It is said that ancient mariners’ maps bore legends that warned of mythical dragons beyond the horizon that would destroy any vessel venturing into their waters.
Many economists today feel the same trepidation that sailors of generations long past must have felt as their ships sailed beyond the known limits. Our own Federal Reserve has minted oceans of money, trillions of dollars, out of thin air. Our national debt stands at levels unimaginable just a handful of years ago. Some say that our national debt is the dragon that will devour us. By most measures, it appears that could be the case. However our national debt is not a democrat or republican issue. It’s a government issue – a government on a decades-long spending bender:
Yes, debt could be a dragon.
Critics of reduced government spending often say that our absolute level of debt is not a concern because our GDP and income have increased greatly over the years however when we look at our national debt as a percent of GDP, the picture is not much prettier. Notice how it is now the highest it has been since the Great Depression? Could be a dragon!
The real dragon in the room is deflation. After nearly a decade of printing mountains of money, the US Federal Reserve and Central Banks the world over are not only out of bullets, they have barely kept the deflation wolf from at bay. As we have written about in previous posts, the velocity of US money has slowed as all of the fiscal stimulus has become lodged in corporate balance sheets in the form of debt used to fund enormous stock buy-backs. Very little investment has found its way into new property, plants, equipment or employees.
Think about it: doubling the national debt in eight years has produced a gasping patient. With the Fed starting to soak up liquidity, the edge of the horizon is in sight. When GDI and GDP (gross domestic income and gross domestic product) slip into negative territory, THERE BE DRAGONS! The deflation dragon – the worst of them all!
Source: Author & unknown artist & http://www.telegraph.co.uk/business/2016/10/19/fed-risks-repeating-lehman-blunder-as-us-recession-storm-gathers/
The point? Gather up all of the liquidity you can muster. You probably have between a month and six months to gird your loins before the deflation dragon appears and when it does, it will likely thrash the markets for two, three or even four years – or more. Who really knows? We aren’t getting into this downturn on the well-worn path of the 60’s, 70’s, 80’s, 90’s and even early 2000’s. This time we have invented a whole new breed of beast. At the nadir, you will be able to acquire quality income-producing assets at once in a lifetime prices. But don’t buy too early. Channel Rothschild, JP Morgan and Joe Kennedy – buy at the bottom, after all of the liquidity that rushes into the market after the first wave is wiped out by the second and third waves. Patience will be rewarded.
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