Global Economy And Market Trends – A Macro View

US Centric as they account for 30% of global GDP, have great stats & their pain is our torture.

CONCLUSION: - Substantiated by compelling arguments and charts in subsections below.

Embracing Fiat money coupled with a growing addiction to Deficit spending these past 50+ years, has brought the world to a point where rising Deficits, Debt and Debt service costs are unsustainable.  More of the same is not an option as this will only lead to higher inflation.  Only austerity, higher taxes and fiscal discipline will get us back on a sound economic footing. 

After 42 years of a falling rates and inflation trend, we seem to have entered a rising inflation and interest rates Super-Cycle that is going to bring all this to a head.  The current rising inflation trend is, almost certainly, unstoppable and should last 10-15 years.  After decades of artificially low rates that made bad investments look rational, high and rising rates have already hit Bonds and Private Credit.  Higher rates will eventually hit Equities and AI Capex Overbuild.  Consequently, we are on the brink of a Great Global Economic and Market Reset comprising a protracted period of stagflation that will rival the pain of the Great Depression of the 1930s. 

QUOTE: Jean Monnet said: "People only accept change when they are faced with necessity, and only recognize necessity when a crisis is upon them." It seems that the world is going to wait until the shit hits the fan before it is compelled to embrace austerity, higher taxes and fiscal discipline, because being responsible could be political suicide.

QUOTE: Ludwig von Mises (Austrian Economist) said:  “There is no means of avoiding the financial collapse of a boom brought about by (Fiat) credit expansion.  The alternative is only whether the crisis should come sooner, as the result of voluntary abandonment of further credit expansion, or later, as the final and total catastrophic collapse of the currency system involved.

INFLATION IRREVOCABLY RISING: Bad for the majority.  Suits the rich as asset prices rise.

The chart below shows the 40+ year decline in the “official” US inflation rate from 1980-2020 and clearly shows that it has broken out to the upside.  We have, almost certainly entered a 10-15 year rising zig-zag inflation Super-Cycle much like that shown on the left.  However, in the 1970s super-cycle CPI inflation was “fairly” calculated, whereas it has increasingly been “deliberately” manipulated/understated from the 1980s by way of hedonic adjustments.   

NOTE! Post 1980, pay increases were based on core inflation, which is far lower than CPI, and much lower than the actual cost of living increases for the majority, as it excludes all food, fuel and energy costs.  See the “actual” cost of living inflation, at https://chapwoodindex.com/, which is far higher for 90% of people, than Governments CPI suggests.  That is because these figures include all the more rapidly rising necessities like Food, Fuel, Energy, Medical and Education.  NB! These high 10+% p.a. “actual” cost of living increases apply more strictly to the poorer 20%-30%-40%, and gradually decrease the higher people’s incomes are.

The breakout of oil/fuel/energy prices from this inverted H&S (fat red neckline), suggests that we are heading back to the target of $114+ (three peaks on left) with 80+% certainty (by latest Dec?).  That lends credibility to the higher inflation suggested above.

The Bullets below list inflationary influences that reinforce all the above.

1. In the absence of fiscal discipline, perpetually high and rising “Fiat” deficit spending is definitely inflationary.  The US forced the world to embrace Fiat money from 1971 when Nixon reneged on the Bretton Woods agreement.  Milton Friedman said: “Inflation is always a monetary phenomenon”.
2. Deficit spending, at 5.0%-6.0% of GDP p.a., has been double GDP growth (2.5%-3.0%) these past 4-5 years when times were/are good, which is inflationary.  NB! Normally, good times are a time for debt reduction. 
3. Odds are that, deficit spending will rocket higher when markets crash and bailouts resume in the next year or two.
4. After US Social Security reserves run out around 2031, an increase in deficit spending will have to make up the growing shortfall as more baby boomers retire.
5. The US Dollar has weakened by 10% these past two years, which is inflationary (for US).
6. The producer price index is rising, and that mostly precedes higher CPI.
7. Protracted Hormuz conflict, exacerbated in both straits by Hezbollah and Houthi radicals, with no end in sight, is underpinning higher energy prices.  Will we see even higher oil when strategic oil reserves and the inventory pipeline run out?
8. Fuel, Energy, Mineral and Food prices have been “trending” rapidly higher of late.
9. AI data centre buildout is fuelling demand for many strategic minerals like Copper, building materials, skills, etc. 
10. Commodity mine/source dominance wars are underpinning those higher prices.
11. Demand is exceeding supply as old mines run out & regulatory and eco compliance walls delay new mines.
12. Land, container and bulk shipping prices have doubled and trebled these past 6 months.
13. If offshoring was deflationary, is onshoring inflationary? Can AI/Automation offset this?
14. Higher Trump tariffs are inflationary (for US).

