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The End is Near?




Weekly Writing 2018.04.23

We appear to be in what I would call the end of cycle in the economy and markets. In summary, I have already called the top in the equity market several months ago. I see nothing that has transpired since then to change my mind. The bond market has been in a slow decline in prices since last summer and appears to now be in the final phase of decline which normally occurs right when the decline in stocks starts to pick up steam. Many liken this period to 1987. In my opinion, it is probably more like 1994 with the exception of debt levels now at historical highs and unsustainable. Remember, 3% is like 6% in “normal” times. Also, remember what recovery we have had since 2008 has been fueled by unprecedented debt, which in my opinion will have to swapped for equity at some point in time—at least on the private side. 

 

Do you happen to remember Minksy’s three types of debt? Here they are: One, good debt which will be paid back by a stream of income—both interest and principal. Two, questionable debt which covers only interest and not principal. Three—what we have had one hell of a lot of—speculative debt which doesn’t pay either interest or principal, and maybe is not even an asset but a consumption item.

 

With the above in mind, much of the trillions of debt taken on during this recovery has created what many call “zombie corporations.” With the Fed raising short-term rates and liquidity drying up, thousands of zombie corporations will be going down. I have seen numbers indicating that possibly 20% of U.S. corporations fit in this category.

 

I need to make another comment regarding the inflation scare which recently again has caused long-term riskless (government) rates to move up. We have recently seen some commodities move upward, items such as oil and aluminum as well as copper. This makes many reminiscent of the 1970s. Don’t be fooled. Under today’s circumstances, such advances will be offset by reductions in the purchase of other items. The answer to offset this ill-fated thought is simply Amazon. Debt and Amazon simply will not allow inflation to become a permanent feature of this economy.

 

Things to Think About

1.    Most pension funds are broke (particularly public).

2.    Both money supply and velocity are declining (charts #1 & 2 below).

3.    Per David Rosenberg: the most troubling statistic is 13,000,000. That is how many new people have entered the financial field since 2009. Watch your pocketbook. They have never seen a bear market.

4.    China is in serious economic trouble.

5.    Lawyers have taken over the world. They don’t create, they redistribute.

6.    Recent economic research indicates government spending is now hurting economic growth.

7.    Economic surprise index is declining (chart #3).

8.    Market valuations today historically will not achieve returns above zero over the next 10 years.

9.    We are only halfway through the Fourth Turning.

10.  Most analysts believe the increase in gasoline costs will offset any benefits coming from the recent tax cuts.

 

So, on and on it goes. And….

Have I mentioned debt today?

 

Chart 1

 

Chart 2

Adapted from mises.org

Chart 3

 

The Best,

Don S. Peters

Information contained in these commentaries is based upon information obtained from sources both external and internal which we consider to be reliable, but the accuracy of the information and the recommendations contained herein cannot be guaranteed, nor do they constitute a solicitation for the purchase or sale of any securities mentioned herein. Information contained in this commentary may not be reproduced in any form without written permission from Donald S. Peters.