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John Taylor Explains Why Off-The-Charts 2011 GDP Estimates Are Irrelevant, And Why Defaults Will Be Pervasive
It appears someone, even if that someone is the traditionally bearish John Taylor, finally gets the fundamental issue at the core of the global financial and economic problem: "We see the health of world economy as being driven by the implied strength of three economic centers: the US, China, and the Eurozone...Each of these three centers has a problem in that the amount of debt is too high and the assets against that debt are unable to throw off enough cash to support it, much less retire it."
2011 – A Bad Year for the Lenders
December 30, 2010
By John R. Taylor, Jr. Chief Investment Officer
It must be the end of the year, as our desks have been buried by an unusually expanding and expansive pile of economic and market forecasts for the next year. At least in the US, the news is seen as so good that the institutional analysts have outdone themselves, going beyond their usual enthusiasm in response to the recent monetary expansion and fiscal laxity. Forecasts of US growth over 4.0% are common, and global GDP is expected to be around 5%. The world outlook might be slowed by European issues, but even there almost all argue that GDP growth is secure. By year-end 2011, the S&P500 is seen around 1500, and even the NY Post-type technicians are pointing to the 3rd year in the Presidential cycle as a guarantee of equity out-performance. Animal spirits are running so high that one pundit argued that in the unlikely event that US GDP were to be as low as 2.5% Bernanke would be forced into future stimulative moves – and then it would perk up. For us these numbers seem a bit high, or very high, and we don’t believe that they represent reality in any case. The only comprehensive picture of the world situation and of the future outlook must be generated through a multi-disciplinary point of view, not by measuring everything from a purely gross output snapshot. Understanding the complex inter-relationships between economic, monetary, trade, risk, political, and psychological factors is extremely difficult. This is not Kansas anymore! Fifty years ago, an analysis of the economic future of the US or any major country could safely ignore the international and monetary factors as one could safely assume that their impact was insignificant, but now those inputs are many times more important. Non-production factors are often the most important, but they are inadequately understood. The global system is a multi-factored creature. It is the human equivalent of the Gaia hypothesis, which explains how the earth has regulated itself, maintaining an ecological balance over billions of years. The analyses that we have just received – and the strategies being followed by many global governments – prove that not many people are thinking on the correct scale.
We see the health of world economy as being driven by the implied strength of three economic centers: the US, China, and the Eurozone. The current GDP forecasts for each of these are positive, but the economic models driving these forecasts should not be trusted as their supporting assumptions do not stand up at this time and as the impact of some non-economic factors are negative. The errors are too many to list here, so one or two examples will have to suffice. In the US, the expectation that a higher equity market will create more retail sales does not consider the weakness of home prices, the coming problems with retirement, and the collapse in state revenues. The models that are driving the forecast of higher sales do not seem to have the right variables or the right weighting of them. Recent Eurozone growth has been pleasantly warm, but this is the wrong way to look at it when half the pool is near boiling and the other half is near freezing. In fact, the better Germany does the more desperate Spain will become. For us, looking at all the inputs into this next year, there is only one that is important: risk. This is most apparent in the level of leverage. Each of these three centers has a problem in that the amount of debt is too high and the assets against that debt are unable to throw off enough cash to support it, much less retire it. In the Eurozone, the ratios of debt to GDP are very high and forecasted to continue higher, but if this happens there will be defaults. The US states can no longer retire their debt as the US laws require, so defaults will be coming. China should have years of further debt expansion before serious problems, but the negative psychological examples of the US and Europe could bring the day of reckoning closer. During the next year, the non-GDP factors should drive this growth train off the track.
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Love this forcast...good stuff. Anyone see this floating around Facebook lately (appologies if this already made the rounds...but its fun to watch Peter Schiff hold his stance while the other people call him a wack-job.
Good stuff - http://www.youtube.com/watch?v=2I0QN-FYkpw&feature=player_embedded
The Euro is backed by nothing, not a military or even european lands. China is in reality backed by an outdated manufacturing base, rampant pollution in cities, impoverished population, communist government, and lagging technology.
