China’s plunge leads global rout
Deflationary winter cycle thrives despite doubters
For many years here we have advanced that the stimulus coming from all the senseless printing schemes by central banks and the runaway deficits of sovereign governments would prove nomatch for the awesome scale of the deflationary forces that accrue in a long wave naturally recurring economic winter cycle advanced in our Kondratieff Wave theory. In recent years nearly everyone doubted this deflation would ever resurface again given the tens of trillions in global fiscal and monetary stimulus puked out by all the developed sovereign nations. We insisted all along that ultimately the higher truths underlying our Kondratieff Wave theory would prevail and the developments in the global capital markets and economies over the past six weeks have more than validated that claim. Oh yes, global debt deflation is alive like never before, proving the K-Winter cycle phase is still evolving and has much further to go before the real bust.
Even those most zealous about the prospects for sustained strong economic growth and an equally rosy outlook for a new bull market are now anguished that the reality of a sustained period of deflation is upon us. At present nearly all of the world’s largest economies such as Japan, Russia, Brazil, and Canada, etc. are in a recession while most of the rest are eking out GDP growth well below 1% a year. Such performance is dreadful especially occurring so long after the financial crisis and given such massive stimulus thereafter. In fact Brazil and Russia are in free-fall and on the verge of a full blown depression. This has occurred mainly from the near 70% plunge in oil over the past two years that in now being felt everywhere. In these two flagship BRICS countries the nasty combination of soaring interest rates and negative economic growth is so awful that their currencies are now in free fall yet sadly each one feeds on each other to create a death spiral condition that’s very difficult to fix in the near term.
Yellen’s press conference performance was incoherent at best On September 17th the Federal Reserve elected to maintain interest rates at zero but threw investors two curve balls we are still talking about today, namely that the call to keep rates near zero wasn’t even close (despite rhetoric to the contrary from several voting members including Bill Dudley before the vote) and also global markets and economies would now have an impacton their decision. This meant the Fed would react later to things such as the plunge of over 40% in China stocks since late June. Such an approach is not part of their dual mandate of stable prices and sustained growth given by our Congress and Yellen’s explanation for their decision at the press conference that followed was confused and conflicted to anyone who watched.
Global economic growth today is in tatters, and not just in the resource dependent nations such as Australia, Canada, China, etc. All nations are suffering from titanic debt loads, severe policy missteps, and weak leadership. The stated policy for so long of kicking the proverbial can down the road has finally caught up us and this new investor worldview was quite evident on when the Fed held rates two weeks ago. At first the markets first cheered then jeered their decision to postpone raising interest rates again for the first time in almost ten years. For the first time I can remember, an ultra-dovish tone from the Federal reserve did not lead to a sustained appetite for risk; instead their dour forecast had the opposite effect. For the first time I suspect since the 2008 crisis investors have awoken to the idea that central bank accommodation is a bad thing as the S&P first soared to 2020 from the algo’s on the headline of no rise in rates but then plunged over 600 Dow points in just over one session as the absurdity of their actions became too clear to ignore. I’ve been waiting to witness such a reaction as this for many years and it seems finally for the first time in years there is bona fide skepticism from investors that mindless printing and ZIRP to infinity is not such a good thing. And that my friends is a big sea change in sentiment worth noting. After all, any addict knows the first step in any recovery is admitting your addiction and clearly at 3PM on September 17th the market finally awoke to that reality. Since then the S&P has plunged almost 7% so I suspect the top may be in for this cycle.
