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The Lull Before The Storm - An Ideal Chance To Exit The Casino, Part 1
Submitted by David Stockman via Contra Corner blog,
Last night’s Asia action brought another warning that the global deflation cycle is accelerating. Iron ore broke below $40 per ton for the first time since the central banks kicked off the world’s credit based growth binge two decades ago; it’s now down 40% this year and 80% from its 2011-212 peak.
As the man said, however, you ain’t seen nothin’ yet. That’s because the above chart is not merely reflective of too much supply and capacity growth enthusiasm in the iron ore industry or even some kind of worldwide commodity super-cycle that has gone bust.
Instead, the iron ore implosion is symptomatic of a much deeper and more destructive malady. Namely, it reflects the monumental malinvestment generated by two decades of rampant credit expansion and falsification of debt and equity prices by the world’s convoy of money printing central banks.
Since 1994 the aggregate balance sheet of the world’s central banks has expanded by 10X - rising from $2.1 trillion to $21 trillion over the period. This rise does not measure some kind of ordinary trend which temporarily got out of hand; it represents an outbreak of monetary insanity that is something totally new under the sun.
What it means is that the Fed, ECB, BOJ, People’s Bank of China (PBOC) and the manifold lesser central banks bought $19 trillion of government bonds, corporate debt, ETFs and even individual equities and paid for it by hitting the electronic “print” button on their respective financial ledgers.
This central bank balance sheet expansion, in fact, represented 70% of the world’s entire GDP at the time the print-fest began in 1994. Yet as an accounting matter this monumental expansion was inherently suspect .
That’s because the asset side was mushroomed by already existing assets which had originally funded the purchase of real goods and services. By contrast, the equal and opposite liability side expansion consisted of newly bottled monetary credit conjured from thin air, representing nothing of tangible value, and most especially not savings from the prior production of real economic output.
Stated differently, the central banks substituted $19 trillion of fiat credit for $19 trillion of real savings from current income that would have otherwise been required to fund debt and equity issued by businesses, households and governments during the last two deades.
Needless to say, this giant substitution drastically falsified the price of money and capital. It represented a big fat bid in the financial markets that drove cap rates to deeply sub-economic levels, meaning that bond yields were far too low and equity prices and PE ratios way too high.
Had the world economy tried to issue trillions of new securities and loans in the absence of this massive central bank balance sheet expansion, interest rates would have soared and PE ratios would have weakened, thereby short-circuiting the reckless expansion of finance which actually occurred.
In short, the torrid pace of central bank bond buying during the last 20 years has caused the global economy to became bloated with over-financialization.
In the case of debt, for example, the expansion ratio was nearly 4X. That is, total worldwide public and private debt outstanding soared from $40 trillion to $225 trillion. This astounding $185 trillion gain compared to just a $50 trillion gain in GDP, meaning that the world’s leverage ratio has soared to unprecedented heights.
The expansion of equity capital on the traded stock markets of the world showed the same trend. Global equity market cap rose by $60 trillion or at a 11% annual rate during the two decades through the May 2015 peak. That was more than double the 5.0% growth rate of nominal GDP, meaning that the implicit capitalization rate of world income was soaring even as the world economy was being bloated and deformed by the greatest credit bubble ever imagined.
At the recent peak, therefore, worldwide finance stood at $300 trillion ($225 trillion of debt plus $75 trillion of market equity) compared to just $60 trillion ( $40 trillion of debt and $20 trillion of equity) in 1994. Needless to say, this 5X gain fueled, among other things, the greatest CapEx binge the world has ever seen.
But is was not healthy, sustainable CapEx because the underlying debt and equity which financed it - a 5X surge in listed company investment during this period - was drastically under-priced. Consequently, the world is now drowning in uneconomic, excess capacity along the entire food chain of final production - mining, bulk shipping, manufacturing, warehousing, containerships and air freight and downstream distribution.
Consequently, the collapse of iron ore mining in Australia and shale drilling in North Dakota alike denote not just traditional commodity cycles in petroleum and steel, but the arrival of what will be a long-running CapEx depression that will shrink final demand for energy and steel products for years to come.
Global Capex- Click to enlarge
The chart below purports to show a difficult outlook for iron ore prices in the next several years owing to an expected further reduction of demand, while supply is expected to grow by another 5% through 2017.