Only the USA is actually backed by something: The worlds strongest military and real fee titled land assets. the US has actually done something about pollution. Odd to be bullish on the US but its the best looking turd of the litter.
That military is a negative not a positive. Try to imagine the US debt and budgets for the past 10 years if the US didn't have 1/2 of worlds military spending.
How will this military be good for the US? Will the US demand goods and services from nations? Huh seems to me that was suppose to happen with Iraqi oil, but didn't. So will the US turn to extortion? Will we threaten China/Russia/EU and force them to give us goodies or invade them/nuke them?
I'm not convinced they would roll over for a threat. I look at America and the fat dumb people and not sure we could beat any one of them. We have a ton of high tech toys but when the debt financing and cheap oil come to an end the military is an anchor around our necks not a blessing.
You said it. I travel the world a lot and when I meet teenagers with only a high school education that are fluent (not conversationaly fluent, FLUENT FLUENT) in 3 languages and I think back to the average US college grad all I can do is laugh and laugh and laugh. I mean seriously. The US used to be great but now it's just full of a bunch of fat dumb people who sit around and suck their thumbs while they watch american idol or whatever the latest reality tv atrocity is thats been created.
I've thought about the military component and what happens if the US decides to go the extortion route but after our economy and currency is totally collapsed exactly who will give them oil to put in their tanks and planes and so on. Beating the US militarily would only be a question of cutting off their oil supply, that is unless they're prepared to go the nuke route, in which case we're all fucked.
I thought that contingency was at least a little bit of the purpose of iraq and afghanistan... and wikileaks leaks...
Our military is a logistics nightmare. Look at the M1 Abrams tank, it's a tale of American over consumption all in itself. The trick to defeating the US in a conflict would be to drag the conflict out as long as possible and chip away at their energy reserves. As it stands now the military is overstretched in 2 foreign occupations and commodity/energy prices are on the rise making them less affordable.
You got that right about multiple languages, sadly I'm sorta in the same boat. Attempting to correct but never bothered as a kid.
Even the brain dead American TV shows are imports - as Idol was copied from a British format and pays royalties to the UK.
I agree that the military will be an anchor around the neck of a sinking USA, just as the disillusioned post-Afghanistan Soviet military was an anchor around a sinking USSR. That nation went from superpower to has been in a blink, and so can the US too.
Loss of confidence can happen very quickly, and the weakening social contract and political accountability are eroding public confidence. Maybe a President Palin could refudiate the federal debt, but if so, would any asset or legal title have value in a lawless and unaccountable USA?
and if the 'refudiated' debt is replaced by the AMERO of the north american union???
@shameful
"So will the US turn to extortion?"
Three empires are rising, led by the U.S., China, and Germany. The North American Empire will result from the annexation of Mexico and Canada.
Even if there is a rise of 3 empires like you say how does that help the US in relation to it's military and extortion? With stronger power blocs the US would be less able to extort not more.
Color me sceptical but I don't see clear empires like that forming. I have a difficult time thinking that all of the EU will kneel to Germany unless Germany can bail out the EU and keep them in goodies (which they can't). I'm not a master of Asian culture, but I strongly doubt the nations of Asia will bend a knee to China willingly. Now will we see economic blocks and satellites form, yeah that's possible. However I don't see empires in the traditional military sense happening any time soon.
Consolidation requires more energy, not going to happen. The trajection is of disintegration, not consolidation. Look around and see that it's nation states that are breaking up (what, Belgium has been without a government for how long?).
History and logic says that, if anything, civil structuring will center around and on cutltural and geographical bases.
Bingo.
we've gone from the greek polis to greater and greater consolidation.
although i think it would be best to go back to the polis, this world, dependent on microchips and undemocratic baronies (corporations), is unlikely to go there without total disintegration.
