Thursday, February 6, 2014

Tectonic Plate-Shifting In The Global Economy

I've been writing this blog for a little over a year, and while a lot of the doom and gloom has been more of a 'slow burn' than a devastating one-off event, it appears we are officially on the cusp of the greatest global collapse of all time (I know it sounds dramatic, cause it is). If you have been following the markets (ok you probably have been more concerned with Philip Seymour Hoffman's inevitable drug overdose to care), you would notice that the Dow Jones has been tanking, Quantitative Easing has been tapered, Emerging Markets are in meltdown mode, and numerous currencies have hit the panic button. No one knew WHEN or HOW the big collapse was going to happen, they just knew it would start in Japan, where the wacky 'Abenomics' policy of it's PM Shinzo Abe kicked off in 2013 - an unprecedented quantitative easing, yen depreciation, and negative interest rates (among others). Now it's impoverishing it's rapidly aging generation due to costlier prices on imports and the government keeps issuing shit bonds to keep the financial system flooded. Well, that contagion is now spreading.

At no prior point in human history have this many economies, markets, and currencies been so inter-connected. Look back over the last few centuries and there was always one dominant currency - but it was always backed with gold. This chart details the past 600 years:


Now we are at a point where the top currencies like the USD, Sterling, Euro, and Yen are not backed by gold. They are fiat ('by decree via government') currencies that freely float and are not anchored by a stable tangible asset. Therefore they are able to appreciate and depreciate based on central bank intervention (note - NOT government intervention). This has given rise to currency wars in which certain countries will debase their currencies in order to improve their attractiveness and bring in more export revenues. Correspondingly, their competitors now look more pricey and less desirable in the global marketplace (as we are seeing with Japan). The wheels are starting to come off - and here are a few areas impacted.

Emerging Markets and Currency Instability
The most obvious leak in the boat right now is the Emerging Markets countries that are witnessing unprecedented capital flight. Turkey (doubled its overnight repo rate last week to keep it attractive), Argentina (devalued by 25% two weeks ago), Venezuela (devalued 44% in December), Russia, South Africa and Brazil are all experiencing selloffs due to their relationships with suddenly troubled and exposed China. Folks, when China cools off, the rest of us get hypothermia. Their inflated and cooked growth numbers of 7-9% are 2x the real growth and they have overbuilt and overbought. Additionally, it must be known that when the Federal Reserve started to cut it's QE program in December by $10 billion, and then another $10 billion last week (down to $65 billion of CTRL P each month), all of that money went into the hands of the 1% and the banksters, who then invested in areas of biggest growth - Emerging Markets! Various ETF's for Emerging Markets are in liquidation mode, and this is starting to catch up with the rest of the global economy. That's what happens when investors think the gravy train is leaving the station! Look at the below graph and the way markets performed when news of a taper and subsequent non-taper broke:

Those with young kids are familiar with temper tantrums. Well this is a 'taper' tantrum in the global markets. 
Fed Quantitative Easing allowed easy money to flow into hot economies from 2010 onward. Now that the spigot is tightening, so is the money flowing into these countries, which causes volatility, then panic, then more volatility until its contagious to the global economy. Bubbles and busts are more psychology than fundamentals. This is simply the latest iteration of it.

Dow Jones Plunging
Fears of a global collapse are starting to send the Dow Jones composite into tailspin mode. Down 1000 points since it's peak in mid-January. Anyone with a functioning brain knew a market correction of at least 10-20% would occur in 2014, but what the cheerleaders refuse to point out is that our economy is not getting better. Estimates of 1.9% GDP growth in 2013 will inevitably be revised downward in the coming weeks, and the unemployment number of 6.7% becomes more and more irrelevant as time goes by, since we are at 40 year lows in the 'workforce participation' pool. It almost doesn't matter if the unemployment rate drops tomorrow, because it's a massaged number that doesn't tell the real story.

Which is stronger in your book - a 6.7% unemployment rate with a workforce participation rate of 66% (like last decade), or a 6.7% unemployment rate with a workforce participation rate of 62% (like now)? What? You didn't get that context on MSNBC/Fox/CNN/CBS/PBS/ABC/NBC/NYT/Jon Stewart? And oh by the way, the CBO has just released a report indicating that Obamacare will cost the economy 2.5 million jobs over the next decade. REMINDER about any CBO calculation - they are chronically WRONG by a large percentage in their estimates. I work in budgeting and forecasting and we are usually within 1-6% within our target/benchmark. The CBO is always 30% or more OFF in their calculations and, when restated, the numbers are always WORSE. So keep that in mind as you look at these charts.


We've also watched the 3.0% yield (cost of US Treasuries interest) crash down to 2.6% since all of the embattled foreign currencies are flocking to the dollar. When yields go UP, it means people are dumping dollars/treasuries. When yields go DOWN, it means people are buying up dollars/treasuries. The USD is the equivalent of the cleanest dirty shirt in your laundry. Or the skinniest person at fat camp. Doesn't mean we are desirable, it means China/Russia aren't ready with a BRIC currency to wreak havoc on the global system. Watch the markets in the coming weeks as we hit debt ceiling talks again (see what happens when you constantly kick the can?). Watch new Fed chairwoman Janet Yellen REVERSE the taper in panic mode sometime in March. We are crack addicts when it comes to free money getting printed, and we are going through withdrawals

Banker Suicides On The Rise
A lot has been made in the news recently about the uptick in banker suicides (just kidding, they don't report this stuff). We've seen a Russell Investments exec, a JPM exec, and a Deutsche Bank exec 'suicided' in the last few weeks. Note the word 'suicided'. These aren't real suicides. These guys know shit is about to get real and were going to either spill the beans or leave the industry. Mind you, the bankers have been responsible for creating a $1.5 quadrillion derivatives market based on hocus pocus financials, rigged the LIBOR and ForEx markets, inflated the shit out of the US bond and stock market, and these Too Big To Fail (TBTF) scumbags apparently haven't learned from their mistakes in the leadup to the 2008 crisis as they play fast and loose with their investments. Expect more suicides in the coming weeks/months, and according to the chief insider at Rogue Money who goes by the name of 'V', The Guerrilla Economist, a high level Citi exec is in the crosshairs - think of this as a major sweep-up before the shit hits the fan. Just to be clear - these men are not killing themselves. Mafia-style witch-hunts are occurring behind the scenes.

Up Next: Bank Insolvency, Capital Controls, and the MyRA
I told you it was going to be a wild year for the markets in 2014, and so far, so good. At this point we are awaiting the first bank to fall. HSBC, Citi, Deutsche Bank, and any number of smaller institutions could drop at any time. It will most likely be a European bank. We are starting to see capital controls on large transactional amounts, withdrawals, monthly fees for just OWNING an account are doubling. Physical and paper precious metals are starting to decouple, the last gold/silver smash appears to have run its course, and the US government has begun its first overture towards snatching retirement savings via the 'MyRA', a retirement account invested exclusively in US treasuries!!!! You've been warned - this will NOT end well.

So that's the latest after a crazy month - watch the Sochi Olympics and pray for no terror attacks. If there is one, it will probably be a Chechen-rebel group linked to Saudi Arabia, because they are still salty at Russia for the whole Syria debacle. Anyway, have a good weekend and stay tuned!

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