IN-DEPTH: TRANSCRIPTION - UnderTheLens - OCTOBER 2019 - Trapped - The Ensuing Market Road Map
Thank you for joining me. I'm Gord Long.
A REMINDER BEFORE WE BEGIN: DO NO NOT TRADE FROM ANY OF THESE SLIDES - they are COMMENTARY for educational and discussions purposes ONLY.
In this Month’s UnderTheLens video, I would like to further expand from a Macro Economic perspective on our recently posted September LONGWave video. I would like to discuss a Macro view of what is happening in global markets.
As such I would like to cover those items listed here.
We have witnessed in 2019 almost all Central Banks and Countries abruptly reverse Monetary Policy from a tightening bias to one of easing. Like lemmings they have followed each other as the slowing global economy has became increasingly more evident.
THE QUESTIONS THAT NEED TO BE ANSWERED BUT THE MEDIA SEEMS TO IGNORE ARE:
- WHY AFTER A DECADE (SINCE THE FINANCIAL CRISIS) HAS THE RECOVERY (WHICH HAS BEEN HISTORICALLY WEAK) RESULTED IN FURTHER SIGNIFICANT STIMULUS BEING REQUIRED??
- WAS THE CAUSE OF THE FINANCIAL CRISIS ACTUALLY CORRECTLY DETERMINED AND WERE THE POLICY RESPONSES CORRECT?
- DO WE REALISTICALLY RECOGNIZE AND UNDERSTAND WHAT THE CURRENT ECONOMIC PROBLEM WITH SLOWING ARE? IS IT CYCLICAL OR STRUCTURAL?
In our recent September LONGWave we talked briefly about how slowing economic growth has put us on the path to Corporate Buybacks and Shrinking Stock Pools ----
.... which is contributing to the Minsky Melt-Up we have been laying out in our videos for a few years now.
This Melt-Up hasn't , nor will it continue to happen without market pull backs - this should be fully expected!
This MATASII charts from our TRIGGERS Technical Analysis offering has identified the path and expected pull back areas we should expect. They are associated with Fibonacci Levels and various concurrent rising channels.
Though we are expecting a pull back in Q4 2019 - Early 2020 we feel we have more to go before the Melt-up finally ends.
We need to expand on some of the ideas put forward in the September LONGWave video to show why this path is almost completely "locked in" due to the Macro Economic parameters now set in motion.
This generic Cycle of Change model is a good illustrative starting point.
When something acts as a Macroeconomic Change Agent it Leads to Various Economic Policy Responses - Fiscal, Monetary and Public.
This in turns leads to adoption and adjustments by consumers, corporations, lenders and societal norms and expectations.
The Behavioral response if sustained, inevitably lead over time to Structural Responses in our global Economies.
At some point these Structural Responses are tested to see if they foster a stable and self correcting environment or are they fundamentally unbalanced and then lead to instability and even possibly worse outcomes.
This Cycle is normal and to be expected, if viewed in the right context.
Let's put some context to the Cycle of Change which we believe we are in presently.
The reality of the slowing Real Rate of Global Economic Growth has lead the Global Economy into an era of "Unsound Money" which in turn has lead to Impairment of the mechanics of working Capitalism. We have long held this will potentially lead to the inevitable failure of Fiat Currencies. This doesn't mean the world will collapse but as we laid out in our 2018 Thesis Paper - "A New World Order" a highly likely in the future as a consequence .
I would like to trace this Cycle of Expected Change through its four quadrants starting with the upper right quadrant to illustrate how much of what we see occurring fits as a logical consequence of the ongoing slowing global real rate of economic growth and expected change that is occurring as a result.
As a society we have failed to recognize this as a massive destabilizing force; that it is Secular and not Cyclical; it is uncoordinated regarding any sort effective global response.
All of this over time has lead to the a larger economic killer and that is Unsound Money.
In our 111 page, 2017 Thesis paper "The Illusion of Growth - When Leverage Fails" we laid out the undeniable fact of slowing REAL global economic growth RATES. The first and second derivatives of this trend are having profound impacts.
Superficially, Global Economic Growth has been rising since 1980 (we will come back to that critically important inflection date in a moment) with a major "spurt" after China entered the WTO.
But as we laid out in the 2017 Thesis paper the whole formula for Real GDP is hopelessly flawed in today's society - from the Inflation Deflators being used, to Growth in Government's contribution through massive Debt increases, to Consumption through Government transfer payments and entitlements.
For the sake of time, I will leave you to read the Thesis paper on the MATASII site.
The reality is without factoring in all the flaws in the formula, since the 2008 Financial Crisis, even the official GDP numbers are falling at unprecedented levels - the result of public policy initiated being unable to fix the problem.
The Three-Year Annualized Real GDP leading up to the 2008 Financial Crisis makes this quite clear. It has only deteriorated further despite what is now approaching $30T of artificial money and stimulus injections.
Wages and Salaries as a %GDP steadily also weakened into the 2008 Financial Crisis.
All of this leading to unprecedented massive inequality - something not seen in modern times.
What you may have noticed so far is three cusps in this part of our Cycle of Change.
' 1980 Cusp to the 2000 Dotcom Bubble Implosion cusp- to the 2008 Financial Crisis cusp to today.
Each era brought with it unprecedented Monetary, Fiscal and Public Policy responses.
This slide shows how dramatic the lift-off in Financial Asset growth as a percentage of GDP has been since 1980.
Something significant occurred here besides Volcker taking the Fed Funds Rate to historic levels to halt inflation and stagflation?
We can see for awhile after the 1980 cusp that US Productivity initially grew with the growth in Financial Assets - before separating. We can see here the 2000 and 2008 cusps which allowed further stimulus attempts at productivity growth.