Unlike the US, Europe actually make things and export them. Germany alone exports more goods than the entire United States. The US won't solve its problems by selling iPads made in China and derivatives.
I think that at the end of 2011, the world will see that all European countries have massively reduced their budget deficits, that stimulus in the US and a lower euro have stimulated exports and boosted the economy, 80 million German consumers, helped by an unemployment rate at 5%, will start buying more from their neighbours and spend their euros on the beaches of Spain and Greece as the West Germans did before reunification. People don't realise how Germany can be a growth engine for the rest of Europe, because since reunification they've had sluggish growth. This time is over, and it is nonsense to think that 10 million Greeks and 10 million Portuguese can bring the euro down while 80 million Germans and 60 million French people get back on their feet and start spending again.
At the end of next year, the US will pale in comparison, running the world's largest deficit ever, with no plans on how to reduce it, because of a paralized political system that is incapable of agreeing on tough decisions and selfish citizens who prefer to use future generation's money rather than cutting today's expenses and bite the bullet. 2011 will be the year of the US debt crisis, and it won't be long before this spin about the US Treasuries sell-off being driven by a "better growth outlook" is proven as the most ridiculous piece of propaganda ever.
With all that fair weather on the continent, it sounds like a great opportunity for the Germans and French to start shooting at each other again. Don't deny it could happen, it's in their blood.
France is what the Germans must cross to get a family meeting with their cousins in England.
Hence all the troubles.
My team is better than your team! Blah, blah, blah...
Europe will head to the dumpers as well, who do you think they export to? US and China.
One of the primary reasons I decided to stay in the US (one either stays and fights, or one flees) was that it has arable land. Fundamentals- food, shelter and water; miss these and you're dead...
so, the u.s. is the only place with good land (and water) (try the southwest.).
the only reasons i'm not leaving the u.s. is new zeland wants one million dollars (nz) to let met in, australia wants 750,000 australian and will only allow me three years at a time, and, of course, my ira money is in the hands of u.s. controlled 'trustees'. (and i'm just too old.)
In other words, the United States will sit idly by while watching its swap lines and other forms of bailouts not only cause an EU recovery, but go surging past the US? Demotion. Back of the class. Dunce hat. Nose in corner.
Peter Schiff is a very very smart man!
www.nacocapital.com
That is a fitting video from 2007.
2007 is relevant today. It is relevant to everyone who says it is futile to short this market. To all of you, I ask, where were you in 2007?
If you were clued in in 2007, like Peter Schiff and some of you were, you were shorting that market. I was shorting that market and I had the best investing year of my career -- Ambac, MBIA, Fannie, Corus Bank, Fannie Mae, homebuilders, Indymac. Fish in a barrel.
Up until the peak, the climate was very unfriendly to bears, and it was much worse than today. The laughter Schiff earns in that video reminds me of the conventional wisdom of this blog, which is that shorting is futile (tellingly, that is a Robo quote).
Today's market is phony, you say (constantly). The Fed is the only bidder. Bennie bucks. Yes, you are correct, ZH'ers. But to you I say, remember 2007. Today's phony market is nothing compared to the phony market of 2007.
Today, only world governments are desperately pumping. In 2006 and early 2007, you had the frenzied peak of the entire market clinging to phony beliefs and old paradigm valuations.
I am short this market because it is phony. That is what shorts do. If you had a pair, you would be too.
The difference now is the specter of serious big time inflation (maybe even hyper), not only do you have to call your shorts right (I agree it isn't that hard in todays market) but you've got to take all those dollars you net and immediately put them into something that will hold the value. I tend to think gold is a good bet but with all the criminals that are running the world financials markets I don't rule out anything. I wouldn't put it past them to seriously depress the price of gold, if only temporarily, among other things to fuck up anybody that's trying to pull what you're trying to pull.
Still I would be interested to hear your strategy on what you plan to do with all those dollars you net from shorting... Logic says it's a great play but since when was the market logical or rational especially these days. I could easily see you getting burned.
