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Guest Post: A 5-Year Scenario: 2011-2016
Written by Charles Hugh Smith from Of Two Minds
A 5-Year Scenario: 2011-2016
In this scenario, the wheels fall off the debt-fueled global "recovery" and assets bottom in 2014.
Here is one possible scenario for the next five years. Why do I consider this somewhat more likely than other possible scenarios? Here some undercurrents which may be generally under-appreciated:
1. There is a difference between speculative and organic demand. The two are of course related, as industrial consumers of resources must hedge against rising prices using the same instruments as speculators--futures contracts, etc.
2. Follow the credit, not just the money. It's not just the U.S. economy which is dependent on cheap, abundant credit--the same can be said of China and the European Union to some degree.
Just because Chinese buyers put 50% down on their fourth flat doesn't mean they don't need credit for the other 50%. Chinese developers are heavily dependent on credit issued or backed by the Central Governments banks and proxies.
Credit is not cash, and creating credit is not the same as printing cash. Shoveling $1 trillion in zero-interest credit into the banking system does not necessarily mean that $1 trillion flows into the real economy--that can only happen if someone or some entity borrows the credit.
This is why some claim that hyperinflation has never occurred in a credit-based system; it can only arise in a monetary system in which cash itself is printed (i.e. Zimbabwe et al.)
I am not making any such broad claim, but to identify the two as identical seems to me to be a profound confusion.
This distinction plays out in a number of ways. If the Fed had actually printed $1 trillion in cash and dropped it from helicopters, then those collecting the cash on the ground might have spent it, creating more organic demand for goods and services.
If the Fed creates credit and loans it to banks at zero-interest rate, the credit only flows into the real economy if somebody borrows it.
Without borrowers, the "money" just sits in reserves, where it does not spark inflationary organic demand for resources, goods or services.
If someone borrows the "money" to refinance existing debt, the only money that flows into the real economy is the difference between their original debt servicing costs and their new debt servicing costs, presuming the new costs are lower than the original. (Not always the case if said borrower had an interest-only "teaser rate" mortgage that he/she is now rolling into a mortgage with principal payments and a market rate interest payment.)
Or a large speculator (trading desk, hedge fund, etc.) could borrow the credit-money to speculate in commodities, driving prices up on the widespread expectation of higher costs in the future. In this case, the credit-money does influence the real world economy by driving commodity prices above levels set by organic demand.
But speculative "hot money" is not organic demand; it flees or is lost if trends suddenly reverse.
Since commodities such as oil are priced on the margins, this matters. A sudden decline in oil from $86/barrel to $76/barrel would trigger an exodus from speculative long positions, reinforcing that decline in a positive feedback loop.
3. Hoarding is a special flavor of organic demand. Like speculative demand, it vanishes once the fear of ever-higher prices evaporates.
4. The global GDP is around $60 trillion; the Federal Reserve has "printed" $2 trillion in the past three years. Placed in the proper context, the Fed's printing and asset purchases are large enough to influence the U.S. stock and bond markets, but they simply aren't significant enough or focused enough to enslave the entire global markets in stocks, bonds, precious metals and commodities.
Other players are busy printing and issuing zero-interest credit, too, of course, but we should be wary of sweeping generalizations about the deterministic nature of these central bank campaigns.
As further context, consider that the Fed's vast interventions have distributed some $2 trillion into the financial sector; meanwhile, U.S. homeowners saw their net equity decline by some $6 trillion.
OK, on to the scenario which will get me in all sorts of trouble:
Here is the sequence of events I consider rather likely:
Q3/Q4 2011-2012: extend and pretend fails. The wheels fall off the global "recovery," the emerging market equity bubbles, oil, China's equities and its property bubble, and most if not all commodities. Gold and silver swoon as per late 2008 as raising cash become paramount. Oil retraces to the $40/barrel level, and then drops further as exporters ramp up their exports to generate desperately needed cash.
Interest rates rise sharply, risk assets tank, borrowing dries up, housing prices "slip" to new lows (the stick-slip phenomenon), and the hated/loathed U.S. dollar confounds almost everyone by breaking out of technical resistance levels.
Civil disorder spreads along with recession and lower energy prices, which devastate oil exporters' primary source of government revenues.