Some propose the record setting carnage in stocks seen in the past several weeks was some garden variety “correction” that was long overdue and welcome. But when the Dow plunged 1080 points at the open on Monday August 24th, it was the biggest intraday plunge in points ever in the Dow, even exceeding the 1000 point intraday plunge of the Dow in May 2010 in the so-called “flash crash”. So it’s not too hard to propose the plunge in stocks in recent weeks is not fleeting. It does have legs. Unlike the late 1990’s Asian Tiger currency crisis or the Black Monday one day crash of 25% 1987, this crisis is unlike those because it is occurring so very deep into this very extended long wave credit cycle and is enjoined with such enormous debt loads. And two other developments suggest this time is different. First, China as the world’s second largest stock market has crashed over 40% in under two months and that has shaken confidence in their leadership more than we know. Second, China’s own economic growth has plunged to 40 year lows and since China for the past five years has provided more than half of all global economic growth and that poses a clear and present danger now to global growth.
Such a toxic confluence can’t be ignored any longer by the sell side pollyanna’s preaching China as a non-stop bull market. That dog just won’t hunt anymore nor will their pack of lies claiming 7% economic growth. Second quarter EPS numbers released by Apple, 3M and so many other US companies proved that once and for all. It’s possible China is now heading for its first Kondratieff Winter ever as an industrialized society. If that’s true it could resemble the 1873-79 period in the US that was marked by a severe decline in growth and capital investment as the excesses of the first major credit cycle in US history came tumbling down as railroad over expansion caused an investor panic so severe that credit conditions were not regained for almost seven years. The common denominator with both cases was unchecked infrastructure growth that was way too much, too fast. In the US the railroads were the culprit, in China it’s the ghost cities with all those empty skyscrapers that are a metaphor for the proverbial fools errand of spending money to dig a ditch and then refill it with the same dirt. In both these cases debt fueled growth that wasn’t so efficient and capital was not chasing it’s highest utility as it must. So if we mix one part China hard landing, one part recession for the key BRICS countries (save India), and another part Federal Reserve recalcitrance in raising interest rates then it’s hardly a stretch to imagine that stocks are under severe pressure. This deflationary time bomb, so very long in the making, seems to have taken a stronghold of the global economy in much the same way cancer can take hold of the human body- slow and steady at first, then suddenly acute.
The solution to such excessive debt must be treated right away and decisively, or else. But the main problem is that there is only one solution for this prognosis- massive debt defaults, lots of them. How did this economic cancer grow so quickly upon the global economic landscape? We would advance that the global aggregate debt now eclipsing $230 trillion USD is the principal cause although others are cited above. Anyone clued in to the notion of compound interest knows this won’t end very well. K-Wave theory proposes the more any entity is indebted over time the more onerous to overcome its debt servitude, which is common sense. Tens of trillions in defaults are on on the horizon and there’s no bailout that can prevent what must ultimately come to pass — very substantial wealth destruction coming from these defaults.
It’s the destabilizing currency markets, stupid! China’s move was a game changer Global stock markets began to decline in mid June when the indexes in China peaked and then plunged due to large margin calls on the debt that retail investors had amassed (gambled). They have been pretty shaky since then as the German DAX declined over 20% in less last month and US markets also plunged the most since the 2008 financial crisis. And then something really, really big happened August 11th, 2015 that will no doubt go down in the history books on global finance when China chose to devalue its currency to reduce its peg to the US dollar. That move was a decisive event that offers a very clear narrative underpinning the troubling but true state of nature in the global currency markets- rampant debasement by nearly all countries. But these aren’t your Daddy’s currency wars of the late 1990’s that were marked by weak Asian tigers such as Thailand or Malaysia,etc. Instead these currency wars are much more disturbing given how widespread they have become and that the worst offenders are the biggest countries on Earth- Japan, the ECB, China and the US.
These three serial debasers are also top three countries in the world for GDP and stock market valuations. And let’s not forget that Bernanke began this race to the bottom in late August 2010 with his fateful decision at the Jackson Hole summit to engage in the ultra- risky and ultra-controversial QE programs designed to monetize the US Treasury debt to goose paper assets in a ill advised attempt to create a so-called “wealth effect” to spur further US economic growth, In recent years other central banks copied
BB’s playbook despite material obstacles to successful implementation that include severe conflicts of interest politically and far too shallow of a pool of available securities outstanding to achieve the desired results. This farce will be all too clear when we come to realize we now have both lousy growth prospects and tens of trillions more debt accrued that was incurred for the stated purpose of alleviating such dour growth. Oops.
