Like I mentioned yesterday, the elephant in the room that has had minimal focus is the global debt stockpile - see chart below- our best hope is kicking the can down the road as far as we possibly can because we won't want to see the day we have to face up to the excesses - sadly these excesses were not even enjoyed by the typical man or woman in the street but they would fall victim when the day of reckoning arrives. And assuming the Big Kahuna does not arrive to do what Schumpeter describes as "creative destruction" (the necessity to rid of zombie, leaching and poor performing companies to make way for productive asset building) in the next year or a few more down the road, then we should expect the debt build up to be even greater with time since governments of the world are ever pushing rates down to encourage more debt and speculation. So a bigger debt means the bigger the pain and the deeper the likely recession that follows. In the meantime, additional money printing and negative interest rates do little to spur the economy but only lending support for buybacks and continued speculation to prop up markets.
It is not difficult then to see a scenario where equity markets could as John Hussman postulates, deliver sub-optimal returns over the next decade (such as Buy and Hold for 10 years with 0-1% return ) - using cheap funds to support equity prices at the time when earnings are declining, implies a higher PE ratio than what the market would have previously accepted but at the same time in the absence of earnings growth, the price can only move so much for so long as price exhaustion sets when the market no longer see much more of an upside. Consequently, a moribund economy translates into a moribund state for the market that could well mirror the Japanese lost decade experience.
Latest from John Mauldin:
In his Summa Theologiae, medieval theologian Thomas Aquinas called lust a “special kind of deformity”:
This may occur in two ways: First, through being contrary to right reason, and this is common to all lustful vices; secondly, because, in addition, it is contrary to the natural order... as becoming to the human race: and this is called "the unnatural vice."
While Aquinas was talking about a different form of lust, we can easily transfer his words to today’s economic picture.
Negative interest rates, stock buybacks to raise valuations, and the idea of printing limitless amounts of money out of thin air... it’s hard to argue the fact that these run contrary to reason and that they violate the natural order.
A recent Deutsche Bank analysis shows that the major global economies now have an average government debt of more than 70% of GDP. This is the highest peacetime level in the past 150 years.
It should be quite obvious that this is unsustainable. That doesn’t seem to deter economists and bankers from trying to sustain it anyway—this time not with monetary tools, but with fiscal policy strategies like helicopter money, debt monetization, MMT, and worse.
All of these essentially say that government debt doesn’t matter and that, in some cases, we actually need more of it.
Looking at past precedents, the only way that can be true is if we are on the cusp of another WW2-like crisis.
Bridgewater founder Ray Dalio recently made headlines by saying the current economic situation reminds him of the 1930s. Ray and I often have differing opinions, but this time I couldn’t agree more.
As Mark Twain supposedly said, history may not repeat but it does rhyme. The fundamental economic conditions, and especially technology, have changed significantly since the 1930s, but human reactions and motivations are still pretty much the same.
