt is 40 percent higher in relation to GDP than it was in 2008, just prior to the Lehman Bros. downfall. To add to the current headache are the rising debt levels of emerging markets and corporate debts. According toMcKinsey & Company, a global consulting firm, two-thirds of U.S. corporate debt are from corporations that pose a high default risk.
So my theory that business cycles don’t matter as much as credit availability. I believe that buying a stock with the old techniques of Price to Earnings Ratios and the strength of the management teams is gone. The stock market is nothing more than gambling. Companies are not grabbing market share or working on becoming more efficient, they are buying back stock to increase the share price. Asset bubbles are appearing in real estate and stocks-bonds. These asset bubbles are blowing up in China, India, Brazil, and Japan. The wealthy of these countries are trying to get their money out of shakey political systems and into North American real estate. Look to LA, NY, San Francisco (the tech sector has helped drive this market more so than foreign investors). Look at Toronto or NY City to see where the foreigners with money are trying to protect their assets. Bubbles, Bubbles EVERYWHERE.
What Happens When That Happens
As you can read in the two analysis below, we are predicting the future. Some things, like the business cycle, the power of government intervention and accumulation of wealth at the expense of the masses have consistent patterns in history, we are in uncharted territory for a couple reasons. First, the numbers are so incredibly large. Mauldin talks about $30 Trillion in debt in America and we ballooned from $60 Trillion in global debt at the popping of our last debt bubble to $170 trillion globally today. These numbers are so astronomical it’s anyone’s guess on what will happen. Mauldin and Hughes allude to civil unrest inside the US, which they summarize will be squelched with ‘free cheese’, in the form of a Universal Basic Income or additional money from a government (printed in the form of debt), for the masses. We could see a global war similar to the rise of Dictators in the 1930 lead to WW2. Hitler was a loud mouth in Germany through the 1920’s who predicted bad times ahead for Germany at the hands of the victors of WW1 and the reparations that had been saddled on Germany. It wasn’t until the Crash of 1929 and the Great Depressions spread to Europe that people started to believe that the nut had some validity. We know how that turned out. Do we have another set of evil men ready to fill a vacuum? You bet, we’ve had evil rulers from the beginning of time.
So my predictions are similar to Mauldin’s;
- The Spark – The next recessions, which can be sparked by any number of things are going to be a turning point. Federal governments have learned that they can push the can by taking on debt and helicoptering every more capital into the economy.
- If the central banks go back into the debt business and the recession is minor. Buy the dip and buy areas that have been shown to artificially grow during a Fed-fueled debt cycle. Think blue-chip stocks and real estate. On real estate, chose wisely the states and cities that are playing long ball. Stay away from Illinois and California and focus on Arizona and Texas. I’d look to the south, states like North Carolina, Georgia, Oklahoma are deep red and nice places to live. Cities like Dallas, Phoenix, Colorado Springs, or Charollete are going to fare better than others. Farmland is always interesting, especially if you can speculate on the edge of one of the cities I’ve mentioned and created a capital-intensive operation that will give you tax incentives during the crazy times. I’m going back to my roots and starting a boutique cattle operation in Arizona for some of these very reasons. I’m also growing and developing Charter schools in these markets for similar reasons.
- Low Rates and Taking on Debt. The flood of debt keeps interest rates low for another decade or so. If you have the income, buy assets with debt. Careful about overpaying because one day the $100k house you bought may be worth $50k. If the $100k house is generating rents to cover your debt payment, ride the wave. I’m exploring developing a fast-casual hotel like Holiday Inn Express. Right now it’s too frothy to buy the land and cover the development costs. During a dip, that asset looks stronger. Build it right and put it in the right area and the cash flow with limited labor starts looking pretty nice.
- Look international – I tell my kids that their Great Great Grandparents left Ireland for a better life. Think globally. Other markets around the world that are great spots to live, fertile lands with tons of natural resources are all places to keep an eye on. I’ve enjoyed Doug Casey’s philosophy and his International Man site which explains some of the nuances of making an international decision.
