I have written many times about how in 2003-2007 all asset classes rose together and in 2008 they all fell together-HARD. I also noted that we appear to be in the same situation today as all asset classes seem to be moving mostly in the same direction. The only notable exceptions this year seem to be oil and gold- both are higher as most other assets are feeling the pain of higher interest rates and inflation.

The major difference I see today is that, unlike 2008, inflation is FAR from benign. We also have never “fixed” our problem of being over-indebted in 2008. We have actually made our situation monumentally worse by adding tens, if not hundreds of trillions in debt globally in the last decade.

It appears that all central banks share the same dilemma. Raise rates and kill the economy- possibly bankrupting many entities or keep “printing” and watch inflation rage- possibly killing the economy just in a different way.

As rates rise this debt gets substantially harder to carry. Individuals, cities, states, companies and even sovereign countries are affected. The more indebted- the more affected.

I have written in the past about “good debt” and “bad debt”. Good debt is debt that is taken on to produce a new asset or fund a project with the idea that the profits will pay off the debt over time. Bad debt is when you buy a depreciating asset or, even worse, use that debt for consumption. Once you consume your purchase, whatever it is you bought, ceases to exist but the DEBT REMAINS.

Far too much bad debt has been created and consumed to purchase government bonds which have been used to keep the freebies coming and interest rates artificially low. Companies have purchased company stock to give the illusion of better earnings than actually exist. Bonds have been issued to prop up failing pension plans. Even individuals are trying to keep up the lifestyle they became accustomed to as prices skyrocket and wages are not keeping up.

Most of this “bad” debt has been consumed and now all that is left is the debt and interest payments that many are not going to be able to repay. (What is the value of a promise that cannot or will not be kept?)

It is obvious that central banks are continuing to rig all markets but none more so than the bond “market”. As rates were spiraling higher the ECB had an emergency meeting. What appears to have happened is that to stop “fragmentation” or the worst credit risk countries from having a debt implosion the ECB could sell better risk debt (like Germany and others) and buy less creditworthy debt (like Italy, Spain and others). How will those in the better risk countries like that? Would YOU rather hold a better risk or worse risk bond?  Add the problems in the Eurozone debt “markets” to the Japanese Bond “market” where the Japanese Central Bank had to conjure up over 10 TRILLION YEN in JUNE to keep their 10-year yield at 0.25%. How long can THAT last?

While Christine LaGarde has discussed a new “tool” to stop fragmentation (their word- my word- IMPLOSION)  in the Eurozone sovereign debt “markets” they actually have only one tool. That is conjure up cash out of nowhere-which creates NO VALUE of any kind but manipulates prices. This has kept bond yields artificially low for over a decade, has led to ridiculous valuations in most risk assets like stocks and has allowed the manipulators to keep other prices-like gold and silver artificially low. Real Estate is also a beneficiary of artificially low rates. Now that rates are rising our children and grandchildren are being priced out of the market by those with cheap money and deep pockets.

While I get upset from time to time by the manipulations because it costs me profits and time I can’t help thinking about how, through the centuries, these same “money changers” have been screwing the entire planet. Think about those that take risks and produce a product. Think about those that put in hard labor and are paid far less than they should be because these clowns can “print” money and basically skim profits while producing NOTHING by manipulating prices up and down to suit their agenda.

It is far more egregious to the real producers of goods than to people like me who simply invest.

The problems that we have now is that the golden goose (producers) have been slain with non-market prices, government regulations and taxation which has made production HARD at best and impossible at worst.

This is a global problem that, at its heart, is the fact that inflation cannot be tamed with minor rate increases and any meaningful rate increases that could slow it down would likely bankrupt many individuals, companies, cities, states and nations.

Keep these numbers in mind. Just in the USA:

  • $91 TRILLION Total Debt. At 1% interest that would cost $910 Billion per year to carry WITHOUT paying any principal back. 2% would be 1.8 TRILLION, 3% would be $2.7 Trillion and so on. Quite a dilemma-particularly with an economy in freefall and dependent upon “printing” money to survive. ($333,333.33 owed by EVERY US Citizen just for this.)
  • Unfunded Liabilities (Social Security, Medicare, Prescriptions, etc. $170 TRILLION. Of course, this is due over time, but we are already conjuring up cash from nowhere to make up the difference in payments in and payments out and this is before the boomers are in full-on retirement mode. Add another $510,298.00 for every American for this amount.
  • State Debt is $1.2 Trillion. Local Debt is 2 Trillion plus. (included in the $91 Trillion)
  • Corporate Debt is currently about $10.4 TRILLION (statista.com)
  • Personal Debt and Student Loan debt combine to over $25 TRILLION more in debt.
  • These numbers all project the real reason central banks NEED inflation. It appears to me that these levels of debt could NEVER be repaid with the US dollar retaining even a fraction of its value. Keep in mind these numbers are growing exponentially from here as we speak.

*All debt numbers from USDEBTCLOCK.ORGexcept corporate debt

How high could interest rates actually rise before this whole edifice gives way and collapses?

We may be about to find out.

Of course, since this is mostly the fault of central banks they need distractions to keep our mind off of the real problem. Bogus hearings, pandemics, wars, etc. to lay the blame on when the actual collapse takes place.

I have said that I am worried about the prices we will be paying shortly for most everything we need to live. This goes for energy, electricity, food, water, etc.

The only way I can see to possibly profit from this mess is to buy hard assets and companies that provide those hard assets and the products we need to survive. I like water, food, energy, electricity, and anything we can barter with.

I also believe that, as the world loses faith in fiat currencies, as has happened hundreds of times throughout history, the world will turn to the old stalwart- GOLD (and maybe silver) to introduce confidence and stability back into the money system. This has been the go-to option in the past and central banks have been on a gold-buying binge for the last 5 years. This is a sign to me.

Of course, Russia, China and many other nations are talking about backing currencies with the commodities that they produce. This makes sense also as “money” backed by something rather than nothing can actually be an asset rather than a liability.

I will take an asset before a liability ANY time. Particularly when I am not at all sure about the ability of the person or entity to actually repay the debt.

Be Prepared!

Any opinions are those of Mike Savage and not necessarily of those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice. The information in this report does not purport to be a complete description of securities, markets or developments referred to in this material. The information has been obtained from sources deemed to be reliable but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.

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