With better grain harvests stemming from improved weather, declining meat consumption in 2012 due to recession and the implosion of the market for corn ethanol, grain prices plummet, wiping out all the speculators who reckoned 2010 had set the trend for the decade.
All of this starts slowly in Q3 2011 but gathers momentum in 2012.
Unfortunately for central banks, all their printing and credit creation is analogous to insulin resistance: without borrowers and solvent banks and consumers, their frantic efforts to "stimulate" their economies with additional liquidity come to naught.
The Central State's other gambit, monumental fiscal "stimulus," runs into the brick wall of rapidly rising interest payments and a political revulsion triggered by the realization that only the financial and political Elites actually benefitted from the trillions squandered in the 2008-2011 orgy of Central State "stimulus" and backstops.
With asset prices collapsing in a phase shift, the equity needed to float new loans vanishes; with risks rising, the market for junk bonds and other risk-laden debt also disappears.
All those who clung on through the "recovery," hoping to made whole, are wiped out. Their bankruptcies trigger a new wave of selling and writedowns.
2013-2014: Re-set and reckoning. Widespread political and financial turmoil leads to a few central choices:
1. Repudiation of the Neoliberal Central State/Financial Oligarchy strategy of 2008-2011 which focused on preserving the insolvent (but politically dominant) banking and Wall Street financial sectors and transferring their private losses to public entities/taxpayers.
2. Replacement of incompetent, venal, exploitative dictatorships with some new flavor or autocracy, oligarchy, theocracy or dictatorship, most of which will prove to be equally incompetent, venal and exploitative--but shorter-lived.
3. Experimentation with new models of governance, "growth" and credit/debt. Some modest recognition of the profound failures in the "extend and pretend" status quo generates a sense that these catastrophically destructive policies have been recognized as such and corrected.
These years will see the near-term bottom in housing, equities, and other assets. Those few who preserved cash during the meltdown are in a position to snap up assets on the cheap. Those who depended on credit/debit find borrowing is now difficult and dear. Those who "bottom-fished" real estate in 2011 are wiped out, along with those who bet that commodities were heading straight to the moon.
2015-2016: false dawn. Things get better; prices stabilize, assets and commodities start rising in price and a sense of hope replaces widespread gloom and distemper.
The real crisis has been pushed forward to 2020-2022. Nonetheless, 2015-2016 will offer those with cash tremendous profit opportunities.
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The conclusions are a bit draconian and most likely just plain wrong, but the article makes some good points that a lot of ZH readers ignore.
Namely that QE is a credit phenomena, and that a lot of our current price inflation is being driven by speculative demand (although there have been some supply disruptions), as QE is just not a large enough when taken as a percentage of the worlds GDP to material influence prices.
So where QE has caused inflation is in the fact that it has increased speculative demand. The interesting thing is that the speculative demand will eventually cause a change in actual demand -- and that speculative demand eventually becomes supply. Without corresponding increases in organic demand, commodity prices will have no choice but to go lower. For example, how can cotton prices be sustained at these levels, when we keep reading that many manufactureres have purchased a year's supply in advance because they are worried about rising prices? With traditional purchasers hoarding, there will be little demand at the new higher prices.
The same can be said of PMs. Silver 50% higher than it was a few months ago. China gold demand increased 50% year over year. These moves reek of speculation.
Speculative purchases will eventually become supply, and are very worrying in a commodities where only 1/2 of the annual production is used for anything other than hoarding in the first place.
While indeed speculative demand can become supply, and it's never a straight line, and even Faber agrees all will come down, it will then all go higher--as debt gets monetized, financial assets backed only by currencies depreciating, will continue to find their way into speculative demand.
The greatest supply will be in U.S. treasuries at the end of the day, and just where will that money move to as it's "risk-free" becomes know and "risk-on?"
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Discussing speculation in the PM markets always confuses me. Is Fort knox and what it supposedly contains a speculative move by the U.S. government to earn additional frn's? When the Tunisian president left he stole tons of gold was this speculation or was he cognizant of a special property that kings, central bankers and tyrants have always understood?
I doubt very much that China's purchase of gold is speculative in nature. Nor that of nearly all the world's central banks who have gone from net sellers of gold to now being net buyers.
