Globalization creates interlocking fragility, while reducing volatility and giving the appearance of stability. In other words it creates devastating Black Swans. We have never lived before under the threat of a global collapse.
—Nassim Nicholas Taleb, The Black Swan: The Impact of the Highly Improbable
Unless you have been doing a Rip Van Winkle somewhere, you know by now that voters in the United Kingdom decided by a margin of about 52 percent to 48 percent to secede from the European Union on June 23, 2016. John Bolton, a former George W. Bush aide, quipped that the “peasants had voted to leave the manor.” This act of insubordination hit world markets like an earthquake. Aftershocks rattled the foundations of the status quo. According to Bloomberg, $4 trillion in paper wealth vaporized on world stocks in the two trading days immediately following the vote. Most of those dramatic stock market losses were subsequently retraced, in the wake of central bank intervention and jawboning that helped spike an epic short squeeze, the biggest since the 2008 financial crisis.
On the other hand, the impact of the British vote, known under the shorthand of “Brexit,” looks to have been more enduring effects in the bond and currency markets—enough to qualify Brexit as a world-changing Black Swan event as defined by Nassim Nicholas Taleb.
Currencies seem to have experienced a dramatic realignment, particularly the British pound. This, in turn, had carry-on consequences. For one thing, tourism to the United Kingdom surged as the weaker pound made travel in Britain more affordable. For another, Eleanor of Acquitaine’s dowry fattened the coffers of Bordeaux wine-makers. As you may know if you are a wine snob or a medieval history buff, the Bordeaux region became a personal fiefdom of the English king, Henry II, when he married Eleanor of Aquitaine in 1152. From that point forward, England became a major market for Bordeaux wines. Many Bordeaux brands have traditionally been marketed from bonded warehouses in the United Kingdom and priced in pounds sterling. The plunge in the pound after Brexit stimulated a surge in orders with London wine merchants. BI, one of the foremost wine merchants in the world (sponsors of BI LiveTrade, the “only 2-way market-making screen for buying and selling top Bordeaux”), reported, “We literally had to close our screens at the moment of Brexit.”1 In an environment where many central banks have been angling to reduce the exchange value of their currency, Brexit produced an immediate eighteen-standard-deviation devaluation of the pound sterling. I joked that the Japanese should announce their intention to withdraw from the European Union.
Of course, that was a joke. But it appears likely that the Chinese could take advantage of the tumult associated with Brexit to permit a larger devaluation of the yuan. This could confound the efforts of the central banks of “advanced economies” to notch inflation higher and devalue their own currencies. A lower yuan would help China export its deflation to the West, as it faces what hedge fund superstar Kyle Bass calls “the largest macro imbalance in history”—an epic asset/liability mismatch (bad debt) equivalent to 10 percent of GDP.2 Compare this with gap of 2.5 percent in the United States during the 2008 financial crisis. As the Chinese authorities seek to fend off a 1929-style depression by caulking the cracks in China’s $22 trillion edifice of “social financing” with still more credit, their effort to “buy time” is likely to translate into lower imported inflation in the West, as well as a stronger US dollar, implying a still more deflationary environment.
The blowback from Brexit in the bond markets testified to significant cross asset stress. The ten-year German bonds gapped higher in a larger move than that experienced on any day in 2008. Global bonds rose in price, as yields on sovereign debt traded to all-time lows, with $11.7 trillion in sovereign issues sporting negative yields. Swiss yields turned negative fifty years out, trading as low as -2.7 basis points.
Ever-lower interest rates imply ever-wider financial fallout.
For example, over $500 trillion in global derivatives trade based on bond yields. This may be one reason that the stocks of big banks and other financial firms with large derivative books did not participate as much as other sectors in the central bank-engineered stock rally that followed two days of waterfall selling in the wake of Brexit.