I'm scared shitless of this market and simply stock piling gold, pms and commodities with any dollars I can find that I don't need ot live for the next few months and hoping for the best. Whoever calls it is doing so at least partly with luck. This market is way too out of control and manipulated.
If you believe criminals are in control, then why do you assume they will allow you to profit from owning PMs? The small-time robber takes at the point of a knife, the pros do it through excise taxes and anti-hoarding laws. I see a time when people with large stashes of PMs will be labeled as terrorists (look at all the guns and ammo!), and the "authorities" will simply confiscate everything.
To-date I feel that I've done pretty well by my decisions. How things end up won't be known for sure until the books are closed (meaning that I'll be dead and therefore unable to assess it all :-) ).
Sold a home mid 2005, which was at the national housing peak: one could say that I "shorted the housing market." Have rented since. Dumped any/all stocks (minimal) in 2000 (got nailed by the crash). I hedged with PMs and currency exchange (CAD): only possible after the exit of wife #1. Two months ago I exchanged the accumulated fiat for physical (Ag) land, taking out a mortgage (timing worked out such that I hit the recent rate bottom).
It all came with a price. I wasn't out partying while everyone else was. Viewed as a doomer and or a nut by many. No TV: quit paying to be propagandized to! (and get off your butts and do something!) No credit cards. Never have owned a new car: been commuting via bicycle for over 5 years. Had one marriage collapse as a result (though she, who walked away, now tells me that I was right about everything and has land of her own). My mortgage terms were pretty steep in that I had to put a lot (of fiat) down, basically draining my cash (shorted the USD? complied with TPTB wanting us to get rid of our currency- the ONE thing that I did go along with them on!).
It's a different day today though. Best advice is to stay out of debt (unless it's cheap debt and it's able to provide you with something meaningful, something that is able to produce/return something). Have a partner (wife/husband) who is on the same page as you are: my current wife utterly rocks in this regard. Concentrate on the only true fundamentals: food, shelter and water. Don't be greedy. Look to be productive. And, yes, diversify (in order to check risk, and to open up more avenues for taking advantage of rising opportunities).
Reminds of 2008, when the MSM used references like "Mother Merrill" and other terms to reinforce the perception of longevity, reassurance, and continuity. Whenever an entity relies on psychological implication and assumptions to exist, that entity is basically...
Full of shit.
Right. So then....what?
If the problem is that the debt cannot only not be repaid, but not even serviced, what is the solution? When individuals get in that fix they go bankrupt and start over.
How does an entire global economy go bankrupt and start over?
http://strikelawyer.wordpress.com
the solution is a one time revaluation of gold to $50,000 per oz. to beef up the asset side of the balance sheet for western economies which are gold heavy.....largest holder of gold at % of reserves.....portugal.....next italy......need I say more
Truly that is the obvious answer to Europe's problems, a sudden and massive revaluation of their gold holdings. So I imagine the stick they're poking the Arabs with to no longer price oil in dollars is quite large.
So the ECB decides that from now on the price of gold (in EUR) is say 10,000/oz and that's it?
Wow. Sounds like a plan!
no, 1st of all # will be much higher..the higher the better for the CB's......doesn't everyone want their assets to be worth as much as poss? That 1 time reval will be arbitrary based on some formulation. The gold will float freely from that point...if the level was set to high fiat will rise vs gold ...to low and gold will rise further...From then on people will be able to choose whether to keep their savings in fiat or gold with gold lquidity being backstopped by the CB's via the banks. This is how govts will measure the popularity of policies. Strong medicine will cause inflows from gold to their fiat. If a particular CB wants increase gold reserves they use strong medicine to create demand for their fiat. Easy money CB's like usa will have their fiat slide even further and their gold reserves will be depleted. At some point this outflow would cause policy reversal.....gold will be the driver of responsible govt
no, 1st of all # will be much higher..the higher the better for the CB's......doesn't everyone want their assets to be worth as much as poss? That 1 time reval will be arbitrary based on some formulation. The gold will float freely from that point...if the level was set to high fiat will rise vs gold ...to low and gold will rise further...From then on people will be able to choose whether to keep their savings in fiat or gold with gold lquidity being backstopped by the CB's via the banks. This is how govts will measure the popularity of policies. Strong medicine will cause inflows from gold to their fiat. If a particular CB wants increase gold reserves they use strong medicine to create demand for their fiat. Easy money CB's like usa will have their fiat slide even further and their gold reserves will be depleted. At some point this outflow would cause policy reversal.....gold will be the driver of responsible govt
That's part of it. But what about the debt? Anyone holding gold is fine under your proposal, but what about everyone and everything else?