NO, when this thing crashes and burns, the system is over. The NEXT time, not 2015 or 2022 or some other shit. NEXT TIME = New Dark Age. Probably irreversable for a few decades.
Or we can avoid all this via reimplementing an OLD, tried and true law....Glass-Steagall.
Anyone playing THIS market with thoughts of 2015 or 2022 is a fucking idiot.
Oh my, really? Glass-Steagall? That certainly may have prevented the housing crisis from exploding the way that it did, but it has nothing to do with our economy and the global economy as a whole dependent on credit and debt. Since the 1980s we have been living in a society where debt is the main engine of growth and the systematic lowering of interest rates and cheap money is a further testatement. If it was not housing it would have been something else.
The MSM would like you to believe that the housing crisis is the reason we are in this mess, that is just half the explanation.
Fascism is what happens when the oligarchs/plutarchs/TPTB feel threatened.
Don't forget to BTFD. It's setting up perfectly for the second wave down where all the smart money gets crushed. Get on the train, ride the wave, it's different this time, the Bersnake will take care of all. Woo Hoo I love watching sanctimonious bitchez getting crushed.
Credit is not cash, and creating credit is not the same as printing cash. Shoveling $1 trillion in zero-interest credit into the banking system does not necessarily mean that $1 trillion flows into the real economy--that can only happen if someone or some entity borrows the credit.
The biggest entity borrowing and distributing this cash is the Federal Government. So the Fed buying up treasury debt and parking it on their balance sheet would be considered to cause cash to "flow into the economy." Did I miss where he mentions this fact?
Make no mistake, bennie etal are very aware of the problems with his helicopter theory. They have ways that we are not even aware of to increase the money supply and ignite inflation. Who really knows what they are doing.
That is why without true transparency and an actual Fed audit we have no idea how much money was sent to who when.
sschu
like the guy and agree with his fundamental ideas.
Would update his deflationary prognosis with continous desperate need of banksters to inflate prices cause it brings operational profits for their puppet speculators and keeps zombie banks afloat.
but in general - rollercoaster inflation will be just a CATALIST on the way to the FINAL GOAL which is EXPROPRIATION of valuable resources and assets. Those they can lay their hands on. Via local crony regimes, corrupt "democracies", friendly central banks and loose/risky commercial banks all over the world.
These days you can clearly see which countries have governments caring about their citizens and others which are uncompetent/corrupted and will make at least next few generation of their citizens slaves to major banksters.
go iceland!
How about China, which is encouraging its citizens to buy gold, compared to the USA? Which country cares more about the self-sufficiency of their people?
So , Happy Days Are Here Again. If Oil does retrace a la 2008 , whats the best way for retail investor to get long the black stuff? Because by 2020 its going to be north of 200.
think it's naive to expect oil again at $40 (only short time maybe, in case of orchestrated black swans) even though that's maybe mark-to-market value. bastards need to keep commodities as high as possible because that will speed up "scenario" realization.
if whole game lasts too long for them , political and hundreds of inherent financial systemic risks may blow up and make us free ... major banksters know that and don't want that.
the only thing i think i know, is that we are kinda screwed whichever direction things go
deflation or inflation
i guess i would prefer deflation
of course, the more i read, the less i know and vice versa
there seems to be no way to completely protect yourself or your earnings either way either
i feel like schoedingers cat
stupid cat
Please, for fuck's sakes, stop posting shit from Charles Hugh Smith.
I am with you Worry. One question, re: unlimited printing - don't the bond vigilantes come into play at some point?
The chances of oil going to $40 a barrel every again are exactly ZERO
Just as humans are, the systems we inhabit (read climate) and the systems we have created (the global economy and the cheap energy-hungry systems) are complex and it is extremely hard to predict what will happen when. All we can do is take some general guesses based on the trendlines and prepare ourselves. And while taking those general trendlines, it would be prudent to consider interactions between these complex systems. This article unfortunately does not do that. it considers global economy as one single complex system and tries to extrapolate future trends. Multiple complex systems are interacting together.
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America has to make the choice now : Is Benbernanification a 'Humpty Dumpty' scenario or a 'Jack n the beanstalk' scenario? Those who love 'the golden goose' and those who beware of 'all the king's horses and all the king's men' are obviously at loggerheads.
Pity we don't have a true tell-it-all crystal ball.