The fine print on the stock pages in the wake of Brexit offers another important “tell” on the world after Brexit. As noted by Gillian Tett in the Financial Times, a surprise among the worst performing stocks in the first trading days after Brexit was MetLife (MET NYSE), down 14 percent.3 MetLife plunged not because it expected a drop in policy business in the United Kingdom. It has none. MetLife plunged because, as an insurance company already suffering from “Financial Repression” (or martial law for money), it was faced with a higher prospect of suffocation as Brexit deepened deflation expectations. With $11.7 trillion in sovereign issues sporting negative yields, the prospect of still lower long-term bond yields promises nothing but woe for insurance companies that have come to rely on income from long-term bonds for funding their policy liabilities. This challenge has gotten serious, according to Bloomberg, as North American insurance companies have experienced a plunge in their bond investment income back to 2011 levels. Insurers such as Prudential Financial and MetLife find themselves holding $132 billion of bonds either in or close to default. Most of these now distressed bonds, by the way, were “investment-grade bonds from energy drillers and retailers that ended up heading south.”4
Note that in the ex-growth world of the twenty-first century, there will be a strong tendency for any Black Swan event to have deflationary repercussions. Why? Because governments have chosen to disguise the failure of growth with credit spun out of thin air. Almost any disruption will tend to jeopardize the ever-more fragile architecture of unpayable debt upon which the status quo depends. The logical consequence of an ex-growth economy is difficulty in meeting interest payments on outstanding debt. This was underscored in the wake of Brexit by the collapsing prices of European bank stock. Monte dei Paschi, the world’s oldest bank, grabbed the headlines when it was warned by the European Central Bank that it needs to shed another €10 billion in nonperforming loans.
More on the deflationary risk below, but shifting focus slightly, you might like to better understand why an innocent water bird, the Cygnus atratus is being widely associated with economic collapse. Here is the backstory.
Consider that the black swan has been emblematic of something improbable or vanishingly rare since the first century when the Roman poet Juvenal wrote about “a rare bird in the land, like a black swan.” At the time, and for another fifteen centuries, it was taken for granted that the black swan did not exist.
That changed in 1697, when Dutch explorer Willem Hesselzoon de Vlamingh van Oost Vlieland (otherwise falsely credited for naming “Rats Nest Island”) sailed into what is now the Swan River in Western Australia (then known as “New Holland”) and found a number of large black swans, three of which he captured and carried away with him.
Black swans came to illustrate a shortcoming of inductive reasoning—namely, that even with a very large sample size, you cannot leap from particular observations to reach a valid conclusion (consequent) that generalizes from those observations (antecedents). The white swan/black swan example perfectly illustrates that.
Before the seventeenth century, when all swans were thought to be white, you could have seen every swan there was to see for a millennium and a half and apparently concluded without mistake that all swans were white. But this would still have been an abuse of logic, as a tally of white swans can never mount so high as to disprove the existence of black swans. But once a single black swan was discovered, the idea that all swans are white was forever falsified.
The philosopher of science, Karl Popper, analyzed this asymmetry that plagues exercises in probabilistic statistics. He made that a crucial factor in his doctrine of falsifiability in The Logic of Scientific Discovery: “My proposal is based upon an asymmetry between verifiability and falsifiability; an asymmetry which results from the logical form of universal statements. For these are never derivable from singular statements, but can be contradicted by singular statements”5
Hence the black swan is the exception that disproves the rule. That is why the Black Swan (in caps) has become an important metaphor for the risks inherent in trying to infer universal conclusions from particular data.
The Black Swan has been immortalized as the poster child for the “highly improbable events” that mathematician and hedge fund philosopher, Nassim Nicholas Taleb, has identified as likely to dominate history. Recall how this expressed itself in the innumerable “white swan sightings” that preceded the subprime mortgage crisis that brought the world economy to the brink of collapse in 2008.
At that time, the record of recent history offered no examples of large clusters of Americans defaulting on their mortgages. Equally, experts testified that housing prices always went up. And for those silly enough to appraise risk in the mortgage market without taking Taleb’s care in considering the role of Black Swans, the data must have seemed convincing. From Alan Greenspan’s swearing in as chairman of the Federal Reserve Board in August 1987, through the peak of the housing bubble in 2007, residential real estate in the United States soared from a value of $5.5 trillion to $22.5 trillion—a fourfold appreciation.
The white swans in view were all beautiful. No one among the bankers worried about the Black Swans that they couldn’t yet see—until those Black Swans landed on Wall Street. But Taleb was attuned to the danger. He famously proclaimed, “I know that history is going to be dominated by an improbable event, I just don’t know what that event will be.”6
In Brexit, you have witnessed another “improbable event” with the potential to dominate history. In a development that heralds the unraveling of the status quo globally, the United Kingdom voted on June 23, 2016, in a referendum to leave the European Union. As Taleb suggests in the comment quoted at the top of this chapter, “Globalization creates interlocking fragility, while reducing volatility and giving the appearance of stability. In other words it creates devastating Black Swans. We have never lived before under the threat of a global collapse.”
