Written by Glenn Van Lendt
As teenagers, we were always short of cash and when we wanted to get drunk, we bought cheap wine and Oom Tas (pronounced Worm Tus, with the 'W' kept silent) was our favourite as it was extremely cheap, readily accessible and seriously unsophisticated. In addition, as Oom translates to Uncle in English, we bought it because we felt like we were putting our trust in a relative. Much like Americans put their "trust" in one of their relatives too .... but I think he's called "Oom Sam".
It was like syrup going down but when it came out (top and bottom), it felt like you were having an end-to-end flossing ..... with barbed wire!
Before it came out it would tour your body from the waist up, intentionally missing your lips and tongue, making you feel warm and in control. Laughter and celebration got louder and louder as you moved into full party mode .... until you stood up!
That's when it took a violent detour to your lips and tongue, and began to move below your waist. Party mode instantly disappeared making way for the devil to appear.
All of a sudden you had no legs and your bottom lip was so loose, you could pull it over your head. Your tongue became so long, that you could wash your entire face with it and believe me, when you were trying to impress some girl earlier on, she found that image of you rather hard to erase from her mind, and she told you so the moment you forgot her name and offended her by calling her baby (hic!)
The reason you did not see yourself losing control until it was too late was because Oom Tas - affectionately known as "Killing Me Softly", was a rather.......... Silent Killer!
In this article we try to look at; the government's (mainly US) intended End-Game, the Undesirable Consequences, and how the GFC is most likely to Cancel itself out.
GOVERNMENT END GAME
As already noted in a previous article An Analogy, the US government has such a large National Debt ($17 Trillion and counting) that they have no way of repaying it and have no intention of doing so either. They'll simply let it pass along to the next generation to pay the piper, or let it collapse under its own weight, whichever comes first.
If no near term global meltdown is triggered inside or outside of the US (Japan being the most likely suspect here), then the US will simply ride the debt horse until it dies, using ineptocratic governance to maintain strategy.
Oom Sam has employed reckless economic strategies, such as having very little regard for fiscal or monetary constraint, as deficit spending and money printing has worked for a long-time despite the US Debt Clock numbers looking more like a googolplex with each passing year.
Nevertheless, despite their many reckless strategies, those strategies have been supportive in the short-term as mindless amounts of liquidity gained traction in the stock and bond markets benefiting those asset classes over the past few years.
Ever since the start of the GFC "Bubble Boy Bernanke" has driven his bus around looking for commercial banks to dump his freshly printed money, hoping that massive liquidity will help contain a solvency crisis.
He ran into one bank; dumped the money on the floor, ran back to the bus, shoved the gear lever into "R" (which he mistakenly interpreted as race), and floored the pedal in search of the next bank. As the bus sped off, he was confused as to why objects ahead seem to be moving further away, but the feeling of motion below his feet made him feel warm and fuzzy, giving him a sense of great achievement.
Banks are now (years later) beginning to push this money into the consumers' hands and this is starting to cause upward momentum in general consumption and real-estate markets across the world. It was the death of real-estate in the US, that was widely regarded as the tipping-point into the GFC and when the nurse attached a tag to its toe saying R.I.P., the boys in long rain coats wearing dark sunglasses and hanging around dingy alleys (government), had other ideas. They preferred to interpret it as "Return-If-Possible", and now years later, it appears their wish is beginning to materialise.
♣ Self Preservation
Everyone agrees that it's a reckless strategy when governments' abuse the printing press or buy back their own bonds* the way the US has since to start of the GFC. Everyone agrees that sound economics has not supported such actions in the past and may not support such actions in the future, but hastening the demise of the current economic model built on debt and greed, by messing it up further in the hope that it collapses, may be where the genius lies.
If "bad economics" proves to be more resilient than you imagined, then send the boys out to buy more Oom Tas and let the party roll-on to your children. Maybe it will simply fizzle out and be of no interest to the next generation anyway.
