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Financial markets are fuelling dangerous times

The bond bubble is cracking, and societies are breaking apart.
The trillions rammed into the ‘economy’ benefitted the few while while millions lost their jobs and homes. Image: Shutterstock

The financial markets have their share of gloom merchants who are always predicting financial collapse. Once every decade or so, they turn out to be correct, but listening to them you risk missing out on some spectacular market gains.

But what when sober and pragmatic fund managers such as Donald Amstad from Aberdeen Standard Investments, with £583 billion under management in 80 countries, warn of imminent collapse in the West?

In particular, he is warning of a collapse in the one asset class traditionally regarded as a safe haven – bonds. The West has reached the end of the road as far as quantitative easing (QE) is concerned. As interest rates drop to zero or lower, central banks will be tempted to fire up the printing presses yet again, but this time banks, pension funds and insurance companies will go bust.

Amstad used some alarming language in an interview he gave with, warning of social collapse and even civil war in countries such as the US. Fund managers typically have a commercial bias towards rising asset prices.

Those who have lived through a few market crashes will recall the admonition of these managers to remain faithful, trust the markets, and wait for the rebound. And they’ve generally been correct. Up to now.

Massive money printing in the post-2008 financial era has not been particularly inflationary for consumers.

This has given rise to the mistaken notion that money printing can be carried on forever without consequence. But there are consequences.

Those billions and trillions of currency rammed into the ‘economy’ have ended up inflating stock and bond prices, to the ultimate benefit of the 1% of the 1%, while millions of ordinary people lost their jobs, their houses and their livelihoods.

In economic terms, this is called the Cantillon effect, named after 18th Century economist Richard Cantillon, who observed that new money created does not filter through the economy evenly. The first to benefit are those sitting closest to the money, such as banks and big companies. They get to take this new money onto their balance sheets first, spend it, and only later does inflation start creeping into the rest of the economy.

It’s a form of redistribution from the poor to the rich. This is precisely what has happened since 2008.

What has alarmed Amstad, among others, is the fact that so much toilet paper money is floating around the global economy that yields have turned negative.

This means you are losing money by investing in bonds in Japan, Switzerland and elsewhere. Put another way, investors are paying governments to keep their money safe. The following chart from Deutsche Bank shows how much global debt is being invested at negative interest rates.

Source: Deutsche Bank

During the emerging market crisis of the 1990s, every country wanted to print money to arrest the crunch. The International Monetary Fund (IMF) stepped in and dissuaded them from doing that, warning that they risked becoming basket cases like Zimbabwe. Asian central banks and governments heeded the IMF’s advice: companies and banks went bust and unemployment shot up, but eventually the green shoots started to appear and Asia emerged from the crisis within a few years.

The calamities that followed

Nearly a decade later it was the tech bubble that burst. Investors were persuaded to abandon common sense and invest huge amounts of money in companies that had yet to turn a profit.

In 2007 and 2008 it was the sub-prime mortgage crisis. Western banks warned unless they were bailed out, financial Armageddon was at hand. Central banks surrendered and started a massive campaign of quantitative easing. All that did was keep equity and bond prices aloft. As US economist Michael Hudson has pointed out, it would have been far better if this money was thrown from helicopters to ordinary people in financial distress. Instead, it was used to fatten the balance sheets of the big banks and enrich their executives.

Printing money, cutting rates

When the 2008 crisis hit in the West, the IMF’s ministrations involved printing money and cutting rates as if the planet’s very survival depended on it. It was advising Western governments to do the exact opposite of what it was advising Asian governments in the 1990s.

Amstad says we are now in the extraordinary situation where 10-year Swiss government bonds are yielding nearly -1%, and even 50-year bond yields have turned negative. Thirty-year US Treasury bonds are now yielding less than 2%, and US President Donald Trump wants to see interest rates lower still.

“These are dangerous times,” says Amstad. “The difference between [the] emerging and the developed world is that the West is on a cliff edge and is running an unorthodox monetary policy.”

Emerging countries have less debt, fewer liabilities and more orthodox money policies. Though they will suffer from any global financial contraction, they will rebound quicker.

Ironically, emerging markets now appear as a safe haven. It is the developed world that is at risk.

