Be Careful With The Financial White Noise (Which Makes Up About 99% Of All Noise)

Is this the greatest economy ever or is society on the brink of economic collapse? We are constantly hit with white noise. Here’s what to do about it… 

Beware the White Noise (And it’s 99% White Noise)

By S. Goble

I’ve listened to hundreds of experts and read thousands of articles over the last few years regarding the current state of the Global Economy.  I’ve been exposed to the full spectrum from, “We’ll never have another recession in our lifetime”, to, “The global financial reset is upon us.”  Everyone seems to have their top picks for why this is the greatest economy ever; tax reform, repatriation, we’re winning the trade war with China, etc. Others have their number one reason why the global economy has one foot in the grave; EROI, demographic population trends, we’re going to lose the trade war with China, etc.  Some of these positions have merit, some do not.  Some of these concepts will become very important in twenty years from now but are largely irrelevant today, and some will never actually surface to become an issue at all.

Everywhere I turn today there seems to be nothing but White Noise.  Merriam-Webster defines White Noise as follows, a constant background noise especially one that drowns out other sounds…meaningless or distracting commotion.  As it relates to the CURRENT state of the United States economy, I submit to you my list of issues that qualify as White Noise.  The trade war with China, the outcome of the Midterms, immigration policy, GAAP vs. Non-GAAP accounting, deregulation, infrastructure spending, how many i devices Apple sold for the quarter and pretty much everything else you see and hear from the various media outlets.  So if all of that is meaningless or distracting commotion, what exactly IS meaningful?  Just two things. Debt Levels and Interest Rates.  Everything else pales in comparison to these two monumentally important data points.  To be sure, issues like the midterms are certainly important  no matter which side of the aisle you lean, however, regardless of a blue wave or a red wave in November, the debt tsunami cares not for political affiliation and will wash ashore.

It amazes me how many people don’t understand how these two data points have to be intertwined in order comprehend their significance.  I hear all the time, “but rates are still historically low”, and “mortgages used to be 12%”.  An interest rate by itself is irrelevant unless there is a corresponding debt amount associated.  As an example, I could loan virtually anyone $1 and charge them a 500% interest rate.  At the end of 12 months, they can afford to pay me back $5 and service the debt.  On the other hand, if I loaned out $10 billion and charged  .1% interest, virtually no one can service that debt.  The $10 billion example is essentially where we sit today.  In almost every category of debt class we are at an all time high; Autos, Student Loans, Credit Card, Corporate and Government (Local, State and Federal).  Much of this debt is variable or short term that is continually being rolled over at 12 month, 36 month or 60 month terms.  Corporations borrowed trillions over the years at 1% and bought back their stock to artificially inflate the price (and the insiders have been selling at record levels). Now these companies are levered with record debt and are starting to roll that over from 1% to 3-4%.  The good companies will begin to report lower profit margins which will affect their stock price.  The bad companies, AKA Zombie corporations (of which there are many) will begin to default.  You should get used to that word Default, you’ll be hearing it a lot as we move into 2019 and beyond.  Student Loans just recently surpassed $1.5 trillion and are already defaulting at a high rate.  Hundreds of thousands of mortgages on 5/1, 7/1 and 10/1 Arms are coming up for refinancing.  How many people can afford to refinance from 3.5% to 6% and still be able to afford the payments?  Not many, defaults are coming.  To make matters worse, the FED is on record as saying they will continue to raise rates for the foreseeable future and possibly well past the neutral rate.  There is no scenario where any of this debt can be serviced, NONE.

The FED will continue to raise rates until something breaks.  We’re headed for another Lehman event.  With all the defaults that will be coming, maybe it will be a domestic Bank that triggers the crisis.  Perhaps it will be the Italian Banking System that kicks it off.  Rest assured whatever it is, it will be globally systemic.  Based on the fact that global debt levels are significantly higher today then in the lead up to the Great Recession, basic math dictates that the fallout will be far more severe.  It’s interesting that basic math can tell us that a crash is imminent.  Some would ask if that’s the case, why can’t the powers that be stop it by halting rate increases?  The answer is that we the people prosper in the boom times but the global power base prospers with the bust.  It’s the bust that allows the powers that be to consolidate their control by picking up assets for pennies on the dollar.  No bust, no consolidation of power and wealth.  It’s why companies like Berkshire Hathaway have over $100 billion stocked away just waiting for the coming carnage to buy up $500 billion worth of assets at the right moment.

Once the crash happens, there will be a period of time I call the land grab phase.  Maybe it will take a couple of months or perhaps even a year but once all the assets that are worth buying are off the market, you can be sure that the the printers will turn back on and rates will be headed back to zero or even go negative.  Only this time it will take magnitudes more then 4.5 trillion to stabilize the system.  Think more in the 10’s of trillions or possibly even more.  Inflation will run rampant.

The process has begun and nothing can stop it. The deep sea earthquake has hit.  The tsunami is on the way.  The only question is how long it will take to hit the coast.  Pay attention to what really matters and don’t let the White Noise distract you.

Best of luck to all!