Among my friends and the faithful 5 I have been talking and writing about a deflationary spiral for some time now and I thought I would explain this a little more today.
Economics can be really complex — but doesn’t have to be — basically there are two things to keep in mind, how much productive engine does the world have making stuff and how much debt does the world have needing to be serviced by that productive engine?
We measure the size of the productive engine as GDP and of course, world debt as world debt. The big lie the public has been told for years now, is that stimulus spending (or what the media calls QE) is necessary to stimulate, support and grow that engine.
This of course, is a lie and cannot continue. In fact, if all the facts and figures are to be believed, this type of monetary interference has the exact opposite effect the bumblers at the White House and Treasury wanted it to.
The world’s growth engine has been slowing down, literally in one wave after another as one government after another has either embraced QE or some version of it. This has been happening for so long, across so many economies it could NOT be a statistical fluke.
The problem? People and governments are hooked on QE, sort of like Meth, it’s users are literally being ruined in front of everyone’s eyes and they simply cannot see it for the denial. A year ago I predicted this spiral would eventually end in a deflationary spiral, an event we don’t want to happen.
The collapse of Iron Ore pricing, then Oil, and the Chinese Stock Market were all called IN ADVANCE by me and now I have my eye on the Bond markets. Why the Bond Markets? Basically bond prices operate in an inverse manner from interest rates creating a Yield To Maturity or YTM, that represents your combined return on the interest and the bond premium (or loss) expressed as yield (assuming reinvestment).
This is Ok under normal circumstances when a Bond buyer can choose to redeem or sell, into a liquid market. BUT, after trillions in QE here and abroad, bond prices are sky-high because of ultra low interest rates by the Fed for a decade now, creating the following problem for that same Fed – if they move rates up now — it will AUTOMATICALLY create another massive deflationary event on top of the other massive deflationary events happening around the globe as those bond prices attempt to adjust donward. Can the market’s liquidity handle that? I don’t think so.
What proof? For 10 years now the Fed has been warning about inflation because according to every computer model they run, that inflationary spiral should be happening. But it isn’t and the reason is simple, you can’t have inflation while also experiencing deflation, or a decline in asset values.
It’s like global warming, first the “experts’ claimed it was going to get warm, when that didn’t happen, they said it would cause cooling, but was still global warming.
Idiots. Inflation hasn’t cropped up and created any waves for the masters of the universe at the Fed as predicted, not because it’s “hiding” like these board members have actually commented BUT because the deflationary pressures in the economy OUTWEIGH the inflationary ones, and this combined with 4 or 5 times as much debt (as a percentage of the productive engine) as we’ve ever had before (worldwide) have made real growth not only difficult to achieve, but discouraged! Put all that together and when the Fed does try to raise rates I think shorting the world’s major bond markets like Germany and the U.S. will be a GREAT idea.
Shorting is when you bet the face value of an asset like a Bond, will decline, and not climb. I actually think this bond price crash development is obvious, not tricky to see and I’m amazed there has been no press about this whatsoever.
Janet Yellen, Fed head, may have everybody else fooled, but I don’t think she is fooling herself. She’s terrified to move off that low Fed rate because she knows, somewhere deep in her bones, it’s not going to be pretty.
Why? That liquidity trap will be the reason. With that many ready sellers and no buyers, it might be the crash the NYSE refuses to have because of all this QE money floating about.
I estimate this to be a $2 Trillion dollar liquidity trap, equal to what happened when Oil plunged, but without the productive kick you get from low oil prices as compensation and productive engine lift. In other words, look out, this crash will finally hurt.