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Great Depression to our Depression: Debt Deflation Doom Loop Lessons

Great Depression to our Depression: Debt Deflation Doom Loop Lessons

We are now in the crosshairs of a mega debt deflationary bankruptcy phase.

Some of our sharpest forefathers left us illustrations to better understand how this cycle operates. It helps that many both actually lived through and studied the last one fresh off it happening. No not this fiat currency bifurcated ivory tower era thinking either ( not you bailout Bernanke).

☠️DEBT DEFLATION BANKRUPTCY LESSONS ☠️

Described as the last honest Federal Reserve governor, John Exter (1910 – 2006) believed by the early 1960s that the Federal Reserve was locking itself into currency expansionism it could not stop without disastrous outcomes and blowback.

He reportedly would say that the Fed was becoming a prisoner of its own currency stock and debt-based growth (effectively painting itself into a corner). Then a trend that risked a credit expansion reaching total US debt levels far in excess of the country’s GDP (quaint times). 

His was an envisionment of a major debt crisis ahead of his life, and he believed the crisis would then turn the economy down, to levels not seen since the Great Depression. 

Exter warned the Fed would one day find itself unable to prevent a wide-scale deflationary depression.

Perhaps the man could never envision our current viral scapegoat or how this global economic shutdown would quicken into existence some of his worst economic predictions.

But by the late 1950s and early 1960s, our financial system was effectively already devolving into a debt-based, debt-driven economy. To illuminate its growing unstable structure, Exter devised an upside-down debt pyramid as this original illustration shows.

Within it, the former central banker presented the US debt pyramid and drew attention to the fact that all foreign economies also had debt pyramids too. The structures are always perched in an unstable manner which Exter believed was also true for the financial system generally.

…click on the above link to read the rest of the article…

Rickards: This Time IS Different

Rickards: This Time IS Different

Rickards: This Time IS Different

Stocks stumbled out of the gate today, at least partially on fears about a resurgence in coronavirus cases.

South Korea, which did an excellent job containing the virus, has reported a new batch of cases. Japan and Singapore also reported new cases. Infections are increasing in Germany as well, where lockdown restrictions are being lifted.

We can also expect a rise in U.S. cases as several states lift their own restrictions.

From both epidemiological and market perspectives, the pandemic has a long way to go. Its economic effects are already without precedent…

In the midst of this economic collapse, many investors and analysts return reflexively to the 2008 financial panic.

That crisis was severe, and of course trillions of dollars of wealth were lost in the stock market. That comparison is understandable, but it does not begin to scratch the surface.

This collapse is worse than 2008, worse than the 2000 dot-com meltdown, worse than the 1998 Russia-LTCM panic, worse than the 1994 Mexican crisis and many more panics.

You have to go back to 1929 and the start of the Great Depression for the right frame of reference.

But even that does not explain how bad things are today. After October 1929, the stock market fell 90% and unemployment hit 24%. But that took three years to fully play out, until 1932.

In this collapse the stock market fell 30% in a few weeks and unemployment is over 20%, also in a matter of a few weeks.

Since the stock market has further to fall and unemployment will rise further, we will get to Great Depression levels of collapse in months, not years. How much worse can the economy get?

Well, “Dr. Doom,” Nouriel Roubini, can give you some idea.

…click on the above link to read the rest of the article…

Investing Legend Sees A Second Great Depression For Stocks By 2023

Investing Legend Sees A Second Great Depression For Stocks By 2023

The name of Kiril Sokoloff, author of the weekly WILTW (What I Learned This Week) newsletter through his advisory firm 13D Global Strategy & Research, needs no introduction on this website for the simple reason that over the past few years we have often published his highly insightful excerpts (most recently one month ago with “A Corporate-Debt Reckoning Is Coming“).

Which is why the latest “Lunch with the FT” feature by the FT’s Rana Foroohar may be of interest to readers curious about Sokoloff’s background and how over the past four decades he became one of the most closely sought after independent thinkers and strategists on Wall Street (he works out of St. Thomas in the US Virgin Islands, unaffiliated with any bank), and why his clients – which include Mukesh Ambani, Sam Zell and Raymond Kwok – are quite happy to pay thousands of dollars for a subscription.