But that is wishful mainstream thinking. In fact, world shipbuilding is coming to a screeching halt; industrial infrastructure building in Brazil, Turkey and throughout the EM economies is in freefall; and China’s credit Ponzi, which generated massive overinvestment in apartment buildings, industrial production and public infrastructure,is visibly toppling.
Accordingly, global iron-ore demand is likely to plunge by 20%, not 2% as shown in the graph. Prices are therefore heading into the $20 per ton range, meaning massive bankruptcies in the industry and a multiplier effect among adjacent sectors.
WSJ
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When this shit will implode it's going to be epic.
Not that it will be fun for anybody....
Wish it would hurry up and die, im running out of popcorn.
Here's the latest viral clip on youtube:
https://youtu.be/FBvX5dNdMK8
After watching this today, all I could think of is that if a society thinks this is funny...
We deserve it to be wiped out.
It's weird, we're getting the same crazy shit "humor" they have in Japan since their economy went down the drain after the 90's.
And where our biggest industry of the world are companies that sell YOUR private data and where all the morons only think about I GOTA HAVE SOME STOCKS FROM THAT COMPANY and don't give a fuck about their privacy...
We deserve it to be wiped out.
Fuck, after surfing for about an hour, I've got 50 popups, my internet froze a dozen times, my linkedin was visited by 10 anonimous visitors and my popup blocker decided to crash.
STEAL EVERYBODY'S PERSONAL INFO!!!! HE MIGHT BUY SOMETHING!!!!
I wonder who the fuck actually clicks banners?
And now, you get a lot of websites that won't even let you in without you leaving you're email! SPAM times a million! That crap takes half my bandwith!
I got a laugh out of the pirate NFL game guys who won't let you watch unless you disable your adblocker. They get really uppity and self-righteous about it.
So your avatar is very appropriate today.
APPROPRIATE IS MY MIDDLE NAME!!
I don't get that. Privacy Badger, Ghostery, work well. Flip side is many sales sites do not work. Win-Win.
I was curious about the video. It sickens me to think taht someone would find it funny. Now this is funny. https://video.search.yahoo.com/video/play;_ylt=A0LEVrdK5VxWG1gAoI0nnIlQ;...
That video is pathetically sick, twisted shit.
[linking to facebook page]
When it does, no more popcorn.
It's time to go short central banking!
Almost like runny fecal matter hitting a rotating bladed applicance?
Think instead in terms of of a giant comet made out of bubbling red-hot manure crashing through the roof of your house.
Hopefully it will wait until after the Super Bowl. We gotta chance this year.
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The Greek women are already using the "system" you allude to.
Energy cannot be created or destroyed...and that's that.
I just wish I had more of it.
In other words, things are finally about to start getting better.
After a, er, short period of dis-equilibrialization.
Imagine the look of surprise on the faces of all the Talking Heads and their dependent audiences.
Who says peak global debt is the end game ? ...we got peaker and peakest global debt left to go.
Certainty : Back against wall, they'll print without concern for remedy.
All a kid needs to become a debtslave is a few maxed out cards and being 30 to 40k down the hole and they'll never be able to repay it.
When I hear about all these young people who are so much in debt these days it's crazy!
Now, they don't need to repay it, banks don't really want them to! Just keep paying the interest year after year.
For a kid who has 40K of debt, the interest is about 400 euro's a month! That's somethings a 1/4th of their income that they give to banks!
WHO IN THEIR RIGHT MIND!!!
and then they explain me the advantages of their upgraded 850 euro's iPhone that has more pixels.
Suckers...
it does beg the questiions 1. what is the constraining variable/weak link in chain? 2. how close are we to the failure point of that variable?
I never would have believed the world (particularly us) could have escaped the last 7 yrs as unscathed as we have (& don't kid yourself - things have been a LOT less painful than they could have been). is there actually a limit? CAN the fed ultimately just [F2]-[0]-[return] its way out of student loans, private pensions, state/big city budget deficits, social security, medicare, etc? I can't for a minute believe they can but otoh I would never have believed they'd be able to scale it as far as they have either?!?
The 21st Century is the New Age of Faith.
Its duration is up to you, since once you stop believin', it's over.
Dinner is on the table! The Greater Depression is on the Menu. I'm not looking forward to the bill.
If you sit in a 24hr restaurant and keep ordering, the bill will never come.
I'll have to try that some time.
. . . __
We might all have to.