govts continue to inflate away/monitize the debt until its all paid off........meanwhile prices have skyrocketed and anyone who didnt have physical gold is fucked...there is no other way...monitize debt.....revalue gold to beef up left side of balance sheet
What on earth are you talking about?
A solution to the current debt problem is to hyperinflate until everyone except the tiny minority that holds physical gold is bust?
That doesn't make any sense whatsoever.
what other choice is there...if they apply haircuts investors will not trust the bond mkt again, therefore no funding...have you not realized financial powers do not care one bit about citizens...only to maintain this corrupt system. Will thge people fight bac? maybe...will the people win...probably not.....master planners have no other choice. Yes it is insanity but their greed and lust for power is boundless. Therefore they wil give it a shot and see if they can keep this thing from breaking. If it does they already have their arks built.
A country going bankrupt will not end funding for all eternity. There is no financing hell to which irresponsible nations are banished. In the end, if it looks like a place that should be invested in, then it will attract capital... whether it's a year, decade, or century after default.
Gold will be revalued despite central banks efforts, not as an intended result.
WAR!!!!
Haircuts!!!!
New monetary and financial system...???
How far can our fearless leaders kick the can down the road? There'll be the devil to pay when the can is kicked in front of an oncoming bus.
Deleveraging is a bitch. Unfortunately, the trades and the leverage are lopsidedly bullish. The casualties will be heavy when everyone tries to take the same exit ramp.
"The casualties will be heavy when everyone tries to take the same exit ramp."
And that's It in a nutshell!
Fundamentals: food, shelter and water. Each must evaluate for these. Will those fiat dollars ensure these fundamentals? Will PMs? Remember: food is going to become more scarce (and water is already under extreme pressure). I'm not thinking that the exit ramp leads to cities...
DAX getting slammed.
Crude now back under $90.
Might be a short trade coming up in stocks.
Probably a tradeable low in bonds.
I'll be watching to see how the bank stocks react.
I used to think we could get out of this mess a year and a half ago....now with all the new programs, QE´s, lies, taxes, regulations.....I think default is the only option and a very messy and violent one that will be...the politicians are NOT addressing the problem....and not one person who caused all this is close to going to jail...not one politician..not one bank CEO....so it goes on and on and on...until it fails for some reason...and it will someday..there is no right or wrong anymore
I don't know who said it the other day, but "the social contract is breaking down."
It was improperly notarized.
Then fed into a computerized system and the original shredded.
What could go wrong?!
"....During the next year, the non-GDP factors should drive this growth train off the track..." (and I would add to this) falling off a cliff and landing upside-down in a ditch....
My best regards,
Econolicious
The growth train ONLY leads to the cliff. Planning for perpetual growth on a finite planet was, and would always be, a bad plan...
Dear Lord,
...
forgive us ALL our debts,
as we forgive ALL our debtors ....
I think you're on to something.
The ramifications are huge, though. Almost unimaginable. Once you start down the road of explicit debt repudiation you can't leave anyone out. It would have to be an across the board kind of thing.
This policy was obviously set before the age of leverage and derivatives being used as ordnance.
I'm soliciting opinions or ideas over here:
http://strikelawyer.wordpress.com/2010/12/30/inflation-deflation-debt/
Feel free to drop by and make a comment.