We find 13D fascinating, and one of the world’s best newsletters for many reasons by the main one is that Sokoloff’s overarching philosophy – fiscally conservative, rational, measured – is congruent with ours: as the FT notesSokoloff “has been trying to make the financial elite see the dangers of seeking to solve the problems of debt with more debt“,  something we too have been doing since 2009 but obviously to absolutely no success.

As the FT continues, “the topic is timelier than ever, given that central-bank balance sheets — already huge before Covid-19 — are headed into the stratosphere, as policymakers struggle to cope with the crisis, not to mention the popping of a debt bubble that grew for years before it.”

Sokoloff is, of course, referring to this.

…click on the above link to read the rest of the article…

Mr. President: Open the Economy Now – Martin Armstrong

Mr. President: Open the Economy Now – Martin Armstrong

Legendary financial and geopolitical cycle analyst Martin Armstrong says shutting down the economy is far worse that the effects of the Wuhan China virus. Armstrong says, “This is just scare mongering, and there is another agenda going on. The WHO is part of the UN, and the UN is for this climate change, and this is what their objective has been: Shut down the world economy, bankrupt everything you possibly can, and then rebuild from scratch. . . . The devastation in the economy is unbelievable. Our computer is very well known. Just about all the intelligence agencies look at it because it’s the only fully functioning artificial intelligence system in the world. It was saying unemployment was going to rise dramatically and retest the Great Depression highs. . . .That’s never happened like that. Even in the Great Depression, it took three years to get to 25%. We passed 13% in the first month. . . . From the very beginning, I said something is not right. Something is wrong. . . . This is really going to push the debt bubble over the cliff. . . . The number that has died is minimal. More than twice that die from the flu. There is no logical explanation to have done this. The study they used was not even peer reviewed.”

So, if Armstrong were face to face with President Trump, what would he tell him? Armstrong says, “What he needs to do is open up the economy instantaneously. I think he needs to appoint a special prosecutor to investigate who started this. All the information I have is pointing to a deliberate and intentional movement to harm the economy. These people are elitists. Bill Gates was in Germany saying everybody should remain in lockdown until he comes up with a vaccine. . . .

…click on the above link to read the rest of the article…

The Lesson of a Crash that Cured Itself

The Lesson of a Crash that Cured Itself

If a government wishes to alleviate, rather than aggravate, a depression, its only valid course is laissez-faire—to leave the economy alone. Only if there is no interference, direct or threatened, with prices, wage rates and business liquidation, will the necessary adjustment proceed with smooth dispatch. — Murray Rothbard

The economic disruption caused by the government’s coronavirus clamp-down may lead to a deep recession or depression; arguably, it already has. President Trump’s $2.2 trillion relief package indicates what his answer to such an economic disaster will be: mega-spending on hand-outs and social projects. Trump is setting himself up as a modern version of Franklin D. Roosevelt (FDR) whose New Deal programs defined 20th century America by diverting it from a largely free-market path down a largely statist one. Trump wants to be an activist president — the type that history books applaud. Congress’s near-unanimous support of the relief bill means that no real brake will be applied on the speed or depth of federal spending. Few voices even question the need for government to lift up the economy by its bootstraps.

The Great Depression of the 1930s is often viewed as the gold standard for a federal response to an economic crisis. And, yet, FDR’s strong-man policies ushered in a decade of economic misery that did not end until the jolt of a world war in which over 400,000 Americans were killed. Happily, a less bloody “success” story exists.

The financial analyst and historian James Grant offers the do-nothing alternative in his path-breaking book The Forgotten Depression. 1921: The Crash That Cured Itself. The crash of 1920-21 is called “the forgotten depression” because it has almost vanished from history books.

…click on the above link to read the rest of the article…

Pandemic-Related Unemployment and Shutdowns Are a Recipe for Social Unrest

Pandemic-Related Unemployment and Shutdowns Are a Recipe for Social Unrest

That’s a huge concern as forecasters expect the U.S. unemployment rate in the months to come to surpass that seen during the depths of the Great Depression.

krtphotoslive884669
(Elizabeth Robertson/TNS/Newscom) 

Could the stalled economy we’ve inflicted on ourselves in our frantic efforts to battle the COVID-19 pandemic lead to civil disorder? History suggests that’s a real danger.