- Be super careful of the stock market right now. I took my soon-to-retire father in law out of the stock market in early 2008 before the crash. It was too frothy and he was too late in his investment game to weather the storm. I didn’t put him back in and missed the run-up but who would have guessed the entire globes central banks would forgo the pain and pump in all the liquidity? Next time, I’ll know better. When the recession hits and the stock market dips 30-40% AND we see quantitative easing or massive intervention, plow into the market and ride the next wave.
- Gold and Bitcoin – I dig in to these but I’m still on the fence. Both of these are stores of value in times of debt-fueled asset inflation. When all else loses market fundamentals, these assets are the insurance policy. Bitcoin is the scariest. Gold is being bought and stored by China and Russia in massive quantities. That should say something.
- A Once Every 5000 Year Debt Jubilee – long shot but who knows. Watch for a world currency and a world central bank to make sure this never happens again. Mauldin suggests it gets quitly decided behind closed doors. That’s never good.
Remember how Peter Boockvar describes the new cycle. Instead of recession pushing asset prices lower, lower asset prices trigger the recession. That will be the next stage as falling stock and bond prices hit borrowers. Rising defaults will force banks to reduce their lending exposure, drying up capital for previously creditworthy businesses. This will put pressure on earnings and reduce economic activity. A recession will follow.
This will not be just a US headache, either. It will surely spill over into Europe (and may even start there) and then into the rest of the world. The US and/or European recession will become a global recession, as happened in 2008.
Aside: Europe has its own set of economic woes and multiple potential triggers. It is quite possible Europe will be in recession before the ECB finishes this tightening cycle. With European rates already so low, and the ECB having already bought so much corporate debt, I wonder how else they will try to bring their economy out of recession? Everything is on the table.
As always, a US recession will spark higher federal spending and reduce tax revenue, so I expect the on-budget deficit to quickly reach $2 trillion or more. Within four years of the recession’s onset, total government debt will be at least $30 trillion, further constraining the private capital markets and likely raising tax burdens for everyone—not just the rich.
Meanwhile back at the ranch, job automation will intensify with businesses desperate to cut costs. The effect we already see on labor markets will double or triple. Worse, it will start reaching deep into the service sector. The technology is improving fast.
Needless to say, the working-class population will not like this and it has the power to vote. “Safety net” programs and unemployment benefit expenditures will skyrocket. The chart below from Philippa Dunne of The Liscio Report shows the ratio of workers covered by unemployment insurance is at its lowest level in 45 years. What happens when millions of freelancers lose their incomes?
Source: The Liscio Report
The likely outcome is a populist backlash that installs a Democratic Congress and president. They will then raise taxes on the “rich” and roll back some of the corporate tax cuts and increase regulatory burdens. They may even adopt my preferred consumption-oriented Value Added Tax (VAT)… but without the “reduce income taxes and eliminate payroll taxes” part that I suggested in 2016.
At a minimum, this will create a slowdown but more likely a second recession. Recall (if you’re old enough) the back-to-back recessions of 1980 and 1982. That was an ugly time for those of us who lived through it.
Of course, that presumes a recession before the 2020 election. It may not happen—I put the odds at about 60–70%. Also, it is possible the Democrats will fumble what for them will be a golden opportunity. I’m not sure Republicans should view that as a “win” because they will then have to deal with the eventual recession themselves instead of being in opposition. I think by the latter part of the 2020s, US total government debt will be at $40 trillion. You think Washington is paralyzed now? You’ve seen nothing yet.
My friend Neil Howe thinks we could see a socially conservative, fiscally liberal party gain power. (Some would argue one already did, given the current GOP’s spending binge.) But in any scenario, I see very little chance the federal government will shrink or reduce its impact on the economy. That is already a big problem and will only grow.
The Great Reset
Unemployment may approach the high teens by the end of the decade and GDP growth will be minimal at best. What do you call that condition? Certainly not business as usual. Long before that happens, the Federal Reserve will have engaged in massive quantitative easing. There’s a lot of misunderstanding about QE, so let me clarify something important.
Quantitative easing is not about “printing money.” It is buying debt with excess bank reserves and keeping that debt on the Fed’s balance sheet as an asset. The Bank of Japan is an example. They did not put currency (yen) into the market. That’s how Japan still flirts with deflation and its currency has gotten stronger. QE is the opposite of printing money, though there is a relationship. That’s one reason central bankers like it.
