August 21, 2013 – Felix Zulauf’s Barron’s Round Table Economic Forecast and its Real Ugly: There is too much debt in the industrialized world and the financial system is virtually busted. Real disposable personal income is stagnating or declining. Employment participation keeps heading south. This produces a chain reaction: Weaker consumer demand in the West weakens manufacturing in places like Asia, which weakens natural-resource producers such as Australia or Brazil. (Note: World debt continues to rise every year and we continually hear these warnings – It will take a significant world event, e.g., Japan drops into the sea; before a domino economic catastrophe occurs).
The global economy is weakening cyclically on top of a highly fragile credit system. It is an explosive cocktail. The tower of debt is compounded by the gigantic over-the-counter derivatives market. In the past 10 years the notional value of derivatives worldwide has grown from $100 trillion to almost $800 trillion. The numbers are mind-boggling. If something goes wrong in the real economy, it could shake the whole credit system dramatically. It is a dangerous situation. (Note: The U.S. Government is attempting to regulate the OTC derivatives market with the aim of making it safer – hopefully before humpty dumpty falls off the wall).
Government policy makers have exhausted a big part of their resources. Governments around the world have realized they carry too much debt and need to tighten fiscal policies. Even the U.S. will wake up to this eventually. Monetary policy, or so-called quantitative easing, doesn’t produce economic growth, given current systemic circumstances. But it may prevent the credit system from imploding, if provided in massive quantities. (Note: The DOW dropped significantly, over the last week to 10 days, as the “T” word – taper – is used in Fed minutes).
The euro is not the real problem but a trigger and compounder of the structural problems. It could only work if the euro zone entered a fiscal and political union, which won’t happen, as Europeans aren’t prepared to give up national sovereignty. Politicians therefore will go from one compromise and quick fix to the next, with the crisis deepening until some nations at the periphery won’t be able to stand the economic pain anymore. They will want their old national currency back, and devalue to adjust the external accounts. (Note: You, like I, must be getting tired of hearing about the demise of the EU – probably not until 2014 to 2017 – when “The Great Transformation” takes place – and it will not be just the EU but all world economies).
China won’t be able to save us, as it did in 2009. The Chinese will lower interest rates but their actions will be reactive and lag. If my thesis is right, we must assume things will go awfully wrong in the next 12 months and the system will be at risk of collapsing. Most U.S.-focused investors might not understand it as they see corporations doing well. (Note: Again, heard this before).
The potential exists for a broad-based nationalization of the credit system, capital controls and dramatic restrictions on financial markets. Some might even be closed for some time.
We are witnessing the biggest financial-market manipulation of all time. The authorities have intervened more and more, and thereby created this monster. They might change the rules when the game goes against their own interests.
We are in a severe credit crunch. It starts when the weakest links in the system can’t finance their activities. Then you have a flight to safety into Treasuries and German bunds, compounded by a quasi-shortage of good collateral. That’s why bond yields have fallen so low. This isn’t an inflationary environment but a deflationary one. (Note: Calls for an economic catastrophe have been heard many times – Nov-2017 is when the USA gets wacked).
The euro zone will come up with quick fixes later in the second half of 2013 and markets will attempt to rally. But I see a cyclical bear market continuing well into 2014. Editor’s note: 2013 is when my cyclical index peaks and plummets. This does not bode well for the future of planets earth. The transformation to a new society and economic model has begun. (Credits: Picture – Getty Images, Narrative – Felix Zulauf for Barron’s,).
The Master of Disaster