Around the world, high unemployment and stagnant economic activity tend to lead to social unrest, including demonstrations, strikes, and other forms of potentially violent disruptions. That’s a huge concern as forecasters expect the U.S. unemployment rate in the months to come to surpass that seen during the depths of the Great Depression.

“We’re putting this initial number at 30 percent; that’s a 30 percent unemployment rate” in the second quarter of this year as a result of the planned economic shutdowns, Federal Reserve Bank of St. Louis President James Bullard told Bloomberg News on March 22. Gross Domestic Product, he adds, is expected to drop by 50 percent.

Unlike most bouts of economic malaise, this is a self-inflicted wound meant to counter a serious public health crisis. But, whatever the reasons, it means businesses shuttered and people without jobs and incomes. That’s risky.

“Results from the empirical analysis indicate that economic growth and the unemployment rate are the two most important determinants of social unrest,” notesthe International Labour Organisation (ILO), a United Nations agency that maintains a Social Unrest Index in an attempt to predict civil disorder based, in part, on economic trends. “For example, a one standard deviation increase in unemployment raises social unrest by 0.39 standard deviations, while a one standard deviation increase in GDP growth reduces social unrest by 0.19 standard deviations.”

…click on the above link to read the rest of the article…

The Crash Of 2020 Is Now Worse Than The Great Depression

The Crash Of 2020 Is Now Worse Than The Great Depression

Back in December, someone in China made bat soup (at least according to the officially accepted narrative that doesn’t get you banned on Facebook, Twitter, etc), and the rest is history: in the next three months, the global equity market has lost $24 trillion in value, more than the $22 trillion in US GDP. And here is a staggering chart from BofA putting the crash of 2020 in its historic context: in the past month, the US stock market has crashed faster than both the Great Depression and Black Monday, and in terms of the total drawdown, the crash of 2020 is now worse than 1929 and is fast approaching 1987.

Below, courtesy of BofA CIO Michael Hartnett, are several other stunning observations on the Crash of 2020:

  • Calls for Fed corporate bond buying, New Deal fiscal policies, new Plaza Accord to stabilize US$, closure of stock exchange coincide with week of Wall St devastation.
  • Peak-to-trough crash in global equity market cap = $24tn (c/o US GDP = $22tn).
  • Monday’s 12.0% drop Dow Jones = 3rd largest crash all-time (c/o -20.5% Oct 19th 1987, -12.9% Oct 28th 1929 – Chart 2).
  • Liquidation of “safe havens” e.g. gold & US Treasuries (TLT ETF sank 20% after oil shock); epic US$ surge reflects funding pressure of excess US$-denominated debt & zero liquidity.
  • Leverage in bond & stocks savaged (see REM, PFF, EMB, homebuilders like TOL – Chart 3); bond yields rise + bank stocks fall = classic sign of deflationary bear market.
  • Feral Wall St means vicious bear market rallies…WTI oil surged 24% today.
  • Stock exchange has closed just 4 occasions: 1914 & WW1, 1933 bank holiday, 1963 Kennedy assassination, 2001 9/11.
  • Global “lockdown” on movement people, goods, services unprecedented but note June 1930 passage of protectionist Smoot-Hawley bill saw US stocks -16.5% in one month.

And some additional views:

…click on the above link to read the rest of the article…

Nothing to Fear But Fear Itself

NOTHING TO FEAR BUT FEAR ITSELF

Customers waited in line at a Costco in Burbank last week to buy water and other supplies for fear that COVID-19 would spread and force people to stay indoors.
Image result for nothing to fear but fear itself coronavirus

“So, first of all, let me assert my firm belief that the only thing we have to fear is…fear itself — nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance. In every dark hour of our national life a leadership of frankness and of vigor has met with that understanding and support of the people themselves which is essential to victory. And I am convinced that you will again give that support to leadership in these critical days.”- Franklin D. Roosevelt – March 4, 1933

Franklin D. Roosevelt spoke these words during his first inauguration at the depths of the Great Depression in 1933. The narrative taught in government schools is how FDR’s words invigorated the nation and inspired the people to show courage in the face of adversity. His terminology was that of a general leading his troops into battle.

