What We Saw and Heard in Our Hotel

Today we spent time eavesdropping on a conversation between colleague Shae Russell and financial and geopolitical expert Jim Rickards.

Check out the snap below of Shae and Jim in conversation…

Source: Port Phillip Insider
Click to enlarge

So, what did Jim have to say? Plenty.

The full video interview will be available to Strategic Intelligence subscribers this week. And we’ll include highlights from the interview on the next episode of the Financial Anarchists podcast — due out this coming Saturday at 10:00am AEDT.

Until then, here are a few highlights of what Jim had to say…

‘[With the collapse of LTCM in 1998] we were just hours away from shutting every market in the world.

In 2018, if not before, who’s going to bail out the central banks?

When you increase the size of the system, the risk doesn’t increase in a linear way. If you double the system, the risk will increase exponentially.

I would say the US is in a Depression, Japan has been in one for 25 years…

The Australian government wants to herd savers into a pen and slaughter them!

So there you have it…Jim Rickards sitting on the fence again. Only kidding. Jim only knows one way — to call things as he sees them.

And, as he sees it, the world’s economies are heading for deep trouble. Pencil in 2018 as the year when the next major economic crisis hits global markets.

When it does, Jim says it will be bigger (much bigger) than the 2008 financial meltdown.

Reality strikes?

Yesterday, the US Federal Reserve did as the market expected. It raised interest rates. Yet Jim says that this won’t be the last rate hike. As he told Shae today: ‘I fully expect them to increase rates again in March.

You can take that to the bank. If anyone knows what they’re talking about, it’s Jim Rickards.

So, they went ahead and did it. The Fed raised interest rates…just as everyone thought they would. Gold stars for everyone.

Now comes the next problem: What happens next?

First up, based on the performance of the US stock market, there was definitely an instance of the ‘buy the rumour, sell the fact’ phenomenon at play.

After soaring over the past month, the Dow fell immediately following the Fed’s move.

Source: Bloomberg
Click to enlarge

That’s not all; the Fed appears to have thrown another spanner into the market by hinting that interest rates could rise quicker than investors expect.

Prior to yesterday’s meeting, the market expected two interest rate rises throughout 2017. After today’s meeting, the Fed has indicated there could be three additional interest rate hikes throughout 2017.

That may or may not have been enough to spook the market.

Remember, interest rates aren’t just neat accessories that have no impact on the markets. Interest rates determine the value of exchange rates and the price of money.

By the ‘price of money’, it’s important to know what that means. It means a) the return savers will receive on savings and fixed or variable rate investments, and b) the cost that borrowers must pay for fixed or variable rate loans.

The latter is the most important here. Savers will cheer the prospect of higher rates after eight years of near-zero returns. Borrowers, on the other hand, are likely to be less ebullient.

As we’ve noted many times, even though the 2008 meltdown was largely a result of excessive debts, nothing has happened to cause a reduction in debts.

In fact, over the past eight years, debt levels have soared. The US public debt now exceeds US$19 trillion. According to the Australian Office of Financial Management, Australian government debt now stands at $463.2 billion.

The debt is likely to breach half-a-trillion dollars by this time next year. What an achievement.

The problem is obvious: As borrowing costs rise, debt repayment costs rise too.

So even if, miracle upon miracle, the global economy does recover and grow, it will have to grow at a faster rate than the rising cost of debt.

Considering how much companies, governments and individuals have further indebted themselves in recent years — in an era of record low interest rates — there is absolutely no certainty that will happen.

Shush! A recession is coming

What was that about an improving and growing economy? That doesn’t appear to be a subject Australians will need to bother themselves with anytime soon.

Of more concern (if it really is a concern) is the prospect of Australia’s first economic recession in 25 years.

The Sydney Morning Herald reports:

Consumer confidence has dived to its lowest level since April in a “jolt to stability and confidence”, plunging into doubt retailers forecasts 10 days before Christmas.

Treasurer Scott Morrison has appealed to the media not to be alarmist in the wake of news showing confidence fell from 101.3 to just 97.3 in December on a scale where 100 means optimists balance out pessimists.

It’s not surprising that consumers feel this way. Australia’s economy went backwards in the last quarter. We don’t believe that economies always have to grow like clockwork.

In a normal world, the word ‘recession’ wouldn’t be such a loaded term. It would be normal for an economy to expand and contract on a regular basis.

To analogise it, an expanding and contracting economy should be no more fearful than a human being who inhales and exhales on a regular basis. We certainly wouldn’t expect a healthy human to be in a constant state of either inhalation or exhalation, fearing the words if the poor, ballooning soul should ever think to breathe out.

But that’s how traditional mainstream economists view economic growth. The economy must always ‘inhale’…in order to grow greater and greater.

It’s no wonder that we slap the term ‘bubble’ on economies and markets that grow to such unrealistically obese levels.

But, after 25 years, a recession must surely come; only, please, don’t speak about it. Be a decent chap, won’t you? As the Sydney Morning Herald notes, quoting Westpac chief economist Dr Bill Evans:

Respondents were aware that the Australian economy contracted in the September quarter, although because the media, quite appropriately in my view, chose not to raise any “recession” scares, the impact on confidence seems to have been relatively modest.

It’s an interesting notion. The definition of a recession is when an economy contracts for two consecutive quarters. The Aussie economy has just ticked off one quarter of contraction.

It is, therefore, halfway there.

Whether it ticks off the second quarter of contraction is something we won’t know until the official number comes out next year. However, is it not unreasonable to pass comment on the prospect of a recession?

Shouldn’t the media actually raise the possibility of a recession with its readers? We don’t consider ourselves to be the ‘media’ as such. We are financial analysts, but we do often stray into what you may call the grounds of the ‘alternative media’ from time to time.

Would it be so wrong for the media to discuss a recession? It appears so. The Sydney Morning Herald quotes Treasurer Scott Morrison:

“As Bill Evans from Westpac has pointed out, the media should not be using the latest GDP result to scare consumers.”

Hmmm. An interesting take. We happen to think the exact opposite. Australia’s economy hasn’t seen a recession since 1991. Far from not talking about it, it would be more useful to openly discuss it.

In fact, if sanity prevailed, it would be an ideal opportunity to advise the public that, in a normal world, a recession is entirely normal. What is abnormal is that economic growth has lasted 25 years.

But that’s not how things work. The mainstream would rather cheer the Australian team along, as they would the national cricket team, or their favourite AFL or NRL club — ‘Another unbeaten season!’

Any sports fan knows their team can’t remain unbeaten. Even Steve Waugh’s tremendous Australian cricket team suffered its share of losses during its dominating run.

But everything relies on growth — especially a debt-laden economy. And that’s the key. Indebtedness requires growth, because, without growth, it makes the repayment of debt so much harder.

Be clear: That’s the real reason behind the fear of recession. It’s the prospect of individuals and businesses becoming more cautious (read, sensible) about debt, and, therefore, creating problems for the banking system, which cannot reasonably survive without ever-increasing debt levels.

Messrs Morrison and Evans may not feel that the media needs to talk about the prospects of recession, but we do. A recession is a major possibility, and investors should do all they can to prepare for it now, while they still can.


Kris Sayce,
For Money Morning

Editor’s note: The above article is an edited extract from Port Phillip Insider.


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