You do now. A strong hint of the “interlocking fragility” that characterizes global finance was provided by the Bloomberg screens blinking red as the realization that “Brexit” would win dawned on previously complacent investors around the world. An abridged summary of the financial pandemonium occurring forty-eight hours after the vote:
I confess that I lack the patience to undertake the long-running exercise in forensic accounting needed to comprehensively quantify the losses in paper wealth occasioned by Brexit. But I am happy to credit Bloomberg’s handy estimate that some $4 trillion in shareholder wealth vanished in the first two trading days after Brexit. Here are some other approximations to help you put the pandemonium in perspective.
Bloomberg calculated that the overnight market movements after Brexit cost the world’s 400 richest people $127 billion. And I did some admittedly back-of-the-envelope exercises to tally other aspects of the market backwash from Brexit. Take the 11 percent drop in the value of the pound. It implied a loss of £172,004 million based on the reported size of the British M2 Money Supply. In other words, £172 billion vaporized in one night—about a quarter of a trillion dollars measured against of the Thursday, June 23, high price for the pound sterling.
Of course, these calculations call out for multiple updates, as initial price movements stand to be reversed (or amplified) by subsequent market movements. For example, the first day of Brexit wiped £200 billion (about $273 billion) off the value of British stocks. Bank stocks were particularly hard hit (Barclay’s down 20.5 percent, with Royal Bank of Scotland plunging 27.5 percent), and they continued to weaken in subsequent trading sessions.
Shortly before the vote, one of the United Kingdom’s wealthiest billionaires, Peter Hargreaves expressed confidence that leaving the EU would be good for British business in the long run. He said it would get British “butts in gear.” In an interview with Bloomberg, Hargreaves observed, “I have more money in the stock market than any other person in the UK. I have £2 billion in the UK stock market. No one has anything like that. Do you think I would be intent on leaving if I thought that was going to endanger my wealth?”
Evidently, Hargreaves was not day-trading his £2 billion portfolio, but hoping to optimize its value over the long run. After the relief rally in stocks, Hargreaves big bet must look better than it did after the Brexit votes were tallied.
You might well ask yourself why a decision by British voters to back out of the European Union triggered trillions in losses in apparently unrelated markets. Why do stocks in Shanghai, Tokyo, and Sao Paulo plunge when the United Kingdom exits the European Union? Why should the UK vote pull billions from the pockets of holders of the South African rand? And why should the Chinese yuan plunge with the pound and the euro? Why indeed?
The simplest answer is that Brexit hints that “the gag is up.” It says that the well-worn tricks of the establishment—bribes, propaganda, fear, and, yes, false flag dirty tricks—are no longer dependable recipes for bending the public to the will of the crony capitalist oligarchs. This has obvious consequences. It means that the status quo is shot. Kaput. Now it is only a matter of time—probably not long—until the crony capitalists lose control and the central bankers are sent packing.
In other words, Brexit implies the end of the global system in which “fictitious capital” is promiscuously created by central banks to inflate the value of investment assets like stocks and real estate for the benefit of speculators—while the majority suffers with a real economy that is starved for capital. It means that the prospects for stock markets around the world will no longer be levitated far above the prospects of companies in the real economy by quantitative easing. More on that below.
Before I delve further into the dark magic of monetary policy, I need to say that for me the real tragedy of Brexit was not the trillions of fiat dollars in market losses but the assassination of Helen Joanne “Jo” Cox, (Labour) Member of Parliament for Batley and Spen, who was brutally murdered on June 16, 2016, at the age of forty-one as she campaigned for the “Remain in the EU” referendum.
Mrs. Cox, unlike so many of her fellow politicians, seen from a distance, seemed to be an admirable character. She was good looking and exceedingly intelligent (she made it through Cambridge as the equivalent of a scholarship student—the first member of her family to earn a college degree—while working odd jobs in a toothpaste factory). She was the mother of two young children, ages three and five, and she was a former leader of the international humanitarian charity Oxfam. Both inside and outside of Parliament, Jo Cox campaigned tirelessly for refugees and the downtrodden victims of the world. You would have been hard-pressed to identify another member of Parliament who would have been such a sympathetic figure to assassinate.