What is not taught in government schools or proclaimed by the propaganda spewing fake news media were the dictatorial type actions taken by FDR over the next month after his “inspirational” speech. He was the first Democrat president to not let a crisis go to waste. The day after his inauguration, Roosevelt assembled a special session of Congress to declare a four-day bank holiday, and on March 9 signed the Emergency Banking Act.

What the American people should have feared was the government taking control of every aspect of their lives and threatening them with imprisonment if their dictums were not followed. On March 6, taking advantage of a wartime statute that had not been repealed, he issued Presidential Proclamation 2039 that forbade the hoarding ‘of gold or silver coin or bullion or currency’, under penalty of $10,000 and/or up to five to ten years imprisonment.”

…click on the above link to read the rest of the article…

Spirits in the Material World

SPIRITS IN THE MATERIAL WORLD

Image result for spirits in the material world

There is no political solution
To our troubled evolution
Have no faith in constitution
There is no bloody revolution 

The Police – Spirits in the Material World

As I was driving home from work last week, an almost forty-year-old song began emanating from my radio. I’ve always appreciated the music of The Police, but was never a huge fan. Spirits in the Material World was a relatively minor hit from their 1981 Ghost in the Machine multi-platinum album. I’ve probably heard it hundreds of times over the last four decades, but the lyrics struck me as particularly apropos at the end of a week where lunatic left-wing politicians staged a battle royale of ineptitude, invective, and idiotic solutions, in front of a perplexed public in a Vegas casino. Sting wrote the lyrics to this song in 1981 at the outset of the Reagan presidency. It is less than 3 minutes in length, but says much about humanity and the world we inhabit.

The interpretation of Sting’s (Gordon Sumner) lyrics depends upon your position in the generational kaleidoscope of history. As a boomer, Sting came of age during the 1960s and 70s. He was thirty years old in 1981 as the Second Turning (Awakening) was winding down and Reagan’s Morning in America was about to launch the Third Turning (Unraveling) in 1984.

His passionate idealism and search for spiritual solutions to the problems of the day had not been extinguished. The raging inflation of the 1970s had led to the worst recession since the Great Depression. The Cold War was at its coldest. Politicians had been discredited as criminal (Nixon) or incompetent (Carter). Sting and many others of his generation had lost faith in the political system. His viewpoint fit perfectly into the Strauss and Howe assessment of our last Awakening period (1964 – 1984).

Image result for awakening strauss and howe

…click on the above link to read the rest of the article…

No One Gets Out Of Here Alive

NO ONE GETS OUT OF HERE ALIVE

“The seasons of time offer no guarantees. For modern societies, no less than for all forms of life, transformative change is discontinuous. For what seems an eternity, history goes nowhere – and then it suddenly flings us forward across some vast chaos that defies any mortal effort to plan our way there. The Fourth Turning will try our souls – and the saecular rhythm tells us that much will depend on how we face up to that trial. The saeculum does not reveal whether the story will have a happy ending, but it does tell us how and when our choices will make a difference.”  – Strauss & Howe – The Fourth Turning

As we wander through the fog of history in the making, unsure who is lying and who is telling the truth, seemingly blind to what comes next, I look to previous Fourth Turnings for a map of what might materialize during the 2nd half of this current Fourth Turning. After a tumultuous, harrowing inception to this Crisis in 2008/2009, we have been told all is well and are in the midst of an eleven-year economic expansion, with the stock market hitting all-time highs.

History seemed to stop and we’ve been treading water for over a decade. Outwardly, the establishment has convinced the masses, through propaganda and money printing, the world has returned to normal and the future is bright. I haven’t bought into this provable falsehood. Looking back to the Great Depression, we can get some perspective on our current position historically.

The Dow is up 450% since its 2009 low, which is the metric used by the establishment to prove their money printing solutions have succeeded in lifting the country from the depths of despair and depression.

…click on the above link to read the rest of the article…

IMF Chief Warns Global Economy Faces New “Great Depression”

IMF Chief Warns Global Economy Faces New “Great Depression”

How’s this for some New Years optimism?

