Scoops Lane
Thursday, 20th March 2014
Melbourne, Australia
By Dan Denning

  • Origins and destinations
  • The $16 trillion question
  • Pushing the boundaries of the tipping point

Origins and Destinations

Our descendents may look back on this week in human history and be dumbfounded at what a bunch of morons we were. Human beings can be so short-sighted. The airwaves are full of three stories today: the missing Malaysian airliner, the Russian annexation of Crimea (and the impending invasion of Eastern Ukraine), and the decision by the US Federal Reserve to reduce its monthly bond purchases by another $10 billion to $55 billion per month.

Markets seem completely unconcerned about the first two and absolutely terrified about the third. No one likes a Debbie Downer. Yet Janet Yellen might as well change her name and put a fake turd in the punch bowl while she’s at it. Stocks and precious metals fell on the Fed news.

But 100 years from now, history will little note nor long remember what happened to the gold price this week. It WILL both note and remember that the Background Imaging of Cosmic Extragalactic Polarization 2 (BICEP) experiment in the South Pole detected a twisted light wave that may change our understanding of how the universe works, and physics itself.

The gravitational waves detected by BICEP 2 seem to prove what physicists call the ‘Theory of Inflation’. In physics, inflation is not always and everywhere a monetary phenomenon. In physics, this theory of inflation suggests that the universe expanded rapidly from a very small point. That’s about as complicated as I’m going to get in today’s Scoops, since the physics of the discovery is beyond the scope of today’s report.

My point? Wanting to know where we come from and how the universe works – our origin and our destination – is as much a human instinct as clubbing your neighbour over the head to steal his property. You take the bad with the good in human nature.

And while there is always plenty of bad to talk about (if it bleeds, it leads), let’s not forget that we may be living in one of the most exciting times in all of human history, a kind of golden age for technology and understanding.

Kris Sayce had an inkling of this before I did. That’s why he was keen to start Revolutionary Tech Investor last year. Since then, he and Sam Volkering have been a dynamic duo of optimism and opportunity. Their latest manifesto from the future can be watched/read here.

The $16 trillion question

How can you have $16 trillion in credit creation in the last five years and NOT have the world’s most dangerous credit bubble?‘ I asked Phil Anderson yesterday.

That’s my point, Dan,’ Phil said.  ‘The urbanisation of China’s population is what’s creating the property cycle in China just as it created similar cycles in the UK, the US, and Australia. People speculate on land values in a race to capture economic rent. It’s basic stuff David Ricardo explained years ago.’

Phil’s been in the office recording some of his basic (and not so basic) ideas in a series of interviews. We’re going into much more depth on some of his ideas to see where they come from and how they can be applied to stock market and economic forecasts. Over the next three weeks, we’ll be recording more interviews, including Phil’s speech at the World War D conference and a live webinar the week after.

Phil speaks at 1:30pm on day two of the conference. His speech is called, ‘The Biggest Boom of All Time is Still Ahead of Us’. Based on our conversation yesterday, Phil reckons that the next month is a real danger period for stocks. But beyond that, he remains ‘exceedingly bullish.’

I won’t be publishing the video series here because I know it’s not everyone’s cup of tea. But if you’d like to watch each episode in the series once it’s published, sign up for notifications here. Once you’re signed up, you’ll be taken to a page with all the current interviews. Then, each time a new episode is published, I’ll send you an announcement so you can view it.

Dan Denning+

Pushing the boundaries of the tipping point

By Vern Gowdie

When is this whole growth charade going to end? Or do we live in a permanently comatose Japanese style economic funk?

The charade I refer to happened in our own backyard.

The recent G20 Finance Minister’s gathering in Sydney agreed to lift global growth by 2% over the next five years. The first rule in goal setting is that you need to ‘make it realistic and believable’; otherwise the chances of success are remote.

In a world where the only growth is on the liabilities side of the ledger, how achievable is genuine economic growth of 2%?

Sure, governments can continue to print and spend more than the tax revenues they generate to manufacture the 2% growth, but it ain’t real ‘stub your toe on’ growth.

Japan is the ‘canary in the economic coal mine’. These officials (and countless ones before them) not only turn a blind eye to this glaring real-life example, they actually employ the Japanese ‘remedy’.
Japan’s 23-year failed stimulus experiment tells us when the will of the people changes (preferring savings over borrowings) then unlimited and indefinite stimulus is futile.

The Bank of International Settlements’ (the central bank of central banks) latest quarterly review provided a sobering insight into how much further down the debt hole the world will go in pursuit of its Japanese-style cure.

The Bloomberg headline on the BIS review said it all: ‘Debt Exceeds $100 Trillion as Governments Binge‘. From mid-2007 to mid-2013 global debt soared from $70 trillion to $100 trillion. It took over a century to reach $70 trillion and in the space of six years another $30 trillion (or 40%) more has been added.

This data is based on numbers from a year ago, so you can only wonder how much more borrowing has been done since then. The only reason this debt level is remotely tolerable is the artificial manipulation of interest rates. The 10-year bond rate chart below shows you that the US 10-year bond rate in mid-2007 was around 5% compared to today’s 2.7%. So while debt has risen, you can see servicing costs have fallen.

The following chart is a couple of years old, but it puts the current level of US rates into historical context. In fact after this chart was published in 2012 the US 10-year rate fell to a 223-year low of 1.5%.  Note that every previous low point in this chart is followed by a mean-reverting upward swing. No exceptions. The first chart shows long rates have also started to edge their way upwards from their mid-2013 low.

Central bankers are fast running out of options to keep the Goldilocks fairytale recovery going.
With cash rates at nearly zero, there is no wriggle room to go lower. So debt can only go higher…to a tipping point.

Japan is pushing the boundaries on where this tipping point may be. Many a punter has come to grief betting on the imminent demise of Japan. But one thing we do know is that every day the Japanese economic train is getting one day closer to the solid concrete wall they are hurtling towards.

From the BIS data its evident the rest of the West is on the same train track and closing fast.
IMF Chief Economist, Olivier Blanchard issued this warning, ‘The risk of deflation is definitely before us.

It’s ‘definitely before us’ because the bleedin’ obvious is staring the European based IMF in the face.
According to Eurostat’s Harmonised Index of Consumer Prices at Constant Taxes (HCIP), which strips out one-off effects of austerity, inflation in the entire Euro area remained at a barely there 0.8% in February.

In fact France, Holland, Belgium, Slovenia, Italy, Spain, Portugal, Greece, Cyprus, Sweden and even Switzerland all registered varying levels of deflation.

China’s GDP growth rate is being revised down and the latest Purchasing Managers Index (PMI) figures are sub-50 (not great numbers for a country relying on manufactured exports).

The only global growth I see is in debt and plenty of it. The debt and demographic (ageing population) lead in the global economy’s saddlebags is certain to trigger the central bankers’ Pavlovian response of ‘more debt funded stimulus’. 

At some point the complacency in the market place engendered by central banks, is going to be replaced with concern followed ultimately by chaos.

The CEO of South Korean major steelmaker, Steel & Posco said in a recent address to shareholders:
‘…steel oversupply and global economic slowdown are inevitable‘.

This fellow is at the pointy end of the supply chain and is preparing his company for the less than robust conditions he sees ahead. You should do the same with your portfolio.

Vern Gowdie+