Tuesday, 26 September 2023 — Gold Coast, Australia

By Vern Gowdie Editor, The Daily Reckoning Australia

[9 min read]

Dear Reader,

‘…most ancient Greek philosophers did not make their money from philosophy. Many of them were from wealthy families and therefore didn’t need to work. Many of them also had wealthy patrons who paid for their expenses.’

Tales of Times Forgotten

Time is one of life’s most undervalued resources.

Most people are so busy with making ends meet on a day-to-day basis , they don’t have time to think beyond the here and now.

‘Big picture’ issues like the ‘Rise and Fall of Empires’ or ’80-year cycles of social evolution to revolution’ or ‘the common characteristics of market bubbles from 17th century Tulip Mania to present day’, are not something a lot of people have the time or inclination to study and contemplate.

However, the cyclical nature of life means that for those who live to or beyond their life expectancy, they are destined to experience ‘seasonal’ changes in society.

My father is turning 94. He went through the ‘winter’ of the 1930s and 40s. And he has now lived long enough to witness the ‘summer’ of abundant credit, attitudes of entitlement, declining levels of respect and courtesy and the pillars of society crumbling (banking, religion, education, law enforcement, judicial, government).

Fortunately, for those of us who are interested in the cyclical nature of society and markets, there are modern day ‘philosophers’ who do have the time, intellect and financial resources to dedicate to researching and educating us on what the past can tell us about a probable future.

How would you answer these five questions?

One such person is, Ray Dalio (founder of Bridgewater Associates — the world’s largest hedge fund).

Dalio (born in 1949( has done an enormous amount of research on what he calls ‘The Big Cycle’.

To quote…

‘I observed a number of big forces happening in magnitudes that never existed in my lifetime but that had existed in these magnitudes during the 1930–45 period. This drove me to study the rises and declines of reserve currencies and the countries behind them over the last 500 years and the rises and declines of China’s dynasties over the last 2,000 years, which led me to see that the same things happen over and over again for pretty much the same reasons and to make a model of these changes.’

As part of his ongoing study into where we might be in ‘The Big Cycle’, Dalio recently published an article titled ‘The State of Trust in the System’.

The article reports on the findings to five questions he asked his readers.

What would be your answers to the questions?

To quote (emphasis added)…

‘In my recent article, in which I explored the declines in truth, trust, and the rule of law in the United States, I asked five questions to see what readers thought. I received more than 43,000 responses.

‘The results are as follows:

‘Q1: Do you trust most politicians in government to render fair judgements of other politicians and non-politicians?

‘No: 89%
Too close to call: 8%
Yes: 3%

‘Q2. Do you believe that most Americans trust most politicians to render fair judgments of other politicians and non-political people?

‘No: 86%
Too close to call: 10%
Yes: 4%

‘Q3: What do you think about those in the media? Do you think that most of those in the media are painting accurate pictures?

‘No: 83%
Too close to call: 8%
Yes: 9%

‘Q4: Do you think that most Americans think that most of those in the media are painting accurate pictures?

‘No: 80%
Too close to call: 9%
Yes: 11%

‘Q5: How do you think the legal system is working? Do you think that it’s fair?

‘No: 65%
Too close to call: 20%
Yes: 15%

‘These survey results, and most other survey results, paint a clear picture of dangerously low confidence in truthfulness and trustworthiness of political-government representatives, the media, and the rule of law…

‘It is an ominous picture because these conditions are classic symptoms of stage 5 of the internal order-disorder cycle, which is just before stage 6 which is when there are great internal conflicts—typically some form of civil war.

‘That is because most people willingly follow rules and laws rather than fight for what they want only when they believe that the people overseeing the system are good and fair.

‘Without these beliefs, they are inclined to fight for what they want and believe in. When that happens, terrible fighting ensues, and order is lost.’

As the ‘seasons’ change, so too does the social, political and investment climate. Everything is connected.

Real climate change you should be aware of

Lazy policy making by central banks and unfettered political largesse may have provided society with some short-term salve, but it has done us no favours in the longer term.

