Financial CrisesMy Comment: From a highly indebted China with a collapsing RE market to the EU with the bond market in turmoil due to a possible Le Penn victory in the French snap elections on 6/30 and 7/7 to the massive US sovereign debt, a bloated stock market, and insane RE prices combined with a no-win presidential election, there are signs of vulnerabilities and financial crises dead ahead. Below are two pertinent articles, first is by Doug Noland who speaks to the potential European Union disintegration and the second is John Mauldin who says a US financial crisis is unavoidable an devastating. Of course the financial crises will be global.
Credit Bubble Bulletin : Weekly Commentary: Potential Catalyst and the Q1 2024 Z.1 Excerpts:
So, it’s safe to assume that the European debt market, especially at the periphery, is highly levered. And this speculative leverage is on top of the typical vulnerability associated with European banks’ huge holdings of the region’s bonds. The traditional “doom loop” of simultaneous gloom enveloping bonds and the banking system is today even doomier with the highly levered hedge funds so actively involved.
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The entire highly levered global speculative Bubble is at risk when euro sustainability fears materialize.
That the shock European Parliamentary Elections followed by a week the shock Mexico election raise odds of problematic de-risking/deleveraging.
The Coming Supercyclical Crisis - Mauldin Economics Excerpts:
John here. Going deeper, it’s quite insidious how what would once have been private debt is now government debt. Mortgages are probably the best example. Federal loan programs (Fannie Mae, Freddie Mac, VA, etc.) either directly own or guarantee most mortgage debt. The credit risk ultimately falls on taxpayers, not the original lenders.
But that’s not all. Think about the COVID relief programs. Small businesses were allowed to use some of their Paycheck Protection Program funds for debt payments, which were then forgiven. The debt was simply transferred from the businesses to the taxpayers. Ditto for student loan forgiveness and assorted other programs.
We saw it again just last year in the Silicon Valley Bank and Signature Bank failures. Remember bank “deposits” are actually
loans from you to the bank. The decision to pay off depositors in full including big businesses who kept accounts far above the FDIC limits was really a kind of loan forgiveness. Everyone got bailed out of what should have been losses.
In all these cases and more, large amounts of previously private debt became government debt.
“The limit to government debt is reached when investors will no longer purchase a country’s bonds at yields that the economy can tolerate or when debt servicing costs crowd out other critical spending.
There is a good chance that bond investors will lose patience if the next administration fails to restore some discipline to fiscal finances.” That last sentence is why I am sure a crisis is coming. There is very little real chance the next administration will restore fiscal discipline, no matter how the election goes, because the American people don’t
want fiscal discipline.
Martin concludes, as I do, the Debt Supercycle can only end in crisis. He thinks this crisis will bring “severe fiscal restraint.” Yet we know Americans aren’t keen on austerity… to say the least.
I was doing an interview with a financial magazine this morning, and I made the point that there will be no resolution of the government debt and deficit problem without a crisis.
And I think Martin is an optimist. Interest as a percentage of government revenues will likely reach 30% by 2034 or sooner. In a budding bond crisis, interest rates will rise faster than we can imagine. I try to imagine what kind of crisis it would take to change this, and it’s hard to see how that happens without truly massive disruptions—certainly massive protests and clashes at a minimum. Ray Dalio is now saying he sees a 40% chance of violence and civil war. None of us want that. But what are the alternatives?
Compromise on a Herculean scale is the best we can hope for. And we better hope that happens before it gets really ugly and forces a delayed compromise that will be even harder.
Anybody want to be president during that crisis?