Insolvency Phase – Now v Great Depression – How this ends

More heavy losses on Wall Street last night signal we could well be in the terminal throes of the “Hope Phase”.  Last night saw the Republican’s stimulus bill blocked by the US Senate and hence the US remains without a bail out package at a time when unemployment figures look to be turning for the worse again and reality without stimulus starts to bite. We heard more news from non-politicians, those actually at the forefront of R&D, that promises of a vaccine being available soon are premature and that one of the leading trials was closed due to ‘neurological’ side effects.  Europe looks to be heading strongly into a broad 2nd wave of COVID, overtaking the US daily infections for the first time in months. Brexit looks stalled again. And to top it off we saw that the US Fed stepped away from the corporate bond buying plate for all of August… But.. but?

Whatever the trigger may be, the odds rise that the Hope Phase ending is getting near.  That, as we discussed in the Australian context this week, may then lead to Raoul Pal’s “Insolvency Phase” where the combination of all the accumulated debt together with deflation leads to widespread insolvencies, of which no amount of central bank stimulus can prevent.  As Pal reminded us recently in an article:

“This phase is characterised by below zero growth (YoY) for an extended period (think years, not a couple of quarters) which gradually leads to increasing deflation and rising insolvencies, which I coupled with falling equity prices, especially in the most indebted companies.

As a reference, the most famous Insolvency Phase in history was 1930 to 1933...”

INDU Index Chart

Pal goes on to explain ‘where to from here’ and references the almost prophetic book “The Fourth Turning”:

“The era was brought to an end by a massive change in legislation in favour of ordinary working people and those without a job, this included social security. They forced the wealth gap to close.

There was also a massive overhaul of the financial and monetary system along with huge infrastructure spending. The programme ran for six years.

I believe that something similar is the only way out of this insolvency too. It is far too big an event to be dealt with by some central bank liquidity and a few cash handouts. The markets and economists are still underestimating the length of the virus era and the impact on businesses, households, central banks and government.

The early 1930s was the last demographic Fourth Turning. We are at the very final stages of the next Fourth Turning today. It feels that Neil Howe and William Strauss’s ‘The Fourth Turning’ has found its moment in history in 2020, just as predicted back in 1997. If you remember, back then they predicted that a debt-driven economic event around 2005 to 2008 would set off a series of knock-on effects including an authoritarian leader focusing on the past and driving divisions in society, pushing the US deeper into crisis and towards chaos.

In the midst of that an even bigger event would occur in around 2020 – they even mentioned it could be a pandemic that would usher in the final change – a new way forward and the start of a new era as an election brings about real change from the previous 40 years. The book is based around past cycles and demographics. It has proven uncannily accurate.

I think the final part of The Fourth Turning is in play. If you haven’t read the book, I urge you to do so.”

We have written many times of the social dislocation that has occurred through the monetary stimulus unleashed, particularly since the GFC, enriching the rich and leaving ‘the rest’ behind.  We saw the first signs of revolt in Brexit and Trump being elected.  At that time these were effectively anti-establishment protest votes with blame being laid at the feet of said establishment.  Trump was going to ‘drain the swamp’ and ‘Make America Great Again’.  In reality he created his own swamp and the US is in its worst recession since the Great Depression with him getting blamed for not taking COVID seriously.  We now have the setup where the same ‘rest’ are now looking to the government so previously despised as their saviour through handouts and other social support.  

Cue the Left in the form of the Democrats and the prospect of the same social equalising measures of 1932.  Notwithstanding how long before we actually see an election result after what promises to be a very drawn out legal battle around postal votes, such radical measures as Modern Monetary Theory (MMT) or Universal Basic Income (UBI) will not be quickly embraced, approved and adopted.  What will happen immediately is high taxes, particularly on the already over inflated tech giants, and how the sharemarket deals with that.  It is also becoming increasingly understood the Fed cannot create inflation and indeed their only real stimulus tool now is ‘talk’ and the jaw-boning is already getting tired and without credibility.  The stage is set for massive market imbalances over the course of what has already been a year for the history books.  Volatility will likely prevail and hard monetary assets such as gold, silver and Bitcoin should shine.  We say “Balance your wealth in an unbalanced world” and we look to have some serious wheel wobbles ahead and potentially a protracted ‘wheels falling off’ event to boot.