RATES IRREVOCABLY RISING: Not good for Bonds and Equities (more about that later).

Rising inflation begets rising rates, as investors seek positive “Real” returns after adjusting for inflation, fees and taxes. 

The US 10 year yield chart below shows the 40+ year decline in rates from 1980-2020 and clearly shows that rates have broken out to the upside.  This is the start of a rising rates Super Cycle that should last 10-15 years, because:  Technical analysis suggests that the rise into the peak (magnified blue insert) should be duplicated by an equal rise when price breaks up out of the pennant (upper arrow left chart), with over 80% probability.  This suggests that 10 year US Bonds yields are going to get to at least 7.5%-8.0% over the next year or two. 

Bullets below list rising rate influences.

1. Countries with huge US Bond holdings, like China and Japan have been selling to reduce Dollar/US exposure, which exerts upward pressure on US rates. 
2. The pension, bond and investment funds’ bond vigilantes, who represent the market, are selling bonds (raising rates), whereas governments are buying bonds to keep rates low.  That is because Countries with high debt, like the US and most of the rest of the world cannot afford higher rates as those raise debt service cost and deficit spending.
3. Higher rates (bond yields), are the market’s way of reflecting higher market risks, which are currently rising, as discussed under various headings below.

BONDS TANKING AS RATES RISE: Currently not a haven asset, so 60:40 portfolio in trouble?  

As interest rates rise, existing Bond values fall, because they need to be revalued to match the new rate, which is why Bonds are losing their haven appeal in the 60:40 portfolio.  As investment companies rotate out of Bonds into Equities to sustain their returns, more Bonds are sold which again increases the market’s yields.  This can become a self reinforcing cycle.  A key question is, where is the money going when it is leaving the 40% bond market allocation?  It can go into Equities, because they are currently providing positive returns, but overexposure to Equities is currently risky since Equity markets are at peaky/record levels by most metrics.  It can go into Corporate Bonds/Private Credit in search of higher yields, but those will also become less attractive if rates keep rising and the risk of a market crash and corporate defaults rises.  More importantly, Private Credit markets mostly fall in the unregulated off balance sheet Shadow Banking preserve and are unsecured.  Finally, it can go into cash and money markets, which provide increasingly attractive safer returns, or into the ultimate haven assets Gold, Silver and PGMs.  Physical Gold is the ultimate haven asset, as that eliminates third party risk.

HIGH AND RISING DEBT AND DEFICITS: Sovereign, Public, Municipal, Corporate & Private.

Since the start of the Fiat era, commencing with the end of Bretton Woods in 1971, debt has been rising and that trend is accelerating.  However, it is economic fact that eventually every additional dollar of debt progressively yields a lower benefit. Consequently, as debt rises, GDP growth falls.  The two charts below show the declining US GDP and rising Debt growth trends since 1971, when the US went fully Fiat, which suggest negative growth and bad times ahead.

