Juggling Dynamite

On a long list of historically reliable metrics, the present global asset bubble is in the top 3 most extreme financial episodes of the past 100 years, surpassing 1929, 2000 and 2007. There is no question that we will be talking and writing about the mental and financial errors made during this manic period for many decades to come. Every bubble begins with an erroneous belief in a ‘new normal’ force that will not allow asset prices to go down. A belief in insatiable demand from China was a key catalyst behind the 2007 bubble peak. Belief in the supreme powers of central planners has been the catalyst behind the latest “QE” or central bank bubble peak. The train wreck unfolding in China is revealing just how foolish and misplaced these belief systems have been. And the revelation is spreading.

Discussing whether a Chinese market crash is ahead, with Ruchir Sharma, Morgan Stanley Investment Management. Here is a direct video link.

Today oil took another drubbing with most other commodities, as the slowing global economy met systemic shocks from collapsing speculative frenzy in China and a surprise “No” in Greece. As dramatic as drops have been so far, it is possible that mean reversion trends here are just getting started.

As shown in this long term chart of West Texas Crude since 1990, a retest of the 2009 lows for crude below $40 is well within reason.  Now that oil is firmly below the secular bull channel that supported it since 2001, a break below the prior cycle low of $37 in 2009 would confirm a fresh secular bear that can weigh on prices and producers for years.

The Canadian (and Aussie) dollar dumped along for the ride as short sellers renewed bearish bets on commodity centric economies and odds increased that the Bank of Canada will cut rates again this month.  See:  Would Stephen Poloz risk ‘inflaming’ Canada’s housing and debt with another rate cut.   Unfortunately, the answer is yes, because all central banks ever had to work with was cutting rates as a tool to encourage risk-taking. But because they used that prod repeatedly and recklessly for the past 15 years,  it is virtually impotent now.  The greatest effect is likely on the currency.  The loonie could easily dive toward the .70U$ area in the process (as shown below).

Throngs of Greek people voted today against the oppressive status quo of impossible debt which has been piled on them since joining the EU monetary union in 2001.  The Greeks (and most other countries) never should have given up their own currency in the first place.  The plan was unsustainable from inception.  All the creative accounting and monetary tricks since, have been designed to cover up this reality in order to enrich large corporations and bankers at the expense of everything else, including democracy.  Today’s “no” vote is finally a step in the right direction.

The outcome also underlines the glaring inter-generational divide between young and old all over the developed world today.  Older people are banking on pensions and benefits that they need younger workers to fund.  The age 50+ group has not saved enough for these commitments themselves and their spending levels are naturally falling as they age.  Not only under-saved, record amounts of older citizens are now carrying unprecedented levels of debt, driving them to work into their 70’s and beyond.  In the process, young people the world over are having difficulty finding stable work at a wage that lets them support their own life and household, while paying for the entitlements and public debts amassed.  Something has to give.

Debt was increasingly used as the stop-gap of choice the past 15 years in order to make impossible math seem possible.  Now that gig is up.  Facts must be faced, bad debts written off, entitlements cut and taxes raised.  Whatever else happens, today marked a turning point in Europe and beyond.  The next phase no doubt will be messy and full of uncomfortable negotiations and concessions, but at least it will be more honest, realistic, productive and ultimately healing of the economic plight now hampering us.

Thank you Greece for finally admitting you are bankrupt.  The Emperor is stark naked and now that you admitted it, the rest of the world can too.  As embarrassing and painful as such admissions may seem, truth is the first essential step. As always we must admit, repent and reform in order to recover.