The world we live in today is unlike any other past era in that information overload has taken over. One might say this is because technology allows information to disseminate instantly. Others would be correct when suggesting there is simply more happening/changing in all facets of life and in much larger fashion than ever before in history.
n fact, when writing on a topic one day, it may be old news by the time it is published, disseminated and read. While deciding on a topic and title for this missive, I realised that almost any single topic would likely be old news before even being published. Titles such as; negative interest rates, negative oil, the world is headed toward ”no bid”, deficits do matter, free money isn’t free, inflation versus deflation, liquidity versus solvency, were all considered but when put together, ”everything is worth nothing” is the final result. Let’s look at each of the above topics and then tie them together.
INFLATE OR DIE!
Negative interest rates: at the turn of the century you would have been considered a lunatic if you spoke of negative interest rates. Yes, Japan had already basically zeroed rates out. But negative? This was impossible...or was it? By 2015, some rates were beginning to go negative and by 2019, some $17 trillion worth of debt worldwide had negative yields.
Negative rates are not sustainable because it destroys capital rather than creating it. Given enough time, negative rates would destroy ALL capital! Any currency with negative interest rates is like a huge neon sign with the word ”worthless” flashing. Think of it this way, if you own an asset (any asset) someone else wants to borrow, they must pay you for the privilege. If you are forced to pay someone to lend to them, your so called asset should be swapped to the other side of the ledger because it has become a liability.
Now let’s look at what happened to oil on that fateful Monday and Tuesday where the spot price traded as low as negative $40. Storage all over the world is approaching capacity, innovative storage options were being sought such as underused transport tankers. As the real global economy sputtered and basically shut down, so did demand and use of oil. But production kept running at rates prior to the demand shock. As days went by, what to do with all this produced but unused oil? Thus, oil which has always been an asset, turned into an instant liability. As a side note, if you own real estate for investment purposes, could your property(s) end up being a liability rather than the asset you believe it to be?
Another potential title was the world is heading toward ”no bid”. As illustrated above with oil, our new world has shown that even something real and tangible can be worth less than zero. No bid can occur because no one is willing (or able) to make a bid for purchase. No bid can also occur due to margin calls. Buyers basically go on strike and will sit back and watch as forced selling occurs. Buyers will only step up when they see extreme value or when they believe the forced selling is over.
Forced selling is an important concept to understand because this is what always happens during recessionary periods. Historically, bad debt or malinvestment gets liquidated during recessions. This has always been Mother Nature’s way of cleansing the system. The problem is this, official policy has not allowed any recession since 1982 to run its full course and clean out bad debt and renew growth on its own. The Fed has been petrified they would face a remake of the Great Depression should they allow a recession to progress naturally. They always forced rates down and massively printed currency each time to abort the contraction for fear of the domino effect of failed credit. In essence, the Fed is terrified of the margin man because it will cause forced selling that will spread like wildfire as nearly everything, everywhere, is margined or borrowed against. As Richard Russell always said, central banks must either INFLATE OR DIE!
PROMISES ARE MADE TO BE BROKEN
Two other titles under consideration were ”deficits do matter” and ”free money isn’t free”. Dick Cheney once said deficits don’t matter. This past week Chairman Powell said ”now is not the time to worry about debt”. I would say this, deficits don’t matter until they do, and exactly when would be the right time to worry about debt? Deficits in essence are ”free money” as it allows one to live beyond their current means and do not have to pay for now...only in the future. Another way to think about this topic is if something has no cost to create, can it have any real value? If we can print trillions of dollars that supposedly have value, why can’t we print an extra few and give the money to everyone? Just print the money and no one ever has to go to work again, right? And going one step further, why do we even need to pay taxes? The Fed can just print enough extra currency to pay everyone’s taxes and forward the funds to their new partner The Treasury. Nirvana right? But then the question remains, if dollars are free to print...what value do they have?
Next we have the age old debate, ”inflation versus deflation”? We have always said the end game to our current system would see both simultaneously in different asset classes. But the very end would see total collapse of the currency. We are already seeing deflation in the things ”we have” such as real estate, businesses (stocks) etc. We are also seeing inflation of the things ”we need” such as food, medicines etc. What must be understood in a world of fiat currency is that the currencies themselves are in fact credit themselves. Currencies are not outright assets without liability like gold or silver, rather they are ”promises”. And as such, in financial meltdown (which is already under way and mathematical in nature), as credit gets liquidated, so does value to currency. The simplest way to state this, credit deflation ultimately destroys confidence and thus the currency itself. A destroyed currency is hyperinflationary as the final endgame. In the end, there can never be true deflation in a fiat world, because central banks will print whatever is necessary...their currency be damned!
This leads us to the ”liquidity versus solvency” issue. 2008 was called a liquidity crisis, it was not. Rather it was a solvency crisis in the private sector and in particular, derivatives, and the leveraged real estate sector. Central banks and sovereign treasuries were still solvent and the only ones with the ability to step in to save the day by absorbing trillions in bad debt/assets. Fast forward to present, central banks and sovereigns have spent 12 years propping up questionable debt/sectors, and in the process ruined their own balance sheets. They are no longer the solution, they have become a very large part of the problem!
Throughout history, fiat currencies have ALWAYS failed in hyperinflationary episodes due to over issuance. Bonds were destroyed in tandem with the currency. Stocks however acted differently. In each and every hyperinflation, stocks would bottom and then move in moonshot fashion...as measured by the failing currency with a caveat. The caveat being that stocks go up slower than the currency loses value, which leaves the owner with diminished purchasing power, but some value nonetheless. Tying all these topics together leads us to the title, ”everything is worth nothing”. Credit has been overly used to bid up all asset classes to the point where we now have an EVERYTHING bubble. Credit is central to nearly all asset valuations creating the problem that everything has someone else’s liability attached to it. Credit flows only because confidence exists. What will happen once confidence is broken or not available ? Asset values will plummet. Lack of credit will not only destroy asset values but also cripple the real economy including most importantly, production and distribution of goods. Can you say ”change of living standards”?
The inherent problem with today’s financial system (other than the fact that virtually everything on the planet has been borrowed against), is the fact that the measuring sticks (fiat currency) used to value assets is in constant flux. How can one have any confidence in the value of anything, if the yardstick is constantly changing? THE yardstick is one pure ounce of gold. What was an ounce of gold 200 years ago, is still the same one ounce and always will be. Gold and silver are THE best monies on the planet because they carry no liability and promise nothing- other than purity and the fact they were already mined and minted. All other currencies are inferior, as they are merely promises by the central banks who issue them…and- promises are made to be broken. EG