Guest Post: The End Game
Via Kevin Muir of “The Macro Tourist” fame
We all know the terrifying debt statistics. We are bombarded every day with bearish reports about the gargantuan Federal debt, and when combined with the growing private sector indebtedness, the monolithic entitlements problem, and the looming pension fund shortage, it is easy to wonder how we will ever get out of this colossal mess.
I do not dispute the numbers one bit. We have too much debt. It’s simple math. We are screwed. Full stop. All o
Well reasoned. Thanks. Makes me think —.
The quickest way to get a boom that will be the end game, is to remove all regulations.
Interesting take. I have felt this way since 2007. But some how CB’s have been unable to create real inflation and higher nominal growth. Instead they created asset inflation that ultimately around 2014 (the end of the corporate profit rebound) has lead to an explosion in corporate debt and investor margin debt.
At the corporate level, I think it started out as the paradox of thrift . Where corporates cut costs to raise margins and share repurchase replaced investment. The initial share repurchases were conducted with true free cash flow and at good prices- large discounts to intrinsic value. The market rewarded CEO’s and by extension shareholders for this and after true free cash flow peaked corporates began using debt to continue share repurchases at an increasing rate and at prices that in most cases are at premiums to intrinsic value destroying value for shareholders.
At the investor level, investors have increasingly added debt to leverage their exposure to rising asset prices. Central bank policy has and will continue to encourage asset appreciation and drive investors to increase their leverage (bears will say force). As long as global central bank policy remains excessively accommodative asset prices will continue to rise and leverage will continue to build. The assets that go up will change as investors rotate to various asset classes and global markets but in aggregate prices will go higher.
A fourth option you left out is war (both trade and combat) and subsequent defaults to enemies i.e. China. If we really want to even out our economic relationship with china forget tariffs just cancel the iou’s that will change everyone’s behavior.
Totally agree. Imo, the timeframe for the big reset is 10-20 years from now another spike in interest rates. We are only now entering the very beginning of a long secular boom. There will be lots of up and down noise that may obscure the long term tend.
Very interesting. As a young grad assistant in Finance one of the first truths i learned from my supervising prof was the notion that more firms die from too much growth than from too little. The way the cash cycle works fairly dictates that outcome. Fifty years of experience working with real companies since has largely supported that notion. And on top of the mechanics of growth add in the insatiable demands from public markets that we must grow everything, all the time, at whatever cost (again, it’s in the math, total return = div + growth) and everyone is pushed to the max. — Enron, Worldcom, Wells Fargo ….. Booms are all potential killers.
Well considered and, in my opinion accurate. The history of the late 1960’s and the decade of the 1970’s could very well repeat except with greater volatility. I fell there is a 70% probability that inflation ( and severe inflation at that) is the only way out of the sovereign debt mess for most of the g-7. I can only pray that my previous experience with the S&P priced at 7X earnings has left me unreasonably jaded and this will not come to pass.
So how does one protect themselves in this scenario?
Very good post. Fear the boom.
I believe this scenario is already well on its way i.e. real dollar purchasing power, $6.00 cup of coffee, $10.00 burrito, $200.00 pair of work boots, $70,000 f150 pickups, $200,000 john Deere tractors, $400,000 grain combines
Agreed we are well on our way with no end in sight. Central banks yap about low inflation which anyone who has a brain knows is bullsh*t. War will probably be the biggest factor moving forward. Good luck folks.