Sovereign debt is at unacceptably high levels, at over 100% for most countries, and mostly over 300% if unfunded liabilities are included.  Sovereign debt keeps rising, because deficit spending keeps rising, since there is no political will to engage in Austerity, Fiscal Prudence and Balanced Budgets.  At some point, debt, deficits and inflation are going to reach an unacceptably high level where the G8 (G20) will have to jointly agree to deal with it to avoid a global hyperinflation (>15%?).  That point will, almost certainly, be triggered by unacceptably high debt service costs at the hand of either unacceptably high debt and/or interest rates.  That agreement will probably include sovereign debt defaults, significant austerity, fiscal discipline with a reversion to balanced budgets, and a new Bretton Woods like global currency peg (reversion to a pseudo Gold standard?).  All this will negatively impact consumption.

CONSUMPTION: Is soon going to fall off a cliff if rates keep rising and that will hit Equities.

The following considerations point to lower consumption:

1. Higher rates lead to higher debt service costs and higher inflation leads to higher product costs, which will both result in spending cuts to balance budgets.
2. From an economic point of view, lower consumption equals lower GDP.
3. Since debt is future consumption brought forward, higher rates and debt service costs will encourage a reduction of debt.  Therefore, debt reduction at Private, National, Municipal, and Corporate levels, implies spending cuts which will hurt consumption.  
4. High and rising debt slows economic growth, per the earlier chart, which will eventually reduce consumption.
5. Consumers are maxed out at a time when the cost of living / inflation is rising faster than their pay increases.  Already both parents in poorer households work, and some two jobs.  
6. AI will put some people out of work, at least until they have been reskilled, which will reduce aggregate per capita consumption.
7. As rates rise, the demand for properties and new builds will fall.
8. If pension funds reduce annuity payments or defer retirement, which they already are, that will impact consumption.
9. The rising income gap = continued impoverishment of the masses is not sustainable.  Today double income families are worse of than single breadwinners in the 1960s.

EQUITIES:

Equities are at never seen record levels by most metrics, exceeding 1928 and 2000.  The charts below, that show Buffet’s indicator (since 1950) and John Hussman’s indicator (1928+), confirm that.  The 60:40 portfolio is in trouble, because rising rates cause both Bond and Equity values to tank. The question is, what is the rate tipping threshold for Equities, 5+%?  Therefore, the question is not if Equities will crash, but how soon a major 50%-70% crash will manifest. 

The pro’s and cons of the current situation are listed below:

1. US Markets have shown impressive gains in the past 2-3 years, but are now toppish.
2. The S&P500’s breadth is improving, which suggest more upside for now (15/09/26).
3. Technical Analysis of the daily charts suggests the possibility of more upside for now?
4. Retail (mom & pop) investors and algorithm driven momentum trades underscore rising prices for now – until they do not.  
5. Retail exuberance usually manifests just before major market peaks.
6. The top 10 shares representing 40% of the total S&P500 market cap points to higher risk. Such concentration usually precedes market tops.  If that bubble bursts markets will crash and a recession will be the result!
7. Huge daily price jumps / volatility in individual equities and equity indices, which is what we are seeing now, usually precede major market crashes by at most a year?
8. High IPO activity, which is what we are seeing now, usually precede major market crashes by at most a year?
9. AI is reputedly driving growth in productivity & profits, which benefits more upside.  If true?
10. Rising rates equal lower discounted income streams and lower Equity valuations.  What is the tipping point that will cause markets to crash?  The 10 year yield over 5.0%?
11. The effects of disruption, where new technologies replace entire industries could be huge.  We see this in the motor industry where EVs and Robotaxis are knocking the entrenched traditional ICE manufacturers.
12. Hyperscalers off balance sheet “data centre” capex in the face of unclear profits, coupled with rising rates, raised risks and will, almost certainly, result in a drop in Free Cash Flow.
13. Share buybacks are artificially elevating PEs and markets, which distort econometrics.
14. The mark to market rule was suspended, which will add steroids to liquidations in the event of any major market crash.
15. Mega incentive bonuses have led to accounting shenanigans, which often hides problems, and is at the expense of, and to the detriment of, all but senior management.

CURRENCIES:

All Fiat currencies have lost about 98% of their value over the past century.  Is the 100 year Fiat Currency era gradually coming to an end?  Roosevelt went Fiat in the US in 1933 and Nixon’s abandonment of Bretton Woods in 1971 put the world onto Fiat currencies by default.