However, US Median Household Income separated quickly in the early 90's as Corporate profits were maintained by returning less to workers in terms of total wages and benefits.
This slide is a little busy but it best illustrates the bigger picture at play during this period of the Cycle of Change.
Up to the 1980 CUSP population and Energy Consumption per capita was helping drive rising living standards. As a consequence rates were rising along with an increasing money supply.
Corporations and investors were seeing increasing total real investment returns.
Savings in the form of corporate profits and public savings were strong and were being invested into productive assets.
As a result and as we saw, productivity was increasing.
Rising worker wages and benefits resulted in rising standards of living across the income distribution.
However, in the late 60's, due to debt from President Johnson's Great Society and the Vietnam War, the US was forced by August 1972 under President Richard Nixon to remove itself from the Gold Standard.
In the 70's, mounting foreign debt levels due to export powers like Japan emerging, the International Balance of Payments System had to be changed from being settled in Gold to being settled via Credit. This was a profound change to the entire Global Economic System that the public didn't appreciate. We saw in an earlier slide the dramatic growth in Financial Assets as a percentage of GDP after 1980.
After 1980 interest rates were steadily lowered as the real rate of growth slowed and Total Returns were maintained effectively through lower interest rates.
Reduced Interest Rates increased consumption and reduced corporate costs.
Worker Wage growth and benefits were steadily reduced by corporations.
Government's increased debt and with it transfer payments to the public to maintain consumption.
Employment and jobs got tighter and shifted towards the non Productive Financialization of the economy
Since 2008 the Global DOW 150 has in reality barely been able to maintain its' 2008 levels.
Savings has been replaced by debt. Both for the public and corporations - all in an increasingly more difficult attempt to maintain profits by corporations and standards of living by the public.
With Savings shrinking there is less money for investment in Productive Assets. Even more problematic with behavior shifts was the investments in non-productive assets or financial engineering.
Shown via the red arrows on the right - from 1980 until 2000 we had debt explosion fostered the illusion of growth. From 2000 on we had easy credit doing the job. Both fostered through relentlessly falling interest rates.
Behind the scenes we grew a gap between Real Disposable Income and the cost of living. This gap has increasingly been filled by consumer credit per capita.
All three stages had different "personalities" but the same low interest rate, debt growth, unproductive investment of financial assets marked them all.
Returning to our Cycle of Change we see that throughout this era we had failed policy responses around the world with various forms of responses - whether QE in the US, QQE in Japan, TLTRO in the EU etc.
Consumers. Corporations, and Governments all responded differently in uncoordinated fashions because of effectively addressing symptoms versus the underlying problem.
What we saw in aggregate was what we have often referred to as Monetary Malpractice.
A path we laid out after the 2008 Financial Crisis that we felt strongly would lead to Mal-investment, Dysfunctional Markets and Delusion investments. We are there!
The malinvestment and leverage currently built into global financial assets is unprecedented and not yet fully tested under stress. Every-time there is the potential of a real stability test, new untested Monetary Policy initiatives are launched along with Fiscal and Policy changes.
You can always count on the government to change the rules, regulations and laws when problems arise. In 1980 it was Global Balances being settled by Credit, in 2008 it was "Mark-to Market" Accounting - just to name a few!
What is currently happening is that debt growth or stimulus spending is no longer delivering economic growth
It has plummeted and been negative for some time.
This is a global problem and is making Monetary Policy ineffective
Velocity of Money steadily worsens as proof of this
This has led us to the third quadrant where we have now actually unwittingly impaired Capitalism. We no longer are operating in a capitalism system but a hybrid that can best be described as Creditism.
In a Capitalist System, Savings and Investment are the primary drivers. In a Creditism System, Credit and Consumption are the drivers. The former is self sustainable. The later is unsustainable without a complete redesign of the global Economic System currently operating. The later has yet to be tested!
We are currently sustaining Creditist System through debt financed Corporate Buybacks which are elevating financial assets.
Buybacks and M&A via corporations versus investment by the public.
.. and all sorts of financial market "gamesmanship" referred to collectively as Financial Engineering.
.. and as we pointed out in the latest LONGWave is leading to less risk taking and more about "capturing" and "Preying" on others versus generic and innovative corporate growth strategies.
This will go on for awhile....
The Minsky Met-up is still underway
We see 3600-3700 and possibly higher before the system actually experiences a stress test that can not be held at bay by Monetary, Fiscal and Public policy reactions.
The likely test will be most likely show itself as a Fiat Currency Crisis. We are already seeing many of the building blocks for such a test through "De-Dollarization (our 2019 Thesis Paper), Currency Wars and Financial Repression (Earlier Thesis papers)
The next corrective consolidation is likely to appear violent but is likely to nothing more than a move towards a trend line that is going parabolic!
If all this seems like conjecture I suggest you revisit your first year calculus coarse on the first and second degree derivatives. Things can appear fine until they suddenly reverse. The rates of change warn you well in advance!
We have been getting these changing derivative rates steadily for years now!!
You have been warned!
As I always remind you in these videos, remember politicians and Central Banks will print the money to solve any and all problems, until such time as no one will take the money or it is of no value.
That day is still in the future so take advantage of the opportunities as they currently exist.
Investing is always easier when you know with relative certainty how the powers to be will react. Your chances of success go up dramatically.
The powers to be are now effectively trapped by policies of unsound money and fiat currencies.
I would like take a moment as a reminder: DO NO NOT TRADE FROM ANY OF THESE SLIDES - they are for educational and discussions purposes ONLY.
Thank you for listening and until next month may 2019 be an outstanding investment year for you and your family.