Signs Are Everywhere …

It appears to me that signs are everywhere that central banks are becoming more and more desperate in their attempts to keep stock, bond and real estate markets levitated. The numbers are truly astounding in new debt issued just in January 2019- led by China’s over $500 billion in stimulus in one month! The problem, as I see it, is that while central banks can (and do) create “money” out of nothing and buy real assets- creating artificial demand and, therefore, higher prices, this action does not help the real economy that you and I depend upon.

China is a good example of this as we have seen recently. ANY pullback in credit creation often leads to extreme pain in their stock and bond markets. Without constantly increasing debts the stock market has gotten hammered and bankruptcies have skyrocketed. This is likely why the massive stimulus was unleashed in January- to keep the economy afloat.

This action actually appeared to help the stock markets short term and may have helped stave off some bond defaults but their economic numbers have been falling like a rock. Exports, imports, sales, etc. All down! It really FIXED NOTHING.

If you think China is alone- think again! In 2008 right here in the USA debt stopped growing for a month or so and we had the great recession to follow. Europe, Japan and most developed nations are on the same “print money and buy stuff” path. They have all seen, at one time or another, that the game, once started, cannot be stopped. It eventually gets to a point where there are no other buyers and there is only one place for prices to go-down. Why do you think the Japanese Central Bank owns most of the assets in Japan and yet their stock market is about 45% lower than it was 30 years ago? Still think this scheme that all central banks appear to be trying is going to work longer-term? Central Banks have our back and it’s different this time? Wake up folks-this will not end with a smile unless it truly is different this time than throughout human history.

The problem, as I see it today, is that the central banks appear to be all-in again to goose up asset prices. While all of this is taking place the underlying economy is falling apart before our eyes.

There are record corporate bankruptcies- and you may have not seen anything yet! There are MANY companies rated BBB that could lose investment grade status at any time. According to CNBC an accounting change that took place on January 1st will make companies recognize over $3 trillion in debt that has been hidden on corporate balance sheets. There is already record amounts of debt on corporate balance sheets but now all leases, rents, equipment leased to run the business that had previously been excluded is now INCLUDED. This could lead to downgrades from the ratings agencies- if they are allowed to do their jobs correctly.

There are record retail store closings and bankruptcies. Auto manufacturers are laying off people in larger and larger numbers as auto sales are plunging in China (7 months in a row), plunging in Europe and stagnating at best here in the USA while loans that are delinquent for existing autos are at all-time highs here in the US.

Michael Every- Rabobank Strategist “US industrial production collapsed on Friday at a 2009 pace. Either we are heading for a repeat of that epic recession or these data were another “glitch”, like retail sales.”

Zerohedge – “German Regulator Bans Short-Selling in Wirecard Shares, citing “contagion” risks”.

Contagion is where the fall of one entity may impact many other entities in a negative way whether it be through counterparty risk (someone you are expecting to repay a debt who cannot) or just a general downdraft in share prices because of uncertainty about counterparty risk that may or may not exist.

This is a pretty draconian measure to be taken in the “greatest economy of all time”. Of course, when we are fist-fed stats like 4% unemployment when 95 million or so working-age people are simply excluded from the statistics it should come as no surprise that many things may not make sense going forward.

This happened back in 2009 right here in the USA when our authorities made it illegal to sell short bank shares. I guess too many of us were on to the fact that the banks were toast until $16 trillion was given to the banks in 2009. (GAO)

Again from Rabobank- China borrowed 5% of GDP in JANUARY alone! That would be 60% of GDP in new debt in a year if it continues at this pace. This came after China’s PPI data showed that it is sliding into deflation again. If this doesn’t smack of desperation I don’t know what would. They have a reported $40 trillion in debt that was “only” $1 trillion in the year 2000. Much of this debt sits in unproductive assets like empty apartments and homes that don’t create an income stream to service that debt.

I am seeing charts all over the place that global trade is collapsing at an alarming rate. What this is telling me right now is that the central banks are managing the stock and bond markets higher but the underlying economy is not being helped. As a matter of fact it may be that the previous cure (more debt) is now this time the cause of the disease.

Asset prices can be goosed up with artificial demand from money created out of thin air. However, as prices and asset prices rise society at large is left behind because their wages are not rising enough to keep up. This is likely why we are seeing falling demand across the globe. All this debt added in the last 10 years has pulled consumption forward to a point where we may be approaching the critical mass of a collapse in demand for a lot of goods for a long time.

Japan is the latest central bank to step up their reported “printing” efforts as Mr. Kuroda has told parliament that the Bank of Japan would consider EXTRA MONETARY EASING IF NECESSARY- this in a place where, according to Reuters, the Bank of Japan already owns 80% of ALL Japanese ETFs, 45% of ALL Japanese Government bonds (over 495 Trillion Yen $.4.5 Trillion US dollars) of a 1.1 Quadrillion Yen ($10 Trillion) market. They are also a top 10 shareholder in 70% of the Nikkei 225. He also said that “We will continue our ETF buying while taking into account market moves and the impact on financial institutions, as well as economic and price developments.” After all of that, their stock market is down 45% in the last 30 years! Keep digging!

Here in the USA we have a President who, it seems, would like to make sure the stock and bond markets remain elevated at any cost. It appears to me that the cost may be the underlying economy as I have seen record store-closings, bankruptcies, falling tax receipts- both corporate and individual and collapsing industrial production just like we are seeing elsewhere although maybe not quite as deep as other parts of the world. It is likely “not quite as bad” because we are running trillion dollar reported deficits and $6 trillion in GAAP (Generally Accepted Accounting Principles) deficits right now in the USA. (USDebtclock.org)

What would our real GDP be if all of that debt was not being added and spent into society? Likely a fraction of what is being reported.

It appears to me that we could be approaching peak debt where virtually all qualified buyers have all of the credit they can possibly handle leaving only those that don’t qualify for loans wanting them. I believe the auto sector has already run that course and we are approaching the other side as delinquencies are soaring in that sector already.

The central banks, who just a few months ago were going to start tapering their buys, are now signaling that more QE could (and most likely will have to be), on the table. It appears they may be the borrowers of last resort- right now!

Many people have asked me why gold and silver are finally going up now. I really have no other answer other than it could be that many are starting to realize what banks, central banks, countries and many billionaires were realizing over the past few years. The ultimate outcome of this “printing and buying” frenzy will likely not end well. There will likely be a reset of asset values. The most likely outcome will be that people will want to get paid with an asset they trust. For 5000 years gold is one of those assets. This may be why central banks bought over 650 tons last year even though they can conjure up a trillion dollars with a keystroke. It may be why many countries are repatriating their gold and buying gold in record amounts. It also may be that this buying is picking up enough steam to overrun the blatant attempts by banks and central banks and possibly countries to keep the price suppressed. The Kitco chart today looks like Dracula’s fangs as it appears that the market would like to rocket higher and it appears that drastic selling pressure was put on at least 5 times today before 12PM.

One day, hopefully soon, we will see an end to the manipulation and we will see a real price for all assets. When that happens it will be in your best interest to …

Be Prepared!

Mike Savage, Financial Advisor

2642 Route 940 Pocono Summit, Pa. 18346

(570) 730-4880

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