And that’s where the tragedy lies. While I can’t prove it, I can’t shake the feeling that Jo Cox was sacrificed for nothing in an unsuccessful ploy by manipulators to change the public mood a week before the vote when polls showed Brexit gaining support.
In the days immediately following her death, I suspected that this despicable act might actually have worked to push the Remain vote to victory. Even Nigel Farage, head of the UK Independence Party, lamented, “We had momentum until this terrible tragedy.”8 Still, after a brief deflection of the momentum in favor of Brexit, the Leave campaign refound its footing, and even Cox’s own constituency voted 55 percent to 45 percent to quit the EU. The manipulators did not realize how weak their position had become. Had they understood the unpopularity of the status quo, they might not have shot Jo Cox, because sadly, she died for nothing.
Martin Armstrong, the renowned economist, drew the connection that must have occurred to many when news of Jo Cox’s murder crossed the wires: “There is disturbing opinion circulating that Jo Cox may have been assassinated to prevent a BREXIT vote. Many are starting to believe there is a conspiracy plot connecting the dots to ensure a sympathy vote to remain within the EU. People are pointing to the familiar tool of assassination often used to achieve political agendas.” Armstrong summarized that for the powers-that-be, “there’s too much at stake to allow Brexit.”9
Whether the powers-that-be murdered her or not is unlikely ever to be known or publically acknowledged. All that can be confidently established is that she was assassinated at a time when the powers-that-be apparently had the maximum incentive to orchestrate a false flag dirty trick.
In case you don’t know Armstrong, he is known for his theory that boom-bust cycles recur once every 3,141 days, or 8.6 years. (That is the number pi—approximately 3.14159 times 1,000.) Armstrong is also heralded for having become a self-made millionaire at the age of fifteen.
Armstrong’s cynical view of the establishment was no doubt burnished by the many years he spent in prison for contempt of court on what he considered to be trumped up charges. If you are a well-bred person of good will, you may recoil from the notion that the usual suspects among the powers-that-be could be implicated in murder to influence an election result. That is totally contrary to the underlying assumptions of civilized, democratic society. A depressing thought, to be sure, but it should hardly be a shock. The establishment has often revealed itself to be without scruples.
I say that without pretending to understand the full ugliness of the covert chain of command by which the decision to kill Jo Cox could have been put into action. I have no idea how they can come up with the warped killer Thomas Mair, who has been charged with assassinating Cox. But I am equally sure that the inquest into her death will not come close to illuminating any “trade secrets” of covert action that could pin the blame on Mair’s handlers, much less on the evil calculus that set the crime in motion. They won’t investigate themselves.
The story, for now, is that Mair was a mentally ill British nationalist with ties to pro-Apartheid and neo-Nazi groups. Witnesses who saw the murder say they heard Mair scream something to the effect of “put Britain first” before he stabbed her.
He also had two letters printed in the South African magazine Patriot-in-Exile. He was quoted as saying, “I still have faith that the White Race will prevail, both in Britain and in South Africa, but I fear that it’s going to be a very long and very bloody struggle.”
In a decision I’m sure someone is regretting, on the night before the attack, Mair visited an alternative therapy center in Birstall seeking treatment for depression and was told to come back the next day.
So did Mair kill Jo Cox because he was a “Leave” sympathizer suffering a deep bout of depression? Or did the establishment use him, and his troubled story, to try to create a scenario in which Britain would stay in the EU?
We may never know.
If you think about it further, don’t forget murder for financial gain is so common it is a cliché. CNBC has aired a long-running documentary series called American Greed. A number of its programs have detailed instances of murder for money. Among the episodes I was able to review, the average sum that seemed to inspire the featured homicides was $4,954,500. Some involved amounts as low as $174,000.
If prominent people will resort to homicide over about $5 million, much less $174,000, is it really far-fetched to suppose that powerful interests would be equally unscrupulous when trillions of dollars hang in the balance? I don’t think so. Indeed, I am sure that whole countries could be wiped out for less.
