The near-certain reassertion of fundamentals is driven by myriad factors. Some of these were covered in a recent Slog Saturday Essay about interest rates, when during the second half of the piece I pointed out that only if everyone is in the same tent will the élite stand firm. China clearly isn’t in the tent: before long Beijing may start pissing into it….and before not much longer, others may join in. But there are eclectic drivers of equally unstoppable importance.
One underpinning belief among those electro-shocking the economic cadaver’s atrophied muscles, for instance, is that confidence will remain firmly behind stock market price levels supported by nothing at all beyond taxpayers’ money – aka, QE. That too cannot hold forever. We have seen unemployment figures massaged widely in the West: by Obama on the basis of those no longer claiming welfare thus being in work (bollocks) and via Cameron claiming that employment is rising (utter bollocks when you count the hours of employment involved). But ultimately, even the most cynical directionalising can’t be kept together if the other signals are all showing bright red: the number of senior US business executives selling their own stock, for example….or the eurozone economic activity figures and Chinese export figures confirming what every sane observer recognises – that (as many sources concurred in today’s second Slogpost) the global problem is one of fundamental lack of demand.
One is led back inexorably to Hoisington’s Q4 report, which asserts, ‘academic studies point directly to overconsumption relative to income in recent decades. Borrowing, leading to overindebtedness, has funded this excess spending. Economic systems must now repay or rationalize the debt in some manner.’
The plain truth is that the debt is not being rationalised, it is being increased. Greece is now seen to be a Mengele-style experiment in getting the ordinary citizen to pay. Clearly, it is a dysfunctional strategy well on the way to producing untold socio-political ramifications. Nobody – not even Lloyd Blankfein – has the balls to try that kind of nonsense in the US. So the US will continue to raise its ceilings and ignore its debts. Now go back to para 2 above and start again: it’s a vicious circle turning inside a broken model: growth through credit cannot be reinstated without yet more debt-creating credit.
A further vital factor is the age demographic…one which, within a decade, really will affect China too. In the West we have too many Oldies, and in China they have – thanks to birth control – too few Yoofs. The Chinese problem is an easy can for the kicking, but not so the post-WWII Western baby boom. Zirp has – literally in some cases – decimated the income of such people. Now, governments can ignore this plight….but once those people have to fall back on the mercy of the State, it then becomes yet another millstone round the stretched elite neck.
The Domino Theory is as relevant today as it always was: an aggregate force builds up as one domino hits another. The process speeds up the longer it continues….and once it starts, there is no stopping it. Observe these dominoes in a roughly particular order:
falling demand >> more retail bankruptcies >> higher unemployment >> more welfare costs >> rising sovereign debt >> corrupted fiat currencies >> investors desperate for better returns >> QE exacerbates currency corruption >> more pressure for better returns >> stock markets fail to meet expectations >> confidence in stock markets falls >> banks fail as sovereigns run out of funds to bail them out >> zero credit = plummeting asset prices >> gold rush.
I have tried, and for the life of me I can’t see any way around this eventual outcome. In my view (and no, I’m not a registered adviser so you have to make your own minds up, I am not directing you about what to do) over time property prices will be driven down, and safe havens like gold will be driven up in worth. It is the ultimate bottom line of indeflation, and my current survivalist strategy will be committed to it until I see conclusive evidence to the contrary.
However, the key thing is to stay glued to the telescope for every signal. As I was saying to a valued contact this afternoon, the days when you could take a firm position and then go off to play tennis for two weeks are long gone. Watch out for Estate Agent property hype and gold lows around $1515-1535. Stay in touch with people trying to sell a house, and gold bullion sites with a track record of diligent chart-watching rather than diatribes about untold wealth. I will go for it when all the planets are aligned.