;)
Party continues until the booze runs out. Then the SHTF.
Who dies first, the Fed and Wall Street or the small people.
LOL, this shit is getting bad....How low can these commodities fucking go ? Anyone here in the steel business who has seen prices drop? Last time i bought any steel was back in 2014, but im sure those prices are falling off the cliff as well?
I can tell you scrap went from a high of about 260 A ton,To about 75. Copper. Alu, way down. Only brass seem to be holding up . And this was about 2 months ago.
Thanks, i found hot rolled prices at the CME group here : http://www.cmegroup.com/trading/metals/ferrous/hrc-steel.html . Its fallen like a rock. Makes me want to buy a shit load of that 1/4" and 1/2" plate and store it in the shed...
Me to . Encase in need to up armor a truck , if I can't get that old tank at the fairgrounds fired up that is.
Boy, it sure is going to be tough for the tax payer to bail out 21 trillion in bank malinvestments. I think i've got about $200 I can lend 'em. After that, they'll have to hit up my great x 10^13 grandkids for a loan.
When the US unemployment numbers turn negative, Frau Hildegard will scream at the Obamination and.... voila !!! A large "tax refund" will be given to all but the rich. I'd wager they'll out do Bush... perhaps $1500/individual minimum, over a five month period. If it does'nt turn the Titanic about, look for Frau Hildegard to promise double the amount.
Don't have many chips on the proverbial table these days and I'm still down slightly since August, but no matter. Before the next FOMC meeting I am all-OUT.
Share that deflation concern with the idiot suburbanites and you'll get a "WTF are you talking about. Gas is down. All is good."
. . . meaning massive bankruptcies in the industry and a multiplier effect among adjacent sectors.
News Flash!! This is EXACTLY what the bastards that caused all of this turmoil want! They want to come in just like they did in the 1930's in the last depression, and buy all of these companies for pennies on the dollar - with money created out of thin air to boot. History doesn't repeat but it rhymes really well . . . .
Sure, and then do what exactly....?
This is not the 1930's. There are now almost 8 billion people competing for the remaining resources that make a decent standard of living possible. The vast majority have no savings, no real tradable skills an no where to run to (like they could in the 1930s - remember, the "western" part of the U.S. was still less than 2% of the population prior to WWII)!!!
Your choices are global debt jubilee (bankrupting all banks and destroying the monetary system), global fucking Weimar (death of all fiat), or global world war...
choose wisely.
I missed the evidence for an increase in iron ore supply. things will be different if supply decreases. Perhaps supply will increase as it is with crude.
Finally, Stockman got a bee in his bonnet.
Way to go, Stockman, you have a brain.
Exit and go what exactly? more cash? more PMs? more property? When there is no price discovery (i.e. no way to price capital risk - interest rates do matter!!!) no one is going to risk any real capital, hence there will be no real growth or innovation...
Global fucking Weimar motherfuckers...
"This implosion of demand cannot be remedied with another round of central bank money printing because the world is already at peak debt."
What has it mattered to them so far...?
What will prevent them from doing it anyway if it keeps the housing market and the S&P levitated, and by extension, major metropolitan areas from erupting into one big Baltimore...?
dont fall victim to the Potent leader syndrome or the same meme the public believes that the Fed has their back...that the Fed will just print and the mkt will go up more. it works until it doesnt and it currently showing dimishing returns/effectiveness. Recall, if you are old enough, that during 2008 the fed cut rates very aggressively and they couldnt get in front of the mkt, it just kept falling b/c another unintended consquence reared its head.
the fed is very powerful, but at the end of the day they cannot absorb trillions of $ of sell orders. they could, but they arent ready b/c they too do not believe significant downside chances exist.
a sandpile or mountain of snow....one cannot tell which flake or grain will trigger 1/3 of the pile to collapse. a little doubt, hesistation, modest selling can and will beget an avalanche.
....still NO ONE speaks of Portfolio Lending that the broker/dealers (now 'banks') have foisted upon thier 'clients'. almost equal to total margin lending which makes the leverage int he mkt astounding!
Does it seem like China puts their PPT on pause every time a Fed rate hike is coming up?
Here in Australia, we're all really happy to be giving our natural rescourses away. After all there's no envioronmental issue, no tax breaks for the foreign owned businesses and (almost)everyone has got a massive house that just keeps going up in value. Who gives a shit what price we get for it, this is the lucky country remember!!!