ECONOMIC AND INVESTMENT THEMES
CRISIS OF THE OLD ORDER
A TURNING POINT IN HISTORY
(This is a rough draft to stimulate planning and discussion.)
END OF GIANT DEBT SUPER CYCLE THAT GOT ROLLING UNDER
REAGAN.
COMING COLLAPSE OF GLOBAL BOND MARKET BUBBLE
Other central banks have poured in money too.
This has manipulated global interest rates to extreme levels.
Just as before 2008 crash Wall Street experts full of fairy tale optimism.
Meanwhile, US has low levels of savings and investment in future. Debt as a percentage of GNP at highest level in history. Net international debt is a staggering $8 trillion. US budget deficit a structural $600 billion problem, US balance of payments deficits also a structural $600 billion problem. CRISIS OF US MIDDLE CLASS Real wages peaked back in 1973. Minimum wage peaked in 1969. Social mobility between classes lowest in developed world. Child poverty near highest in developed world. Student debt now higher than credit card debt. Middle class families have only survived via borrowing, particularly real estate debt and mothers working more hours. No longer any way to expand this. Only modern state without national health insurance. FUTURE: UNWINDING DEBT SUPER CYCLE. Option A: Orderly reform like New York 1975 – 1985 or IBM 1993 – 2000. Chances for this. Not likely. Trump is hardly a force for consensus. Option B. Far more likely. A series of collapses. America will return to the “good old days” when economic collapses were as American as the flag and apple pie. GLOBAL DEBT CYCLE “Recovery” from 2008 produced by huge wage of money printing by major central banks. In China this might work since a lot went into investment. By contrast in Europe, America and Japan money went largely to prop up rotting system. COMING TRADE WARS Can American keep on losing $600 billion a year in trade? No. However, Trump’s bad relations with allies and crude policies bode ill for orderly reform. In 1914 every one agreed a European war would be a disaster. Today every one knows a global trade war would be a disaster. However, the current situation is not tenable. Trump’s policies could wreak economic havoc against Mexico and Asian exporters like China. DEEPENING CRISIS IN AMERICA COLLAPSE OF FINANCIAL AND SOCIAL SAFETY NETS CREATED SINCE GREAT DEPRESSION America’s social safety has never been good. Clinton severely damaged what little there was with his “welfare reform” and mass incarceration policies. Trump is now proposing to shred what’s left. Meanwhile, the safety net under the banks has also been shredded. There is no more political will for a new series of bailouts. Also the money is no longer there. Thus, the next big crisis will be unlike any since 1929. IMPLICATIONS OF CRISIS FOR US BANKING SYSTEM. In the next crisis, depositors are going to pay. There will be a “bail in”. Depositors stand to lose big. This is likely to fuel panic and worsen problems. Again this has all happened before in collapses such as the 1840’s and 1870’s. LEADERSHIP CRISIS IN AMERICA Trump is not accepted by a large part of US or the world. On top of that he is very unstable. This bodes ill for crisis management. GLOBAL ENVIRONMENTAL ISSUES This is a real wild card. Evidence from Arctic and other places is grim. Chances of a natural disaster are high. For example, a Category 4 hurricane would flood most of New York and so on. We’re not even mentioning a natural EMP which could knock of power for years. GLOBAL GEOPOLITICAL ISSUES The real wild card here is the new Cold War Obama started with Russia. If this is not stopped, Russia and China will come together in a military alliance against America. All around the world a new global arms race is growing. India and Pakistan are emerging as serious nuclear powers. This will further hurt world economy.
WHO IS PREPARED? In spite of the Brexit madness Europe can weather the storm. It has modern social welfare systems in place. It does not have the huge trade problems of America. China can weather the storm in our view but this is likely to be a very bloody process. We see the Chinese government willing to use the most bloody and brutal measures. Japan is a wild card due to Fukashima and earthquake danger under Tokyo. Also Japan faces long term economic threat from China. Would not be too optimistic about this. Russia might do OK since the sanctions have already pushed Russia to be more independent. WHO IS NOT PREPARED? American is not prepared at all. Trump = political mess. Also, America’s lack of a social safety means potential for huge levels of violence Also, idiocy and incompetence of America’s overpaid financial leaders bodes ill. Mindless optimism prevails (as it did before the big crashes of 2001 and 2008.) Mexico faces big trouble due to Trump’s hostile policies and its dependence on US. WHAT TO DO? Cash is not safe since the banking system is not safe. Government securities of major governments are probably OK although even this could be a problem since Republican lunatics have openly suggested defaulting. Also, Trump’s lunatic budget and health care programs are likely to throw US government finances into chaos since Democrats will never accept the crazy and criminal cuts proposed. EMERGING FROM THE CRISIS Stocks that reasonably priced are hard to find but some deep value investors probably have some good ideas. Dominant companies that have the leadership and the finances to survive will become more dominant. After the crisis the global center of financial power will shift sharply away from Wall Street for the first time since World War I. Germany and China will become more powerful. Environmental investments will be more necessary as these problems get a lot worse. Solar power is a huge long term winner. A potential wild card here is Bolivia which has the world’s largest lithium reserves. (However, new battery technologies will be vital.) In Europe military spending will rise as relations with America sour. In America defense spending is less clear due to its severe financial problems. In general we see spending on war and internal security rising as the world become more violent. We are living at a turning point is history. 500 years of white imperialism are crumbling. The decline began with the two world wars. The new American imperial, plutocratic “order” put in by Clinton is now crumbling. Trump’s election is the final nail in the coffin. China is emerging as the global super power as it was for hundreds of years. India is rising. The age of Wall Street that began in World War I is ending. The legacy of western imperialism and neo-imperialism is a planet in deep environment crisis. We are going to spend the next few hundred years dealing with this. People may say this is grim but life has always been a challenge. The “green” preindustrial world was a grim place. There is always a will to survive.