The longwave economic paradigm is simple: The economy goes through 48-64 year cycles that are fairly regular, although there is a case for a 75-year cycle that goes along with some theoretical work I did with a colleague in 2000-2001 about how long a currency could last until it was overloaded with debt and needed collapse (a value restoration process) in order to retain its value.
Here lately, the US currency has been relatively stable, which is why gold and silver haven’t gone screaming toward the stars. But give it time.
We are still in the bottoming-out portion of the longwave decline in interest rates that any damn fool can see by looking at a long-term chart of the 10-year Treasury.
Since we know the absolute peak of rates was July of 1981 and since we know that the Long Wave is normally 54 years in length, all you need to do is add 27 years to 1981 and you should get a sense of when the real economic bottoming process should begin.
2008. (Look surprised!)
Now, I apologize if this is just too damn simple, but we have a problem because the bottoming is not completely done. In fact, it has barely even gotten underway yet. We keep propping up losers.
The result is we still need to see a repudiation of debt at a massive scale and until that happens, the Long Wave bottom won’t be here. We’re just dancing on the front end of real economic collapse, still.
The most recent data to neatly summarize the mess is the Comptroller of the Currency’s quarterly derivatives report. The most recent being Q4 of 2013.
On the surface, there are some statements that sound almost, well, encouraging…like this:
“Notional derivatives fell $3.0 trillion, or 1%, to $237.0 trillion. Derivative contracts remain concentrated in interest rate products, which comprise 82% of total derivative notional amounts. Credit derivatives, which represent 5% of total derivatives notionals, declined 12% from the third quarter to $11.2 trillion.
So things are getting better, yeah? Well….er…the economy is recovering, right?
Not so fast, Bucko. Do you have any idea how much $237-trillion of notional value is? To put things in perspective, the USA’s entire economic output this year will be around $16-trillion. So the value of the derivatives is 14.8-YEARS of everything American does.
The happy-go-lucky people believe that it doesn’t make sense to worry about the possibility of all that notional debt becoming real because all of this is hedged and structured. Besides, aren’t these players all serious-minded, ethical, deep pocket people? They wouldn’t screw anyone, right?
The problem is (when we go back at look at the Bank Herstatt close call with world-ending collapse in 1974) that we see that settlement risk is horrific.
Still, undaunted, the happy-go-lucky types came up with new ways to avoid the world-ending. The Wikipedia entry on Settlement Risk lists three alternatives:
Continuous Linked Settlement is particularly interesting (and with enough coffee, the explanation here will make sense).
My point is simple: When you look at the credit mess, what you find is that the global financial disaster of 2008-2009 did not end the accumulation of debt on top of debt. All it did was stop it near present levels. For now.
And that gets us to the problem of when the next crisis should appear.
Not today, of course. But in Wednesday’s Peoplenomics report this week, I laid out a way to guesstimate when the Mother of all Crashes could show up…and that seems to me to hinge on the timing of the Fed’s rate increase.
Will they have to raise rates? Sure…
Dynamics in play actually require that interest rates this low can’t go on forever because of certain large players whose entire future is built around interest rates much higher than present levels. So as the cheap money of today persists, it actually carries with it the seeds of destruction for long-term players.
If, in coming months, you read about a big life insurance company getting in trouble, I want you to bookmark this morning’s report: An industry which has oodles of money to park over very long periods of time can have world-ending financial problems when office buildings they own are no longer needed because we’re all working from our homes and cars and mobile devices.
The same processes that killed residential real estate is still coming for commercial. And the fallout next time around could be even bigger and more costly to the tax slaves of last resort. And you know who that is, right?
I hope you did read this possibly most important story of the week, didn’t you?
(more after this)
So How Durable?
While we keep sniffing the air for the scent of burning time fuses on the industry side, the statistics out this morning from Census on Durable Goods are worth a read:
New orders for manufactured durable goods in June
increased $1.8 billion or 0.7 percent to $239.9 billion,
the U.S. Census Bureau announced today. This increase,
up four of the last five months, followed a 1.0 percent
May decrease. Excluding transportation, new orders
increased 0.8 percent. Excluding defense, new orders
increased 0.7 percent.
Machinery, up following two consecutive monthly
decreases, led the increase, $0.9 billion or 2.4 percent to
Shipments of manufactured durable goods in June, up
four of the last five months, increased $0.3 billion or 0.1
percent to $238.2 billion. This followed a 0.1 percent
Transportation equipment, up following two
consecutive monthly decreases, drove the increase, $0.5
billion or 0.7 percent to $70.2 billion.
Unfilled orders for manufactured durable goods in
June, up fourteen of the last fifteen months, increased
$8.7 billion or 0.8 percent to $1,096.8 billion. This was
at the highest level since the series was first published on
a NAICS basis in 1992 and followed a 0.7 percent May
Transportation equipment, up nine of the last ten
months, led the increase, $4.9 billion or 0.7 percent to
Market futures points to the Dow being down about 20 at the open, but the real number that matters is 17,100.18 on the Dow (last week’s closing Friday level) and last week’s Friday close of 1978.22 on the S&P.
The Imperial President
Latest move – which the administration figures can be done through what? (Executive Orders!) is to say that people from Honduras are “refugees.”
Odd that we are welcoming people from such places, yet when people try to leave America, we hound them for at least 10-years of taxes…but I digress. Just seems a bit one-sided and seriously denominated, if you know what I’m saying.
Senators Cruz and Sessions are trying to stop it, but don’t hold your breath. You don’t appoint Supreme Court justices.
This is called “separation of powers” – power in the hands of the few.
On the other hand, worries the NY Times, Texas NatGuard could get arrest powers to deal with illegals. OK, so? And?
Troubles of Israel
A quick check of Wikipedia gives some context:
The West Bank, including East Jerusalem, has a land area of 5,640 km2 and 220 km2 water, the northwest quarter of the Dead Sea. It has an estimated population of 2,676,740 (July 2013). More than 80%, about 2,100,000, are Palestinian Arabs, and approximately 500,000 are Jewish Israelis living in the West Bank, including about 192,000 in East Jerusalem, in Israeli settlements. The international community considers Israeli settlements in the West Bank, including East Jerusalem, illegal under international law, though Israel disputes this
So yes, the Israelis are outnumbered, and the West Bank (depending on which real estate agent you listen to) belongs either to Party J or Party P.
With Gaza and now the West Bank, it’s a two-fronts war ramping up….SecState Kerry might as well be yelling at the tide not to come in…but he’s pressing a ceasefire. Good luck with that. (I tend to bet on the tide.)
EU Sanctions Mess
I don’t know if you remember how the whole Ukraine mess got started with US officials passing out cash and cookies in Kiev last December and the EU in April declaring their intent to economically subjugate Russia into an EU that “…stretches from Lisbon to Vladivostok…”: but the EUromaniancs are now working on still more Russian sanctions.
This should prove an interesting case study in how Russian Nationalism (as in WW II) can be turned on a galvanizing event – like sanctions. At some point the Russian population will get seriously pissed at the EU and the move to attack the dollar and Euro by the BRICs countries will become as close to a sure thing as silicone in Hollywood.