By Ben Bauer
Through thorough outlining and my personal opinion — the stock market will enter bear market (down 20+%) within Q1 (maybe Q2) and will likely fall even further as the Quantitative Easing (QE) illusion of growth disappears. Pretty much all metrics are showing a global drop off in trade and growth. Oil is now in the $26 range and pretty much all industrial commodities have collapsed, this is a clear indication that growth has stopped. Since 2009 global debt has grown by ~55 trillion and yet we only got ~18 trillion in global growth. When debt grows this much faster than growth it will inevitably lead to the debt not being able to be serviced. Additionally, when individuals, company’s and countries borrower money they are pulling spending power forward. This means they can spend more now but at the expense of being able to spend in the future, since they now have to service the debt. This means future spending will have to fall and if this is the case how can we get growth when the debt needs to be serviced? The answer is we will likely not, this is one of the reason we can get deflation (prices falling) when the debt burden gets so large (bonds are one of the only places to hide from deflation). There is now a global race to the currency bottom as central banks devalue their countries’ currencies to try and drive demand and inflate away the debt. China started this process last year and I am willing to bet they have a lot more to do. When a countries currency becomes cheaper relative to another countries it can attract investment from other countries. For a simple example; if you wanted to go to Canada today and ski at Whistler / Blackcomb, one US dollar would get you 1.4569 in Canadian dollars, meaning it is a great deal for you to take your winter vacation in Canada. This attracts money to Canada and makes products made in Canada cheaper to the world. It does makes products in Canada for Canadians more expensive since it costs more of their dollars to buy good though, so there is certainly a negative. Also, when central banks devalue the currency they are making the debt cheaper to pay back since the value of the debt also falls, since it is priced in the currency of the country that is devaluing. This is one of the reasons why I think China is going to have to continue to devalue their currency and likely by another 25% to 35%, maybe more, they now have a massive amount of debt (35 trillion by some accounts). The issues with devaluing the currency is that investors that have money in China will try and get it out of the Chinese currency, this will just accelerate the devaluation process. The reason investors do this is because let’s say you have a $1000 in Chinese currency and they devalue the currency by 25%, now your $1000 is really worth $750. This means you want to convert it as soon as possible to another currency. The Chinese government is now essentially placing capital controls to prevent people from converting their currency, so they cannot get their money out. At the end of the day there is too much debt as a debt crisis cannot be solved by more debt, which is what was done last cycle (globally). The bill is now coming due on this and the highest quality safe haven assets (perceived to get the money back) will likely continue to see money pour into them. This means US T-Bills and MBS’s to the point we could retest the cycle lows in both. Do I think the US is in such fantastic shape, not particularly. However, relative to other countries currently we are and the US T-Bill for decades has been seen as a safe haven, which I think in the end is not entirely true but all that matters is market perception. Rates will continue to fall. I think once again the Fed could be driven into action of QE (not that I think this really solves the problem, just delays and makes worse later)…but if they are, the hurdle will be quite large and we will likely have to see a lot more pain in the markets and economy. I think (or at least I hope) they understand they created a monster in the “bad news is good news” meme. This is what drove markets higher for the past 5 years…QE while the economy largely disconnected from this and saw lackluster growth. The Fed created this great divide by driving asset prices higher that were not supported by fundamentals. This is why I think the hurdle will be high for any Fed action.