Alan Greenspan was famous for making unintelligible pronouncements about the economy back when he was chairman of the Federal Reserve Board (1987–2006). In those days, the media hung on his every word. Parsing his famously garbled sentences became a high art. He must miss his lost status as a “Master of the Universe” because he has resorted to the ultimate “sneaky trick” to see himself more widely quoted. He actually flirted with talking sense. His sentences still don’t exactly parse. But if you listen closely, you can tell what he is talking about. And some of it is even true.
When it came to Brexit, Greenspan told CNBC that it was the worst crisis he could recall. “There’s nothing like it. Brexit is only the tip of the iceberg.” He sees much more economic and market disruption to come. In my view, Greenspan correctly identified one of the crucial issues underlying the British decision to secede from the European Union. According to Greenspan, “It is caused essentially by output per hour in virtually every country slowing to a halt. The result of this is that real income is not going anywhere. This is causing a severe political problem.”10 He added, “We are in very early days of a crisis which has got a way to go.”
Perhaps without intending, Greenspan pointed to an important aspect of the ongoing challenge you face. Collapse is a long-term process, not merely an episodic tribulation.
Lest you forget that Greenspan was a high priest of the establishment, he went on to lament the fact the British people were given a voice to determine whether they wished to remain within the EU. He called the election a “terrible mistake.” Greenspan opined, “It didn’t have to happen.”
Or did it?
For many years, I have pointed out that big governments, much less a European super state, are anachronisms. This has been true for decades. The boundary forces that determine the scale at which violence can be successfully organized have decisively altered the logic of power. Since about 1950, the smaller party in asymmetric conflict has defeated the larger, ostensibly stronger power in wars the majority of the time.
This is exactly what you should expect if you have your eyes open. Think about it. US military outlays (including military spending disguised in the budgets of other departments than Defense) exceed those of all other countries combined. Even so, the United States failed to defeat a peasant army in Vietnam. And more recently the United States proved woefully unsuccessful in combatting ragtag bands of squalid terrorists in Iraq and Afghanistan.
Notwithstanding these spectacular failures, few have paused to consider what this implies for the architecture of government. We have had lots of navel gazing about “foreign-policy overreach,” and the limitations of “nation-building.” And the operatives of the Deep State have outdone themselves in dreaming up far-fetched rationalizations for multi-billion-dollar weapons systems like the Littoral Combat Ship, ostensibly meant to improve the dwindling effectiveness of combatting asymmetric threats (or weaker foes). But few have dared to wonder what the faltering projection of power tells us about the viability of legacy institutions of big government.
You only need to look back a couple of hundred years into history to see that big government as it evolved in the twentieth century came along as a side effect of industrialism. There were no governments before the Industrial Revolution that spent even 10 percent of what current governments spend in real terms. They couldn’t. It was impossible.
The feasibility of any government is inevitably tied to the underlying physical basis of the economy. No government can spend resources that do not exist. Big government only became feasible when factories powered by hydrocarbon energy permitted a vast increase in the value of the economy and thus the scale of warfare. Armies were outfitted with mass-produced weapons that could only be afforded by taxing away a big share of a rapidly growing economy. Competition in warfare at an industrial scale, as exemplified by World Wars I and II, required the capacity to mobilize vast resources that were beyond the reach of all but a big government.
But that time is passed now. Current events clearly show that it is no longer necessary to maintain a vast industrial base to achieve military effectiveness. Governments in the Middle East struggle to keep the upper hand over small, highly motivated groups of fanatics like ISIS.
Advantages to scale in the organization of violence have plunged, as they have in economic organization. The result has been a widening megapolitical disconnect between legacy institutions and the underlying physical and technological foundations of the economy. This is reflected in a chronic slowdown in economic growth, sky-rocketing government budget deficits, and the accumulation of unpayable debt.
This is part of the reason for the triumph of crony capitalism. As the late Kenneth Boulding suggested, an all-but-inevitable consequence of the growth stall is a relentless effort by special interests to make government an institution for redistributing income away from the weak and toward the powerful. The advantages enjoyed by larger enterprises in lobbying and the protections they enjoy from the rigors of the market by their success in purchasing regulatory favors entail artificial returns to scale.
The various expedients for disguising collapse—budget deficits, conjuring money out of thin air to finance malinvestment booms, crony capitalist rip-offs (antimarket regulations)—have the perverse effect of weakening the economy and making the ultimate collapse worse.
