By David Stockman
I believe the world is at the greatest financial market inflection point since 1929. One that calls for a basic truism:
You can make a profit in a rising market if you are long. And you can profit in falling market if you are short.
The $64 million question is: How can you know the market’s direction?
There are all kinds of financial advisors, market seers, chart readers and fancy investment formulas. Each purports to answer that question. But all of these assume some kind of steady state world in which the future unfolds in a grand cycle based on past history.
“Just get some good pattern recognition software” a financial TV advertisement might tell you, and “you're all set to make a killing.”
I don't believe that for a second. We are in uncharted waters after nearly 20 years of madcap money printing by the Fed and other central banks.
Everything has been wildly inflated -- stocks, bonds, real estate -- and also the entire real economy as measured by global GDP. That includes trade volumes, capital spending, commodity prices, energy and mining capacity, manufacturing investment, bulk carriers and containerships. Also, warehouse and distribution facilities, brick and mortar retail space and much, much more.
But before we get to some of the facts about this great financial deformation, let me get right to the investment thesis. The world's central banks are finally out of dry powder. They no longer have the means to inflate the global credit and financial bubble.
That's why I’m calling today’s FOMC meeting the most crucial inflection point since 1929.
We have reached the apogee of history's greatest credit inflation. Now we’re hurtling into a prolonged worldwide deflation. You can already see this deflation in the plunge of oil, iron ore, copper and other commodity prices.
The Bloomberg Commodity index has fallen 70% since its 2008 peak. And it has now reverted to levels not seen since 1999 -- while falling lower by the day.
For a while Wall Street trumpeted all of this as the "commodity supercycle.” They insisted that $120/barrel oil and $200 per ton iron ore were a sign of unprecedented growth and prosperity.
But that’s nonsense. It was the manifestation of an orgy of credit expansion that was unsustainable, and destined to end in a fiery crash. The one happening now.
Central banks are pushing on a string. They can't generate more credit no matter how hard they try because most of the world is at what I call "peak debt.” That's the point where households, companies, governments and even countries are tapped out. They’re stuck with such monumental debt burdens that they can't service any additional debt no matter what the interest rate -- even zero or below.
Case in point: The European Central Bank (ECB) has pushed deposit rates in Europe to negative 0.3%. Yet, private credit to households and business remains flat. That’s because they are already swamped with more debt than they can handle in an economic context of virtually no real growth.
Likewise, Japan is off the charts with public and private debt equal to 450% of GDP. But despite years of zero interest rates and massive money printing by the Bank of Japan (BOJ), credit stopped growing long ago. Japan is now in its fifth recession in seven years.
And now the Fed is pinned between that kind of rock and hard place, too. It has kept the money market interest rate pinned at zero for 84 months running. It has been truly lunatic.
You can't have free short-term money forever. It would allow financial gamblers to fund their speculations -- so-called carry trades --with zero cost money indefinitely. You don't need to know much about human nature to know that's a recipe for a speculative mania and a subsequent bust.
At the same time, this so-called business expansion is getting long in the tooth. It’s been 78 months since the June 2009 bottom. The average post-war economic expansion lasted only 60 months.
And only one lasted appreciably more than the present cycle. That was in the 1990s, before we had $19 trillion of public debt and nearly $60 trillion of total credit outstanding including households, business, finance and government. It was also before we had off-shored a substantial part of our manufacturing economy.
The Fed has dithered and equivocated itself right into an impossible corner. When it raises interest rates -- even by 25 basis points -- tomorrow, it will begin tightening right in the teeth of the next recession. The economic downturn is already gathering force throughout the world. And, in my judgment, it will hit American shores next year or shortly thereafter.
Of course, our clueless Keynesian money printers at the Fed think the U.S. economy is looking just peachy. That’s because they track the wrong indicators. Especially the heavily manipulated, seasonally maladjusted and constantly revised jobs numbers published by the Bureau of Labor Statistics (BLS).
