Saturday, 7 February 2015

"This Down Cycle is Likely to be Remembered in a Hundred Years"

"We are in the first stage of this downturn. It is too early to see what will happen - a change of this magnitude means the darkness and mist is very great. This down cycle is likely to be remembered in a hundred years"
Crispin Odey, Hedge Fund Manager

The next great financial crash. Its not a matter of if, its when. Crispin Odey correctly predicted the first crash back in 2007/2008 and is warning once more that the system is looking decidedly shaky. Other hedge fund managers have also stated the current "recovery" is propped up by a debt fueled binge built on paper straws. I too know it will all not end well. So how bad are things?

Debt just keeps getting worse. Its been allowed to get worse as Governments are all on a fiat based based monetary standard and have moved interest rates as low as possible. In most countries Governments have also been active buyers of their own debt through schemes such as "Quantitative Easing". These factors are allowing Governments to keep the party going. Consumers once more are taking on more debt. Larger mortgages fueling real estate bubbles along with consumer credit which in the UK is back to its 2008 peak. 

The 2007/08 crisis was a warning that private debts were too high. These were caused by Governments throwing money in the system after the dot-com crisis. Their solution to the banking collapse was to throw more money into the system, thus propping up private debts and exacerbating them. At the same time Governments debts have also continued to rise at an alarming rate. So countries are back to the 2007/08 position, only in a worse state. All of which makes a mockery of the Conservatives "Austerity" program in the UK. George Osborne has not eliminated the deficit as he claimed he would back in 2010 - in fact he's not even halved it, despite another inflationary credit boom. The countries credit rating was downgraded. In four years he's borrowed more money than all previous Labour Governments in history combined. Public Spending has increased - Austerity means you cut your outgoings, not increase them. I never believed Cameron and Osbourne back in 2010. The US Dollar continues to strengthen, interest in precious metals is apparent once more and Commodity prices have tanked - all indicating the economic environment has become more uncertain.

The Bond market is a bubble. In many countries we have not seen bond rates so low for centuries. QE and fiat money are causing these abnormally low rates. When this goes bang all hell will break loose. Forget about crisis it will be Armageddon. I think we will get a number of "mini" crisis before this calamity hits us. Why? Governments will continue using monetary policy to paper up the cracks. No private bond buyers? Governments and Central Banks will buy their debt more and more, until only the Central Banks will be the major buyers. In turn this money will come out of thin air. This is a tipping point which can either result in high inflation or runaway inflation. There's two components to Inflation. Increasing the supply of money and peoples psychology, the latter is the tipping point.

  • Inflation is caused by an expanse in the money supply. Making too much money in relation to an increase in goods and services causes consumer prices to rise. A Government can get away with this process for a while like now. Markets have been lowering costs, Governments take advantage of such action by increasing the money supply. Its not at a critical point yet, but central banks are laying the foundations for it to potentially get out of control. The most important factor involved in inflation is human psychology.
  • A collapse in currency is generally caused by a fall in confidence of the public. The Public becomes weary that the Government will continue to print more money. People start trying to spend or exchange such money for anything. Thus supply outstrips demand causing it to devalue further. This cycle can be re-enforcing, prices rise further, people loose confidence thus putting increased selling pressure. If a Government has burdensome debts it becomes very hard to stop QE or raise interest rates to defend the currency as its not in a position to do so. 
The final point is of particular importance to any crisis, the general public's perception at the current time. There were few people warning prior to 2007/08 saying a crisis was coming but there were a few who could see it coming. It is only when the masses realised the reality that the crisis came. Again, the same people who were warning about 2007/08, including Crispin Odey, are sounding the alarm once more. Why? Because the fundamentals are terrible and there has to be a crisis. Governments don't stop financial mishaps, they cause them. How long have we got? No one knows. All you can do is get ready and accept this will not end well.

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