1. Fiat Currencies beget Currency Wars, which beget competitive devaluations to preserve export competitiveness.  Gold holds its “Real” value as currencies lose theirs.
2. Trump is deliberately engaging in strategies that weaken the US Dollar, to boost US export competitiveness and reduce imports? (other countries’ exports).
3. The US privilege of owning the global reserve/petrodollar currency is slipping, particularly after it was recently weaponised.  That will underpin a gradual weakening trend.
4. The world is trying to move away from the Dollar, because it was weaponised by the US.
5. The world is selling US Bonds, which will further weaken the Dollar.

ECONOMY AND THE FED: The world is due for a massive global economic reset.

This has been the longest run in history without a material recession in the US.  Recessions are useful in that they enable the elimination of excesses, but QEs damped down the impact of the 2001/03 and 2007/09 recessions.  Therefore, the next great recession could be a doozy that clears the cumulative uncleared excesses.  However, it will co-exist with inflation.

1. The concentration of wealth has once again reached 1929 levels, which suggests that we are due for a great reset / depression to restore the balance.
2. The Fed can no longer raise rates to cool the economy, as higher rates will hurt it and further QE could/would be inflationary.  True for all economies.
3. The industrial manufacturing era economic metrics are not suited to a digital era economy that is characterised by dematerialisation and demonetisation.
4. Iran’s rebel groups like Hezbollah and the Houthis, effectively control both the Red Sea and Hormuz by way of continued attacks on ships.  The more likely it continues, such economic warfare could tip our delicately poised global markets over the edge.
5. Manipulation of Unemployment, Inflation and consequently GDP statistics haven’t helped as it all leaves us with a clouded picture of the status quo.
6. The unwinding of the massive leveraged derivatives market, in the event of a significant Equity crash, would exacerbate the impact of any crash on the participants.
7. Thanks to the Iran war, right wing Muslims now have an axe to grind with the US and its allies, which almost certainly means that the risk of disruptive Terror attacks has risen.  

GOVERNMENT AND TAXES: True of the US and most countries.

The US Economy’s lack of fiscal discipline these past decades is unsustainable, and they now face perpetual rising deficits and debt, which will lead end in disaster, or higher taxes.  Higher taxes are inevitable, preferably sooner rather than later, because the following will eventually have to be addressed:

1. Rising entitlement/deficit spending and debt service costs are driving a rising debt spiral.
2. The wars in the Middle East cost money that will come from raising deficits, or taxes.
3. They have not spent enough on maintenance and development of infrastructure/bridges.  Eventually that backlog will have to be addressed at massive “additional” cost – up taxes?
4. When Social Security runs out of money in 2031, they will need to find additional funds.
5. If the US wants to replace entitlements with a UBI, they will need to find additional funds.
6. When Austerity and higher taxes are embraced, consumption will decline.
7. Lobbying & the corporatocracy are undermining good governance, enabling monopolies and hurting the economy, all of which have hidden costs.
8. America has weaponised the Dollar and its Superpower privilege, which has broken trust and many co-operation agreements.  The negative economic impact is in the pipeline.

PENSION FUNDS: A dead concept.

Most pension funds are in trouble as the number of contributors keeps falling while retirees keeps rising.  Moreover, one company career is over as most people will in future be working for themselves and/or for multiple  companies at once.  Already pension funds are increasingly reducing annuity payments, raising retirement ages, or both, with no end in sight.  US Social Security is nearing bankruptcy.  All the above is going to wreak havoc with the retirement plans of millions and the belt tightening is going to impact consumption.

FINAL THOUGHTS:

The deferral of consequences does not equate to the absence of consequences.  Timing the end is a muggs game, preparing for the worst is not.  Preparing for it makes one Antifragile.  This is definitely a time to go defensive with your investment portfolio.  Lose nothing when disaster strikes.  Have a buffer.

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