As this recession unfolds, we will see the Fed and other developed world central banks abandon their plans to reverse QE programs. I think the Federal Reserve’s balance sheet assets could approach $20 trillion later in the next decade. Not a typo—I really mean $20 trillion, roughly quintuple what they did after 2008. They won’t need to worry about the deflation that usually accompanies such deep recessions (dare we say depression?) because the Treasury will be injecting lots of high-powered money into the economy via deficit spending. But since we have never been in this territory before, I must say this is only my guess.
If that’s what they do, will it work? No. The world simply has too much debt, much of it (perhaps most) unpayable. At some point, the major central banks of the world and their governments will do the unthinkable and agree to “reset” the debt. How? It doesn’t matter how, they just will. They’ll make the debt disappear via something like an Old Testament Jubilee.
I know that’s stunning, but it’s really the only possible solution to the global debt problem. Pundits and economists will insist “it can’t be done” right up to the moment it happens—probably planned in secret and announced suddenly. Jaws will drop, and net lenders will lose.
While all that is brewing, technology will keep killing jobs. Many mainstream commentators and serious analysts like Karen Harris (see The Great Jobs Collision) are projecting that 20–40 million jobs will be lost in the US alone and hundreds of millions across the developed world.
As we get into the 2020s, the presidency and Congress will again be whipsawed, and we will begin to discuss Bernie Sanders’ “crazy” universal basic employment idea, or others like it. By then, the idea will not be considered crazy, but the only feasible choice. Even conservative politicians can see the light when they feel the heat.
All of this is going to lead to the most tumultuous decade in US history, even if we somehow (hopefully) avoid throwing a war into the mix, as is typical of the end of a Fourth Turning. Typically, the end of a Fourth Turning (which started in 2007, according to Neil Howe), has been accompanied by wars. This one could, too, though I think we will more likely see multiple low-grade skirmishes.
If we somehow get through all that, and particularly the Great Reset, the 2030s should be pretty good. In fact, think incredible boom and future. No one in 2039 will want to go back to the good old days of 2019. Our kids will think it was the Stone Age. But we have to get there first.
That will be our topic today as we continue my Train Wreck series. This will be chapter 8. If you’re just joining us, here are links to prior installments.
- Credit-Driven Train Crash (May 11)
- Train Crash Preview (May 18)
- High Yield Train Wreck (May 25)
- The Italian Trigger (June 1)
- Debt Clock Ticking (June 8)
- The Pension Train Has No Seat Belts (June 15)
- Europe Has Train Wrecks, Too (June 22)
Tie-Ins – 7 Deadly Sins – 4th Turning
Mauldin breaks down the financial implications of gorging on debt. We don’t just live in finance, we are an integrated society and financial implication have an effect on our politics, our cities and our families. Charles Hugh Smith weighs on the progression from abundance to scarcity. These theories of financial markets and societies tie into my theory of my 7 Deadly Sins resting in all of us and all of the societies. It also ties into the Straus – Howe theory of the 4th Turning.
Just as the acorn can lead to a 1000-year-old oak tree, that one day falls, so does great societies rise and fall. It’s the cycle of life that we can watch across at least 10,000 years of organized civilization. (Historical Decline blog post HERE)
The Gathering Storm
July 4th is an appropriate day to borrow Winston Churchill’s the gathering storm to describe the existential crisis that will envelope America within the next decade. There is no single cause of the gathering storm; in complex systems, dynamics feed back into one another, and the sum of destabilizing disorder is greater than a simple sum of its parts.
Causal factors can be roughly broken into two categories: systemic and social/economic. The central illusion of those who focus solely on social, political and economic issues as the sources of destabilization is that tweaking the parameters of the status quo is all that’s needed to right the ship: if only Trump were impeached, if only GDP hits 4% annual growth rate, if only the Federal Reserve started controlling the price of bat guano, etc., etc., etc.
