Crash or Collapse?
QUESTION: You hear the big talk at Davos was the next big crash. Roubini,..etc all the big economists are calling for one in the next 24 months and say its due for this business cycle to have a crash in bonds and stocks.
GB
ANSWER: What I see is nothing like the traditional crash. First there will be the explosive advance in the stock market. This is a Sovereign Debt Crisis. There is no way the stock market will “crash” into some dark hole. For that to happen, confidence would have to shift from PRIVATE back to PUBLIC. That is just not possible when government is the problem. Even in hyperinflation all assets rise and the currency collapses. That is the extreme in isolated peripheral economies. That is not possible in the core economy. The British Empire collapsed from the peripheral inward leaving just Britain-Scotland-Ireland-Wales. Even that is now possibly breaking apart. Yet, Britain is not crumbling into dust as did Rome. The fall of Rome was a major collapse that led to a Dark Age.
This will not be like anything seen in past 200 years.
Eastern Ukraine is Now Russia Without Invasion
Sending in Russian “tourists” running around in unmarked military uniforms has achieved Russia’s goal of annexing Eastern Ukraine without formally sending in troops. Moldova is now joining Russia while Romania has closed its airspace to Russian planes. What happens in the West is now hanging in the balance. We do not see any head-to-head confrontation before November.
Global Market Watch for May 12th, 2014
German Municipalities In Crisis
I have warned that about 50% of the German municipalities are on the verge of bankruptcy. The pensions have been unfunded and are absorbing everything. As we saw in Detroit with more than 50% of current revenue going to pensions, taxes either rise, the borrow more, or they are out of business. We are in a giant bull market for taxes increases on every level. This is the real downside of Marxism – they theory that just keeps taking.
The German municipalities currently need more than 100 billion euros to renovate their dilapidated infrastructure. Government has been mismanaged on a grand scale and all politicians can do is think it is the public’s fault for not paying more taxes. They refuse to ever look at how they are running government on every level. It would be nice if there really were smart elite people in charge for only someone without any common-sense would have designed a political system that currently rules the world.
God never promised honest politicians nor did He promise qualified ones. Society votes for people who smile nice and we think that there is an honest politicians in the every corner of the world. The problem is, God made the world round and he has been laughing ever since.
German municipalities face rising debt levels that mimic Greece. They cannot afford the investment to even maintain schools and roads any more. We are headed into an economic abyss beyond contemplation. And people worry about hyperinflation?
Australia’s New ‘Demolition man’
Australia has been a resource-rich country that was used to running a surplus in the years headed into the 2007 financial crisis. The deficit now has a lot of people concerned in Australia – but not all. Australia is a highly socialistic country with very vocal Marxist groups. Mr Abbott has indicated that all Australians will have to share the pain to guarantee future prosperity and that has the socialists dubbing him the “Demolition Man”. An Australian socialist is typically up there with the French version who never saw anyone else’s money they felt was not their’s for the taking.
Abbott has been talking tough with tax hikes for the rich, cuts to welfare and the raising of the retirement age to 70. However, the socialist in Abbott is expected to introduce massive national building projects that will only drain the national wealth – not solve any economic future problems for Australia.
These are the expectations to be included in his economic blueprint. This interesting aspect is the swing toward conservatism politically. Given this is where each day begins, the sense outside of Australia is that the political winds may be changing.
Abbott is looking to save billions of dollars in a fight against Australia’s ballooning budget deficit, which is forecast to reach 123 billion Australian dollars ($115bn; £68bn) over four years. This is clearly austerity – not hyperinflation. Australia has a budget deficit of around 3% of gross domestic product (GDP), while public debt is less than 20% of GDP. That is far less than what Greece and France as well as the United States and most of Europe.
The A$ bottomed in 2001 and peaked against the dollar in a 10 year decline for the US$ into 2011. This lined up with our Economic Confidence Model. We should see a 3 year reaction into 2014 for the US$ (A$ decline). This is already causing political changes in Australia thanks also to the decline in Emerging Markets. There is the potential for a 7 year US$ rally if we see new highs in 2015 and a higher yearly close.
A Virtuous Cycle in the Economy
QUESTION: Mr. Armstrong, What is a virtuous cycle?
Thank You
SK
ANSWER: A virtuous cycle in the economy means that higher wages stimulate consumption, leading to higher prices and larger corporate profits. This is typically distinguished as a shortage of labor driven cycle rather than a mere cost-push cycle that was indicative of the 1970s driven by the external increase in oil prices. The A virtuous cycle is one where wages drive the cycle rather than external factors or even an increase in money supply due to fiscal mismanagement.
Some people have distorted this qualification and applied it to merely increased wages without regard to the cause. It has been used in immigration arguments but the theory is different. Legalize the illegal labor that will generate more taxes and they then assume their wages would rise. Interesting concept, but it fails completely under the real definition of a virtuous cycle that is a shortage of labor, not merely a rise in wages. They confuse the result with the cause.