1930’s Trade Wars redux- deja vu of the last K-Winter?
We advanced here six months ago the notion that the protracted currency wars seen since 2010 are likely a modern version of the 1930’s trade wars last seen at the peak of the last Kondratieff Winter. Those trade wars began though a collective sense of self interest best understood as the classic “every man for himself” mantra that then prevailed. Such a mantra provoked most nations to panic to protect their own economic markets (but not capital markets), yet ultimately these practices exacerbated a global recession into the Great Depression. The US was all too complicit in promoting this madness then when Congress passed the Smoot Hawley Tarriff Act of 1928 that set the stage for the global trade wars of the 1930’s. The rest is history, as they say.
These protectionist policies were enacted by so many nations to prevent damage to their own economies but in fact they had quite the opposite effect since they were all done in concert and thus ultimately severely limited trade. We advanced here in early 2015 that this was occurring again yet in a much different form- currency debasement- which has become the preferred tool for nations seeking to engage in the same selfish behavior they did in the 1930’s. In fact last week in the Wall Street Journal, CEO Andrew Mackenzie of the world’s largest mining company, BHP Billiton, provided ample evidence how these protectionist policies have come to dominate the landscape in recent years. He referred to, among other things, proposed policies such as the US oil export ban and certain tariffs imposed by European countries since 2009 in what he referred to as a “clamor for protectionism” . And who would be more clued in to this than the CEO of the largest provider of materials to the entire world? No doubt, he’s keen to the peculiar and vexing challenges marking late stage economic winters and his peers are also taking note.
Moreover, President Obama has recently promoted severe trade sanctions and tariffs against China if they don’t immediately cease to be a serial violator of cyber crimes against the US and other western nations. Inaction on both sides however seems likely given how difficult is for any one or two leaders to reverse overnight several generations of accepted behavior. Although I have no credentials as a diplomat on these matters, I am quite sure that protracted trade wars and divisive tariffs are not the preferred solution here as they are likely to cause great harm to both countries much like all trade wars have over time. But sadly we are in the end game on this serious matter where nations will forge their path for years to come. Will it be like the disastrous path taken from 1928 (HSAct) to the late1930’s, or will a more evolved approach take shape that seeks to prevent the 1930’s style disaster? No one knows, but I do know this- our beloved K-Wave theory has been holding up quite well. The nuances occurring within each season are playing out much as we have projected despite the sustained rise in stocks the past few years that came in large part to ZIRP and tens of trillions in fiscal and monetary stimulus.
When conditions are so extreme as they are today at the tail end of a 70 year super-cycle of debt then the case for a Kondratieff Winter is made more clear by the higher truths that make the case for an economic winter so evident. I can think of nothing that better suits our making the case comparing the 1930’s and the present economic winter than this parallel action seen today by among all the global market players in today’s currency wars versus the approach taken during the last Kondratieff Winter cycle with those trade wars. I could live three lifetimes and never get a better chance to highlight the hallmark features that supports K-Wave theory. And that case is now stronger than ever given all that has happened since early August.
Where are we now exactly in this very extended K-Winter cycle phase? Well, my friends that is the multi- trillion dollar question that trumps everything and I am unable to provide any precise forecast due to the ceaseless printing schemes executed by all the global central banks so determined to overcome this fourth Kondratieff Winter of the modern industrial age. However I can provide some very clear guidance on the forecast of one David Barker, who I consider to be the world’s foremost expert on Kondratieff Wave theory. In fact he has no peer.
