This weeks reversal higher in the markets came on the heels of even more money printing news out of China. I cover this in more depth later in this update as well, but here’s the gist of it; The Central Bank of China (PBOC) announced another newer and even better round of quantitative easing (QE), this time in the amount of CHY 500 billion (roughly USD $84 billion). These freshly printed digits are being deposited in the 5 largest Chinese banks, in equal amounts, which they say will “encourage Chinese banks to lend more money“. Let’s hope so…their stock market just had its worst day in over 6 months and the economic news out of China has been dismal at best.
When we look at the global economy over the past 6 years, following the onset of financial collapse in 2008, it is absolutely stunning how large a role China has played. They have consistently purchased at least 50% of the world’s most important commodities (iron ore, grain, cotton, oil, gold, etc). These figures are mind blowing to say the least, but what kind of financial shape have these massive expenditures left them in? A precarious one, at best.
Sure, China’s news today turned around a poor stock market, but the BIG question that every top expert that I know and trust is asking remains the same; “how much longer will the global economy be on life support, where additional trillions in fresh currency and debt are needed each and every year just to keep the patient alive??”
IS ALL OF ASIA A BLACK SWAN EVENT WAITING TO HAPPEN?
One of the many, and most serious, global black swan possibilities is of course Japan’s ongoing economic demise, something I have written about in the VRA a great deal over the years. As a top 3 global power (along with the US and China), the coming collapse in Japan’s government bonds will send tsunami-sized shockwaves throughout the entire world, while turning this once great and proud country into the next Zimbabwe.
For those that may have forgotten, Zimbabwe was our modern day Weimer, Germany. In 1923, and as a result of missing a single debt reparation payment, Germany began its epic financial collapse…which ultimately led to the rise of power for Adolph Hitler and of course, World War II.
From 1999 to 2013, the inflation rate in Zimbabwe averaged 54,912 %. And yes, this was the average over a 14-year period. As incredible as this number may be to believe, the worst level of inflation actually occurred in July of 2008, when it hit an all time monthly high of 2,660,522 %! These are the official numbers as reported by the Reserve bank of Zimbabwe. I keep a Zimbabwe $100 trillion dollar note in my day timer, as a reminder of what happens when government finances go horribly wrong. By the way, that $100 trillion note was barely enough to cover the cost of a local newspaper.
You’re probably asking “but that was Zimbabwe…could this really happen in Japan, or to another major global economic power”?
Trust me….the leaders of both Zimbabwe and Germany never believed that it would happen to them…and these two countries are by no means alone in hyperinflationary collapse history.
Amazingly, 32 countries have experienced the total collapse of their currency due to hyperinflation over the last 100 years, with 21 countries having experienced it in the past 25 years and 3 countries in just the past 10 years(Madagascar, Romania and Zimbabwe). The United States is actually one of the few countries to have experienced not one, but TWO currency collapses during its history (1812-1814 and 1861-1865). With our current level of fiat money printing and ongoing monetary destruction, many experts believe that a third currency collapse is in the cards once again…count this author in that camp. It’s a question of when, not if…
Back to Japan. With debt to GDP now surging past 230%, Japan is well past the danger zone and as a result, the government has resorted to desperate economic measures…truly, Japan has become a financial twilight zone. In fact, Greece (by several measures) is actually in much better fiscal shape than Japan!
But as hard as this may be to believe, Japan’s financial picture is in actuality far worse than even this. Instead of measuring fiscal health using GDP figures, a better comparison is to examine each country’s debt to tax revenue, since that is the government’s source of income. This also offers a better comparison because different countries have very different levels of taxation. A country with high taxes can afford more debt than a low tax country. Debt to GDP ignores this difference. Comparing debt to tax revenue reveals a much truer picture of the burden of each country’s debt on its government’s finances.
When we use these figures, Japan is in the worst shape of every developed country, with debt as a percentage of tax revenue at a shocking 900%! In fact, they are twice as bankrupt as even Greece, which is in second place at 475%.
What about the U.S.? We have now jumped up to third place on this illustrious list, with a debt to income measure of more than 400%. If the U.S.were a family, it would have needed serious financial planning long ago. But boy oh boy does it help to have the world’s reserve currency, which forces other countries to convert their own currency into US dollars before transacting much of their international business…and for essentially all commodities, including oil, gold, silver, etc.
Not to be left off of the list is previously mentioned China. Even with today’s $500 billion (Yuan) QE, Hong Kong's index fell for an eighth session in a row overnight. In the mainland,China's two major share indexes posted their biggest daily loss in more than six months to an 8 week low, after a slew of weak economic data generated fresh worries about China's economy and prompted their latest round of QE.
China's lack of monetary growth (relative to past extremes) is a fact, and it’s resulting in the slow unwind of the entire previous boom. We’ve all seen China’s ghost cities and read about their ongoing real estate issues, but this is only the beginning.
Continue to avoid Chinese stocks. Their version of a free market system, something they call “state sponsored capitalism”, is really not much different from what we see here domestically. The U.S. ran trillion dollar plus annual deficits for 5 straight years, and while record tax revenue has helped a great deal of late, we continue to run up our unpaid tab. Through August our deficit was already at $598 billion, with 4 full months to go.
China's central bank, the People's Bank of China, continues to announce short-term boosts in credit, what we call QE, however these are minor efforts that will only slow the ultimate collapse, with little chance of reversing it.
STEPS TO TAKE NOW
While no one knows exactly how much longer QE will continue to be well received by the markets, we have all the evidence that we need to know it cannot bail out the global economy forever. At some point, much sooner than later, trillions upon trillions in new debt will have to be resolved. Unfortunately for Japan, China and the US (along with all of Europe), once interest rates begin to spike, making these payments will be more and more difficult. This is when the bond market vigilantes will pounce.
For now, make sure you have zero exposure to China and Japan….this includes Australia as well.
Sell any investment that is bond/debt related, where the maturity is longer than 3 years.
Continue to dollar cost average into precious metals and the miners....mining stocks are trading at rediculously low levels...and are as oversold as at any point in memory.
(The VRA Portfolio has a complete list of recommendations)
Next up, be ready for an explosive move higher in the VIX (the fear index). As we head into the always crazy October time frame, look for serious volatility to return....and currently, there is next to zero fear in the market, which is very interesting considering we are starting our NEXT war in the Middle East, talk of WWIII due to Russia's aggression in Ukraine and the fears of destabilization elsewhere in Europe.
The stock markets next moves are critical in determining the overall health of this market…which as I’ve written looks shaky at best, judging by almost all of the internals that I follow (momentum, sentiment, leadership and breath).
The risks surrounding us today have never appeared greater, and to top it off we now have an Ebola virus outbreak that has already claimed more than 2700 lives. The CDC and WHO are now saying that this is nowhere near over and that the worst still lies ahead, with 500,000 being infected within a few short months. In fact, the CDC just began telling US hospitals that they should expect Ebola to hit our shores, along with the specific steps to take. Scary stuff for sure. Even scarier for the 3000 US soldiers that our President just ordered to Liberia…the epicenter of the Ebola outbreak. Why our young hero's must be forced to do the worlds heavy lifting is anyones guess...just another example of Rome burning.
The stock markets of the world have ridden all of these negatives up the proverbial wall of worry…and when the central bank led buying frenzy ends, there will be hell to pay….and we will be prepared to make fortunes.
Until next time, thanks again for reading.