We have become weak, dependent and spoiled.

Whenever anything ‘bad’ happens (like a system trying to correct the excesses of the past), the cry goes up ‘Government must do something to fix this problem’.

News flash…there is going to be an ‘event’ (like a 1930s style economic upheaval) that will be beyond the ability of central bankers to permanently fix…market forces, in a long drawn out battle, will be the victor (as they have been throughout history).

The cycle is turning, but few realise how close we might be to these ‘sunny days of summer’ turning into the ‘bleakest of winters’…now that’s a climate change you really need to be worried about.

This is later

Another who thinks deeply about cycles, politics, culture and markets, is Michael Lewitt of ‘The Credit Strategist’. Michael has been writing his newsletter since 2001.

In a recent article, title ‘This Is Later’, he warned (emphasis added)…

‘Since the year 2000, the world experienced three seminal events that changed the course of history — the 9/11 attacks, the 2008/9 financial crisis, and the Covid-19 pandemic. 

‘Each of these events unleashed political and policy responses that adversely changed the ways we govern ourselves and reinforced or accelerated negative economic and social trends. 

‘The consequences of those responses include not merely our ruined cities and their broken citizens but a debt-dependent economy and an ungovernable and corrupt political system.  

‘The last twenty years saw America rot from the inside physically and spiritually.  We can pretend that we still have time to reverse our decline but the sad reality is that “This is later.” 

‘There is no market for truth in America.  Accordingly, there is a total lack of candor regarding the true state of the American and global economy. 

‘Headlines like “Resilient Economy Defies Expectations” that appeared over the byline of Fed whisperer Nick Timiraos in The Wall Streeet Journal on September 2 are eyewash designed to distract the masses from the underlying rot. 

‘Wherever you turn, the media and Wall Street are focused on discussions of topics that only matter if you have the life-span of a dragonfly (4-6 months — yes I had to look that up).’

Later has arrived.

Debts have been accrued.

Malinvestment has occurred.

Overpricing of artificially boosted corporate earnings has happened.

Zombies are headed for the corporate graveyard.

Globalisation is being dismantled.

Peace dividend is over.

Inflation genie is out of the bottle.

Forget about what’s happening to today or next week on the markets.

Lift your eyes to see what you suspect (and, can probably feel) is coming…a high pressure system that’s going to herald in a significant seasonal change.

Until next week…

Regards,

Vern Gowdie,
Editor, The Daily Reckoning Australia

By Bill Bonner Editor, The Daily Reckoning Australia

Dear Reader,

Now I’ve got plenty of arms
Big arms. Pretty arms.
I got arms up the wazoo.

~ General Rancor, Spy Hard

The Fed is supposed to begin its “pause”…a prelude, it is widely believed, to cutting rates next year. Nearly 20 years ago, we wrote a book, with Addison Wiggin, in which we saw this coming.

On some dark day in the future, we predicted, “the Fed will panic. In desperation, [the Fed chairman] will point south, toward Argentina. ‘There…that is our only way out,’ he will say.”

That was what is known in meteorology as a ‘long range weather forecast.’ But the range is shortening all the time. And investors are beginning to look for their umbrellas.

Climbing Mt. Debtmore

Here is an item from yesterday’s news, Scripps:

‘US national debt surpasses $33 trillion for first time     

‘The U.S. national debt exceeded $33 trillion for the first time ever this week, according to the Treasury Department, surpassing a critical milestone at a time when government spending is in the national spotlight.’ 

Now, let’s widen the focus. Reuters:

‘Global debt hits record $307 trillion, debt ratios climb - IIF

‘Global debt hit a record $307 trillion in the second quarter of the year despite rising interest rates curbing bank credit, with markets such as the United States and Japan driving the rise, the Institute of International Finance (IIF) said on Tuesday.

‘The financial services trade group said in a report that global debt in dollar terms had risen by $10 trillion in the first half of 2023 and by $100 trillion over the past decade.