Over the years I’ve read his books, spoken to him and subscribe to his newsletter. He asserts that the very worst aspects of this extended winter won’t likely take effect until 2017 or a bit later as central banks will do whatever it takes to preserve the status quo in finance as we know it. Such a forecast that does not imply a near term and terminal stock market crash may seem a bit shocking and even disappointing to those like me who have researched this theory for so long and would be bewildered at the notion that this winter season may extend even further out to be over 20 years total (2000-2020). But over the years I’ve been very impressed that Barker has been among the very few long wavers refraining from predicting even a severe correction until recently, meaning he has been the rarest of this breed in having resisted for so long calling for a total crash
This is quite unlike the Elliott Wave advocates who since 2010 have repeatedly forecasting a market crash. Baker’s model is entirely focused on the Kondratieff economic long wave whereas the Elliott Wave model is focused on the performance of stock prices over time. But as we all know stocks have received an enormous boost since 2009 through ZIRP and so many QE programs by the Fed designed to goose paper stocks far above their true level on a real price discovery basis. This has turned the EW primary count on its head time and again for the past five years as their wave count keeps getting extended due to human interference. It is a natural flaw of that discipline even though it did work so well until central bankers put their 88 trillion pound finger on the scale to basically render the EW primary count moot in the near term.
Naturally, stocks and economic growth have decoupled like never before and this explains why Kondratieff Wave theory has trumped Elliott Wave theory the past several years. However historically, both these long wave disciplines have been more in lockstep because typically stock markets decline or tread water when global economic activity is so meager. But unchecked and seemingly unlimited QE programs from nearly every central bank on Earth has thrown out the playbook and provided for this extreme gap between stocks and the underlying economic fundamentals. Stocks eventually will revert to the mean, so to speak, but when? The primary count put out by Barker suggests we will see a severe decline of up to 25-30% from the all-time highs through October and then a new round of QE by the US and global central banks that will provide enough cushion for the markets to avoid a major crash until the very last Kitchen cycle which is expected to end in a few years.
The central bank manipulation in recent years has indeed been undertaken to a primary degree, some 20-30 or more standard deviations removed from historical norms relatively speaking and this farce just cannot be overstated. It has no doubt impacted our Kondratieff Wave theory too, but not so much really. Massive and unprecedented monetary intervention hasn’t rendered us unable to make many successful and unlikely forecasts here that have came to pass since our inception in the summer of 2007. These include forecasting the financial crisis of 2008-9 and the global stock market crashes that followed, the US Dollar index soaring, not the feared hyperinflation despite all-in QE by Bernanke’s QE schemes, gross misallocation of resources leading to rampant over-production by corporations creating a massive commodity glut, and weak global GDP growth despite all the trillions of global fiscal and monetary stimulus. But above all, KWave theory principles strongly suggested that deflation could not be tamed despite all the trillions of fiscal and monetary stimulus put forth to overcome it. For that, all the advocates of long wave economic theory can take a victory lap.
Anyone who had researched our extensive material here over the years could see there would be no escape velocity in global growth because unlike other downturns this one occurred at the end of a long wave credit cycle noted for multi-trillion dollar excesses. Tales of such miraculous rebounds from the ashes just do not occur at such late stages of these cycles until the excesses of debt are removed via massive defaults. Why? Because $230 trillion in outstanding debt (not including over one quadrillion of derivate liabilities incurred) that keeps compounding is just too much to bear. For proof of this just look to the swift and shocking annihilation of the world’s top commodity trading firm Glencore PLC or Brazilian state owned oil giant Petrobras. Like so many others they were so certain only a few years ago that commodities and most assets would keep rising higher forever yet they ultimately buckled under their own weight of excessive debt loads and brio. They are now troubled by virtue of ignoring the implications of making such heavy investments at the tail end of the largest long wave credit cycle in human history. Oops.