Most of the jobs they keep reporting are what I call "born again" jobs that were lost in two recessions so far this century and then temporarily recovered again. Thus of the 13 million jobs alleged created since the recession bottom, nearly nine million of them or 68% were simply recovered from earlier recession losses.
Or they are part-time jobs in bars, restaurants, retail stores and temp agencies that pay less than $20,000 at an annualized rate.
By contrast, if you look at full-time, full pay jobs in manufacturing, energy, mining, white collar professions, information technology, business management and services or finance and real estate, there are currently 70.5 million of these breadwinner jobs. That's 3% less than 16 years ago when Bill Clinton was still in the White House.
The Fed is looking at the illusion of recovery, not the real thing. If it were real, we would not have 102 million adult Americans without jobs. Or a real median household income of only $54,000 -- a level originally reached way back in 1989.
And we would not still have 46 million citizens on foods stamps compared to 18 million at the turn of the century. Or 35% of the population receiving some form of public assistance.
We can cut to the chase: The Fed's drastic spree of so-called extraordinary policies -- zero interest rates (ZIRP) and quantitative easing (QE) -- have backfired.
They inflated the Wall Street casino and crushed honest savers and retirees. They’ve also left the Main Street economy stranded in the weakest recovery since World War II.
That's not hyperbole. Other than on a very short run basis due to the plunge of oil and commodity prices, consumer inflation has been running about 2% per year. Based on historic patterns and the principles of sound money, nominal interest rates should be in the 4-5% range to allow for a real return for risk, illiquidity and deferral of consumption by savers.
The difference between that and current zero rates is astonishing when viewed at the macro level.
Since there are upwards of $8 trillion of bank deposits and like savings in the US economy, the Fed's ZIRP or zero interest policy results in the arbitrary and unjust transfer of some $300 billion per year of interest from savers to borrowers, banks and Wall Street speculators.
Consider a working American who spent 40 years at the median wage, lived frugally, and managed to accumulate a nest egg of $250,000.
If he is now retired and needs to stay liquid for health or family reasons or out of just plain prudence and therefore has his money invested in CDs or treasury bills, here's what he gets: $750 annually.
That’s less than one Starbucks cappuccino per day! That's right. One cappuccino for a lifetime of thrift.
The point here is not to harp about the injustice of it all. One of these days the voters will figure this out and they will come after the Fed and the rest of Washington with torches and pitch forks.
No, the point is that this very same injustice has massively distorted the financial system and created the set-up for the next stock market crash.
But another stock market meltdown does not mean that you need take it on the chin again… maybe for the third time in the century.
That's why I have come out of retirement and joined up with my friends at Agora Financial. We’re creating a project that helps you profitably navigate this great inflection point.
One that helps you make a profit when the stock market is plunging into one of the deadly down-cycles.
Last night, we went into the mechanics such a strategy. The event was live and free. We recorded it for you to watch, but are pulling it offline tonight at 9 p.m.
It’s crucial you watch our presentation before today's Fed announcement is made. Click here to watch the full free training event. We called the event “The End of the Bubble Finance Era.”
......Now just a couple of more words on why I believe the market is heading for a meltdown even more devastating than that triggered by the Lehman failure in the fall of 2008.
First, proof that massive money printing has inflated the stock market but not the real main street economy was evident again in last Friday's release of total business sales for October.
It showed that combined manufacturing, wholesale and retail have been falling for the last year, while inventories continue to rise. This creates a false impression of growth in the GDP numbers, but the inventory-to-sales ratio does not lie.
At 1.38X it is now in the recession red zone.
Likewise, orders for business CapEx continue to fall, exports have plunged, activity at US ports is way down from last year and the various indices of rail and truck freight have dropped sharply lower in the last few months.
These are the kinds of indicators that have always been the sign of recession approaching, but this time there is an added dimension that is truly frightening.
