The four horsemen of the Apocalypse were the sign of the ‘end-of-days’ in the book of revelations in the Christian bible. The four horsemen in this article are: global debt, NIRP, low global growth and deflation. The ‘end-of-days’ is for the fractional reserve banking system that allows banks to control the global money supply and entrench debt driven growth.
I know some of you die hard capitalist may say that this is heresy, well maybe it is…I don’t give two hoots. But before you exit at least listen to my arguments and allow me to defend my position. I have written my concerns in a number of article, my most recent is about the ‘currency wars’; and for which I would hope most of you are now; or are fully aware of. When someone is stabbing you in the back they are not going to tell you, you must feel it, or to be clearer, actions speak louder than words.
Horseman #1: Global debt levels
This is already known to everyone so I will not go over this and bore you to death. What is now happening in financial market is the spread in awareness to this fact. Global equities have from 2013/14 rolled over (the key one being western equities- with the aberration being SHSE, which is a genuine casino). The EPS has dropped off due to a broad based fall in earnings that have missed expectations. The consumer in developed countries is tapped out. Given that these economies are consumer driven this is bad news. Many economists thought that the fall in crude prices would lead to a net benefit to the economy with more disposable consumer income. Unfortunately these economists somehow forget the massive debt burden that these consumer, companies, and governments are under. Any income will go into repaying debt and not going into spending.
Companies are facing tighter credit conditions and those in the oil patch are facing headwinds in raising capital and are cutting jobs and investment. This distress will breakout into the broader economy as banks tighten up and look for best of-bread borrowers to lend to since they are also under pressure to increase capital reserves and find growth areas to make money from.
Governments are in the cycle of austerity and are NOT going to expand their balance sheets and are trying to raise as must revenue as possible to pay of its debts (derived from bailing out the global financial markets).
So there is compression due to lower quality credit in credit markets and a flight to government bonds, no or very low appetite for consumer spending, and no government stimulus.
Horseman #2: NIR-Negative Interest Rate Policy
The transition from ZIRP to NIRP is starting to grip central banks as another policy to engender spending and growth. QE has failed and not the final nail in monetary policy in at hand….NIRP. Japan as admitted –indirectly- that its 20 year policy of QE has failed. This is a monumental policy admission with the expected silence by main stream financial media. These pundits, notably CNBC.com being the mouth piece of banks and their analysts and economist have said very little about this true ground shaking event since it points squarely at the US being the next central bank and economy in the firing line. To this point the BOE president Mark Carney made no bones last week that the direction of interest rate will be up. This is not a consequence of improving fundamentals but to dispel BoE considering NIRP.
Today’s (Wednesday 10th Feb 2016) US FED congressional hearing by J. Yellen will be key in given markets some indication on how the FED views NIRP. The Dollar has appreciated against a basket of G10 currencies over the last 2 years and the Dollar index is still in the 90’s thus interest expectations are still to the up side. With key G10 currencies weakening due to NIRP of their central banks; Dollar strength is still acting as a collar around the US economy; notably US exports which are drivers for US manufactures and GDP.
This key issue to be aware off is that after the December rate hike in the US, the US treasury yield curve has turned negative. This means that markets are not pricing in 4 rate hike projection of the FED due to the weak US fundamentals. Financial markets have now reacted to this by tightening credit spreads and yield spreads for risky debts. This has impacted high yield markets and is now contaminated investment grade spreads. Notably the financial markets are selling bank debt and are putting stress major banks as a function of their credit quality and the pricing of the assets on their balance sheets.
Horseman #3: low global growth
Well this is known….CHINA….end of story.
Horseman #4: deflation
The reduction of imports of commodities and the increased export of commodities and semi-finished and finished products from China is crushing all commodities markets apart from Agri’ which is the last to go since it will require a reduction in global population to reduce demand and supply is inelastic. This supply glut and lack of demand as the second largest economy will cripple global GDP.
Conclusion:
Over the short, medium and long term the glob will be in stagflation - low growth, low inflation/deflation, and very low interest rates or worst case negative interest rates. This will be combined with economic, financial markets and Fx shocks that will constantly lead to risk-on risk-off trading behaviors. The only game in town iare the central banks; unfortunately they are in uncharted waters and this is the crux of this article. Central bankers do not have a clue how to get out of this mess and get back to ‘normal ‘times.
My view is that they cannot get out of this mess simple due to the mountain of debt that the global banking system has built up in order to drive debt based growth. The money supply is the barometer of growth and inflation. For example in the UK @3% of the money supply is made out of currency (i.e cash) the remaining @97% is bank credit. Bank credit is the private money that banks create when they provide loans or buy assets. The other kind of money is central bank reserves (cash and other liquid assets), but this never goes into the real economy.
So the ONLY way the real economy can grow (i.e. getting access to money- 2 out of the 3 kinds of money) is via borrowing from a private bank. For many generations this has been the norm and the loosening of reserve requirements and capital requirements has allowed bank credit driven money supply of the world to balloon, along with indebtedness. This has risen to crisis levels even surpassing the levels reached in 2008/9. Thus strategically the worlds banking systems is ‘bankrupt’ …there is no more debt driven growth that can reduce the already over flowing lake of debt. This leads to my final conclusion; which, if my analysis is correct can only lead to massive defaults and thus the banks will again be the center of another crash since they are the only ones holding the can.
The real question then will then be a political one…will the voting public and tax payers in the G10 countries (the one with the most debt) allow another bailout or will there be an awakening and the restructuring of the reserve banking system.