A negative yield curve is usually a harbinger of recession, but this time Western central banks have very little firepower left to refloat their economies. Should the world enter recession at a time when no one is earning interest on their savings, corporate and banking failures are inevitable.

Banks make money when interest rates are high, yield curves are steep (in other words, interest earned on longer-term bonds are significantly higher than on shorter-term bonds), and credit spreads are wide. We now have the opposite of these three conditions in most of the developed world, but especially in Europe. Banks struggle to make money when yield curves are negative. The recent spike in market volatility is a sign of growing panic, and funds are rushing into cash – which at least holds its value in nominal terms.

Not only are bonds paying next to nothing in interest, but their yield curves have also turned negative – meaning longer-term bonds are paying out less than shorter-term bonds.

Investors expect to receive a higher rate of interest for investing for a longer period of time. When shorter-term bonds pay out more than longer-term bonds, a recession is usually not far behind.

Source: Federal Reserve Bank of St Louis, US

The problem is aggravated when pension funds are factored into the equation. US government debt currently stands at $21 trillion, yet its liabilities are probably 10 times this amount – about $124 trillion. Says Amstad: “To the man in the street this means [the] US government has promised to pay this amount but has not funded it. Where the hell is the US government going to get $124 trillion from? It just cannot be done.”

The result will be a fight over who gets whatever the US government is able to pay, which is where it gets frightening. Civil war may be the result. If you are gay, Muslim, black or a woman, you are already under attack, says Amstad. The UK government is in similar straits. Italy is threatening to leave the European Union, and the UK is in a political crisis over Brexit. Society is breaking down.

“What we have never had to cope with before is if there is a bubble in the risk-free asset class. What happens when that goes pop. What is the new risk-free?”

China is on a different path. It is solvent, has low levels of debt, low levels of liability, and an asset-packed balance sheet with state-owned enterprises that are massively profitable.

The West is going to have to own up to a failed economic experiment and take its medicine.

That means allowing any recession to play out, and with that expect to see some spectacular corporate and banking failures.

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Savers may have zero interest, but the banks are still sitting in the middle with fat margins. Compare US Treasury rate to the typical prime rate for business? Or the annual rate used in asset rentals. That spread is still 8%

Governments would need to go deep negative to get low interest finance into SME’s if the bankers insist on their 8% tax on society

The million dollar question is: why has the world got itself into this huge debt problem in the first place?

The answer seems to be that our financial systems of positive interest rates, the accumulation of savings for pensioners and the repayment of personal and government debt needs an economy of continual and continued exponential economic growth.

In turn, this needs sustained cheap energy.

Cheap energy started disappearing in the 70’s and since that date it has been substituted by debt. Ie, bringing future expenditure forward to the present and hoping to repay it out of an energy surplus in the future. But it’s now obvious that there will never be a future energy surplus big enough to satisfy both the debt and the exponential economic growth needed for the future.

If we stop racking up debt, that’s the end of economic growth and with it the global financial system; and the only way we can rack up more debt is if it costs zero. Hence our zero and negative interest rates.

The next million dollar question is: how much longer can we keep on doing this? And what will trigger it to stop? If we look at Japan for guidance it seems that it can keep on going a bunch longer than anyone would think possible.

The fact that inflation has not appeared in the global economy in spite of the money printing and debt creation tells you that economies are not really growing at all, and that economic growth could just be sleight of hand.

Japan seems to have avoided default because the debt in the country seems to be owed to the citizens by the state. Defaults are going to be far more likely when the debt is owed by companies and individuals to the bankers. The other big trigger could be a loss of confidence in a significant country. There are a couple of candidates here…. Argentina, Italy, Japan, Britain after Brexit, Germany even.

The last economic crisis had defaults by homebuyers followed by a collapse in property prices. The next crisis will no doubt be similar: an asset price collapse creating defaults from a significant class of borrowers who owe money to banks.

This is why Trump is so fixated on keeping the stock market afloat. But the size of the problem: obligations to pensioners and medical costs for retirees, tells you that there cannot be a squaring of the circle and that somewhere in the next 10 years or so, this thing comes down.

So what do we do to protect ourselves?

Please advise.

