Upon entering the lift to our office this morning the news headline said G20 leaders agreed on wanting to increase economic growth by 2%. I wryly thought ‘and I agree I want a Ferrari’. In the reality of the current economic conditions there are simplistically 2 scenarios they can follow – politically unpopular economic structural reforms or growth fuelled by, you guessed it, more debt. No prizes for guessing which is the most likely. Sure I could by a Ferrari, but the debt burden would likely cripple me. This is a simple analogy of the world we find ourselves in – growth fuelled by too much debt is unsustainable.
Last night we learned of Japan entering its second recession since Abe took power in 2012 and implemented the unprecedented monetary stimulus program affectionately called Abenomics – including central bank purchases of essentially all issued debt and incredible swathes of public shares. Clearly all that printed money, debt and zero rates is working a treat. Reality is setting in. It’s why the US is so scared about raising rates. It hasn’t worked, its creating a huge problem, but the market is hooked on free money. Where do you go?
One clear symptom of debt fuelled growth is the creation of bubbles in the ‘free money’ fuelled stock market. Even after the recent relatively small correction, the market includes a host of incredibly fanciful price earnings multiples and is dominated by high frequency trades using algorithms not fundamentals as a basis of trade.
The thing with real growth is it needs consumption. The thing with consumption is it needs prosperity for the masses not the share buying few. After debunking the latest Australian employment numbers (by the way the more independent Roy Morgan employment survey has unemployed at 8.8% PLUS under-employed at 8.6% - that’s 17.4% in total) The Daily Reckoning’s Vern Gowdie poignantly had this to say:
“The statisticians can fool some of the people, but not all of them. If people don’t have genuine jobs or enough hours of employment, they won’t spend money or go into debt (unless it is to pay for essentials).
This is why the economic data (that also has a thick coating of lipstick and make-up on) looks so weak.
Which is why we see negative interest rates in Europe. Which is why we see Japan still going full tilt with its wacky print-and-be-damned policy. Which is why we see such wailing and gnashing of teeth over a 0.25% interest rate rise in the US. Which is why Australia’s GDP growth rate slumped to 2%. Which is why we are seeing mining companies scrambling to find creative ways to pay down their debts.
Next time you hear ‘good news’ on the unemployment front, think a little deeper than the headline.”
Our point? One can too easily get caught up in market euphoria, supported by bogus economic data and hope based projections rather than reality based projections, especially if the hope is debt funded. Ask yourself honestly where you think markets are at. Then ask yourself if you have enough financial insurance through safe haven investments.