Summer 2014 Economics and Markets Commentary
Posted by jdavis on August 31, 2014
There have been few surprises in economics and markets, though it was notable The European Central Bank reduced some interest rates BELOW 0%, Emerging Markets' shares indices continue to rise strongly and Government Bond prices have rallied, consistently and steadily since the first day the markets opened on 2 January 2014.
A theme Jonathan Davis has written of many times, during the last few years, is how we, in the West, may be #turningjapanese. What this refers to is Japan's lost TWO decades between 1989 and 2012 when Japan had Deflation and a slow growing or mostly falling economy - in other words a generational Depression. During this period their stock market and their real estate valuations collapsed 80% each.
In the West we have had practically zero interest rates (Base Rates) for several years now yet... contrary to consensus economists' prognostications, not only is inflation not rising but actually we are positively in at least DISinflation (falling inflation) or, in some countries in the EU, in downright DEflation - falling PRICES.
We have long said this may happen and we have long said we are probably nowhere near the end of this particular road.
THIS is the INEVITABLE result of the debt mania we have had for many years. Eventually, there is so much debt that whatever governments and central banks do they CANNOT avoid deflation. Don't listen to me, it's what the Finance Minister (think UK Chancellor) Herr Schäuble of Germany said last week www.bloomberg.com/video/schaeuble-sees-draghi-at-end-of-stimulus-video-8pUAYYcYQqiVZE2Ikc8Upw.html (5m 15s in).
I repeat, we have been saying similar for years.
So the new Bogeyman is Deflation.
Politicians and Central Banks tell us we MUST avoid it at all costs because, after all, look what happened to Japan during its deflationary Depression, they utter.
Except Japan did not have a Depression BECAUSE of Deflation, it was Deflation and Depression which AROSE FROM the fallout of a massive debt bubble which burst in the late 80s.
Also, what did Japan do to come out of Depression? They borrowed more. And more. And more. They are now the most heavily indebted country in the developed world. And, though, they are now moving to INFlation, they remain in Depression. Google Einstein to see his definition of insanity.
And, look at that, whatever mistakes Japan did for now 25 years, the West has been making exactly the same ones since 2009. Solution to the huge Recession in 2008 from the initial bursting of the debt bubble...? Borrow massively more. Again and again and again. It's called Quantitative Easing.
You Couldn't Make It Up.
So our economy will go the same way as Japan. That is our prognosis based on the experience of Japan and we are doing as they did.
It seems the 'smartest' investors in the World agree with little us - the Bond market is deemed more canny than those in the stock market. And when Bond prices are rising it suggests falling interest rates and falling inflation and slowing or falling economies.
When bond prices rise, their associated yields (or interest rates) fall (do ask if you wish a detailed explanation). The table below, from Wednesday 27 August, shows the real time prices and yields from across the World. The blue dot - to the left of the range - shows where yields are now, compared to the range over the last year.
Almost all of the blue dots ie almost all government bond yields are at year lows.
Don't listen to me (the bulk don't!), listen to the likes of The Finance Minister of a little country called Germany AKA The EU's Sugar Daddy and the MultiHundred TRILLION $ market which is government bonds.
WE ARE IN AT LEAST DISINFLATION AND PROBABLY OUTRIGHT DEFLATION.
As I am often wont to say on Twitter we are #turningjapanese.