Contrary to Alan Greenspan, it was hardly a “terrible mistake” that “didn’t have to happen” for the UK to withdraw from the EU. It was only a matter of time until some concatenation of events occasioned a crisis to bring the institutions of the status quo into better alignment with megapolitical conditions.
The decentralization of production as digital information has come to play a larger role in the production process implies that ever-smaller units of government could be effective in providing the conditions for free market prosperity. Equally, this implies that diseconomies plague big governments.
That, in turn, helps explain why the European Union was created in the first place. Not simply as a free trade alliance as it is often described, but as a cartel to help shore up big governments by protecting them from competition. The late free market economist Murray Rothbard saw the EU as “part of a very long campaign to integrate and cartelize government in order to entrench the interventionist mixed economy. In Europe, the campaign culminated in the Maastricht Treaty, the attempt to impose a single currency and central bank on Europe and force its relatively free economies to rachet up their regulatory and welfare states.” Rothbard elaborated, “Brussels has forced low-tax European countries to raise their taxes to the Euro-average or to expand their welfare state in the name of ‘fairness,’ a ‘level playing field,’ and ‘upward harmonization.’”11
In short, quoting Rothbard’s EU critique, “the socialistic Eurocrats have tried to get Europeans to surrender to the super-statism of the European Community.”
The leaders of this enterprise were in no mood to see it derailed by popular revolt. Martin Schulz, president of the European Parliament, expressed a brazen contempt for the views of the “little people.” Said Schulz, “The British have violated the rules. It is not the EU philosophy that the crowd can decide its fate.”
Unless you are a tycoon in the upper fractions of the 1 percent, he is talking about you. Charming, isn’t it?
David Stockman took the opposite attitude to that of Alan Greenspan and Martin Schulz. Stockman weighed in with a “Bravo for Brexit,” pointing out:
At long last the tyranny of the global financial elite has been slammed good and hard. You can count on them to attempt another central bank based shock and awe campaign to halt and reverse the current sell-off, but it won’t be credible, sustainable or maybe even possible.
The central bankers and their compatriots at the EU, IMF, White House/Treasury, OECD, G-7 and the rest of the Bubble Finance apparatus have well and truly over-played their hand. They have created a tissue of financial lies; an affront to the very laws of markets, sound money and capitalist prosperity.12
My old friend Marc Faber, speaking to CNBC, saw that “Brexit is a victory of ordinary people, common sense and people who are prepared to take responsibility for the sake of freedom against a political and financial elite that only cares if stocks go up or down and does not care about the interests of the average British citizen.”13
Note the contrast between Greenspan’s view—that even permitting the British public the opportunity to decide on continued EU membership was a “terrible mistake”—and Stockman’s view—that it was a good thing to slam “the tyranny of the global financial elite.” Stockman goes on to declare, “The days of the Financial Elite’s rule are numbered.”
I believe he is right. The days of the status quo are numbered. Even before Brexit, it was ripe for a fall. The United States, along with most of the world, is already in recession, and the central bankers, along with the other mandarins of statism, haven’t a clue what to do about it. Incomes for nonelite workers have been falling for about half a century. And even in a quasi “sort-of” democratic system that was eventually bound to have consequences. As Faber underscored in a CNBC interview, the revolt against the establishment “is already well underway. Brexit is a huge boon for Trump and a wake-up call to Hillary that ordinary people are sick and tired of being lied to and cheated by the crony capitalistic system.”14
Battle lines are drawn. Foreign Policy magazine has published an article by James Traube proclaiming, “It’s time for the elites to rise up against the ignorant masses.” According to Traube, “It’s not about the left vs. the right; it’s about the sane vs. the mindlessly angry.”15 He seems to think it is entirely appropriate for bankers and the high nabobs of crony capitalism to use the powers of government to empty the pockets of the “ignorant masses.” But woe to those ignorant masses who dare to repudiate “the bankers and economists and Western heads of state” who instruct them on the boundaries of permissible anger. Perhaps one of the reasons for the virulent reaction against the “ignorant masses” is the instinctive understanding by Traube and other defenders of the status quo that anything that encourages people to think more deeply is subversive.
The status quo is an engineering marvel, a convection erected on the flimsy footing of fake statistics, unfunded liabilities, preposterous growth forecasts, and funny money accounting. Upon inspection, it is evident that national debts (sovereign paper), far from being high-quality “riskless assets,” are predestined to become little more than souvenirs of lost causes like Confederate money.