Nevertheless, bad economic practice for the purposes of self preservation knows no shame and is at the dawn of creating a new consumer upswing which will leave conventional economic models scrambling for answers, as mindless amounts of money cause the long anticipated collapse of world economies to experience whiplash when kicked ever harder towards future generations.
If you took a conventional economic approach at the advent of the GFC, you'd be forgiven for thinking that the sky was about to land on your lap. However, when you have no idea about what the future holds and you are looking for answers to help you navigate difficult times, predicting human behaviour (rather than using statistical or economic modelling), is often a better guide of possible outcomes.
The Government and Banking fraternity trait which best described their approach to the GFC, was self-preservation laced with collusion. These guys were so determined to survive that if anyone stood in their way, they'd literally shove the sun in their face.
♣ Death the Leveller
So far the crumbling PIIGS (Portugal, Ireland, Italy, Greece and Spain) have failed to bring the US to its knees, and neither has Japan despite its staggering internal debt levels. In fact, one could argue that these countries have been supportive, in the sense that they've made the US the one eyed monster in the land of the blind. All this in addition to the US government adopting a fiscal policy which regarded austerity as a word for PIIGS-'not'-US (An Analogy)
No one's blinking (they're all blind I suppose) because we're all guilty by association and a US economic collapse will take everyone down alongside it. They are still the world's economic superpower and only their collapse will immediately finalise the GFC.
The notion that any of the PIIGS could usher in a Matthew 12:36 moment, will not happen and can be filed alongside your favourite Schwarzenegger movies on judgement day. There was a time I thought that Greece could trigger a more severe GFC mark II, but I no longer hold that view. Japan, has a chance....maybe.
We're all in this mess together and the efforts over the past 40 years of pushing for the global village scenario has finally been realised. The US's tentacles in the form of; big business, military, and call-centre twangs (especially out of India)..... finally have us in their grip ....they own us and they know it.
United their problems become ours, divided their problems become ours!
As the GFC unfolded, reckless fiscal policy in highly indebted countries was used to pump prime economies (notably the US), but there is only so much deficit spending can achieve, before it becomes a serious burden especially in terms of higher interest payments.
Coming up the rear is the other "usual suspect" of monetary policy, and it is like a tsunami, it causes little damage over the ocean and is preceded by a ghost like calm which only animal instinct can detect .....until it becomes visible on the water line. It's this policy that is threatening to create new asset price bubbles unlike any before it.
Governments across the world are in deep collusion in the area of monetary policy and never before have they swapped so much spit in the shower, where despite the water being turned off, it still appears to be raining.
The effect of lower interest rates and mountains of excess bank cash reserves have now appeared above the waterline behind you, so as you turn around, get prepared to be smacked in the face by the Pacific.
Asset price bubbles in the stock and bond markets (as shown by the next four graphs) have been fuelled since 1981, with both bull markets occurring around that time within months of each other. Other asset classes such as real estate and commodities are also much higher over the period noted above, albeit that the latest commodity run started about 2002.
They've all had their major bubbles and busts over time but all-in-all, they are way up, thanks mainly to an ever increasing forty year old surge in the demand and supply of credit as well as growing consumer demand across the world. These asset class bubbles can still continue for a very long time as-long-as; they are not totally debt funded and do not boom all at the same time (not for prolonged periods anyway).
The bubble rotation process that enriches some, whilst impoverishing others, has worked for many decades and has the ability to continue for many more, as long as it does not impoverish everyone at the same time.
Graph at 11th Sept 2013 (Source : Yahoo Finance)
If you look at the Dow Jones graph above, you can see a major Megaphone formation with an upside between 15,500-16,000 (before possible reversal), and massive downside potential. The target zones are mere observations, not predictions, and any imminent breach of 16,000, will only confirm the unleashing of mad money and bring greater losses on massive corrections later on.
For now, the Dow looks ripe for rotation into the consumers' favourite.....namely real estate!
Projection through to 2020.