The unwelcome reality is the systemic issues cannot be reversed with policy tweaks or shuffling those at the top of a crumbling centralized order. The systemic problems arise from the structures of centralization and monopoly capital, theinstitutionalization of perverse incentives and the depletion of natural capital: soil, water, fossil fuels, etc.
We can create “money” out of thin air but we can’t print fresh water, productive soil or affordable energy out of thin air.
Regardless of their ideological labels, centralized socio-economic systems follow an S-Curve of rapid expansion during a “boost phase,” a period of stable expansion (maturity) and then a period of stagnation and decline as the system’s participants do more of what’s failed, as they cannot accept that what worked so well in the past no longer works.
A successful model traps those within it; escape becomes impossible. That’s the lesson of the S-Curve:
The Ratchet Effect is another key reason why meaningful reform of the status quo is impossible. In flush times, budgets expand as easily as waistlines, ratcheting up to consume ever-higher revenues. But once revenues start declining, the administrative/consumerist status quo is fiercely resistant to any reduction.
Like a body which has grown fat from excessive consumption and a decline in vitality/ functionality, the status quo resists any reduction in staffing or spending, sacrificing muscle to keep its layers of fat untouched.
In other words, the social crises, the constitutional crises, the financial crises–all of these are to some degree mere manifestations of the failure of centralized systems that arose to benefit from conditions that no longer exist.
Our centralized institutions and systems are failing, and shuffling the management and tweaking the parameters cannot stave off collapse.
What nobody gorging at the trough of the status quo dares admit is the system is failing most of its participants, and this is the source of populism and other manifestations of social disorder. I often publish this chart, as it crystallizes and encapsulates the verboten reality of 21st century America: the few are skimming the vast majority of the rewards of the system, at the expense of the many.
The many are politically powerless and divested of capital. Our centralized system concentrates wealth and power into the very apex of the wealth-power pyramid. In this apex, wealth, power, and control of media and surveillance all mix easily: thus Bezos controls Amazon and The Washington Post and has long-established ties to the National Security State in what’s been aptly described as Surveillance Capitalism, a term that also describes Facebook and other quasi-monopolies of social media.
Rather than admit the failure of our socio-economic system, those benefiting from the system’s gross imbalances are pursuing a multi-pronged strategy of control:
1. Propaganda. The basic idea here is simple: ignore what your own experience is telling you about the failure of our socio-economic system and believe a carefully tailored host of interconnected narratives that all is well and this is most prosperous, wonderful system in the galaxy, nay, the universe.
Anyone who challenges these narratives is quickly attacked and marginalized:a highly centralized state goes hand in hand with a highly centralized media. Anything outside this apex of wealth and power is dismissed as “fake news.”
For example, anyone who dares measure real-world inflation is quickly attacked and marginalized, least the restive masses finally awaken to the reality that the unprotected are being ravaged by 6% to 8% annual inflation in big-ticket items while the protected elites bask in subsidies that protect their self-serving fiefdoms from the harsh reality of rising inflation (i.e. loss of purchasing power).
2. Bribery and buy-offs such as debt forgiveness, tax breaks and Universal Basic Income (UBI). To calm the restive masses who have been disenfranchized, exploited and transformed into tax donkeys, those in the apex of power offer bribes and buy-offs: hey, let’s “forgive” student loan debt–but of course it’s not actually forgiven; the losses are simply transferred to the taxpayers.
Tax breaks and subsidies are used to mask the ever-greater share of the nation’s wealth being skimmed by junk fees, useless licencing, compliance penalties, and taxes on everything.
Universal Basic Income (UBI) is the ultimate systemic bribe. Having stripmined the unprotected non-elites of opportunity and capital, those at the top of the wealth-power pyramid are promoting basic material survival as the substitute for actually having a stake in the system.
The unspoken reality is that UBI is designed to give debt-serfs just enough income to keep servicing their debts. Why not bypass the charade of “helping the powerless” and transfer the taxpayers’ money directly to the banking sector?
The gathering storm cannot be dissipated with propaganda and bribes. The status quo is only hastening its demise with its strategy of misdirection and distraction.
My new book Money and Work Unchained is $9.95 for the Kindle ebook and $20 for the print edition.
If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com.