Its a lipstick on the pig mkt..& a pig is just a pig.
Robo is even starting to look at the Short side...!
I concur with JT defaults via a housing led decline across the board.( Bank, Corp and Individual Bankruptcy) Muni's included now also. The RE Bubbles in more exotic locations start to join in as well. Canada, China and Australia.
and the Eu situation for added excitement.
“GDP” is a big fat lie.
GDP = Gv + C + I + (Ex - Im)
Gv = total spending by government (federal, state, and local)
C = total spending by consumers
I = total investment (spending on goods and services) by businesses
(Ex - Im) = net exports (exports - imports)
- Thus, we see how Gv (comprised entirely of debt and counterfeit money) can account for ALL alleged GDP growth !!!
GDP “growth” is further exaggerated higher by under-reporting CPI dollar inflation (see shadowstats).
Wealth is “created” by pillaging natural resources such as forests, fisheries, etc. By counting the depletion of natural resources as current income rather than as the liquidation of assets, the traditional GDP calculation violates basic accounting principles.
The GDP rises whenever money changes hands. For good or ill.
Max your credit card buying junk, GDP increases. Build a prison, GDP increases.
Pay for foster care, GDP increases. Provide child care yourself, no added GDP.
Let us for now leave aside the theoretical notion of a self-regulating “invisible hand” producing the ideal results through dollar “votes”.
Let us at least agree that the current “hidden hand” is one held by plutocratic insiders who make decisions of wars and bailouts that determine the direction of trillion$ of “GDP” .
rwe2late most regulars on ZH know that GDP as a metric is broken.
As been said many times before on ZH, debt (fiscal, stimulus, monetary) driven GDP is historically meaningless. Essentially pulling growth forward at the risk of ultimately debasing the currency. Furthermore, debt has a negative impact on real GDP, but is never factored in.
So when we provide a number like percentage of debt to GDP, when GDP is also largely debt, what do we get? Well not much. Perhaps a way for the politicians to downplay the magnitude of the problem. But, at times I wonder, are they not just fooling themselves?
More meaningful would be comparing debt to net tax revenue. A way to basically judge, realistically, if we will, or politically can, pay our debts.
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The article talks about Economic models? Based on what historical trends? How do you model FED future action? Where's the correlation? The only model that perhaps applies is a long term bubble model, which can be easily undermined by crisis.
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Most of John's article was vague to the point of useless. Dammit give me something useful, some insight as to how the states will default, the vulnerabilities of municipalities and how a hung congress will be unable to help.
Mark Beck
The elephant in the room is Demographics. A huge surge of baby boomers is going to test the three big economies severely. Instead of generating tax revenue each BB now consumes tax revenue. Instead of buying McMansions each BB wants to sell his home to pay for retirement. Then there's the question of health care...
Any way you look at it we have big trouble brewing.
The U.S. can fix its demography problem by annexing Mexico. Plenty of fresh blood to pay taxes and serve as cannon fodder. Farfetched? A recent survey showed that a majority of Mexicans would prefer to live in the USA if given the choice. We can just move the border south and grant their wishes!
So we need a new baby boom. That will fix things.
Found this:
http://endoftheamericandream.com/archives/in-2011-the-baby-boomers-start...
Be scared. Be very scared.
GYWO--Bailout!
http://www.youtube.com/watch?v=8nhYAOWEKxE
Oldie but goodie.
Yet another in depth analysis of the whichness of what that mentions not in a single word that oil is $90+ for 2 of the last 3 years.
Amazing if next year will simply be boiled down to the platitude, "Don't Fight the FED".
As was this year, in essence.
Or, there is John Taylor's view ...
Neither a borrower nor a lender be.
Funny. I was gonna write a 100,000 word message that exactly equates to your one sentence message. Hmmmmmmmmmmm. Good post. Maybe I'll write my long message anyway. Not sure.