The latest increase has lifted the global debt-to-GDP ratio for a second straight quarter to 336%. A slowdown in growth, alongside a deceleration in price increases, have caused nominal GDP to expand less slowly than debt levels and were behind the debt ratio rise, the report said.’

And here is another report, which gives us a hint of the Fed’s coming panic, the Washington Examiner:

‘Treasury yields hit highest since 2007 as markets fret Fed action

‘Treasury yields have risen in the lead-up to the Federal Reserve’s next interest rate decision this week, with the 10-year yield hitting its highest level in more than a decade.

‘Benchmark 10-year Treasury yields were sitting at 4.34% on Tuesday, the highest they have been since 2007. Meanwhile, the benchmark two-year Treasury yield was at 5.08%, the highest it has been since 2006, although it was briefly a bit higher in March.’

Let’s see. The world’s debt pile is getting higher and higher…as interest rates go up. Somewhere up ahead, the drunk driver meets his brick wall. 

No Way, José

In July of 2020, the yield on a 2-year Treasury bill was 0.11%. Now, over 5%, it is 45 times as high. And if the world’s debt had to be financed at today’s 2-year rate, it would mean annual interest payments of more than $15 trillion — or 17% of world GDP.

Not going to happen. Can’t happen.  

The problem is the ARMs. Last week, the financial world was enchanted by the biggest IPO in 2 years. The Financial Times:

‘Shares in the chip designer, Arm, jumped as much as 20% as it began trading on the Nasdaq yesterday, valuing the Softbank-backed company at more than $63 billion.’ 

The company was worth only $32 billion in 2016. Seven years later it added $31 billion in value. How was that possible, given that sales growth and net income actually declined last year?

“We’re more diversified now,” explained the CEO.

This is, of course, no explanation. Diversity may make a company more resilient; it is not likely to make it more profitable. Last year the company had net income around $500 million. At $63 billion, the market is capitalizing the business at 120 times earnings. Or, to put it another way, if you bought the whole business…and things stayed the same…you’d have to wait until year 2,143 to get your money back. Which is a long time to expect things to stay the same in the tech world.  

Yes, some people may still have rotary phones and wear bell bottoms. Long Playing vinyl records are coming back in style. But nobody is getting rich by selling floppy disks or cassette tapes. For every new technology, there is newer technology. And for everyone who makes money betting on it, there are at least 10 old geezers living on Social Security who wished they’d sold earlier.

Things never stay the same. You have to adjust to them. Which is why it is not the short Arm that gets our attention this morning…it’s the long ARMs.  

Printing Press Prosperity

We all know that homeowners would have been better off if, when the gettin’ was good, they had gotten long-term fixed-rate mortgages. They could make their small payments…and wait for the mortgage company to beg them to pay off their loans early. 

An adjustable rate mortgage, on the other hand, in a period of rising interest rates, is murder. Imagine you have a mortgage of $300,000. You got it at 3% — or less than $1,000 per month. Now, it’s 7% — more than twice as much.  

Shorter-term loans are generally cheaper, so much of the world’s debt is short-term, and — in effect — adjustable rate. We’ve seen (above) that the official US national debt is over $33 trillion. We’ve also seen that $7.6 trillion of it will need to be adjusted over the next 12 months. Instead of paying 0.11% — as the Treasury did for a 2-year loan in 2020 — it may pay over 5%. A big adjustment. But that’s not all. Not included in the official debt total are obligations for Social Security, veterans’ benefits, disability (NOT including reparations or student loan forgiveness) and other unfunded liabilities that tote to nearly $200 trillion, according to our usually reliable source, MN Gordon at Economic Prism. These liabilities adjust daily. That is, the funds for them must be raised on the open market, as they come due.  

All this adjustable rate debt is like a dental appointment that has been put off for too long. It won’t be much fun, when you finally get in the reclining chair.

We stand by our forecast. As the rates move upward…and businesses, households and the government try to adjust, central banks around the world will panic…and go back to the printing presses.

Regards,

Bill Bonner,
For The Daily Reckoning Australia