@ Navigator

IMHO it’s pretty simple and obvious. Politicians and their bureaucrats cannot stick to a budget. Not at any level, federal, state or municipal. Debt pervades all countries at all these levels. They never even attempt to pay the debt off and just raise taxes to pay the ever growing interest. But there is a limit to everything whether they realise that or not.

So Austrian economics tells you that a credit fuelled bubble ends in just one of 2 ways: a debt default and economic contraction, or money printing to meet obligations and the collapse of the currency.

Take your pick. I choose money printing. So buy the only currency that can’t be printed…gold

Hmm no China isnt in all that great shape.
There is massive debt in that aystem, a lot of it off-balance sheet.
China sits with a situation where credit is driving their growth and they are also trying to grow their way out of debt.
Shadow debt that is. And most of their wealth is tied to property prices. If that falls..
The next global economic crisis may just as well be triggered by a chinese collapse.
They are not as safe as they make out to be

Yes … and has often been said in discussing the China story, no-one really believes the Chinese government statistics and nothing is on an open book basis there.


There seems to be a concerted effort in the MSM to portray China as “our friend” and a good counterbalance to the (Trump) US.

They indeed may very well be the cause of the next financial collapse. They are effectively a centrally planned Communist country.

China is solvent with no debt, huh,,?????? China, my friend is the world’s greatest Ponzi scheme ever known!!! Their financial situation is the same one that Bernie Madoff used.

Since the dawn of time there have been predictions to the end of the financial system. Still waiting…..
And to refer to China as financially better off is incredibly inaccurate and just a plain lie. Since 2008 china has racked up a debt pile secound to none, with most analysts pointing to this debt pile as the harbinger of the next recession. And should the West collapse as the article suggests, why exactly would China and the other emerging economies be better off? To whom exactly would they sell their products? A poorly written, fear mongering thesis worthy of the garbage bin.

Scary analysis. During the great depression my family lost everything. In those times there was lack of liquidity and deflation prompting abandonment of the gold standard.

Today we have massive government interference in the economy. Seems this will not prevent a repeat of that era. This time we could see the opposite with inflation caused by too much monopoly money. Venezuela style collapse hitting developed markets.

A gradual return to the gold standard could re-impose fiscal responsibility. Maybe the bitcoin brigade will get there first.

Under a Fiat currency system the most important question, the issue that underlies the decision making process for the entrepreneur, is how to benefit from the Cantillon Effect.

With the current policies of QE, the monetization of debt and negative real interest rates, the Cantillon Effect is being thrown into overdrive.

This is a debate worth having because those who can correctly identify the source of newly-created credit, will become wealthy while those who ignore this effect will be impoverished in relation to those who will benefit.

“Those billions and trillions of currency rammed into the ‘economy’ have ended up inflating stock and bond prices, to the ultimate benefit of the 1% of the 1%, while millions of ordinary people lost their jobs, their houses and their livelihoods.”

Thank you for reminding everyone of this!

“Global debt is nearly 320% of the world’s GDP, also near the all-time high”

I really would like one or maybe a few of the savvy Moneyweb economists to explain just how the global economy can survive this anomaly. Who lends the funds, who guarantees them, are they real or simply extended credit, which banks are the source of guaranteeing this debt? In other words, which banks to avoid.

I think everyone here knows the old piece of advice that expenditure of nineteen shillings and sixpence = happiness but expenditure of one pound and sixpence = misery or words to that effect. In the last few decades the global economy has moved into a virtual world of (intangible)assets and expansion based on hoped for profits.

And yes, ooner or later the only solution will be WW3 …

So what is the solution Ciaran? That is why we (retail investors) are on this site. Just getting all the doom and gloom helps very little. What should we do? Sell everything and go to cash?

Ditto for some of the learned/erudite comments.

With respect, the aim is to put our capital in the best-performing instrument. The situation as described in the article led to the same outcome over thousands of years. We tend to think that everything has to be new, because we are “modern”. We can learn from history here.

Since you ask the question, I will give you my perspective on the answer. Have a look at every instrument you currently own, or are advised to own. Then plot a graph of the past performance of those instruments relative to gold. If those instruments are rising in terms of gold, then keep is. If those investments of yours are declining in terms of gold, sell it and buy gold.

It is simple logic. Gold is true money or incorruptible cash. If you cannot find anything that outperforms cash, simply stay in cash.

