di Walter Snyder, Swiss Financial Consulting
Membership in the Gloom and Doom Club guarantees that one will eventually see a correction, recession or worse. The Asian crisis of 1997, the dotcom bubble of 2000, the Great Recession of 2008 and the Eurozone crisis of 2011 will be followed by another crisis, which is currently in the making. Reckoning that 2008 was the start of the most recent recovery, biblical wisdom suggests that the seven fat years will be followed by seven lean years.
The necessary ingredients for the great crisis have been previously noted: deflation, huge sovereign debt, unwieldy corporate debt, an increasing bond spread, sagging commodity prices, a slowdown in China, huge injections of liquidity thanks to QE, near-zero interest rates since 2008, an apparent absence of inflation in the CPI although equity and real estate prices have increased. The central banks are now ill-prepared to fend off the next crisis as interest rates cannot be lowered any more while the Fed ruefully ponders increasing the prime rate though the dollar is over-valued.. The ECB and BoJ are still struggling to promote growth.
As soon as the Fed decides on even the slightest rise in interest rates, capital will flow into the already bloated dollar from emerging markets, thus tightening up credit, just as rising rates will make it more difficult for companies in dollar-denominated debt to service their bonds. With US energy companies suffering because of low oil prices, OPEC members short of cash for the same reason, China slowing down from growth rates of more than 7%, the Middle East in turmoil and terrorists on a rampage, the scene is set for market turbulence and high volatility. Seasoned investors will react defensively and look for solutions to avoid drowning in the flood.
Gold bugs will rejoice as the yellow metal proves its worth as a safe haven when China reveals how much gold it has really piled up in the last ten years. Over-priced real estate may suffer somewhat, but bricks and mortar are hard to blow away. The big bad wolf will gobble up unwary asset managers who stayed too long in bonds that fetch ever lower prices as the Fed retraces the path to “normal” interest rates. Thanks to new trade agreements, American courts will reward government prosecutors with enormous amounts of cash demanded from foreign companies that failed to comply with regulations in favor of US intellectual property.
At the same time, the over-valued dollar will result in the volume of American exports falling to dismal levels. The US will export little oil because other producers will continue flooding the market as they are doing now. The crunch will come when EU courts rule against American IT monopolies and refuse to recognize the fines previously imposed on companies outside American territorial jurisdiction, thereby annulling the trade agreements that favor the US:
This scenario is possible and would mark a real crisis in the process of globalization. At the same time, China will be pushing the yuan to become an international reserve currency in place of the US dollar. If the American-dominated IMF refuses to admit the yuan to the privileged basket it seeks to jump into, China could react in ways that do not correspond to what the US would like.
The best of times may now lead to the worst of times due to the foolishness of central bankers who believe that interest rates and unlimited liquidity are the be all and end all of financial wisdom. The time is ripe for the US to be shaken. Gold, real estate, defensive equities and commodities are the ballast that will keep investors’ ships stable in the coming storm.