To wit, this bubble was global like never before. Just two big figures give you some idea of its immense magnitude.
When the Fed went into its present money printing mode about 1994 after Washington bailed out the Wall Street banks during the Mexican peso crisis in 1994 and Greenspan panicked in the face of the so-called bond vigilantes revolt, it touched off a worldwide response and money printing imitation by virtually every other major central bank.
They did it to keep their exchange rates from soaring against the dollar and thereby undermining their exports. But to keep their exchange rates pegged they bought US treasury debt and similar securities--------trillions of them.
At the time the Fed's balance sheet was about $300 billion and it had taken 80 years to get there. It is now 15X bigger, and all of that growth was funded by hitting the "send" button on the Fed's digital printing press.
Likewise, the combined central banks of the world---including the ECB, the BOJ, PBOC, etc----- had about $2 trillion of assets on their balance sheets about 20 years ago. Now they are 10X larger at $22 trillion.
Here's the thing. Nearly $20 trillion of fiat central bank credit has been injected into the world financial system over the past two decades, and this high-powered money has, in turn, triggered the greatest expansion of financial credit in human history.
In 1994 there was about $40 trillion of public and private debt outstanding in the world compared to $28 trillion of GDP. So the leverage ratio of the global economy was less than 1.5X income or GDP.
Today there is $225 trillion of debt outstanding, representing an incredible gain of $185 trillion.
Needless to say, global GDP did not grow on a commensurate basis. Not even close.
In fact, it only expanded by about $50 trillion, meaning that $4 of debt were created for every dollar of output growth. It also means that the world's leverage ratio has doubled to 3.0X-------a figure which is off all the charts of recorded history.
Even a passing acquiantance with elementary school math tells you that is not sustainable.
In fact, we are already there. The apogee has been reached. The bubble is beginning to collapse on itself.
I believe the global economy is vastly bloated with debt-based spending that can’t be sustained. And that this distortion is compounded on the supply side by an incredible surplus of excess production capacity. As well as wasteful malinvestments that were enabled by dirt cheap central bank credit.
Consequently, the world economy is actually going to shrink for the first time since the 1930s. That’s because the plunging price of commodities is only a prelude to what will amount to a worldwide CapEx depression — the kind of thing that has not happened since the 1930s, either.
There has been so much over-investment in energy, mining, materials processing, manufacturing and warehousing that nothing new will be built for years to come. The boom of the last two decades essentially stole output from many years into the future.
The epicenter of the global commodity, industrial and CapEx boom was in China. Thanks to the greatest money printing spree by the PBOC in recorded history, outstanding public and private debt there has exploded from $500 billion in 1994 to $30 trillion at present.
That’s a 60-fold gain. Is it any wonder that the commodity and CapEx charts went nearly vertical during the peak of the global boom?
But now China is facing the collapse of its credit Ponzi, and capital is fleeing the country at a prodigious pace.
In the last 15 months alone, nearly $1 trillion has high tailed it for London, New York, Australia, Vancouver and other resting places for flight capital.
So the PBOC is being forced to stop its printing presses in order to prevent the Yuan exchange rate from collapsing and the capital outflow from getting totally out of hand.
Even in Japan, massive money printing is not working and the BOJ is unlikely to go any further.
The markets are not remotely prepared for the deflationary recession that is now engulfing the world economy. That's why today's action by the Fed is going to be such a shock.
While there may at first be a dead cat bounce or an effort by the robo-traders and hedge fund speculators to spark a relief rally, it will be short lived.
Then the morning after will set in. As the signs of global deflation and recession become increasingly frequent and obvious, the casino gamblers will come to realize that the Fed is out of dry powder. It will be powerless in the face of the coming downturn.
That's where my event recording and brand-new project will make all the difference. Its purpose is to help you spot the most compelling opportunities to profit from a falling market.
The video and my special invitation go offline at 9 p.m. tonight. Please view both now by clicking here before then.