The mere fact that a knowledgeable person such as yourself ask this question proves how Central Banks have distorted price signals. Don’t be fooled. do your own calculations or ask someone who us qualified to answer this question.

Thanks Sensei, that does help.

You ask the right question. The reality is that since the year 2000, very few opportunities outperformed gold. This implies that the world has experienced deflation for the part 20 years.

We do not experience this deflation because currencies are being devalued faster than investments are falling. The trick is now to identify the signals that will mark a renewal of a true bull market. I think the first sign will be a steady increase in interest rates. At the moment, and for the foreseeable future, interest rates will decline further and will be combined with more devaluation or QE.

Gold is the best alternative now. Gold ETF listed on the JSE or London will do the trick. You don’t have to own physical gold.

I hope this helps.

@Sensei…Sensei wrote:

“You don’t have to own physical gold. ”


The sad reality is: If you dont hold it, you dont own it !

Piglets, when the final reset comes, all those paper contracts wont be worth the toilet paper you wipe your bum with every morning I’m afraid

Investors around the world will go to sleep on Friday counting the ‘millions’ in the bank [ all binary 0’s and 1’s existing on a computer screen you fools !! ], and on the Black Monday, everything will reset to zero

Extreme, but in a nutshell, once it starts tumbling, it will happen so fast the majority will be caught

So….the only end game is to have a secluded piece of land far away from the impending ‘smart cities’ and concentrated masses of people living on edge, with clean water and your own food supply that you farm yourself

Invest in your skills:

I’m talking real world skills [ask yourselves, do you know how to slaughter an animal for food ?…when last did you tap a water well ?…hows your survival skills…are you fit ?…..etc etc ]……. spirituality………. and your loved ones,……… as this is all that will matter in the end

This will be the only real ‘wealth’ you can count on

Call me the ultimate prepper if you want, but this will be the final reality I have come to realise at my older age

Think about it very carefully before you jump to any knee jerk reactions here

Ive done the rounds, and played all the financial games, and have come back to Gold and Bitcoin as my last refuge

But even they are not fool proof once you drill down

And I’ve been down that rabbit hole, many times over

But most will deny this, and carry on as before…thats because, one thing history teaches us : Is that we never learn from history, and are doomed to repeat our failures

Realitybites, interestingly enough, I agree with you. I believe the only sustainable and well-adapted life-skills and lifestyle are those of the bushman. Not the way they live now, but rather the way there predecessors used to live. They lived in harmony with nature and the availability of food and water determined the population growthrate. Life on earth will revert back to the lifestyle of the hunter-gatherer. It is inevitable when we consider the usual socio-economic sycles, meteorite strikes, solar flares, cataclysmic volcanic activity etc.

When it comes to owning physical gold. If the financial system does implode to the extent where a contract with a bank is not enforceable, then we will have no use for gold either. There will be nothing to buy. Shops will be empty, and nobody will be willing to swop their last few chickens for a hand full of gold coins.

Therefore, I take my chances and own the financial instruments. I like to live dangerously.

@Sensei……Thanks for your feedback – you always on the ball

“When it comes to owning physical gold. If the financial system does implode to the extent where a contract with a bank is not enforceable, then we will have no use for gold either.”

Sure,I’ve thought of that

But still better to hedge your bets..?…so a few gold coins is better than nothing for possible barter options

And yes, like you,I also am guilty of owning paper contracts…..there might be a few years left, so make hay while the sun shines – nothing wrong with that

But always go forward with the thought in your mind that the murky entity on the other side of the game table is betting against you

“I like to live dangerously”

Its dangerous times….and luckily you have red pilled yourself

For everyone else, this is the grim reality we laid out here,whether you accept it or not

Of course, not one of us wish this scenario, but unless there are some radical changes, which in itself also brings with it dangers, this is the inevitable path we are all on

In the mean time I’m slowly reducing all my fiat holdings and phasing over to hard /soft PM’s and Bitcoin…and I already have my little plot of land in the wilderness that I am building on

At the end of the day, all you can do is try stock the odds in your favour

Good luck to you all

Trump is going to squeeze the last big communist state into oblivion, and thereafter the US will also come crashing down, buy gold and silver! Emerging markets won’t be spared!

End of comments.





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