After coming up on 22 years in the industry I am increasingly astounded by how intelligent and experienced fellow financial advisors allow their own logic and common sense to be overshadowed by the views of fund managers and economists. One needs to keep top of mind of course that the primary role of these commentators is to attract new money flows to the asset managers, whilst the primary role of a financial advisor is to firstly protect and then grow their client’s money.
Let’s rewind to Sept 2008, where to the anguished amazement of those across the financial industry and lay people alike, Bear Stearns and Lehman Brothers were allowed to go bankrupt. The US Fed bailed out the usual suspects, Goldman Sachs, JP Morgan Chase, Bank of America et al, despite the fact that they were equally guilty of the same bad behaviour that led to the demise of Lehman Brothers and Bear Stearns.
The financial crisis that has unfolded in Greece, Portugal and many European countries is a direct consequence of the banking failure in the United States at the end of 2008, but instead of the banks which caused the crisis through reckless lending being brought firmly into line they continue in the same manner as they did before the crisis, whilst entire countries are jeopardized with “austerity” !
The backlash from this “failsafe” mortgage securitisation would also have resulted in the people of Iceland finding themselves in a similar position to the Greeks and many other Euro zone countries, had the Icelanders not had the fortitude to arrest their “banksters” and politicians, write off all the so called debt, and essentially start from scratch. Almost 6 years later their economy is flourishing.
With hindsight “everyone could see” how reckless it was to grant home loans to unemployed people who were living in trailer parks, but that was done before the lesson was learnt that property prices couldn’t and wouldn’t only go up!
So it will be with the lesson to be learned from the level of United States debt and global debt relative to the performance of stock markets in the USA and other offshore markets as well as here in South Africa. In the 14 years since we entered this century US debt has gone from USD 1 trillion to more than USD 17 trillion, and even at an interest rate of 0.5 % the interest on this debt exceeds the GDP of the USA.
The response of the US Fed post the 2008 financial crisis, instead of imposing stricter regulation of bank’s lending activities, was to embark on a program they dubbed “quantitative easing”, a fancy name for money printing, releasing initially USD 80 billion per month of “printed” money into the market via the issuing of US Government bonds, continuing with this for more than 4 years, and more recently slowing down the money printing to a meagre USD 60 billion per month. The bottom line is that the structural issues leading to the 2008 crisis have not been resolved. On the contrary, the exact same bad behaviour has continued and been encouraged.
Where did all of this money go? If one looks at the level of unemployment in the USA, or since these numbers are often fudged by government, as an alternative considers the number of Americans on food benefit stamps (more than 50 mil which is 1/6 of their population) you can begin to form a clear picture that all the printed money is not finding it’s way into the underlying economy. To be defined as unemployed in the USA a person needs to have been actively looking for work within the last 3 months, 3 months after those who eventually give up trying to find employment they are reclassified as ‘choosing not to work’. This is why it is possible for it to seem as if officially published unemployment figures have improved, whereas in reality unemployment has got worse.
Stock markets around the world, including the USA and SA, have been fuelled by this readily available cash, creating a perception of recovery and growth which is not underpinned by what is happening in the real economy. In South Africa since the 2008 crash the JSE has grown by almost 150%, whilst GDP has contracted from 5.5% per annum to 2.5% per annum, a shrinkage of more than 50%. How can this be one might well ask, surely there must be some connection between the success of an economy and the success of the listed companies operating in that economy. In a closed economy this may well be the case, but in a world where the money printed by the US Fed finds it’s way into the hands of major global banks, and can flow in and out of stock markets at the push of a button, it’s easy to see how such a disconnect can happen.
The only distinction between the way the world has responded to the USA’s money printing spree, and the way it responded to Zimbabwe’s past similar spree which in their case led to massive hyperinflation, is credibility. The rest of the world still (for the time being) believes the USA to be capable of repaying the debt it has created but did not believe Zimbabwe to be capable from the start.
Asset managers and market commentators are now confidently reporting that developed markets are firmly on the road to recovery, and yet the debt in the global financial system exceeds USD 100 trillion, with even the global body the Bank for International Settlements warning of the dangers posed by this. The USA once again postponed their own review of their debt ceiling to March 2015. By all accounts the debt in the US financial system won’t be paid off 2 generations from now!
We live in a world where everything and anything that is not sustainable must come to an end, which is the natural “cycle of life” which evolution has taught us separates successful species from those that do not make it. So what will it take for the world to realise that the USA cannot repay themselves or anyone else for that matter? An escalating conflict in the Ukraine coupled to the still simmering Israel / Iran conflict, perhaps a mass selloff of US debt by their main creditors China and Russia (Russia could even do this in retaliation for the Ukraine situation), rising interest rates worldwide which would lead to a drop in the values of government bonds, or perhaps quite simply enough people opening their eyes to what is right in front of them.
The debt in the total global financial system is in the region of USD 1.5 quad trillion, a head spinning number, maybe to state it in simpler terms the world apparently owes itself 60 times what the world generates in global GDP. No matter how the mainstream media, politicians or market commentators spin it, the path we have taken since 2008 has created a situation which is going to make the 2008 financial crisis look like an introduction to kindergarten! The question is not if it happens, the only uncertainty is WHEN?
By Alastair Scott
Body Corporate Bridging Solutions
082 920 9513