By Shah Gilani
Welcome to insanity, which – by a definition commonly attributed to Albert Einstein – is doing the same thing over and over and expecting a different result.
Our insanity is actually a dangerously circuitous negative feedback loop.
It’s all about “Extraordinary Popular Delusions and the Madness of Crowds,” which happens to be the title of a brilliant book published in 1841 by Scottish journalist Charles Mackay. If you did not read this book, you should because it provides factual, granular evidence of what happened in the past when crowds – mostly crowds of investors – went mad following popular delusions of their day. We’re there again.
Only this time the popular delusions are exponentially more dangerous and the crowds – most of the global populous – aren’t just going to go mad, they’re going to go broke.
Here’s who’s deluding us, over what, why, how they’re doing it, and how it’s going to end… and how you can save yourself from going broke.
Who’s responsible for the insanity – and why?
It’s extraordinary, for a lot of reasons, but we’re being deluded by the two most powerful institutions on earth – governments and central banks. They’re deluding us into believing they can manufacture economic growth and prosperity. And they’re insanely doing the same things over and over that haven’t worked.
Governments are essentially out of ammunition when it comes to their ability to generate meaningful economic growth. The United States’ Congress abdicated their fiscal powers back in the 1970s to the Federal Reserve (when it gave the Fed the “dual mandate” to spur employment), so successive American administrations and legislatures have been impotent in terms of being able to generate meaningful economic growth.
European governments punted their sovereignty to the European Union and with it their individual ability to take extraordinary measures to spur country-specific growth. They too punted their fiscal powers to the European Central Bank (ECB).
China was the last giant country whose government was able to generate extraordinary growth. Now, that’s over. Emerging markets followed China and grew robustly, but nothing like China. And they’ve slowed, too.
With global growth behind us, on account of businesses and economies being subject to immutable cyclical realities, and the beyond gigantic byproduct of insane debt darkening the planet like a Death Star, economies across the world are all languishing, at best.
Globally, that can be seen in terms of PMIs, purchasing manager’s indexes. PMIs are sentiment indicators. Purchasing managers’ indexes (most economists and analysts prefer following manufacturing purchasing managers indexes as opposed to services indexes) are all hovering around the 50 line in the sand marker, where a reading above 50 means expansion and a reading below 50 points to a contractionary trend.
Nowhere is any PMI much above or below 50. They pop higher, then drop back. The U.S. ISM manufacturing PMI reading in August was 49.4. In September it rose to 51.5. Since 2008 it’s been up and down, but basically undulating around the 50 level. China’s latest PMI reading came in at 50.4, the highest it’s been since October 2014. The same is true for the rest of the world.
What that means is growth, in terms of manufacturing, is languishing. After the Great Recession we were supposed to see a big recovery. It hasn’t happened. As a friend of mine always says, “If you’re not going forward, you’re going backwards.”
Governments want the public to believe they are capable of generating growth by means of fiscal stimulus. They can’t – because they’re already too deeply in debt. The U.S., for example, is swimming in debt. Public debt’s risen $1.4 trillion so far in 2016. America’s total public debt (government indebtedness) is almost $20 trillion.
Globally, according to the IMF, gross debt, including government, private-sector (excluding financial companies) and household debt is $152 trillion. It’s delusional to expect governments to spend to stimulate growth by adding to already massive amounts of debt they can’t ever pay back.
That’s madness because increasing debt requires greater debt service payments that cancel out the net increase in GDP growth, which stagnates standards of living, ultimately depressing them. “Excessive private debt is a major headwind against the global recovery and a risk to financial stability,” IMF fiscal chief Vitor Gaspar said in a recent speech.
Governments are once again talking up fiscal stimulus because the partner they handed off their economic growth responsibilities to, their central banks, have dropped the baton.
The same thing over and over
We’ve been deluded into believing that central banks possess some magic dust to sprinkle on economies to make them grow. Globally, they’ve tried printing money, quack-a-tative easing, buying mortgage bonds and corporate bonds, and the Bank of Japan’s even been buying stocks. And none of it has worked to stimulate growth.
As a measure of how insane the delusional game is getting, the Federal Reserve is even considering buying stocks. In an exchange during Janet Yellen’s testimony before the House Financial Services Committee last week, when South Carolina Republican Mick Mulvaney said to Fed Chair Janet Yellen,
Her response was (emphasis mine):
If you clear away the smoke and mirrors from Yellen’s answer, she’s saying if Congress gave the Fed more power they’d be buying stocks.
The delusion is that governments and central banks can mastermind growth with gimmicks. Only free markets, left to their ups and downs, can create growth.
What’s not working is government and central bank interference in global deleveraging. Their efforts to stem natural deflationary cycle lows facing economies on the heels of the 2008 blow-off of leveraged indebtedness, cut off the free market’s salutary course.
The same thing is going to happen. There’s going to be a day of reckoning. Only this time it’s going to be the real deal. There’s only one way to play the end game.
Ride stocks up, as long as they go up. Ride bonds up, as long as they go up. And get out and short them with both hands when they start slipping.
And, by the way, we’re almost there.
Shah Gilani is one of the world’s foremost experts on the credit crisis. He’s a seasoned veteran of old-line New York and Boston investment banks and trading houses and is currently the editor of several reputed financial journals.
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