All the advanced economies are Looney Tunes productions at risk of a Wile E. Coyote moment. They are all suspended in thin air, resting on nothing but an ill-placed confidence that could be wiped away as investors contemplate this or the next Black Swan.
The status quo has been collapsing for decades. Evidence of this is apparent in decelerating economic growth and the fact the governments of all advanced industrial economies are unable to pay their way. You need only consider the astonishing, previously reported fact that $11.7 trillion in government debt is trading with negative interest rates.
Thanks to the growth stall, insolvent governments cannot afford to pay honest interest rates on their rapidly metastasizing debt. In other words, conditions are so weak and the options for deploying large sums in investment seem so uncertain that people are prepared to pay governments for the privilege of lending them money. According to Fitch’s, the credit rating agency, the total value of bonds trading with negative yields has soared by $1.3 trillion in June 2016 alone.16
This tells you that the deflationary dynamic characterized by Exter’s Pyramid is already at work in a big way. It calls into question all the derivative illiquid investment categories at the top layers of that unstable, inverted structure, including ultimately the purportedly safe government bonds themselves.
That is why I think anyone with the capacity to do so would be well-advised to prepare for the worst and put a few hundred thousand dollars aside in actual gold bullion in a repository outside the banking system. I believe we are headed for deflationary collapse. But it is also possible that elites desperate to teach “the ignorant masses” a lesson could also engineer hyperinflation as the whole economy collapses.
Either way, the real price of gold is destined to go higher. This is obvious for hyperinflation. But gold should gain relative value in a deflationary environment precisely because the deflationary liquidity pressures may force the sellers of paper gold claims to buy large quantities for delivery. Or default. Be that as it may, it underscores the drawbacks of relying on the leverage in futures trading to profit from “paper gold.”
I doubt that you would go wrong in a worst case circumstance if you purchase actual gold and warehouse it in safe vaults outside the banking system in Switzerland. For more information, contact Johny Beck, partner, Matterhorn Asset Management AG at jb@goldswitzerland.com. Their websites are www.goldswitzerland.com and www.matterhorngold.com.
Meanwhile, keep your eyes open for other precious metals investment opportunities for a world in crisis. As legendary trader Jim Rogers says, “This is going to be worse than any bear market that you’ve seen in your lifetime.”
Rogers forecasts, “The EU as we know it will not exist, the Euro as we know it will not exist . . . I’ll tell you what I’m doing, people have to make their own decisions, going into this I’m long the U.S. Dollar, I’m short U.S. stocks, I own some Chinese shares, I own agriculture around the world. These are things that might do well no matter what happens . . . these are going to be perilous times, I hope I get it right.”
You should be entertaining similar thoughts.
For better or worse, anything that cannot go on forever will inevitably come to an end. The Black Swans fluttering overhead are omens of deep tectonic disturbance. For decades, pressures have been building along the fault lines of our civilization. One fine morning, something will give way and the rickety edifice could tumble down.
1 Greenhalgh, Hugo, “Bordeau Vintners Raise a Glass to Brexit Effect as Wine Sales Reach Five-Year High,” Financial Times, August 13/14, 2016, 1.
3 Tett, Gillian, “Now Watch the Shift in Interest Rates,” Financial Times, July 1, 2016.
4 Durden, Tyler, “North American Life Insurers ‘Accidentally’ Pile Up Massive Distressed Debt Holdings,” Zero Hedge, August 12, 2016.
5 Popper, Karl, The Logic of Scientific Discovery (London: Routledge, 2002), 19.
6 Taleb, Nassim Nicholas, The Black Swan: The Impact of the Highly Improbable (New York: Random House, 2007).
7 https://peoplestrusttoronto.wordpress.com/2016/06/26/china-devalues-yuan-most-in-10-months-as-premier-li-warns-of-brexit-butterfly-effect-on-financial-markets-economy/.
8 http://www.zerohedge.com/news/2016-06-19/nigel-farage-brexit-we-had-momentum-until-terrible-tragedy-here-are-latest-odds?page=1.
10 http://www.usatoday.com/story/money/business/2016/06/24/greenspan-brexit-euro-eu-greece-oecd-economy/86336802/. Note: USA Today editors chose to narrow the allocation of Greenspan’s comments in a way that they do not apply to the United States. Read them without those brackets. They do.