How Bad Can This Get, And How Fast?
There’s so much negative real bad economic and financial news out there that it’s hard to choose a ‘favorite’, but I guess I’m going to have to go with what underlies and ‘structures’ it all, the IIF stating that for the first time since 1988 and the Reagan presidency, there’s more money flowing out of emerging markets than there’s flowing in. That is for sure a watershed moment.
And no, that trend is not going to be reversed either anytime soon. Emerging economies, even if they wouldn’t include China -but they do-, have relied exclusively on selling ‘stuff’ to the rich world which combined cheap commodities with cheap labor, and now they see their customer base shrink rapidly just as they were preparing to harvest the big loot.
Now, I hope I can be forgiven for thinking from the get-go that this was always a really dumb model. That emerging nations would provide the cheap labor, and the west would kill of its manufacturing base and turn into a service economy.
This goes very predictably wrong if and when we figure out that A) economies that don’t manufacture anything can’t buy much of anything, and B) that we can sell those services our economies are ‘producing’ only to ourselves, as long as the emerging nations maintain a low enough pay model to make their products worth our while to import.
It makes one wonder how many 6 year-olds would NOT be able to figure this out. In the same vein, how many of them would be hard put to understand that our economies, overwhelmed by, and drowning in, debt, cannot be rescued by more debt? Here’s thinking the sole reason so many of us don’t get it is that we’ve been told it’s terribly hard to grasp, and you need a 10-year university course to ‘get it’.
I see a bad US jobs report coming in as we speak, and that’s not really saying much of anything. The damage not only runs far deeper than those massaged reports, it’s also already been done ages ago. Non-farm employment reports are Brooklyn Bridge-for-sale territory.
We’d all be much better off looking at the $11-13 trillion in ‘value’ lost from global equity markets in Q3. Or, for that matter, at Goldman’s statement that, and I’m only slightly paraphrasing here, only companies buying up their own stocks could save the S&P 500 for 2015.
Think about it: we don’t make much of anything anymore, and what we do make hardly anybody wants to buy, so we issue debt and buy it up ourselves. This may well be presented as a clever ‘investment’ model, but I aks of you: how much closer to eating our own excrements are we comfortable getting?
Stock buybacks can have strategic advantages in specific circumstances in healthy economies, but massive buybacks on the back of too-cheap credit/debt is not one of those circumstances. It’s desperation writ very large.
One other article that stuck out, because it brings into the bright shining limelight the longtime Automatic Earth assertion that we are headed for a disastrous “multiple claims to underlying real wealth”, is Paul Brodsky’s piece served by Tyler Durden. It has far more value than any alleged jobs article, because it describes the real world, not some distorted fantasy:
[..] the data show plainly there are five times as many claims for US dollars as US dollars in existence. Does this matter to investors? Well, yes, it matters a lot. Not only is there not enough money to repay outstanding debt; the widening gap between credit and money is making it more difficult to service the debt and more difficult for nominal US GDP to grow through further credit extension and debt assumption.
Remember, only a dollar can service and repay dollar-denominated debt. Principal and interest payments cannot be made with widgets or labor, only dollars. This means that future demand and output growth generated through more credit issuance and debt assumption is self-defeating. In fact, it adds to the problem.
[..] the value of dollar-denominated assets is not supported by the money with which it is ostensibly valued. This has not been a problem historically because the proportion of un-reserved credit has been low relative to asset values and cash flow. As we are seeing today, however, it is becoming a significant problem because balance sheets are already highly levered and zero-bound interest rates chokes off the incentive to refinance asset prices higher.
If the total value of US denominated assets is, say, $100 trillion, and the US dollar money stock is somewhere around $12 trillion, then the inescapable implication is that the market’s expects either: a) $88 trillion more US dollars will be created in the future to fund the purchase of the gross asset pool at current valuations; b) there has to be a decline in the nominal value of aggregate assets, or; c) both.
The US is not going to ‘create’ $88 trillion. More debt cannot solve this. And so the only option available is a huge decline in asset ‘values’. ‘Values’ that have been grossly distorted for years now, and which we all could have known can’t be kept from falling back to earth indefinitely.
Just Friday morning, we saw 3 other key indicators all point way down. That’s not in itself peculiar or anything, what’s peculiar is that it’s taken so long for people to figure out which way the wind blows. And I betcha, most still won’t get it. Because they’re all exclusively looking for signs of a recovery.
They’ve been looking for 8 years or so now, and there’s always some piece of data that can be found to feed the blinders, but it’s all been nonsense for 8 years running. Your economy, my economy, and the global economy, can and will not recover, and certainly not as long as more debt is injected in our already insanely overindebted financial systems.
You can’t fight historically unequaled amounts of debt with even more debt. But yeah, well, that’s the only trick our pony can think of. Those 3 key indicators -and there’s more where they came from- are the Guardian Gauge: ‘Destruction Of Wealth’ Warning Looms Over Stocks, the Global Dow: Key Global Equity Index Has Fallen Off The Precipice and the IIF’s take on net capital flows for global emerging markets I started out with, Is This The Mother Of All Warnings On Emerging Markets?
I don’t want to make this another of those endless articles, but do click the links, and do read up on each of them. And then shiver. Have a stiff drink. Unless you’re still looking for a recovery. And let’s not forget, yes, it’s true that massive stock buybacks in the US, Europe, perhaps even China, as well as more QE to infinity and beyond, may save a bunch of numbers and you might be sitting pretty yet under the yuletide tree.
But the simplest of principles stands no matter what: there’s no way out of this that doesn’t lead through the exact kind of massive debt deleveraging that all governments and central banks are ostensibly trying desperately to prevent. And which will make the debt deflation, certainly after 8 years of trying to push the 180º opposite way, epic and monumental.
On the bright side: at least if you would have read the Automatic Earth through those past 8 years, you would have known and hopefully been prepared for that debt deflation. It’s not as if it’s something new or unexpected, not around here.
$13 trillion in market losses in just one quarter would be very hard to make up for even in very favorable circumstances. We have no such circumstances. We’ve built our very lives on squeezing China et al for 27 years, and issuing more debt as if there’s no tomorrow – sort of a self-fulfilling prophecy -, and now we’ve belatedly realized that there’s a time limit on that model.
But hey, by all means, it’s your money, and it’s your life, so do keep on betting on that recovery, and the return to ‘normal’, whatever that once was. Put it all on red. Go crazy! You do risk becoming a lonely crowd though. Meanwhile, those of us down here with our feet planted in the real earth have just this one question: “How bad can this get, and how fast?”.