Today was not a pretty day. And to regular readers it doesn’t come as a huge surprise. Most pundits, economists and investors are arguing about the effect from the debt ceiling and whether a new recession is on the horizon. The bottom line is that we’ve been in a recession this entire time. We’ve been in a balance sheet recession. All that happened in 2009 was that the government decided to fill the void left by the private sector. As the de-leveraging has continued and the stimulus has slowly peeled off the consumer has been exposed as increasingly weak. A series of failed policy measures appear to be culminating with the debt ceiling vote where our government proved itself completely incompetent with regards to the workings of the monetary system and their duty to the American people.
Of course, these problems have all been compounded by Europe where most people are confusing these nations as being identical to the USA. Europe is a single currency system made up of currency users. They are not remotely analogous to the USA, but that hasn’t stopped the incessant comparisons from people who don’t understand what they’re talking about. Unfortunately, it has guided much of public policy. Making matters worse is the clearly misguided policies of the ECB and the EMU. They fail to understand that the EMU is an incomplete monetary system and that there are only two options from this juncture – full steam ahead into currency union or dissolution. And as they twiddle their thumbs deciding which direction it will go, the world falls apart around them.
The third leg of the crumbling chair is China where misguided government policy led to a stimulus that was never necessary. The result is surging inflation and a highly unstable economic environment. The Chinese have attempted central planning on a scale that the world has never seen. Ultimately, this sort of spending tends to resolve itself in one way – via painful recession. Are we on the verge of this? I am not certain, but recent data from China does not look good.
I wish I had some silver bullet for investors. Regular readers know I have been vocally bullish about gold and US Treasury bonds in recent years and the closer followers have seen my equity moves in real-time – the latest of which involved a sell signal exactly one month ago. But like every other investor, I don’t have a silver bullet. I am just another guy with a decent understanding of the macro environment, the monetary system and a risk management plan that I hope will avoid more pitfalls than not. I like to think I’ve gotten the macro picture largely right in recent years, but the message of the balance sheet recession and the Main Street crisis has fallen on deaf ears. And as the message fails to be heard, it appears that we will let the cards fall where they may. In my opinion, all of this doesn’t have to be happening. But we’ve implemented misguided policy after misguided policy. And now we’ve all become convinced that there’s nothing else that can be done. So austerity will win and the global economy will lose.
I wish I had something more optimistic to say (trust me, I am a very optimistic person in the long-run). But this environment is eerily reminiscent of 2008 when credit markets were seizing up, banks were falling apart and fear ruled the day. You’d like to think that we learned something from that whole episode. It’s pretty clear that we didn’t. But hey, on the bright side, we might get another go at 2008 and if we do I hope we’ll be certain to avoid the same mistakes we made last time. Unfortunately, the deep changes this country and the world needs are unlikely to occur without something forcing the hands of the people in power. And given the grip of fiscal austerity, that might just mean we need to see something far more frightening than this to get them to understand and act. So, please return to your seats and fasten your seat belts. It appears as though the global economy is entering a bit of turbulence.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.