One of the biggest myths sold to the public after 2008, was that the world economy would go through a period of deleveraging (reduction of debt). Take a look at this chart:
Clearly the numbers do not match up to this myth. In reality the 2008 US real estate bubble bust was and is presently being replaced by an even larger international debt bubble, the likes we have never witnessed. Just so that we do not lose proportion...as long as the economic global village continues to grow evenly across the planet, the air in this bubble will be slowly released to the point that we will all applaud a job well done by our leaders.
Now with that in mind, I would like to concentrate on the two key macroeconomic drivers upon which the international fulcrum rests in 2015 and arguably for the next four or five years. They are the GLOBAL CURRENCY WAR and a rising BULL MARKET IN THE US DOLLAR. Japan recently kicked off this war by announcing a program of Quantitive Easing (printing) and allowing its currency to fall. Another word for this is "devaluation". Europe is expected to follow and we are now witnessing the rapid decline of the Euro. Interestingly, Switzerland has announced that from 22nd January 2015 Swiss interest rates will be negative. Even more interesting, on the same date the European Central Bank (ECB) will be discussing the possible implementation of its own QE program. What is it the Swiss know that we don't?
The decline in the Japanese Yen has made Japanese exports cheaper. So what is the obvious move by Japanese competitors? Devalue their own currencies. The countries most affected are South Korea, China, Hong kong, Taiwan, Singapore, Malaysia, the Philippines and Thailand. Now think Europe. Let the fun begin!
Assuming that most international debt is denominated in USD (it is) and that every time the USD appreciates in value, the debt chart above looks more ominous. Since 2008 there has been an orgy of cheap dollar loans to emerging economies. Now that the dollar is rising, this same debt is more difficult to repay. the Bank for International Settlements, estimates that total USD-denominated credit to non-banks outside the United States is more than $9T. Phoenix Capital Research: "Imagine if the entire economies of both Germany and Japan exploded and you’ve got a decent idea of the size of the potential impact on the financial system". The Massive USD-China Yuan carry trade (Borrow USD and switch to Yuan for higher Yuan interest rate) has created a shadow banking system in China estimated to be monumental in size.
To combat the carry trade and the fall in emerging market currencies, China has reduced their interest rates, trying to make the Yuan less attractive. The Inconvenient Truth believes that this is too little too late and that nothing less than a devaluation of the Chinese currency will suffice, especially if the USD continues to strengthen while the Yen deteriorates. Mauldin Economics: "There are no cases in modern history where an economy has managed to avoid a banking crisis or outright bust after experiencing rapid lending growth anything like China’s ongoing credit boom."
As we move into 2015, every potential crisis creates potential opportunities. For example, a strong USD and a weak Yen is one possibility. My cousin Hilton is predicting the Japanese Yen will fall to historical lows. I tend to agree. And on that note, I wish you all health, happiness and family love over the holidays, forever and a day.
We are all wrong so often that it amazes me that we can have any conviction at all over the direction of things to come. But we must.
Jim Cramer
Expect the best. Prepare for the worst. Capitalize on what comes.
Zig Ziglar
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