The new head of the IMF, who took over from Christine Lagarde in November, warned that the global economy could soon find itself mired in a great depression.

During a speech at the Peterson Institute, IMF Chairwoman Kristalina Georgieva compared the contemporary global to the “roaring 20s” of the 20th century, a decade of cultural and financial excess that culminated in the great market crash of 1929.

According to the Guardian, this research suggests that a similar trend is already under way, and though the collapse might not be around the corner, when it comes, it will be impossible to avoid.

While the inequality gap between countries has closed over the last two decades, the gap within most developed countries has widened, leaving millions more vulnerable to a global downturn than they otherwise would have been.

In particular, she singled out the UK for criticism: “In the UK, for example, the top 10% now control nearly as much wealth as the bottom 50%. This situation is mirrored across much of the OECD (Organisation for Economic Co-operation and Development), where income and wealth inequality have reached, or are near, record highs.”

She also warned about the potential for climate change to become a bigger obstacle for humanity, while increased trade protectionism instills more volatility in markets.

She added: “In some ways, this troubling trend is reminiscent of the early part of the 20th century – when the twin forces of technology and integration led to the first gilded age, the roaring 20s, and, ultimately, financial disaster.”

She warned that fresh issues such as the climate emergency and increased trade protectionism meant the next 10 years were likely to be characterised by social unrest and financial market volatility.

…click on the above link to read the rest of the article…

Underestimating Them & Overestimating Us

UNDERESTIMATING THEM & OVERESTIMATING US

“Do not underestimate the ‘power of underestimation’. They can’t stop you, if they don’t see you coming.” ― Izey Victoria Odiase

Image result for bernanke, yellen, powell

During the summer of 2008 I was writing articles a few times per week predicting an economic catastrophe and a banking crisis. When the biggest financial crisis since the Great Depression swept across the world, resulting in double digit unemployment, a 50% stock market crash in a matter of months, millions of home foreclosures, and the virtual insolvency of the criminal Wall Street banks, my predictions were vindicated. I was pretty smug and sure the start of this Fourth Turning would follow the path of the last Crisis, with a Greater Depression, economic disaster and war.

In the summer of 2008, the national debt stood at $9.4 trillion, which amounted to 65% of GDP. Total credit market debt peaked at $54 trillion. Consumer debt peaked at $2.7 trillion. Mortgage debt crested at $14.8 trillion. The Federal Reserve balance sheet had been static at or below $900 billion for years.

During 2007, a risk averse senior citizen couple (my parents) who had accumulated $200,000 of retirement savings over their lifetime of hard work, could generate $10,000 of interest income in a Vanguard money market fund yielding 5%. This supplemented their modest Social Security income of $20,000 to $30,000 per year. The interest rate on savings during normal economic times was generally 2% above inflation, which hovered around 3% in 2007 according to the data manipulators at the BLS.

As the summer of 2008 progressed, I felt more disconnected. I had been doing everything possible to support Ron Paul’s candidacy for president, but the masses weren’t ready for the truth or the reality of our situation. In my opinion the country was already off-course and headed towards a debt created disaster. 

 …click on the above link to read the rest of the article…

Fourth Turning Economics

Fourth Turning Economics

“In retrospect, the spark might seem as ominous as a financial crash, as ordinary as a national election, or as trivial as a Tea Party. The catalyst will unfold according to a basic Crisis dynamic that underlies all of these scenarios: An initial spark will trigger a chain reaction of unyielding responses and further emergencies. The core elements of these scenarios (debt, civic decay, global disorder) will matter more than the details, which the catalyst will juxtapose and connect in some unknowable way. If foreign societies are also entering a Fourth Turning, this could accelerate the chain reaction. At home and abroad, these events will reflect the tearing of the civic fabric at points of extreme vulnerability – problem areas where America will have neglected, denied, or delayed needed action.” – The Fourth Turning – Strauss & Howe 

Image result for total global debt 2019

The quote above captures the current Fourth Turning perfectly, even though it was written more than a decade before the 2008 financial tsunami struck. With global debt now exceeding $250 trillion, up 60% since the Crisis began, and $13 trillion of sovereign debt with negative yields, it is clear to all rational thinking individuals the next financial crisis will make 2008 look like a walk in the park. We are approaching the eleventh anniversary of this crisis period, with possibly a decade to go before a resolution.

