The U.S. federal government has over $19 trillion in funded debt, at least $6 trillion in off-balance sheet obligations, and staggering unfunded liabilities for Medicare, Medicaid, Social Security, etc., which are thought to exceed $100 trillion. The market outlook from John Emery, a Toronto-based investment strategist with Sprott Asset Management, says no country will be immune from the fallout of an upcoming ‘annus horribilis’.
The market outlook for 2016, is that it’s shaping up to be an ‘annus horribilis’ globally and, despite the constant cheery propaganda emanating from government sources and the mainstream media in the U.S., no country will be immune.
The problem is, very simply, excessive and increasingly unserviceable debt everywhere. The world has long since passed the point where debt can be created in a productive sense.
This was foreseen many years ago by those who are adherents of the Austrian School of economics but, unfortunately, the Keynesians have been in control and continue to peddle the notion that more deficits and debt are the answer to our economic and financial problems.
In the wake of the 2007-08 financial crisis, what this approach has done is to buy more time, but what it most assuredly hasn’t done is provide any solutions whatsoever to our myriad economic and financial issues.
At the time the crisis struck in 2007, global debt was in the neighborhood of US$140 trillion and that amount nearly brought the system to its knees.
Today, that number comfortably exceeds US$200 trillion and the systemic leverage is further enhanced by an almost unfathomable amount of derivatives with a notional value of more than US$1 quadrillion (that is, a thousand trillion).
This edifice of debt has been kept afloat by a zero-based interest rate policy in most of the developed western world, massive quantitative easing (QE) programs globally, and accounting chicanery that doesn’t come close to recognizing the seriously impaired value of the assets on the balance sheets of banks globally.
Therefore, it was fascinating that Richard Fisher, the former Federal Reserve governor for the Dallas region, recently went on CNBC and essentially told the truth.
He admitted that the Fed, of which he was a member at the time, thought it could create a wealth effect by its extensive implementation of QE and that it would benefit the U.S. population as a whole.
However, in the interview, he acknowledged that hadn’t occurred and we were now confronted with overvalued markets (where the money flowed rather than into economic endeavours) and that it would take time to work out.
His candour was certainly welcome but I think he seriously understated the ultimate negative impact. Both the bond and stock markets in the U.S. are now grossly overvalued by virtually any historic metric that one would care to apply.
The debt load, at all levels of U.S. society, is unsustainable and the economy is now starting to give ground noticeably despite all the official propaganda to the contrary.
Thus, I was initially amused by the upbeat nature of President Barack Obama’s final State of the Union address but was appalled when he boldly stated: “Anyone claiming that America’s economy is in decline is peddling fiction.”
I am one of those individuals and will now cite numerous reasons for that point of view.
Despite the bogus statistics being constantly provided by various government sources, any objective market outlook will reveal the U.S. economy is fading badly on many fronts.
Manufacturing has been in decline for years. Now, this sector is suffering greatly due to the overvalued U.S. dollar in a world where competitive devaluation is the rule of the day.
Construction and housing, which initially benefited mightily from the low interest rate environment in conjunction with easy availability of money, now appear to have topped.
Low labour participation rate
The important retail sector is currently taking a big hit due to an ongoing lack of real income growth for the vast majority of the U.S. populace.
This is occurring despite a large drop in energy costs. The recent travails of leading retailers like Wal-Mart and Macy’s are proof positive of this reality.
Despite the glowing (but incorrect) unemployment numbers produced by the Bureau of Labour Statistics, the labour participation rate in the U.S. has fallen to levels not seen since the mid-1970s, when women were just beginning to be a major factor in the overall labour market.
It is truly shocking to me that approximately 94 million people of working age in the U.S. currently do not have a job.
However, the area that is currently in most difficulty is the energy sector, which ironically was one of the few real growth engines in the U.S. economy post-2008.
Due to the fracking boom, the U.S. daily oil production grew from 5.35 million barrels per day in 2009 to 8.7 million barrels per day in 2014 and employment in the industry boomed. Unfortunately, this increase was totally attributable to the high-cost fracking business and was largely funded by debt.
With Saudi Arabia leading the charge to maintain its market share while global demand rapidly slows, the oil price has collapsed by over 70 per cent from the peak prices in 2014.
In that milieu, the U.S. fracking boom has morphed into a disaster of job losses, debt distress and a very uncertain future.
Superimpose this reality onto the difficulties being encountered by the other sectors of the U.S. economy and, in my opinion, President Obama’s words look hollow at best.
However, the real problem for the U.S. government may lie in its own finances. Without even reciting the financial woes of many cities and states in the U.S., the federal government itself is in deep trouble.
It currently has in excess of $19 trillion in funded debt (comfortably over 100 per cent of GDP, a historic danger zone for any sovereign country), at least $6 trillion in off-balance sheet obligations, and a staggering amount of unfunded liabilities for Medicare, Medicaid, Social Security, etc., which are thought to exceed $100 trillion.
Russia, China fighting petrodollar pricing
The U.S. is, for all intents and purposes, flat broke but because the country still possesses the “exorbitant privilege” of providing the world’s reserve currency, it has been able to get away with its debt orgy up to this point.
However, there are moves afoot globally to relieve the U.S. of its role as the sole provider of the world’s reserve currency. One of the key underpinnings has been the “petrodollar” status which has seen all the oil traded in the world priced only in U.S. dollars.
Now Russia and China are making serious moves to price oil in currencies other than the dollar. At the same time, the virtual collapse in the oil price has sharply reduced dollar demand from the other players.
The greatest risk, however, may be the massive overhang of dollars globally.
The vast proportion of central bank reserves in the world are denominated in dollars and the growing concern about the dollar’s longer-term value is being demonstrated by unprecedented large sales of U.S. Treasury bills by numerous global central banks.
Metal, like scissors, beats paper
I strongly suspect that something very disruptive is on the horizon for the world’s present fiat currency system as a result of all these machinations.
This brings me to my favourite subject, gold and silver, both of which are historically undervalued due to the continued abuse of both in the paper markets.
The ability to sell massive amounts of paper gold and silver, which are minimally backed with physical metal, in conjunction with the widespread use of derivatives has allowed the central banks and their bullion bank accomplices to drive gold and silver to unsustainable low levels. When this Ponzi scheme is overcome, observers are going to be stunned by the price explosion in both precious metals.
To provide an analogy, if a third party were allowed to counterfeit, with no restraints, several billion Facebook, Google or Amazon shares and sell them in the market, where do you think the price of those shares would be?
Essentially, this is what has occurred in the gold and silver paper markets.
This presents a historic buying opportunity and my best strategic investment advice is to take advantage of it by purchasing physical gold and silver as soon as possible.
Investor’s Digest of Canada , MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846