Despite the certainty of the awful Kondratieff Winter endgame, one certain to make the 2008-9 crisis a picnic by comparison, I must alert our readers that the primary count from David Barker remains that the endgame financial crisis has most likely been delayed until 2017 or a bit later perhaps. His models are based upon some unique harmonic ratios of the universe such as the Fibonacci sequence, golden ratio, etc. and his model goes back to the early 11th century at the genesis of mercantile commerce in Europe. His long wave model divides the long wave, into 144 equal parts. It was believed that October 14th 2014 was the end of the 144th cycle dating all the way back to the 11th century but when Barker noticed the oversized response (some tens of trillions in commitment by 4 central banks in a few days) and then realized and conveyed to us that these central banks had in fact bought one more Kitchen cycle that would extend the final carnage into the 2017-2019 period.
When I read his report then in mid October 2014, I was fit to be tied because I was so sure all these printing schemes were sure to fail soon and wasn’t that so obvious to everyone? But the four key central banks tripled down to avert a looming crash and the markets rallied into mid 2015 due to the determination of central bankers who had thwarted yet another disaster. But now the sins of the past have come hone to roost and Barker’s primary count for now is this- US and global stocks will plunge far below the 1820 S&P lows seen last October, perhaps to the 1570 levels last seen in November 2012 as the full impact of QE to infinity was initially being absorbed by the markets. The recent meltdown in stocks, GDP and confidence is now already sufficient to support such a bold call. This plunge that began in August 2015 is expected to break through the October 2014 lows, and then look out below. At some point this fall, it may seem to most like the real K-Winter end game has arrived. But Barker holds that one more massive round of global QE is in store that could delay the true reckoning until the end of the this last Kitchen cycle in a few years. While that now remains the primary count, there are several potential foils that could shatter this bull market and upend this rather optimistic count.
The scenarios below could accelerate KW end game into the near term and render the 144th Kitchen moot if any of the were to manifest in the near or intermediate term:
a) Interest rates spike too much too quickly. Even 150 bps gain on the UST 10 year note in a month or so would be plenty to destabilize global credit markets given all that leverage. Interest rates are the single largest cost of capital in any society and nearly all nations are today so dependent upon enormous credit to maintain that pace.
b) The US dollar index soars above 106.77 (FIB breakthrough number) triggering massive foreign debt repayments in USD to avoid outright defaults on several trillions in dollar denominated debt where there is a race to repatriate in a currency crisis. Any close in USD Index above 106.77 would be ultra -deflationary and incur massive EM repatriation of USD denominated debt (to mitigate currency risk from negative USD exposure. All hell would break loose from a USD index close above that level as it would trigger the biggest flight to safety ever seen in the capital markets. Deflationists like Barker and K-Wave advocates know this is the absolute worst case scenario.
c) a derivative blow-up at at one of the six global money center banks- i.e. Citibank, JPMorgan, Deutsche Bank, Barclays, etc. Their books are the mother of all black holes and even the regulators are clueless to their off balance sheet liabilities.
d) a bona fide black swan such a solar storm surge cutting off electricity, the internet being shut down or a hacking incident that takes the cake. Or something like an assassination of a major leader or a geopolitical wild card such as Russia invades Ukraine ,Estonia, or Poland
e) a China hard landing that freezes credit in China and and crushes global global growth.
It is shocking that as recently as late June of this year, most investors were still in a Xanadu phase, mesmerized by all the multibillion dollar takeover offers from big game corp hunters such as biotech Pacman Allergen and Valiant, ceaseless multi- trillion dollar stock buybacks and spinoffs (Hewlett Packard), massive stock splits (Apple and Netflix), and excessive one time special events (Abbie Vie) all designed to goose stocks in the near term, never mind the consequences. But, oh how the mighty have fallen. So look where they are now- bellwether Apple Computer near a bear market, Amazon down even more, Netflix, down over 20%, from its highs and Disney down 20% and Freeport McMoran down over 50%%, etc. since last year. Altogether there are so many of these unnerving development for our markets when the most owned and most revered icons come tumbling down to Earth so fast.
Evidence mounts that a big-time reversion to the mean is looming for stocks soon as investors come to realize that central banks are no longer important — they are just impotent.