As I was thinking about what confluence of economic factors might ignite the next bloody phase of this Fourth Turning, I realized economic factors have been the underlying cause of all four Crisis periods in American history.

Debt levels in eurozone, G7, US and Germany

The specific details of each crisis change, but economic catalysts have initiated all previous Fourth Turnings and led ultimately to bloody conflict. There is nothing in the current dynamic of this Fourth Turning which argues against a similar outcome. The immense debt, stock and real estate bubbles, created by feckless central bankers, corrupt politicians, and spineless government apparatchiks, have set the stage for the greatest financial calamity in world history.

 …click on the above link to read the rest of the article…

The Coming Credit Meltdown Will Be As Bad As The Great Depression And The Financial Crisis: Deutsche

The Coming Credit Meltdown Will Be As Bad As The Great Depression And The Financial Crisis: Deutsche

With investor attention increasingly focusing on what most believe will be the catalyst for the next financial crisis, namely a tsunami in corporate defaults as a result of the disastrous combination of record leverage, higher rates and an economic slowdown, overnight we presented the view of FTI global co-leader of corporate finance and restructuring, Carlyn Taylor, who predicted that “a spike in defaults is on the way, sooner or later.”

The expansion is pretty long in the tooth and there’s definitely a lot of buildup. The activity level of restructuring is rising, maybe not at the rate of bankruptcies, but the pipeline of companies we think are going to end up in restructuring, based on metrics that we analyze, that volume has gone up. And we’re so busy, which we don’t think is just market share, because we think our competitors are also very busy.

Yet while investor worries have centered on record corporate leverage…

… a growing number of strategists are warning that corporate bond market illiquidity is an even greater risk factor.

Not long after Goldman most recently warned that the biggest threat facing the broader market in general, as well as corporate bonds in particular, is a sudden collapse in liquidity, overnight UBS credit strategist Steve Caprio and his team laid out four major reasons why global corporate bond market liquidity has deteriorated over time.

These are:

  1. Rising investment fund ownership of corporate debt,
  2. Low interest rates,
  3. A lack of dealer intermediation, particularly in periods of rising credit risk, and
  4. Potential new EU regulation on trade settlement failures.

 …click on the above link to read the rest of the article…

“Past Is Not Prologue” But Over The Long-Run, We’re All Skeptical

“Past Is Not Prologue” But Over The Long-Run, We’re All Skeptical

The last 20 years have been the toughest stretch for US stocks since the Great Depression into World War II. The next 5 years will either confirm investors’ worst fears that stocks are no longer “for the long term” or begin to re-instill confidence in the asset class. 

The fulcrum issue: avoiding a +10% annual drawdown any time between now and the end of 2023.

Over the last 20 years US equity investors have seen the worst aggregate returns since the period that includes the Great Depression and World War II. We’ve covered this topic a few times before, but here is a quick reprise:

  • The compounded annual growth rate (CAGR) for the S&P 500 from 1999 – 2018 is 5.6% on a total return basis. (Data courtesy of NYU professor Aswath Damodaran.)
  • That is the lowest 20-year trailing return since the period ending 1950, which had a 3.7% CAGR.
  • Adjusting for CPI inflation, 20-year trailing returns ending 2018 are 3.0%. The last time inflation-adjusted returns were lower than that was 1998, thanks primarily to the double-digit inflation of the 1970s.

In our view, the fact that 20-year S&P real returns are at +60 year lows explains more about the current market environment than any other single statistic. Capital moves to passive, low fee investment products when returns are this low, because every basis point of expenses matters. Rate-of-return-targeting capital (i.e. pension and sovereign wealth funds) shifts to riskier asset classes like venture capital and private equity in an attempt to juice portfolio returns. Everything from the dramatic growth of ETFs to SoftBank’s $100 billion VC fund ties right back to that paltry 5.6% long run return on the S&P 500.

 …click on the above link to read the rest of the article…

Olduvai IV: Courage
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Olduvai II: Exodus
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