Consensus growing on global asset bubble
In Q3 we saw more of the same- ever slowing global growth combined with central bank measures that seem more desperate than ever before. In fact the WSJ just reported that global growth has slowed from 5.4% in 2011 to around 3% this year. Of course more than half of that growth coming from bloated GDP figures from China that can’t be seen as credible. This means that global growth is more like sub 3% and even our own US growth has been sub 2% for many years.
These figures are amazing when you consider that global interest rates are zero to negative around the world combined with tens of trillions in central bank stimulus since 2008. This stimulus provided by central banks combined with multi-trillion dollar global fiscal deficits is so large the average person cannot completely appreciate it’s true scale and yet despite this enormous tailwind global growth is not only awful but has been declining each of the past five years. Good thing for central bankers that they are not elected by the public for if they were they would have been fired long ago.
Instead these modern day money changers insist on doubling down on failed policies because that is the only path they know. They remain thoroughly ignorant and clueless about the Kondratieff Wave theory of long wave economic cycles and as a result there is no monetary or fiscal restraint to be seen anywhere. Such preposterous ignorance remains the primary purpose for this website as we want as many people as possible to know about the naturally recurring cycles of boom and bust that results in a prosperous creative destruction process that we should embrace. Sadly the top global government officials and central banks remain ignorant of this to the detriment of all of us. However the day soon that will change when the final stage of this Kondratieff Winter occurs. Only then will these notions pivot from far flung ideas now in denial to be self evident and obvious all along.
Why is global growth so pathetic despite the gigantic stimulus unleashed since 2008? Simple- we are in the very late, late stages of a credit cycle that began over 60 years ago that now sports almost $200 trillion in global debt, a level so staggering that no human alive can comprehend it’s scale, much like it is impossible to comprehend the distance from our Earth to Pluto. Last week the IMF sent its strongest warning ever that the bloated levels of debt threaten global growth and prosperity for years to come. That is the essence of KW theory- that growth is hampered in the very late stages of a long wave credit cycle because the severe debt overhang serves as an albatross that cannot permit substantial growth and prosperity. And of course that is precisely what we see all over the world. And yet the Kondratieff Wave theory continues to flourish and hide in plain sight, only to be exposed to most after a severe crash in global paper assets such as stocks and bonds. Never mind the all-time highs in both stocks and bonds- K-Wave theory is flexing its muscles now like never before.
One day soon I promise K-Wave theory will be embraced as the public backlash of the ruling elites intensifies. We are already seeing a global revolution of sorts with populism raging all over the world in a revolt against the trend of globalism over the past three decades. Events such as the so called Brexit vote in late June are becoming the norm and we can expect more of that for sure in the coming years. As I have described at length in previous posts we are now experiencing so many of the same conditions of the last K Winter in the 1930’s such as rising nationalism, global trade wars and the like.
The only difference I see between this decade beginning in 2008 and the 1930’s is that modern day central banks are determined to elevate paper assets to unsustainable levels and try to be super heroes with all their extravegent and over the top policy measures determines to print our way to prosperity. But no can do as the natural forces of a late stage economic winter with hundreds of trillions in debt are just too much to overcome. Here’s a secret few realize- global central banks pray at night for the only thing that can save them- hyper-inflation. Yet despite all their printing for the past eight years they cannot even attain their paltry 2% target levels. This just underscores how futile this approach has been and how one day the shame of this approach will be laid bare for all to see.
Given that such low growth rates have endured for over eight years corporations, along with global central banks, have been forced to turn to draconian measures to keep their stock prices elevated. Chief among these are stock buybacks and to a lesser degree increases in dividend payouts. Just last month the WSJ reported that the total sum of corporate buybacks since 2008 had exceeded profits for the same period, a fact that is truly astonishing. These buybacks are very telling because they reflect management’s conclusion that their excess capital is better deployed buying their stock because the opportunities for reinvestment in their businesses are so poor. Such a mega-trend does not bode well for corporate profits in the coming years but who cares? Management prefers boosting their share price in the short term through financial engineering over the more classic reinvestment that was a hallmark of US corporations for so long.
Central banks have also followed suit in their ongoing desperation to keep stock and bond prices elevated. Through their bold yet questionable actions we have seen bond prices go up since 1982 (save a brief period in 1994) and stocks as well despite a few short periods in 1987 and 2008-2009. They have deployed every conceivable measure, even negative interest rates, with enormous scale to overcome the naturally recurring economic winter but have failed miserably to generate any meaningful growth. But the forces associated with a late stage Kondratieff Winter have thwarted their plans to generate economic growth or the inflation they so desperately want so they can repay the tens os billions in debt notes they hold with a more depreciated currency in the future. But their own financial engineering will prove to be futile when the sovereign debt bubble, the biggest one in world history, bursts one day in spectacular fashion.
Let’s now pivot to the biggest threat near term to the house of cards built by central banks- the looming fate of Deutsche Bank. DB is the absolute poster child for too big to fail banks given their actions since the financial crisis of 2008. DB today can be seen as a bankrupt entity enduring a perfect storm of challenges. They have far more non performing loans than their books would suggest and their profitability is hampered by Europe’s sub par growth that is among the worst in the world, even more so than US banks they are handicapped by the ECB’s horrific policy of negative rates. Thus, their Tier 1 capital levels are dwindling and last week it was reported that several prime brokerage firms pulled their money out of DB in a classic run on the bank.
They were also hit with a proposed $14 billion fine by our DOJ and even though the final settlement is likely to be lower no one can doubt they are in peril from a capital crunch. Add in their exposure to some $3-400 trillion dollars in notional derivates and you have on hell of a powder keg brewing here. A bailout by the German Bundesbank or the ECB is I believe a certainty, the only question is when. I suspect there is a decent chance that all their shareholders could be wiped out but I am more sure they just wont allow Europe’s largest bank to fail. But look to news on the perils of DB to be a barometer of global stock levels in the coming months as even a bailout will shake global investors to their core. Let’s all hope a DB debacle won’t spread into another global financial crisis. Since 2009 global central bank policies combined with several brilliant innovations have forestalled any stock market crash and have enabled the major averages to hit new all-time highs. But I suspect these gains cannot be maintained even in the intermediate term given the outsized levels of debt among sovereign nations and corporations who have borrowed trillions in recent years to finance their outrageous stock buybacks.
Even more daunting is the fact that nearly all the gains in the major averages over the past few years have come from Amazon, Google, Apple, and Facebook because this tiny pack of brilliant innovators are the only firms showing real sustainable growth. Such a lack of breadth in gains is a hallmark of market tops and we could be near one now but it is senseless for anyone to call a market top here as long as the absurd measures that have been noted above persist. The collapse of these paper stock and bond prices will crash under the pressures of the KW when they the weight of the levitation is just too much to bear. We don’t know when but we do know it will.