It is also interesting to note that a 4.73% compounded rate on the Dow over the period shown above, would have got the index to the same point on both graphs by September 2013 (shown by the single arrow).
So does that mean that no matter what happens to the real Dow Jones between now and 2020 (or thereabout), the compounded Dow (directly above) and real Dow will meet again some sunny day at 21,187 (two arrows), or the equivalent trajectory later?
My answer is a definite yes, if we do not have a GFC supernova ending (discussed below) before then. However, even the continued trajectory of a compounded slope is only possible when investors in the asset class it represents, maintain a good percentage of equity, new money and positive cash flow (in them), as opposed to the assets purely equaling their debt value (or less).
As we move towards saturation point (no equity, no positive cash flow, no new money), asset bubbles that are debt driven are about playing hot potato with a stick of dynamite, with equity and cash flow as the fuse, and not much imagination is needed if the fuse runs out.
Graph at 11th Sept 2013 (Source : Yahoo Finance)
A Marvel in Government Engineering
The US 10yr Bond rate has been on a run for about 33 years and continues to defy sustainable upward rates pressure. Recent US Federal Reserve comments have caused an uptick in the 10 year bond rates, and if they move above 4% (breaking the down trend line from 1987 forward), it could signal the beginning of a bond shakedown, but I doubt whether they'll allow that.
At this point in time, the Feds comments look like a head-fake, as the baton may simply be passed to Japan -and their freshly printed Yen- to allow the cycle of US bond buying to continue (Japan buying of foreign debt)
Both major asset classes (stocks and bonds) appear to be close to (or moving towards) their turning points and if they do not turn at these points, their eventual reversal will only end up being rather violent later.
More so than stocks, bonds have been government engineered and this engineering may need to continue in order to keep rates down for longer than anyone can anticipate, despite the tsunami of bank lending to come. This is mainly because I do not believe the US (especially Japan) can afford to pay higher interest rates on their national debt as the percentage of tax receipts already allocated to debt financing is over stretched.
So can they continue to engineer rates lower for longer? I think so, as government budgets in the form of lower receipts and failing austerity, requires interest rates to stay as low as possible for as-long-as-possible.
Read that as 4-ē-va!
Real Estate (US)
Actual Graph at June 2013- Source U.S. Department of Commerce: Census Bureau
Déjà vu?.... Creo que si!(I think so.)
One can hardly claim that the US housing market has been in bubble mode since 1963 given a rather linear graph above, however some bubbles can be identified along the way, 2003-2007 inside of the large ellipse being the most infamous, however look at the small ellipse to the right currently having an upside break-out! The consumer is slowly being sucked back into this market, which will see momentum build strongly over 2014/15.
US Real Estate on a compounded projection through to 2020.
A compounded rate increase in the real estate market of approximately 5.55% since 1963 would have brought the median sales price on US housing to the same point (about $255,000 - $260,000) on both graphs by mid 2013 shown by the single arrow.
So does this mean that no matter what, the median price of USD366,506 (shown by the double arrows) will be reached by 2020 or the equivalent trajectory a little later? Again (as for the stock market) my answer is yes, if the fuse (noted above) does not run out.
Much like the stock markets, equity and positive cash flows in the form of collateral, rent, wages AND low interest rates are essential ingredients for sustainability to allow us to continue to sip the unsophisticated wine, especially from the Central Bank's monetary policy fountain.
Nevertheless, with all these assets above, the more the equity, collateral, new money and positive cash flow gets squeezed, the greater the undesirable consequences.
I think we'd all like to know, when a normal investment environment will emerge (if at all), but unfortunately we need to unwind the excess of the past mainly through debt default or forgiveness before this happens.
GFC Pop Gun ending
So far, government action has produced "death in slow motion" and we are in the grip of overall deflation in the western world. There is a massive attempt to sustainable inflation but nothing seems to be working other than bubble inflation due to money rotation through various asset classes.
