End of the 40-Year Bull in Debt and a “Global Depression” Threat – Mish Talk

June 1, 2022

Discussion Topics

Please do yourself a favor and watch the video link below. Here are just some of topics discussed.

Possible end of the 40-year bull in debt, if so a “global depression” threat
Emerging Market Blowups
The Yen
Equity Markey Complacence – Bond Market Reacting to Reality of Higher Interest Rates, Equity Markets Say Prove Hikes Are Coming
Game of Chicken
Average age of Senators – No one will stand up to the Fed except Pat Toomey
Jay Powell knows the damage he did by saving BBB-rated bonds
Yield Curve Inversions – How Much Time Is There?
Watch currencies especially in countries importing energy
Inventories
De-globalization
Not going to get fiscal stimulus in this mid-term election year.
Housing wealth effect in reverse
Violent unwind of the carry trade (Yen and Euro)
Pension Plan Irony, Pension Plan Risk, Pension Plan Ponzi Schemes
Fed Pushes Legal Limits
Monetary policy favors the 1%
Extends and Pretend on Commercial Real Estate Loans, Midsize Banks Hold this Debt
Investment ideas: Look for Safe Municipals (not Illinois), Gold, Cash
Avoid value traps like discretionary spending and healthcare, wary of energy because of huge valuation runups

Two Teaser Quotes

In response to a question about the end of the 40-year bull market in bonds, Booth replied:

“I don’t do hyperbole at all, but if this really is the end, and we really are going to see real rates rise appreciably, then you are talking about a global depression.“

Later in the interview, Booth commented “If you want a front row seat with popcorn, follow the EM [emerging market] space.”

YouTube Interview

Thanks to Danielle DiMartino Booth and Francis Hunt for an amazingly informative video interview.

It’s about an hour long, and it may be the best financial hour you spend all year.

But I would like the final word.

Nixon Shock, the Reserve Currency Curse, and a Pending Currency Crisis

Booth commented “If you want a front row seat with popcorn, follow the EM [emerging market] space.”

Let’s tune into my September 30, 2019 post Nixon Shock, the Reserve Currency Curse, and a Pending Currency Crisis

Here are some key snips

Our Currency But Your Problem

Shortly after taking the Treasury post, Connally famously told a group of European finance ministers worried about the export of American inflation that the dollar “is our currency, but your problem.”

On August 15, 1971 Nixon directed Connally to suspend, with certain exceptions, the convertibility of the dollar into gold or other reserve assets, ordering the gold window to be closed such that foreign governments could no longer exchange their dollars for gold. He also issued Executive Order 11615, imposing a 90-day freeze on wages and prices in order to counter inflation. This was the first time the U.S. government had enacted wage and price controls since World War II.

So Much for Temporary

The move was not temporary. There have not been any restraints on deficit spending since.

Wars became easy to finance. Deficits? No problem.

In 2011, Paul Volcker, who replaced William Miller as Fed Chair in 1979, expressed regret over the abandonment of Bretton Woods.

“Nobody’s in charge,” said Paul Volcker.

Who Really Want’s Reserve Currency Status?

Despite moaning about the dollar, China does not want to have the world’s reserve currency because it implies running trade deficits in which other nations accumulate yuan reserves.

Japan and the EU (led by Germany), don’t want to have the reserve currency “advantage” either, for the same reason: An export-based, current account surplus economy is incompatible with reserve currency status.

Global Consumers of Last Resort

The US is stuck with the reserve currency because we have the largest, most open capital markets in the world, the world’s largest bond market, and a far better business climate than the EU, China, or Japan.

To ensure the US remains the curse holder, the EU and Japan have negative rates, China does not float the Yuan but props up corrupt SOEs, and Germany punishes the rest of the EU.

Currency Crisis Coming

Since the dollar is still rising (thanks to European, Japanese, and Chinese tactics), It may take even bigger US deficits before something major breaks.

On that score, both political parties in the US are poised to deliver increasing deficits as far as the eye can see.

Meanwhile, negative interest rates are destroying the European banks. For discussion of this important issue, please see In Search of the Effective Lower Bound.

A currency crisis awaits as the current path is not sustainable.

Timing and conditions of the crisis are not knowable. It can start anywhere but I suspect the EU, Japan, or China as opposed to the US.

Meanwhile, I suggest holding at least some gold.

Currency Crisis Start Where?

Scroll to Continue

On September 30, 2019, I commented “Timing and conditions of the crisis are not knowable. It can start anywhere but I suspect the EU, Japan, or China as opposed to the US.”

This week, Booth commented “If you want a front row seat with popcorn, follow the EM [emerging market] space.” She’s also watching the Yen.

Those are independently arrived at positions. I rather doubt she knew who I was back then, nor was I a follower of Quill.

In the above video interview, Francis Hunt asked Booth where a crisis starts. She admitted she does not know, and that’s something I have been saying a lot recently.

It’s amazing that people actually believe they know where the Bitcoin, the Dollar, the stock market, etc. is going to go.

No one does.

But we can say this is not an exact repeat of 2008.

Then the dollar index plunged from over 100 to 72 and hyperinflationists came out of the woodwork. Since then, the dollar index rose from 72 to 103 with gold now at $1850 (something few if any would have predicted).

Everyone is massively concerned about inflation now. Generally, when everyone is looking one way, something else happens.