As you might know by now, Jim and I will be interviewing with Greg Hunter tomorrow for early Sunday release. We plan on talking about the current “technical” dollar short created by all the emerging market dollar loans currently on the books. Richards Russell first spoke of this and called it the “synthetic” dollar short. You see, when a borrower from a nation with a currency of their own, borrows dollars, the loan must be paid back in dollars. This creates artificial/short term yet very real demand for dollars when the loan is paid back.
What I want to talk about today is “MOPE”, management of perspective economics and give you a little background as to what to listen for when Jim and I talk. I’m doing this in the hope it will make listening to the interview more fruitful rather than listening to it
So, Jim coined the phrase many years back to describe a situation where lying about the current fundamentals could be supported or confirmed by pricing in markets. In other words, “the economy is great, just look at the Dow Jones”! Of course, markets were taken over by machines that used the fuel provided by the central bank(s) and lowered interest rates. It became one glorious and they hoped, self sustaining circle (bubble). The thought was, if markets are up then people will feel good and then borrow and spend more. They were right, but the problem is the game has “no ending” because after markets close for the day, they must reopen again the next day. What I mean here is, no matter what levels the markets got to …there is always tomorrow to deal with.
Our talk will basically be that “tomorrow” is in fact here as evidenced by the emerging market credit bubble being popped and trade wars commencing. These events show two things that do not fit into the MOPE scenario. First, Mother Nature’s law that there is a limit as to what can be borrowed and serviced has been reached by the emerging (and developed) markets. Second, trade wars and tariffs have begun because the economic “pie” has not grown fast enough to keep up with the debt many players have taken on. In other words, since the pie is not expanding, everyone wants a bigger slice of it.
The emerging market problems we are told will not be “contagious”. Do you remember hearing the same thing regarding real estate debt back in 2008? Speaking of real estate, we are already seeing 2008 2.0 begin to play out all over the world as sales volume has turned decidedly negative and is being naturally followed by softer pricing. Don’t ever forget, real estate (as have nearly ALL assets) has been pushed higher by the use of easy credit, credit is now beginning to tighten. The world is totally financially interconnected where nearly everyone trades with everyone else, and everyone owns everyone else’s debts (and these debts are considered assets). Because of this structural cross ownership and trade, contagion is guaranteed.
And this folks is the GIANT RUB and what you need to be thinking about when you listen to our interview. MOPE is running head first directly into reality! The reality is that rates could not really go below zero percent even though it was tried. We reached global debt saturation levels for all intents and purposes. It is the emerging markets that are first showing stress. This will spread to Asian emerging markets, then to China/EU/Japan and of course finally to the U.S..
“They” (central banks) will never let it happen you say? Well, maybe you are correct and I can guarantee the central banks will certainly try to prevent a credit meltdown. But you do understand the only tool they have to prevent such an event, right? Central banks can ONLY reverse present course and immediately crank up QE all over again …except in much larger quantities because the debt (and derivatives) outstanding are so much larger than they were just a few short years ago. Global debt is now $247 trillion (derivatives maybe 5 times that), even a 5% interest rate means that debt service is $12 trillion or so. Do you see the problem? The problem is that $12 trillion (or $18-20 trillion if rates were fully normalized) is FAR TOO MUCH FOR A $75 trillion global economy to support!
OK, enough of the “why” as we forecast it and have beaten it worse than any dead horse. Rather, listen for “why now”. It is now because the official story is coming apart at the seams. Emerging market debt cannot be hidden with derivatives. The debt is either serviced, not serviced, or …central banks must begin QE again which means printing money and lowering rates to zero again. The same can be said for the softening and very heavy global real estate markets, derivatives which have been used in all paper markets have no effect of support whatsoever. Remember, “debt” is not only a liability on one side, it is also and asset on the other side. Please read this to better understand www.zerohedge.com And in case you have not been paying attention, the only equity market that is up so far this year is the US, and ALL global debt (bond) markets are down as rates have moved higher. Markets have and are turning down all over the world, the US will not stand alone. Don’t fool yourself that the U.S.is the cleanest dirty shirt of the batch, the entire load will be cleaned in a re set.
To finish, listen closely to our interview because market participants worldwide are all huddled on the same side of the bubble boat …at a time when years of MOPE is being disproven. The vast majority who are offside also have debt carrying assets and have made moves to “chase yield”. The only assets without credit supporting price are basically gold and silver. There is great credit in those markets but that credit has been employed to keep prices from rising. The canaries in the coal mine (gold and silver) have been silenced but that hasn’t stopped participants from beginning to keel over. In the words of Sir Richard Russell, “inflate or die”. It is here and now …this is exactly the crossroads we will speak of with Greg Hunter.