Self preservation is now front and centre and "bugger-thy-neighbour" is in full swing as the people in afros, sporting long side burns and wearing stilettos (government), try anything to ensure self-preservation and the supply of a public pipe with an endless amount of,,,,, "tobacco" (erhum!).
As noted before, governments will try to push the consequences of this financial crisis off to your children to solve, but the relay (unlike Romeo), must never die, this way the baton is passed so far down the line that it will be of no interest to the next generation, much like the Great Depression of the 1930's is of no interest to us today.
GFC Supernova Ending
Asset price increases in some assets such as gold (Paper Power - Part I) are mostly a result of mindless amounts of mad money rotating through asset classes chasing capital gain. This silent emphasis towards speculation (ehrr investing) will continue to produce volatility and asset price bubbles,,,,,,, real estate will be next!
As the GFC is a global crisis unlike any we've experienced before and brought about by reckless credit supply, high debt levels and corporate greed, the order of economic collapse (should there be one) will be a crisis of confidence in all asset classes at the same time, with the exception of currency, because currency is where everyone will run when there is total confusion and unusually high interest rates are on offer to those who are cashed up.
Glimpses of this can seen from US dollar index which is off its GFC lows (see graph below) despite massive money printing over the past five years (or so). How ironic, but maybe not, when you look at the possible reasons outlined in (Fiat vs Gold)
(Graph: April 2013)
The tipping point will come when assets can no longer be held and are no longer seen as a store of value. This point will be reached when equity and positive cash flows are non-existent causing asset values to equal or fall below their liabilities, and where assets become unsaleable at any price, because credit has frozen-up and everyone is in a dash-for-cash.
Ironically, cash is the asset class that would rank as the most abused courtesy of the government printing press, yet it will become the most sort after during any financial system collapse (should one occur).
The margin of error will have reached zero and the system built on decades of easy credit will arrive at its destined hour. It is at this point when debt will finally crush everyone at the government, corporate and consumer levels and default and debt forgiveness will enter front and centre stage.
Eventually, there will be a currency crisis, but not as a result of people wanting to get rid of currency in favour of hard assets (currency swap) as happens during periods of high inflation, but because decades of excessive currency printing will need to be extinguished to take away the "monopoly money badge" awarded to it by the over-zealous use of the printing press.
After some serious and lengthy global pain, it will mark the moment of economic transformation, and a wonderful new beginning will emerge world-wide.
When the world's major economies experience a Global Financial Crisis such as the one that started in 2007/8, you can almost guarantee a long term deflationary spiral that will last for many years. The point about this deflationary cycle is that it will be littered with even bigger (false) asset price booms and busts as mindless amounts of money attempts to continue the recycling process from one asset class to the next chasing capital gains at any cost, until collateral and equity no longer exist anywhere other than in cash. It is at this point that the bell will toll on what we've come to regard as "the world's great recession"
If a loss of confidence should happen slowly over decades, then get use to long term pain which will eventually end like the silent "p" in bath and be of no interest in time to come. If an unforseen event should suddenly bring the world's financial system to its knees, then get use to massive volatility and more impoverishment to be followed by an eerie short-term calm, and then a fantastic new beginning!
When we look back one day at the medicine governments and banks shoved down our throats with their mindless self-preservation strategies, it would have been tantamount to having gargled with barb wire!
All the ordinary bloke had left as the GFC gained momentum was to literally turn his back towards the bankers, governments, business and filthy rich, so that they could administer death by a thousand cuts.
This is the world's "Oom Tas moment". We'll drink this unsophisticated wine for years into the future. Nobody's allowed to stand-up and face reality, because that would equate to an economic enema and....
....they're saving that "sensation" for future generations!
*as this article was being written, the Federal Reserve made comments about the possible winding back of bond purchases, which would to put permanent upward pressure US interest rates and that's not desirable, unless somebody else was lined up to pick-up the slack. Somebody else? I think that's Japan's other name (Japan buying of foreign debt).
Please note that this article is written for the purpose of information sharing and no responsibility is accepted for any misinterpretation as a result of the author's opinion.