Raoul Pal has released his monthly update on markets which, as always, is one of the best summary reports on everything that is happening in the markets, in the world, and in the business cycle. As the Global Macro Investor observes, there is indeed "a lot going on." Not surprisingly, the key issue that Pal continues to focus on is the global debt-to-GDP ratio which is, and will likely always be, in excess of 300% until either we see global defaults or inflate our way out of it. His summary on the issue of unsustainable sovereign issuance: "Something has to give or bankruptcy will ensue as the markets dictate both the private sector's and the public sector's ability to borrow. The first part of this equation came to pass in 2008 as bank lending to the private sector shut down. No amount of regulation, political shenanigans or QE has fixed this in any way. Bank have got no money so they are not going to lend. End of story." Of course, the wildcard is the Fed, which can and will continue monetizing future debt issuance, and pumping money in blind hopes of a pick up in borrowing and inflation expectations, until the US finally wins the race to the bottom in the FX race (and once again, for the cheap seats, the so very inappropriately named hyperinflation is not a phenomenon of high inflation - it is the loss of faith in the currency). Yet the Fed refuses to acknowledge this, just as it refuses to acknowledge that the US needs deflation, something which the banking criminal syndicate will never allow: "The dirty truth is that no one wants to take the pain and allow for debt deflation. The debt pile is still growing although at its slowest pace on record. The debt deflation that everyone so wants to avoid is the thing the US needs the most." Pal's conclusion: "All this means is that the economy becomes ever more reliant on low interest rates for it to function. One day the markets will not allow the Fed to run this policy and rates will rise and the system will be brought to its knees. The outcome will happen regardless of whether they try to inflate their way out of debt and rates rise, or they increase the debt burden and sovereign risk is priced in via rate rises. With a continuation of the current economic policies, the end result of a default is inevitable. It's not rocket science." For the traders out there GMI has the following simple recommendatio: "Buy the DXY."
All this and much, much more in the full report.