January
21, 2015
The Biggest Bubble In Financial History is Bursting
The
mainstream financial media likes to focus on stocks because:
1)
The stories are a lot sexier than bonds or currencies
2)
They make for better hype jobs than bonds or currencies
If
your job is to sit in front of a camera selling the notion of getting rich from
investing, you’re not going to talk about bonds or currencies (maybe the latter is of interest
but only with insane amounts of leverage which usually bankrupts a trader in
his or her first trade).
However,
today stocks are in fact a very minor story. They are, in a sense, the
investing equivalent of picking up pennies in front of a steamroller.
That steamroller is the $100 trillion bond bubble.
For
30+ years, Western countries have been papering over the decline in living
standards by issuing debt. In its simplest rendering, sovereign nations spent
more than they could collect in taxes, so they issued debt (borrowed money) to
fund their various welfare schemes.
This
was usually sold as a “temporary” issue. But as politicians have shown us time
and again, overspending is never
a temporary issue. This is compounded by the fact that the political process
largely consists of promising various social spending programs/ entitlements to
incentivize voters.
This
type of social spending is not temporary… this is endemic.
The US is not alone… Most major Western nations are completely
bankrupt due to excessive social spending. And ALL of this spending has been fueled
by bonds.
This
is why Central Banks have done everything they can to stop any and all defaults
from occurring in the sovereign bonds space. Indeed, when you consider the bond
bubble everything Central
Banks have done begins to make sense.
1)
Central banks cut interest rates to make these gargantuan debts more
serviceable.
2)
Central banks want/target inflation because it makes the debts more serviceable
and puts off the inevitable debt restructuring.
3)
Central banks are terrified of debt
deflation (Fed Chair
Janet Yellen herself admitted that oil’s recent deflation was an economic positive)
because it would burst the bond bubble and bankrupt sovereign nations.
The
bond bubble, like all bubbles, will burst. When it does, everything about
investing will change.
Bonds
have been in bull market since the early ‘80s. Thus, an entire generation of
investors and money managers (anyone under the age of 55) has been investing in
an era in which risk has generally gotten cheaper and cheaper.
This,
in turn, has driven the rise in leverage in the financial system. As the
risk-free rate fell, so did all other rates of return. Thus investors turned to
leverage or using borrowed money to try to gain greater rates of return on
their capital.
Today,
that leverage has resulted in $100 trillion in bonds with over $555 trillion in
derivatives based on bonds.
This
bubble, literally dwarfs all other bubbles. To put this into perspective, the
Credit Default Swap (CDS) market
that nearly took down the financial system in 2008 was only a tenth of this
($50-$60 trillion).
When this bubble
bursts, 2008 will look like a picnic."
(Source: Graham Summers, Phoenix Capital Research)
China’s Ultimate Debt Bubble:
27 Times Growth in 14.5 Years
"We have shown many times in the past how the U.S. debt bubble mushroomed in the
boom that started in 1983. U.S. debt grew 839% in 25 years into the bubble peak
of the first quarter of 2009. That was 2.68 times GDP growth.
How can you have debt grow 2.68 times GDP and not have a debt crisis?
Any economist that didn’t and doesn’t see that as a problem (think Paul
Krugman) should be driving a limo instead. At least they could keep the suit
that way.
But as you would suspect, China makes that look like nothing. Just since 2000,
or 14.5 years, China’s total debt grew from $1 trillion to $27.35 trillion or
2,635% while GDP grew from $1 trillion to $9 trillion.
Look at this
chart…
China’s debt
grew 3.43 times GDP for 14.5 years. That has got to be the fastest growth rate
of any major country ever.
Yet many economists praise China’s new state-driven capitalist model. Yes, now
governments can take debt and leverage to extremes that the free market system
could never dream of… That’s a good thing?
The U.S. and most developed countries have now taken over the economy and are
setting short and long-term interest rates at zero or less when you adjust for
inflation and target growth and inflation rates.
The central bankers want to run our economies like a machine as if it were an
inorganic process when it is actually a very dynamic organic process that plays
on opposing forces: boom and bust, innovation and creative destruction,
inflation and deflation, and success and failure. That’s the secret to the
golden goose of free market capitalism.
Many investments will always fail, that is how we learn and evolve. But
governments in a top-down and less accountable process will almost always make
worse investments than the bottoms-up free market system.
China now has 27% of urban homes vacant, excess capacity of 30% to 40% in major
industries from cement to aluminum, and hordes of empty malls, offices, roads,
bridges and rail systems. Real estate has gone up over 7 times since 2000 –
does that sound like a bubble to you? The U.S. real estate bubble was a mere
2.2 times.
The government has suddenly pushed 220 million unskilled people from rural
areas into urban areas where they’re not even registered citizens. What happens
to these people when the bubble bursts?
China is going to finally prove once and for all that top-down, centrally planned
economies are far inferior to bottoms-up free market ones. Russia wasn’t enough
proof for clueless economists. They’re going to have to eat their words on
this.
You could look at China’s debt to GDP ratio of 2.64 times versus that of the
U.S. and say that’s not as high as us at 3.54 times. But emerging countries
have much lower debt ratios than developed ones as their consumers have much
lower incomes and are much less credit worthy.
China’s debt ratios are more than twice that of similar countries like Brazil
or India.
China’s capital investment from the government has been far higher and has
lasted far longer than any other emerging country. This investment and debt
binge is truly unprecedented!
The best comparison with the U.S. would be to compare China’s debt growth for a
similar time frame into the peak of the U.S. bubble, or 14.5 years from the
third quarter of 1994 into the first quarter of 2009 as the chart below shows.
China’s total debt grew 8.74 times as fast as
U.S. debt in 14.5 years. Holy crap, we have no idea what a debt bubble is!
China
will NOT have a soft landing. It will fall like an elephant.
Those 220 million people that they forced into urban areas are screwed. They
will be jobless and likely not even have the option to go back to their rural
farms for self-subsistence as those areas have now been paved over with empty
condos.
At least they’ll have those empty condos for squatter rights.
We’ve also been warning that the Chinese government will start restricting the
growing exodus of the most
affluent Chinese (the smart money getting the hell out of Dodge). They just
announced a crackdown on taxes owed for foreign income.
The next step could be restrictions on leaving the country without a major exit
tax.
We are about to witness the greatest economic and social disaster in modern
history."
Harry Dent
DentResearch.com
